Estimating Systems – Get Competitive

1. www.BOEMax.com Estimating Systems – Get Competitive www.EVMax.net Tom Shanahan of ProjStream And David Eck, CPA of Dixon Hughes Goodman

2. About ProjStream • Headquartered in Orlando, FL • Enterprise Software Company • Our Vision • Creating value throughout the entire life cycle of a project, from the pre-award phase, the transition from pre-award to award, and delivery • Our Mission • To make our clients successful in winning and delivering projects

3. Agenda • Why is it important to have a solid estimating system? • Discussion of FAR 15-2 and DFARS 252-242-7005 Compliance • What is a Basis of Estimate? • What are the Components of a good BOE? • Historical Data and Cost Estimating Relationships (CER’s) • Strategies to Capture Historical Data – Establish a Closed Loop Estimating System We will touch on these items (more detailed discussion in follow up webinar – 10/29/14) • What is Cost Proposal Traceability and why is it important?

4. Estimating Systems – Why are they important? • Evaluating, re-engineering and maximizing process efficiency should be a high priority to government contractors • Estimating function optimization has a DIRECT causal beneficial relationship to the organization’s end strategic goals: 1) To win and execute new business2) To maximize cost recovery3) To enhance profitability

5. What is an Estimating System? The estimating system is defined as: “The policies, procedures, and practices for budgeting and planning controls, and generating estimates of costs and other data included in proposals submitted to customers in the expectation of receiving contract awards.”

6. What is included in an Estimating System? • Organizational Structure • Established lines of authority, duties and responsibilities • Internal controls and managerial reviews • Flow of work, coordination and communication • Budgeting, planning, estimating methods, techniques, accumulation of historical costs and other analyses used to generate estimates

7. When is an Estimating System Required? Estimating Systems are required for all contracts awarded on the basis of cost or pricing data.

8. DFARS Business System Rule • The Business System Rule will apply to any DoD CAS covered contracts • Reference DFAR Sub-part 242-70:- Contractor Business System Deficiencies 242.7000 • Contract Clauses-Contractor Business Systems 252.242.7005-Estimating System 252.215-7002

9. Applicability of the Business System Rule: Estimating System • The Business System Rule will apply to any DoD CAS covered contracts • Reference DFAR Sub-part 242-70:- Contractor Business System Deficiencies 242.7000 • Contract Clauses-Contractor Business Systems 252.242.7005-Estimating System 252.215-7002

10. Where to Identify Estimating System Criteria Criteria • DFAR 252.215-7002 Audit Plan • DCAA auditing procedures from the Budget and Planning System Internal Controls (11020) are now included in the estimating system

11. Estimating System Basic Requirements • Disclosed In Writing to the Administrative Contracting Officer (ACO) • Accurately describe: • Policies, procedures and practices • Significant Detail for the Government to Make an Informed Decision • Complies with written documentation and disclose significant changes

12. Estimating System Criteria • Establish clear responsibility for preparation, review, and approval of cost estimates and budgets. • Provide a written description of the organization and duties of the personnel responsible for preparing, reviewing and approving cost estimates and budgets. • Ensure that relevant personnel have sufficient training, experience and guidance to perform estimating and budgeting tasks in accordance with the Contractor’s established procedures. • Identify and document the sources of data and the estimating methods and rationale used in developing cost estimates and budgets. • Provide for the adequate supervision throughout the estimating and budgeting process.

13. Estimating System Criteria • Provide for consistent application of estimating and budgeting techniques. • Provide for detection and timely correction of errors. • Protect against cost duplication and omissions. • Provide for the use of historical experience, including historical vendor pricing information, where appropriate. • Require use of appropriate analytical methods. • Integrate information available from other management systems. • Require management review, including verification of compliance with the company’s estimating and budgeting policies, procedures, and practices.

14. Estimating System Criteria • Provide for internal review of, and accountability for, the acceptability of the estimating system, including the budgetary data supporting indirect cost estimates and comparisons of projected results to actual results, and analysis of any differences. • Provide procedures to update cost estimates and notify the Contracting Officer in a timely manner throughout the negotiation process. • Provide procedures and ensure subcontract prices are reasonable based on documented review and analysis provided with the prime proposal, when practicable

15. Estimating System Criteria • Provide estimating and budgeting practices that consistently generate sound proposals that are compliant with the provisions of the solicitation and are adequate to serve as a basis to reach a fair and reasonable price. • Have an adequate system description, including policies, procedures, and estimating and budgeting practices, that comply with Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement.

16. Estimating System should tie to the Disclosure Statement Mirror the disclosure statement in these areas: • Direct vs. Indirect Costs • Allocation of Indirects • Facilities Cost of Capital • Material items such as scrap, rework and spoilage • Warranties • Maintenance • Inflation and Escalation.

17. FAR and Proposal Elements DIRECT LABOR A time phased (i.e., monthly, quarterly, etc.,) breakdown of labor rates and hours by category or skill level and the basis for the estimates of rates and hours (i.e., historical experience, engineering estimates, learning curves, etc.). If labor is the allocation base for indirect costs, the labor cost should be summarized in order that the applicable overhead rate can be applied. (FAR 15.408, Table 15-2 II.B.) • Hours • Rates and Costs by Appropriate Category

18. Direct Labor Element of Cost AmountReference Engineering Labor $452,151 Schedule 1 Manufacturing Labor 26,412 Schedule 1 Direct Labor Overhead @ 56.7% 271,345 Schedule 2 Material 113,175 Schedule 3 Material Handling Overhead @ 5.0% 5,659 Schedule 4 Subtotal $868,742 G&A @ 8.0% 69,499 Schedule 5 Estimated Cost $938,241 Profit @ 10.0% 93,824 Total Price$1,032,065 ========

19. Direct Labor Timephased

20. Rate Support Schedule 2002 Engineering Labor Cost Labor Category Rate/HrHours Total . Program Manager $33.93 683 $23,174 Senior Engineer 26.391,20031,668 Junior Engineer 22.12 1,800 39,816 Engineering Aide 14.50 1,800 26,100 Technical Writer 16.00 - - Metallurgist 18.85 1,900 35,815 Draftsman 18.95 2,200 41,690 Total D/L – Eng9,583$198,263 2002 Manufacturing Labor Cost Labor Category Rate/HrHours Total . Fabrication $10.85 400 $4,340 Assembly 9.25 - - . Total D/Labor – Mfg 400$4,340 . Total Direct Labor $202,603 ==========

21. Material MATERIALS AND SERVICES Consolidated Price Bill of Materials. A consolidated priced summary of individual material quantities included in the various tasks, orders, or contract line items being proposed and the basis for pricing (vendor quotes, invoice prices, etc). The offeror must include raw materials, parts, components, assemblies and services to be produced or performed by others. For all items proposed, the offeror must identify the item and show thesource, quantity, and price. (FAR 15.408, Table 15-2 II.A.)

22. Material (Consolidated Bill by Supplier)

23. Material (Consolidated by Part in Descending $ Order)

24. Supplier BOE (Cost and Price Analysis)

25. Supplier BOE (Cost and Price Analysis) – attach documentation

26. Supplier BOE (Cost and Price Analysis) – view documentation

27. Indirect Costs INDIRECT COST DETAIL Cost Breakdowns, Trends, and Budgetary Data (FAR 15.408, Table 15-2 II.C.) • How Indirect Costs Are Computed • Rate = Cost Pool / Allocation Base • What costs are in the pool? • How Indirect Costs Are Applied • What is the allocation base?

28. Indirect Costs (Overhead) Element of Cost Amount Reference Engineering Labor $452,151 Schedule 1 Manufacturing Labor 26,412 Schedule 1 Direct Labor Overhead @ 56.7% 271,345 Schedule 2 Material 113,175 Schedule 3 Material Handling Overhead @ 5.0% 5,659 Schedule 4 Subtotal $868,742 G&A @ 8.0% 69,499 Schedule 5 Estimated Cost $938,241 Profit @ 10.0% 93,824 Total Price $1,032,065 ========

29. Indirect Costs (Overhead) Schedule 2 Cost Element 2002 2003 2004 Total D/L – Engineering $198,263 $148,838 $105,050 $452,151 D/L – Manufacturing 4,340 8,776 13,29626,412Total Direct Labor $202,603 $157,614 $118,340 $478,563 (Sched 1A) (Sched 1B) (Sched 1C) D/L Overhead Rate 56.7% 56.7% 56.7% 56.7% (Schedule 2A) . Direct Labor O/H $114,876 $89,367 $67,102 $271,345 ========= ======== ======== =========

30. Indirect Costs (Overhead) Budget for FY 2002 Labor Overhead Actual Overhead Expenses for FY 1999 - 2001 (Note 2)Budget Actual Expenses (Note 1) Overhead Expenses 2002 200120001999 Indirect Payroll $260,000 255,120 280,450 225,320 Payroll Taxes 228,000 223,615 245,538 197,308 Vacation 120,000 117,692 129,231 130,846 Holiday 110,000 107,885 118,462 95,192 Sick Leave 50,000 49,038 47,832 43,269 Pensions 171,000 167,712 184,154 147,981 Employee Morale 5,000 4,530 5,960 4,210 Entertainment 50,000 45,820 57,352 39,820 Office Equipment 7,000 3,251 4,525 6,320 Depreciation 5,000 5,125 5,075 4,925 Subscriptions 1,500 1,485 1,450 1,475 Travel 22,000 25,352 18,085 21,025 Miscellaneous 2,000 2,421 2,310 1,824 Stationery 6,000 5,421 7,921 5,105 Reproduction 17,000 16,891 18,451 14,555 Maintenance 5,000 4,871 5,431 4,322 Rent 202,000 200,000 200,000 196,000 Telephone 11,000 10,545 11,752 9,850 Insurance 102,00098,50096,00092,000 Total Pool $1,374,500 $1,1345,274 $1,439,979 $1,214,347 Less Unallowable Costs Entertainment 50,00045,82057,35239,820 Net Allowable Expenses $1,324,500 $1,299,454 $1,382,627 $1,174,527

31. Indirect Costs (Overhead) Budget for FY 2002 Labor Overhead Actual Overhead Expenses for FY 1999 - 2001 (Note 2)Budget Actual Expenses (Note 1) Overhead Expenses 2002 2001 2000 1999 Net Allowable Expenses $1,324,500 $1,299,454 $1,382,627 $1,174,527 Allocation Base Direct Labor $2,336,000$2,221,289$ 2,613,662$2,147,216 (Note 3) Rate 56.7% 58.5% 52.9% 54.7%======= ======= ======= ======= ======= (Note 4) Explanatory Notes Provide the prior three years’ actual overhead expense and allocation base in the same format as the budget for 2002. For the year 2001, actuals to date are provided. The projected overhead expenses are based on the company’s operating budget for 2002. The operating budget supporting data is located in file "DAAH01-02-R-0001, Overhead Operating Budget" and is immediately available upon request. Includes Bid and Proposal Labor of $5,000 The same rate is estimated for fiscal years 2003 and 2004. We anticipate minimal inflation and a stable business base. The data and analysis supporting this assertion is located in file "DAAH01-02-R-0001, Overhead Forecast" and is immediately available upon request.

32. Data Driven Estimates

33. Cost Traceability

34. What is a Basis of Estimate? • Provides the elements and rationale of every component of the work that is the basis of the final price • Provides the logic, estimating methodology, data and calculations used to estimate the resources required to perform the work • Provides credibility in the numbers and assists the government in determining if the estimates, and therefore the price is reasonable

35. Basis of Estimate (BOE) Brings together: • Work Breakdown Structure (WBS) • Schedules • with labor category estimates, material, travel • ODC estimates • includes quantities and unit pricing

36. Attributes of a BOE • Meets Customer Constraints • Demonstrates Understandingof Requirements • Estimates and Assumptions are well documented • Conveys that estimates are credible, defendable and realistic • Aligns with WBS, SOW and other project structures such as CLIN

37. What is a Basis of Estimate Used For? To evaluate the Cost Reasonableness and Realism of your estimate. • Realism – Compatibility of estimate with scope (as defined in the estimate Task Statement or Statement of Work) • Reasonableness – Justification for estimate development methodology, and completeness and accuracy of the mathematics applied

38. What are the components of a BOE? • Proposal and BOE Header Information • Task Description • Assumptions and Risk Development/Mitigation • Estimating Methodology • Rationale or Justification • Cost Estimate Distribution

39. BOE Header Information Typical BOE Header Data • SOW mapping to the WBS is critical for the proposal manager or pricing lead • Dole out estimating responsibilities to the team • This process leads to verification that all SOW items are addressed by Task Descriptions and no items are duplicated or omitted

40. Task Description SOW 3.4.2: The assembled structural and aerodynamic components of the air vehicle that support subsystems essential to designated mission requirements. Includes basic structure, rotary wing pylons, alighting gear, secondary power, instruments, transmissions, gearboxes, etc. Interprets the SOW and defines what will be done. Provides a complete and clear explanation of the tasks that will be done in relation to the Statement of work. Task Description: Includes assembly, integration and test and checkout of all elements into the airframe as a whole, all administrative and technical engineering to perform integration of level 3 air vehicle and airframe elements, installation, integration, test and checkout of avionic systems Why is this task being done? Reference driving document, usually the SOW Avoids requirements misinterpretation, clarifies gray areas

41. Assumptions SOW 3.4.2: The assembled structural and aerodynamic components of the air vehicle that support subsystems essential to designated mission requirements. Includes basic structure, rotary wing pylons, alighting gear, secondary power, instruments, transmissions, gearboxes, etc.Task Description: Includes assembly, integration and test and checkout of all elements into the airframe as a whole, all administrative and technical engineering to perform integration of level 3 air vehicle and airframe elements, installation, integration, test and checkout of avionic systems Identify assumptions that the estimate is based onCan lead directly to identification and mitigationof risk. Assumptions: Includes labor to analyze, design, and develop avionic suite interfaces, drawing prep and establish avionics interface equipment requirements and specs, coordination with Subcontractors and test groups. Does not include: development, testing and integration of software, avionic system testing, assumes two retests of all subsystems Defines boundary conditions that can impact the estimate Examples could include number of retests, receipt of GFE

42. Estimating Methodology There are two main categories of estimating methodologies: • Historical – Always reference historical data if it exists • Judgment – Level of Effort, Engineering Estimates, etc. Supplier quotes are more supportable than LOE or Subject Matter Expert Judgment – Supplier Analysis attached to the BOE’s is important as part of the subcontract price analysis

43. Estimating Methodology Historical resource based estimates are easier to support than judgmental type estimates

44. Rationale or Justification • Back Up the Estimating Methodology • Explain why you chose the particular methodology • Explain how the estimate in question relates to work that was previously done. Provide a convincing argument to support the estimate here: Convince your customer that you understand the requirement and can perform the work as estimated

45. Cost or Estimate Distribution • Time phase spread the estimate • Ensure dates of the estimated activity support the RFP contractual requirements • The time-phased estimates and cost schedules that result in an RFP submittal should at least be the beginning of the planning function for an IMS Incorrect time phasing of estimated work can lead to incorrect costs due to escalated rates

46. Basis of Estimate Example

47. Basis of Estimate Example: Subject Matter Expert

48. Basis of Estimate Example: Unit or Multiplier method

49. Basis of Estimate Example: Unit or Multiplier method

50. Basis of Estimate Example: Basis of Quantities