NCMA Training:
Price Analysis
for
Non-Price Analysts
Erin E. Mansur
March 2011
1
Agenda
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2
Why We Analyze Proposals
Cost or Pricing Data
Proposal Analysis Techniques
Proposal Analysis Steps
Final Thoughts
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.
3
Why We Analyze Proposals
Cont.
• 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
4
General Considerations
• Various techniques may be used singularly or
in combination to analyze cost or pricing data
• Complexity and circumstances of each
acquisition determine the level of detail of the
analysis required
5
Cost or Pricing Data
• All facts that, as of the date of price
agreement, or, if applicable, an earlier date
agreed upon between the parties that is as
close as practicable to the date of agreement
on price, prudent buyers and sellers would
reasonably expect to affect price negotiations
significantly.
– Factual
– Verifiable
6
Cost or Pricing Data
Cont
• Truth in Negotiation Act (TINA) says
– MUST obtain cost or pricing data (certified) over
$700,000 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 $700,000
where an exception/waiver does not apply
7
Proposal Analysis Techniques
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Cost Analysis
Price Analysis
Cost Realism Analysis
Technical Analysis
Unit Prices
Unbalanced Pricing
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Proposal Analysis Steps
1. Examine Proposal for Compliance with FAR Table 15-2 and the RFP
2. Review Contractor’s “Groundrules and Assumptions” and/or “Terms
and Conditions”
3. Request Field Pricing Support
(DCAA Audit / DCMA Pricing & Tech Supt)
4. Request Technical Evaluation from Program Office
5. Build Pricing Model
6. Begin Preparing a Preliminary Price Negotiation Memorandum
(PPNM)
7. Start Performing Price/Cost Analysis
The Air Force has a Proposal Adequacy Checklist that should be included
with all RFPs for actions exceeding $700K
9
Proposal Analysis Steps
Cont.
8. Review Technical Evaluation for adequacy
9. Review results from DCAA/DCMA
10. Incorporate Tech & DCAA/DCMA Results into Pricing
Model
11. Perform Weighted Guidelines Analysis (unless CPAF)
12. Final Price Analysis
13. Prepare Business Clearance Pricing Charts
14. Complete PPNM
15. Prepare Govt Offer Position for Negotiations
10
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.
11
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
12
FAR Table 15-2
Cont.
• 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.
13
FAR Table 15-2
Cost Elements
•
Material - Contractor must provide:
– Consolidated priced summary of individual
material quantities (Bill of Material) identifying
the item, source, quantity, and price.
– Cost/Price analysis of Subcontracts over $700K if
no exception applies.
– Subcontractor cost or pricing data must be
provided to the Gov’t if:
>$12.5M; or
10%+ of prime contractor’s price
14
FAR Table 15-2
Cost Elements, Cont.
• 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
15
FAR Table 15-2
Cost Elements, Cont.
•
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.
16
Step 2
Review Groundrules & Assumptions/Ts & Cs
• Ensure that proposal are not based on
assumptions that are not true or terms that
are not acceptable
– e.g.
• Availability of Govt Furnished Property (GFP)
• Access to Govt Facilities
• Special Provisions that are unfavorable to Govt or
unfairly limit Govt Rights (e.g. Data Rights)
• Identify issues early, contact contractor ASAP.
– Issues that affect the contract price have to be
addressed soon – may require revised proposal
17
Step 3
Request Field Pricing Support
•
DFARs PGI 215.404-2(a), Field Pricing Assistance,
contains the following guidance:
(i) The contracting officer should consider requesting
field pricing assistance for—
(A) Fixed-price proposals exceeding $700K;
(B) Cost-type proposals exceeding $700k from offerors
with significant estimating system deficiencies.
(C) Cost-type proposals exceeding $10 million from
offerors without significant estimating system
deficiencies.
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Step 3
Request Field Pricing Support
Cont.
• DFARs PGI 215.404-2(c), Audit Assistance for
prime contracts or subcontracts contains the
following guidance:
(i) The contracting officer should consider requesting
audit assistance from DCAA for—
(A) Fixed-price proposals exceeding $10M;
(B) Cost-type proposals exceeding $100M
19
Step 4
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
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Step 5
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
21
Sample Pricing Model
Base
Direct Material
Material 1
Material 2
Total Direct Material
2011
Rate
2012
Rate
Base
Total
Base
77,872
77,872
1.00000
1.00000
77,872
77,872
-
1.00000
1.00000
-
251
1,744
79
2,074
43.16000
52.22000
63.20000
63.20000
10,833
91,072
4,975
106,880
15
15
44.41000
53.74000
65.04000
65.04000
945
945
Fringe Benefits
Fringe
Total Fringe
106,880
0.63700
68,083
68,083
945
0.65300
Overhead
Labor Overhead
Total Overhead
174,963
0.43400
75,934
75,934
1,562
0.43200
Direct Labor
Labor Category 1
Labor Category 2
Labor Category 3
Labor Category 4
Total Direct Labor
ODC
G1 6OTravel
Total ODC
Subtotal Cost
G&A
G&A
Total G&A
250,897
0.26500
Total Estimated Cost
FCCOM
Overhead FCCOM
G&A Fccom
Total FCCOM
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Total
Fee or Profit
Profit
Total Price
Total
$
$
$
77,872
77,872
$
$
$
$
$
10,833
91,072
5,920
107,825
617
617
$
$
68,700
68,700
675
675
$
$
76,609
76,609
-
-
$
$
-
328,769
2,237
$
331,006
595
595
$
$
67,083
67,083
2,832
$
398,089
66,488
66,488
2,237
0.26600
395,257
251
1,744
93
2,088
174,963
250,897
0.00574
0.00045
1,004
113
1,117
1,562
2,237
0.00596
0.00043
9
1
10
$
$
$
1,013
114
1,127
395,257
0.10000
39,526
2,832
0.10000
283
$
39,809
3,125
$
439,025
435,900
Step 6
Begin Preparing Preliminary PNM
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A Preliminary PNM is not duplication of effort.
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It can help avoid mistakes that may not be easily corrected
after negotiations
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It is essentially 2/3 of the final PNM
Knowing what you need to address in the PPNM and 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 7
Price/Cost Analysis
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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!)
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This is “cost analysis” not price analysis, but make sure
Technical Team is given access to this data for the
Technical Evaluation
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 element breakout
– Reasonableness is based on a thorough
analysis of each cost element
– Profit is evaluated
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Cost Analysis
• Per Far 15.404-1 (a)(3) Cost analysis shall be
used to evaluate the reasonableness of
individual cost elements when certified cost or
pricing data are required. Price analysis should
be used to verify that the overall price offered
is fair and reasonable
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Cost Analysis
• Analysis of each major cost element
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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
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Price Analysis
FAR 15.404-1(b)(2) includes the following
examples of methods of price analysis:
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Compare Proposed Prices
Previous Prices
Parametric
Catalog or published prices
Government estimates
Market prices
Pricing information provided by offeror
Price Analysis
• The first two techniques are the preferred techniques (15.4041(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, then the CO may use any of the
remaining techniques
• But don’t ignore any pertinent information!
– Government estimate
– Market research
– Historical prices
– Explain what you concluded on any price information
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Price Analysis
FAR 15.404-1(b)(2) includes the following
examples of methods of price analysis:
• Compare Proposed Prices
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Comparison of Proposed Prices
• Comparison of proposed prices received in
response to a solicitation (competitive)
– Considered reasonable unless PCO has information
to believe it is not
• Especially if competition meets standard for Adequate
Price Competition (APC) in FAR
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Adequate Price Competition
• APC FAR reference 15.403-1(c)(1)
• Comparison to other proposed prices received
is normally used as part of APC determination
• What conditions need to exist for APC?
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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
Price Analysis
FAR 15.404-1(b)(2) includes the following examples of
methods of price analysis:
• Compared Proposed Prices
• Previous Prices
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Compare to Previous Prices
Price Analysis includes:
• Validating basis of prior determination of fair and
reasonable
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Competitive, sole source, commercial?
Prior award date
Quantity
Price
Contract Type
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.
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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
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Step 8
Review Tech Eval for Adequacy
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Does Technical Evaluation:
– Address types and quantity of labor?
– Provide sufficient rationale for all labor hour
positions (Objective & Going-In)?
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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 9
Review DCMA/DCAA Reports
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Were all costs reviewed?
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Are the results of the audit “qualified” for any reason?
Are there “unresolved” or “unsupported” costs? If so why?
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What did we request?
You may need to contact contractor to insist they provide support
to DCMA/DCAA
Be aware of the “Report Release Restrictions”
Do You understand Results?
Step 10
Incorporate Tech Eval, DCMA/DCAA Results
into Pricing Model
•
Double check your entries
– Make sure you are not duplicating exceptions taken
by Tech Eval & Audit
•
e.g.
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•
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)
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Step 11
Perform Weighted Guidelines Analysis
• DFARS 215.404-4 mandates the use of the
Weighted Guidelines tool to develop a
profit or fee objective
– Except for:
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•
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Cost Plus Award Fee Contracts
Contracts with Federally Funded Research and
Development Centers (FFRDCs)
Step 11
Perform Weighted Guidelines Analysis
• Key Elements
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Contractor Risk Factors
Contract Type Risk
Working Capital
Contractor Facilities Capital Employed
Cost Efficiency Factor
Weighted Guidelines
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Step 12
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…
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•
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Quantities
Schedule
Escalation
Ts & Cs
Step 13
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
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Step 14
Complete Preliminary PNM
• Everything but “Results of Negotiations”
should be complete.
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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
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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?
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–
–
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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.
Step 15
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
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Final Thoughts
• Proposal Analysis is a Team Effort
– Everybody’s part is important
– Use Available Resources
•
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When we have done a good cost analysis - Negotiations
can be fun, challenging and very rewarding.
Questions?
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