NCMA Training:
Price Analysis
for
Non-Price Analysts
Jill L. Murphy
ESC/PKF
Senior Cost/Price Analyst
March 2010
Price Analysis: A Step By Step
Approach
• Analyzing Proposals
• 14 Steps of Pricing
Why We Analyze Proposals
Per FAR 15.402:
Contracting Officers Shall -(A) Purchase Supplies and Services From
Responsible Sources at Fair and
Reasonable Prices.
This Is the Basis for All Other Pricing
Related Regulations and Policies.
General Considerations
• Objective of Proposal Analysis is to ensure
that the final agreed-to price is fair and
reasonable
• Contracting Officer is responsible for
evaluating the reasonableness of offered
prices:
– Contracting Officer may request the assistance of other
experts to assist with the evaluation
General Considerations, Cont.
• Various analytical techniques may be used
singly or in combination
• Complexity and circumstances of each
acquisition determine the level of detail of the
analysis required
Proposal Analyses
•
•
•
•
•
•
Cost Analysis
Price Analysis
Cost Realism Analysis
Technical Analysis
Unit Prices
Unbalanced Pricing
Proposal Analysis Steps
Actions up to $10M - Buyer/PCO Tasks
Actions >
$10M
1. Examine Proposal for Compliance with FAR Table 15-2 and
the RFP
Price Analyst
2. Review Contractor’s “Groundrules and Assumptions” and/or
“Terms and Conditions”
Buyer/PCO
& Price Analyst
3. Request Field Pricing Support
(DCAA Audit / DCMA Pricing & Tech Supt if needed)
Price Analyst
4. Request Technical Evaluation from Program Office
Buyer/PCO
5. Build Pricing Model
Price Analyst
6. Begin Preparing a Preliminary PNM
Price Analyst
7. Start Performing Price/Cost Analysis
Price Analyst
Proposal Analysis Steps
Continued
Actions up to $10M Buyer/PCO Tasks
> $10M
8. Review Technical Evaluation for adequacy
Buyer/PCO
& Price Analyst
9. Review Audit results
Buyer/PCO
& Price Analyst
10. Incorporate Tech & Audit into Pricing Model
Price Analyst
11. Perform Weighted Guidelines Analysis (unless CPAF)
Price Analyst
12. Final Price Analysis
Price Analyst
13. Prepare Business Clearance Pricing Charts
Price Analyst
14. Complete PPNM
Price Analyst
15. Prepare Govt Offer Position for Negotiations
Price Analyst
Step 1
Examine Proposal Data
•
•
•
Does proposal contain Cost or Pricing Data in
a format consistent with FAR Table 15-2 (FAR
15.408)?
Does proposal comply with specific RFP
instructions?
If answer to either question is No, call
contractor ASAP.
FAR Table 15-2
(Found under FAR 15.408(m))
•
FAR Table 15-2 requires:
–
–
–
–
–
–
–
–
A Proposal Index of all Cost or Pricing Data
Cost Element Breakdowns for each CLIN consistent with
contractor’s cost accounting system
Total Summaries by Cost Element
Identification of Incurred Costs (Actuals)
Submission of FPRA if negotiated
Proposed use of Govt Furnished Property
If subject to Cost Accounting Standards (CAS), a statement on
adequacy of Disclosure Statement
Identification of any CAS non-compliances
FAR Table 15-2 - Continued
•
Even though Cost or Pricing Data is factual
not judgmental, per Table 15-2 I C, contractor
must submit any information reasonably
required to explain estimating process,
including -– The judgmental factors applied and the mathematical
or other methods used in the estimate
– The nature and amount of any contingencies included
in the proposed price.
FAR Table 15-2
Cost Elements
•
Material - Contractor must provide:
–
a consolidated priced summary of individual material
quantities (Bill of Material) identifying the item, source,
quantity, and price.
– Summary of cost analysis of Subcontracts over $650K
if no exception applies and subcontract cost or pricing
data if thresholds exceeded ($11.5M+ or 10%+ of total
price)
FAR Table 15-2
Cost Elements - Continued
•
Labor - Contractor must provide:
– a time-phased (e.g., monthly, quarterly, etc.)
breakdown of labor hours, rates, and cost by
appropriate category, and furnish bases for estimates
•
Note: This where the contractor tells us “how
and why” they bid the hours they did. It
almost always includes judgmental factors
FAR Table 15-2
Cost Elements - Continued
•
•
Indirect Costs - Contractor must provide:
– how they computed and applied indirect costs, including cost
breakdowns. Show trends and budgetary data to provide a basis
for evaluating the reasonableness of proposed rates. Indicate the
rates used and provide an appropriate explanation.
Note: In proposals with major contractors, indirect cost data is
often limited to a description and listing of the rates. The details
behind the rates are contained in the contractor’s forward
pricing rate proposal submitted to DCAA & DCMA. We rely on
DCAA & DCMA to analyze that data.
Step 2
Request Field Pricing Support
•
DFARs 215.404-2 contains the following
guidance:
(i) The contracting officer should consider
requesting field pricing assistance for—
(A) Fixed-price proposals exceeding $650K;
(C) Cost-type proposals exceeding $10 million
from offerors without significant estimating
system deficiencies.
Step 2
Request Field Pricing Support
•
Usually a full DCAA Audit but sometimes we
tailor our request to specific elements of cost
•
We rarely ask DCMA to perform a Technical
Evaluation
– But DCMA can be of assistance to our technical
evaluators
Step 3
Request Technical Evaluation
•
Buyer/PCO will request tech eval
– Tell them what needs to be evaluated
•
•
•
•
Material (Types & Quantities)
Labor Hours
ODCs
Person doing pricing should communicate to
Tech Eval team on how they need the Tech
Eval summarized.
– e.g. Hours by Labor Category, by CLIN, by Year
Step 4
Build a Pricing Model
•
Build a spreadsheet model to price the action
– Includes all cost elements & Profit
– Original Model will validate accuracy of contractor’s
proposed price
•
•
If model doesn’t produce same result as proposal (except
minor rounding errors), either your model is wrong or proposal
is wrong (Hint: it is usually your model that is wrong)
If Contractor’s proposal is wrong, contact contractor
Sample Pricing Model
SAMPLE PRICING MODEL
GREAT RIVER
PURCHASED PARTS B
ATTRITION (B)
MATERIAL OVERHEAD B
RC 21 MGT SUPT
RC 30 Q/C
RC 74 TOOL FAB
TOTAL GR DIR MFG
MFG OVERHEAD - GR
MFG FRINGE - GR
BASE
2006
RATE
6,867
6,867
8,331
1
0.0432
0.3160
6,867
297
2,633
754,679
754,679
917,680
1
0.0460
0.4640
754,679
34,715
425,804
761,546
926,011
0.046
0.463
761,546
35,012
428,437
991
62
3
22.89
19.39
18.12
22,684
1,204
54
1,126
549
58
23.26
21.80
18.22
26,205
11,965
1,057
2,118
611
61
23.09
21.56
18.21
48,889
13,169
1,111
23,942
1,733
39,227
2,790
22.64
63,169
29,999
12,833
39,227
39,227
45,778
29,420
63,169
63,169
1,056
23,942
23,942
125.30%
53.60%
TOTAL GREAT RIVER
-
CLARKSBURG DIR MFG
-
MFG OVERHEAD - CLARKSBURG
MFG FRINGE - CLARKSBURG
-
11.05
12.72
11.47
17.78
125.30%
75.00%
TOTAL CLARKSBURG
23,942
G&A
71,241
1
9.20%
0
41.10%
SUBTOTAL COST
116.70%
75.00%
7, 164
23, 942
71,241
0.00231
0.03478
0.03478
0.00439
-
40,342
7,273
2,697
2,522
-
52,836
-
663,138
663,138
TOTAL COST
107,685
12.00%
BASE
TOTAL
RATE
Composite
119.96%
66.89%
11.94
13.68
12.80
18.80
116.70%
75.00%
4,231
702,365
29,280
2,479,696
1
9.20%
0
48.70%
0.00196
0.05703
0.05703
0.00416
75,777
42,253
481,686
99,496
34,532
47,424
40,342
7,273
2,697
2,522
11.94
13.68
12.80
18.80
481,686
99,496
34,532
47,424
663,138
52,836
12.55
663,138
773,882
497,354
663,138
663,138
116.70%
75.00%
773,882
497,354
1,934,374
4,231
64,618
726,307
1,207,612
2,550,937
9.20%
1,556
2,237
37,819
10,316
4,231
66,821
48.49% 1,236,892
4,480,933
793,625
39,227
663,138
2,479,696
$$$$
1,346,300
1,934,374
2,203
17
833
313
$$$$
1,270,098
107,685
TOTAL COST OF MONEY
TOTAL PRICE
2007
RATE
-
TRAVEL
PR PAY DIR MFG
PROFIT
BASE
76, 202
CLARKSBURG
RC 20 PROD
RC 21 MGMT SUPT
RC 30 Q/C
RC 40 TOOL DES
COST OF MONEY
MATERIAL
GREAT RIVER
CLARKSBURG
G&A
$$$$
4,588,618
800,789
63,169
663,138
2,550,937
0.00196
0.04860
0.05703
0.00417
1,573
3,070
37,819
10,629
1,163
52,584
53,753
108,848
5,145,466
5,317,949
537,712
550,634
5,683,178
5,868,583
12,922
121,770
4,480,933
12.00%
Step 5
Begin Preparing Preliminary PNM
•
A Preliminary PNM is not duplication of effort.
–
•
It can help avoid mistakes that may not be easily
corrected after negotiations
–
•
It is essentially 2/3 of the final PNM
Knowing what you need to address in the PNM will force you
to address those things during proposal analysis &
negotiation
At this point you can already prepare 1/3 of the
PNM – Introductory info, Proposed amounts and
Basis of Proposal sections of the Cost Element
Summary portion of the PNM
Step 6
Start Doing Price/Cost Analysis
•
If we or someone else bought the same or
similar item before:
– What was the price?
– How long ago? what quantity? delivery schedule?
– Same Ts & Cs, financing methods?
•
Did we ask for actual cost data from prior
buy? (if not, do it now!)
•
This is “cost analysis” not price analysis but make sure
technical team is given access to this data for tech eval
Price vs. Cost Analysis
• Price Analysis is…
– Look at total price
– Reasonableness is based on a comparison of
proposed prices to same or similar items
– Profit is imbedded in price
• Cost Analysis is…
– Look at detailed cost breakout
– Reasonableness is based on a thorough
analysis of each cost element
– Profit is evaluated
22
Price vs. Cost Analysis
• Truth in Negotiation Act (TINA) says
– MUST obtain cost or pricing data (certified) over
$650,000 UNLESS
• Price Based on Adequate Price Competition
– Price analysis, usually comparison of offers
• Law or Regulation (mainly utilities)
• Commercial Item
– Price analysis
• Modification of a commercial item
• Waived by Head Of Contracting Activity
– Use cost analysis for procurements over $650,000
where an exception/waiver does not apply
23
Cost Analysis
• Per Far 15.404-1 (a)(3) Cost analysis shall be
used to evaluate the reasonableness of
individual cost elements when cost or pricing
data are required. Price analysis should be
used to verify that the overall price offered is
fair and reasonable
Cost Analysis
• Analysis of each major cost element
–
–
–
–
–
–
–
–
–
–
Labor Hours
Labor Dollars
Indirect Costs (Fringes, Labor Overhead)
Materials
Subcontracts
Intra-Company Transfers
Other Direct Costs
Cost of Money
General and Administrative
Profit/Fee
• Other cost elements can be added when applicable
25
Cost Analysis (cont)
• Cost Analysis is a Team Effort
– Your job is coordinate efforts of the entire team to
ensure a thorough analysis is performed.
FAR Price Analysis Methods
FAR 15.404-1(b)(2) includes the following
examples of methods of price
analysis:
•
•
•
•
•
•
•
COMPARE PROPOSED PRICES
PREVIOUS PRICES
Parametric
Catalog or published prices
Government estimates
Market prices
Pricing information provided by offeror
27
Price Analysis Methods in FAR
• The first two techniques are the preferred techniques
(15.404-1(b)(3))
– If CO determines that information on competitive proposed
prices or previous contract prices is insufficient to determine
that the price is fair and reasonable
• May use any of the remaining techniques
• Roughly listed: Least Intrusive to Most Intrusive
• But don’t ignore any pertinent information!
– Government estimate
– Market research
– Historical prices
– Explain what you concluded on any price information
28
FAR Price Analysis Methods
FAR 15.404-1(b)(2) includes the following
examples of methods of price analysis:
• COMPARE PROPOSED PRICES
29
Comparison of Proposed Prices
• Comparison of proposed prices received in
response to solicitation (competitive)
• Considered reasonable unless PCO has
information to believe it is not
– Especially if competition meets standard for Adequate
Price Competition in FAR
30
Adequate Price Competition
• APC FAR reference 15.403-1(c)(1)
• Comparison to other proposed prices received
is normally used as part of adequate price
competition (APC) determination
• What conditions need to exist for APC?
– Expected at least 2 offers
– Compete independently
– Can satisfy government requirements
– Best value award
– Price offered is not unreasonable
– Price is a substantial factor in source selection
31
FAR Price Analysis Methods
FAR 15.404-1(b)(2) includes the following
examples of methods of price
analysis:
• COMPARE PROPOSED PRICES
• PREVIOUS PRICES
32
Compare to Previous Prices
Price Analysis includes:
• Validating basis of prior determination of fair and
reasonable
–
–
–
–
Competitive, sole source, commercial?
Prior award date
Quantity
Price
33
Compare to Previous Prices
• Be Aware of:
– New item vs. overhaul with same National
Stock Number
– Urgent vs. normal delivery schedule
– Technology change
– Configuration change
– Terms and conditions
– Manufacturing process changes
– Market conditions
– Etc.
34
Compare to Previous Prices
• Document details of analysis
• For example:
– Escalation used
• Time, rate, etc.
– Basis and currency of previous price
• Competition, cost analysis, etc.
– Similarity of items
• Any difference affecting price
– Explain differences or adjustments
• Quantify price differences
35
Step 7
Review Tech Eval for Adequacy
•
Does Technical Evaluation:
– Address types and quantity of labor?
– Provide sufficient rationale for all labor hour
positions (Objective & Going-In)?
•
•
•
•
•
If proposed numbers were accepted – why?
If reductions are recommended – why?
Are recommendations summarized correctly to allow Govt
Pricing Positions to be developed?
Have all hours been evaluated?
Doubts about tech eval? - play “devil’s
advocate” with technical team on key
issues
Step 8
Review Audit Report
•
Did Audit review all costs?
–
•
•
Are the results of the audit “qualified” for any
reason?
Are there “unresolved” or “unsupported” costs?
If so why?
–
–
•
•
What did we request?
You may need to contact contractor to insist they provide
support to DCAA
Utilize ESC Liaison Auditor (Zelma Calderon)
What are the “Report Release Restrictions “
Do You understand Audit Results?
Step 9
Incorporate Tech Eval and Audit Results into
Pricing Model
•
Double check your entries
– Make sure you are not duplicating exceptions
taken by Tech Eval & Audit
•
e.g.
– Tech Eval deletes Part # NGX105 valued at $100,500
– DCAA questions costs of $27,000 for Part # NGX105
– If Tech Eval position is adopted you delete $100,500 from
Material (Don’t delete another $27,000)
•
Does the total cost look right?
– e.g. how did a 12% reduction in hours result in a
20% reduction in total cost? (probably not right)
Step 9
Incorporate Tech Eval and Audit Results into
Pricing Model (Cont)
•
Analyze the Govt Position
– Is it consistent with Price Analysis?
– Top-Down look at hours
•
How many equivalent full-time people are represented by
the labor hours? Does it make sense?
Step 10
Perform Weighted Guidelines Analysis
•
DFARS 215.404-4 the use of the Weighted
Guidelines tool to develop a prenegotiation profit or fee objective
–
Except for:
•
•
Cost Plus Award Fee Contracts
Contracts with Federally Funded Research and
Development Centers (FFRDCs)
Step 10
Perform Weighted Guidelines Analysis
•
Key Elements
–
–
–
–
–
Contractor Risk Factors
Contract Type Risk
Working Capital
Contractor Facilities Capital Employed
Cost Efficiency Factor
WEIGHTED GUIDELINES
Step 11
Complete Price Analysis
•
This is the final cross check of the cost
analysis.
– Does our Objective Price make sense when
compared to the same or similar efforts all thing
considered…
•
•
•
•
Quantities
Schedule
Escalation
Ts & Cs
Step 12
Prepare Business Clearance Charts
•
Using Data from your Pricing Model,
prepare Business Clearance charts.
– Template for charts can be found on the
PK Homepage
– Local Process Guidance
- Documents Library
- Clearance
Step 13
Complete Preliminary PNM
•
Everything but “Results of Negotiations”
should be complete.
What is a PNM?
*** Price Negotiation Memorandum ***
“ A PNM is a document that summarizes the process of
negotiating a contract’s price; the outcome of that
process; and, serves as a record of the decisions
made in determining a price to be fair and reasonable.”
Nash and Cibinic
Must be a complete summary of the negotiation process
46
What is a PNM?
• Every PNM should show the contractor’s
proposed amounts, the Air Force Objective,
and the negotiated amounts by cost element.
47
Need for Documentation
• Why Document your pricing?
– FAR 12.209
• …the contracting officer must establish price reasonableness in
accordance with 13.106-3, 14.408-2, or Subpart 15.4, as
applicable…
– FAR 13.106-3(a)(2)
• If only one response is received, include a statement of price
reasonableness in the contract file
– FAR 15.406-3
• CO…shall document in the contract file the principle elements of
the negotiated agreement
• What is the Documentation used for?
–
–
–
–
Providing information for future buyers/CO’s
Defending the Air Force in claims or protests
Supporting Defective Pricing efforts
Providing information for DoD IG, GAO, etc.
48
Organize Your Thoughts
• Top-Level Pricing Impacts
– CLIN Organization
• By Debit/Credit
• By Contract Type
• Flows to the modification/contract
• Set up a matrix
– Picture of the pricing changes
– Useful for Clearance Briefing
– Outline for PNM writing
49
What Makes a Good PNM
• What Makes a Good PNM
–
–
–
–
Documentation of analysis (crux of pricing and PNM)
Discussion of issues and positions
Negotiated terms and conditions
Logical flow:
•
•
•
•
•
Proposal to Tech Eval
Tech Eval to Price/Cost Analysis
Price/Cost Analysis to PNM (& Negotiations)
PNM to Modification/Contract
All numbers consistent
– Understand how to develop pricing numbers
• Have you convinced the reader that the Price is fair and
reasonable?
– Achieved through complete and accurate price/cost
analysis and full discussion
50
Step 14
Prepare Govt Offer Position
•
Prepare Government Offer Position
– Both cost and profit/fee
•
You need to be able to tell the contractor
why your offer is less than the proposal
(details)
– Understand the key technical & audit issues and
be able to talk to them in “layman’s” terms
Clearance Review & Approval
• Reference: AFFARS 5301.9000 Clearance
– Ensures contract file and intended contract/modification
comply with law, policies and regulation; and result in fair and
reasonable business arrangements
• Approval to begin negotiations with traditional pricing
• We no longer use IPT Pricing! (Policy Memo 2009-PK-003)
52
Final Thoughts
•
•
Proposal Analysis is a Team Effort
– Everybody’s part is important
– Use Available Resources
When we have done a good cost analysis Negotiations can be fun, challenging and very
rewarding.
Questions?
54