Contract Pricing Principles

2. Contract Pricing Principles Breakout Session # 305 Monday, April 11, 2006 Time: 1:30 PM-2:30PM Presenter: Janie Maddox Corporate Learning Solutions NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

3. Seminar Objectives • Understand the principles of contract pricing from both the buyer(Govt.) and sellers(Federal Contractors) perspective NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

4. Contract Pricing and The Contracting Process Pre-Award and Solicitation Evaluation and Award Market Research Acq Planning Requirements Determination Competitive Or Sole Source Evaluation/ Negotiation Selection Award RFP PROPOSAL PREPARATION BUSINESS PLANNING . . . MARKETING NEGOTIATION CONTRACT ADMINISTRATION Completion / Payment / Closeout Performance Monitoring Contract/System Compliance Contract Modifications Kick off . . . SUBCONTRACTING . . . DELIVERY & COMPLIANCE . . . CHANGES, . . .. . . INVOICING . . . SCHEDULING MONITORING ACCEPTANCE CLAIMS & DISPUTES CLOSEOUT & COLLECTION Note: Shaded area represents contractors activities during each Phase NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. KEY POINT Market conditions, not the supplier’s cost, usually determine selling price. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. Reviewing the Purchase Request or Cost Estimate • How was the estimate made? • What assumptions were made? • What information and tools were used? • Where was the information obtained? • How did previous estimates compare with prices paid? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. Government Pricing Objectives Government Pricing Objective Purchase at fair and reasonable price Price each contract separately Exclude contingencies NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. Fair and Reasonable Price Reasonable • A price that a prudent and competent buyer would be willing to pay, given knowledge of: • Market conditions • Supply and demand • General economic conditions • Competition • Market definition • Relative pricing Fair • Fair to both the seller and buyer NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

9. FAR 15.405(a) States that: A fair and reasonable price does not require that agreement be reached on every element of cost NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

10. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Govt.’s Primary Techniques to Proposal Analysis • Price analysis shall be used when cost or pricing data are not required • Cost analysis shall be used when cost or pricing data are required • Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. Definitions of Price & Cost Analysis • Price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit. • Cost analysis is the review and evaluation of the separate cost elements and profit in a proposal and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. Definition of Cost Realism • Cost Realism means that the costs in an offeror's proposal are realistic for the work to be performed; • Costs reflect a clear understanding of the requirements; and are consistent with the various elements of the offeror's technical proposal. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. What is Cost Realism? • Is the process of independently reviewing and evaluating specific elements of each offeror's proposed cost estimate to determine whether the cost elements--- • are realistic for the work to be performed • reflect a clear understanding of the requirements • are consistent with the unique methods of performance and materials described in the offeror's technical proposal. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. Truth & Negotiation-Cost & Pricing Data Requirement • The threshold is $550,000 under the following when no exceptions apply: • The award of any negotiated contract • The award of a subcontract if prime or higher tier was required • Modification of a any sealed bid or negotiated contract where the the aggregate change exceeds $500,000 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. Exceptions to TINA/Cost & Pricing Data Requirements • Adequate Price Competion • Prices set by law or regulation • Acquisition of a commercial item • Where a waiver has been granted • Modifications for commercial items NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. Certificate Of Current Cost Or Pricing Data This is to certify that, to the best of my knowledge and belief, the cost or pricing data (as defined in section 15.401 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4) submitted, either actually or by specific identification in writing, to the contracting officer or to the contracting officer's representative in support of ________* are accurate, complete, and current as of ________**. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreements between the offeror and the Government that are part of the proposal. Firm __________________________________________ Signature _______________________________________ Name _________________________________________ Title ___________________________________________ Date of execution*** _____________________________ * Identify the proposal, request for price adjustment, or other submission involved, giving the appropriate identifying number (e.g., RFP No. ). ** Insert the day, month, and year when price negotiations were concluded and price agreement was reached or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price. *** Insert the day, month, and year of signing, which should be as close as practicable to the date when the price negotiations were concluded and the contract price was agreed to. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. Price Analysis The process of examining and evaluating a proposed price to determine if it is fair and reasonable, without evaluating its separate cost elements and proposed profit. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

19. Seven Methods of Price AnalysisFAR 15.404-1(b) • Compare proposed prices • Compare previous prices • Complete a parametric analysis • Consult catalog or published prices • Obtain government estimates • Look at current market prices • Use pricing information provided by offeror The first two techniques listed are the preferred techniques NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

20. Comparison of Proposed Prices • Comparison of Proposed Prices is a method by which the analyst compares offers received in response to a solicitation. • Selecting the best value based on comparing the offers usually results in a reasonable price • Analyst is looking for Adequate Price Competition(APC) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

21. Adequate Price Competition • The CO must receive at least two offers • Each offeror must be competing independently of one another. • Proposals must satisfy government requirements. • Best value award, price and other factors must be considered. • Price offered should not be unreasonable. • Price is a substantial factor. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

22. One Offer APC • Can APC exist with only one offer in a competitive solicitation? Yes,under the following conditions: • There was a reasonable expectation that two or more responsible offerors would submit offers. • The Contracting Officer can reasonably conclude that the offer was submitted with the expectation of competition: • Circumstances indicate that the offeror believed at least one other offeror was capable of submitting a meaningful offer. • The offeror had no reason to believe the other potential offerors did not intend to submit an offer. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

23. Compare to Previous Prices • Validate a price by looking at a previous price that was paid for the same or similar item and that has been determined to be reasonable. • It is important to consider the following: • Was it a competitive price? • Was it sole source or commercial? • How long ago was that price paid? • What was the quantity? • Were there technical or market changes that would affect price? [Depending on the answers to these questions, the previous price will need to be adjusted accordingly in order to make it useful and valid for comparison ] NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

24. Important Points • When comparing previous prices, be aware of the following circumstances that may make a comparison suspect: • New item vs. overhauled items with the same National Stock Number (NSN)* • Urgent vs. normal delivery schedule • Technological changes • Configuration changes • Terms and conditions • Manufacturing process changes • Market conditions NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

25. Parametrics • A Parametrics Analysis is a means of determining prices based on a mathematical formula. • a valid and accepted price analysis method that is occasionally used. • A detailed Parametrics Handbook detailing how to apply parametrics to government contracting is available at: http://www.ispa-cost.org/PEIWeb/newbook.htm NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

26. Container A Container B Parametric Calculations in developing a CER Container X CER 15 Cost ($K) 1000 Square Feet NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

27. Cost Estimating Relationships(FAR 15.404-1(b)(2)) • Has the CER been widely accepted in the market place? • Does the CER produce reasonable results? • How accurate is the CER? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

28. Catalog Prices • The FY99 Authorization Act states that “when obtaining information from the offeror is necessary, …information submitted by the offeror shall include, at a minimum, appropriate information on the prices at which the same or similar items have been sold previously…”. • Compare the offered prices found to the actual sales prices of the same or similar items sold by that offeror. • The offered catalog prices should be considered a sole source offer to be negotiated. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

29. Catalog Pricing • In addition to price, it is important to take into account the following: • Trade discounts • Terms and conditions • Quantity discounts • Payment terms NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

30. Catalog Pricing (cont’d)How do you find about these? • Do Market Research: • This is critical. To negotiate reasonable prices, it is important to understand the market • Contact other agencies/companies: • Often, other agencies/companies will have bought the same or similar item and can provide advice or comparisons.  • Ask offeror for access to sales invoices: • This will allow you to find out prices, current discounts and other factors affecting similar sales. • The offeror may give you access to actual sales invoices but not allow you to take notes or make copies. May require non-disclosure • Actual Sales Information, discounts and terms • The FY99 Authorization Act provides for access to this information NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

31. GSA Schedule • GSA Schedule should not be used as the sole basis for determining a reasonable price. • a valuable starting point, but additional analysis is required. • GSA does perform price analysis, but it is limited. • GSA encourages negotiation of schedule prices, especially if the buy is for large quantities. • GSA prices frequently represent a quantity of one. • Use GSA prices as a data point for comparison, but don't rely on them exclusively. • They must be supplemented with other analysis. [If you use GSA prices, document the manner in which they were used.] NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

32. Comparison to Government Estimates • A government estimate is usually developed for budgetary purposes, and should not automatically be considered reasonable • If the government estimate significantly varies from the proposed prices, try to identify and quantify the primary reasons for the difference. These may include: • Technical differences • Market conditions • Budget constraints NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

33. Using Market Research • As a price analysis method means: • pricing of same or similar items offered in the commercial marketplace that may or may not be offered to the Government. • the conditions and environment surrounding the price must be evaluated for similarity to purchase • One sources of detailed information on performing market research is found at: https://www.afmc-mil.wpafb.af.mil/HQ-AFMC/PK/pkp/pkpc/mr-caqc.htm • Critical!FAR 10.002(e) states that you must document your market research. It doesn't say how. Use your best judgment. Make sure to document who you talk to, what you discuss, and other sources you use for information. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

34. Comparative Analysis • Side by side comparison of price lists • Printed Price lists • Online Web Services NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

35. Price Comparison • Comparison uses five steps: • Select prices for comparison to: • Competitive prices. • Commercial prices. • Historical prices. • Price estimates base. • Independent Company Estimates (ICE). • Identify compatibility factors. • Determine the potential impact of these factors. • Adjust prices. • Compare adjusted prices to the offer. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management Price Analysis Section 2.8.3 Created: 09/24/2004

36. Pricing Information from Offeror • If other methods do not provide support for a reasonable price, the Govt. buyer can request information other than cost or pricing data. • This may include information on labor rates and hours, material costs and similar details. • The information will not be certified under the Truth in Negotiation Act. • This information could be part of the proposal or a separate fact-finding request. • The information will usually be in company format. [Obtaining information other than cost or pricing data is the least preferred way of obtaining support for a reasonable price because it is the most intrusive] NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

37. Cost analysis the review and evaluation of the separate cost elements and profit in a proposal and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

38. Cost Analysis of Cost Proposal elements: • Material • Bill of Material • Purchased Parts • Subcontracts • Labor • Labor Mix • Labor Hours and Rates • Overhead Rates • Profit/Fee NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

39. Cost Allowability • A cost can be properly charged to a contract when it is-- • Reasonable • Allocable • IAW Appropriate Accounting Practices • IAW Terms of the Contract • and not disallowed by FAR Part 31 Cost Principles NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

40. Direct and Indirect Costs • Direct Costs- Any cost that can be identified specifically with a final cost objective • Indirect Costs-Any cost that cannot directly be identified with with a single, final cost objective NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

41. Composition of Indirect Costs • In general, indirect cost accounts fall into two broad categories: • Overhead-These are indirect costs related to support of specific operations. Examples include: • Material Overhead • Manufacturing Overhead • Engineering Overhead\ • Field Service Overhead • General and Administrative (G&A) Expenses-These are costs related to the general management and administration of the business unit as a whole. Examples of G&A Expense include: • Salary of the executive staff of the corporate or home office • Salary of staff services such as legal, accounting, & public relations, • Selling and marketing expenses NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

42. Allocation of Indirect Cost • Indirect Costs are charged to a particular product though the use of indirect cost rates • Indirect Cost Rate = Indirect Cost Pool/Indirect Cost Allocation Base • Calculated by dividing a pool of indirect costs(e.g. Overhead,G&A) for the period by the allocation base (e.g. direct labor hours, direct labor cost) for the same period NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

43. Subcontract Pricing • The CO must determine price reasonableness for subcontracting costs • Even when subcontract prices have been negotiated before negotiation of the prime contract • The prime contractor or subcontractor shall: • Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices • Include the results of these analyses in the price proposal NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

44. Commercial Item Pricing • CO must establish price reasonableness in accordance with • FAR Subsections 13.106-3 or 14.408-2 • or FAR Subpart 15.4 • as applicable NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management