NCMA Training: Price Analysis for Non-Price Analysts

1. NCMA Training:Price AnalysisforNon-Price Analysts Jill L. Murphy ESC/PKF Senior Cost/Price Analyst March 2010

2. Price Analysis: A Step By Step Approach • Analyzing Proposals • 14 Steps of Pricing

3. 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.

4. 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

5. 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

6. Proposal Analyses • Cost Analysis • Price Analysis • Cost Realism Analysis • Technical Analysis • Unit Prices • Unbalanced Pricing

7. Proposal Analysis Steps

8. Proposal Analysis StepsContinued

9. 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.

10. 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

11. 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.

12. 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)

13. 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

14. 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.

15. 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.

16. 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

17. 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

18. 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

19. Sample Pricing Model

20. Step 5 Begin Preparing Preliminary PNM • A Preliminary PNM is not duplication of effort. • It is essentially 2/3 of the final PNM • It can help avoid mistakes that may not be easily corrected after negotiations • 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

21. Step 6Start 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

22. 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

23. 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

24. 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

25. 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

26. 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.

27. 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

28. 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

29. FAR Price Analysis Methods FAR 15.404-1(b)(2) includes the following examples of methods of price analysis: • COMPARE PROPOSED PRICES

30. 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

31. 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

32. FAR Price Analysis Methods FAR 15.404-1(b)(2) includes the following examples of methods of price analysis: • COMPARE PROPOSED PRICES • PREVIOUS PRICES

33. 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

34. 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.

35. 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

36. 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

37. Step 8 Review Audit Report • Did Audit review all costs? • What did we request? • Are the results of the audit “qualified” for any reason? • Are there “unresolved” or “unsupported” costs? If so why? • 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?

38. 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)

39. 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?

40. Step 10 Perform Weighted Guidelines Analysis • DFARS 215.404-4 the use of the Weighted Guidelines tool to develop a pre-negotiation profit or fee objective • Except for: • Cost Plus Award Fee Contracts • Contracts with Federally Funded Research and Development Centers (FFRDCs)

41. Step 10 Perform Weighted Guidelines Analysis • Key Elements • Contractor Risk Factors • Contract Type Risk • Working Capital • Contractor Facilities Capital Employed • Cost Efficiency Factor

42. WEIGHTED GUIDELINES

43. 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

44. 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

45. Step 13 Complete Preliminary PNM • Everything but “Results of Negotiations” should be complete.

46. 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

47. What is a PNM? • Every PNM should show the contractor’s proposed amounts, the Air Force Objective, and the negotiated amounts by cost element.

48. 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.

49. 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

50. 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