Contract Pricing and Pricing Strategies

1. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Contract Pricing and Pricing Strategies Beverly Arviso, CPA, CPCM, CFCM, NCMA Fellow Arviso, Inc. beverly@arvisoinc.com 757-373-9536

2. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Learning Objectives Planning the Pricing Strategy Understanding the Requirements Cost or Pricing Data Price Analysis Cost Analysis and Cost Realism Analysis Indirect Rates and Competitive Rate Strategies Best Practices

3. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Planning the Pricing Strategy Identify core business areas and what opportunities to pursue Develop a bid/no bid decision process Develop a Bid and Proposal (B&P) budget Start the proposal activity early in the process Identify the proposal team Internal and external parties FAR 52.219-14 Limitation on Subcontracting Teaming Agreements Non-Disclosure Agreements

4. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Planning the Pricing Strategy Develop a proposal schedule Include due dates for the pricing team Prepare a compliance matrix Include assignments and responsible author with clear due dates Schedule kick-off meeting with teaming partners

5. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Understanding the Requirements Obtain a clear understanding of the requirements Read the solicitation (and read it again, and again, and again…..) Determine the contract type(s) Section B, Supplies or Services and Prices/Cost Section C, Statement of Work Section L, Instructions, Conditions, and Notices to Offerors Section M, Evaluation Factors for Award Clarifications, discussions, and negotiations Evaluated price vs. proposed price

6. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Understanding the Requirements Pricing Policy (FAR 15.402) Contracting Officers SHALL: Purchase supplies and services from responsible sources at fair and reasonable prices may require certified or other than cost or pricing data to make that determination Price each contract separately and independently NOT include any amount for a specified contingency to the extent that the contract provides for a price adjustment based on the occurrence of that contingency

7. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost or Pricing Data Policy on cost or pricing data Do not obtain more information than necessary Data collection and preparation is expensive Order of preference for type of data required No additional information is needed if the price is based on adequate price competition Information other than cost or pricing data (Certified) cost or pricing data

8. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost or Pricing Data Cost or pricing data (defined at FAR 2.101): Factual, not judgmental and are verifiable More than just historical data, cost or pricing data includes all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred

9. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost or Pricing Data Cost or pricing data (defined at FAR 2.101): Include, but not limited to, such factors as Vendor Quotes; Nonrecurring costs; Information on changes in production methods and in production or purchasing volume; Data supporting projections of business prospects and objectives and related operations costs; Unit-cost trends such as those associated with labor efficiency; Make-or-buy decisions; Estimated resources to attain business goals; and Information on management decisions that could have a significant bearing on costs.

10. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost or Pricing Data Threshold for requiring certified cost or pricing data is >$700,000 Exceptions to certified cost or pricing data Prices are based on adequate competition Prices agreed upon are based on prices set by law or regulation Commercial item acquisitions When a waiver is granted When modifying a contract or subcontract for commercial items

11. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost or Pricing Data Other circumstances where certified of cost or pricing data are not required Exercise of an option at the price established at contract award or initial negotiation Proposals used solely for overrun funding or interim billing price adjustments

12. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Price Analysis Examination and evaluation of a proposal without evaluating each separate cost element or proposed profit Always involves some form of comparison Competition in the market determines the price to be fair and reasonable Price analysis is required in every acquisition

13. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Price Analysis Price Analysis Techniques Comparison to other proposals received Comparison of previously proposed prices for the same or similar items or service Commercial items or services Prices set by law or regulation Catalog prices Independent Government Cost Estimates (IGCE)

14. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Price Analysis Price Analysis alone may not be sufficient for Sole source procurements, including FFP Modifications or changes to existing contracts

15. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost Analysis and Cost Realism Analysis Cost Analysis The review and evaluation of separate cost elements and profit or fee proposed to determine a fair and reasonable price or to determine cost realism, 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

16. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost Analysis and Cost Realism Analysis Cost Analysis Techniques Verification of cost or pricing data and evaluation of cost elements Evaluate the effect of the offeror’s current practices on future costs Compare costs proposed for individual cost elements Verification that the offeror’s cost submissions are in accordance with FAR Part 31 and CAS (if applicable) Review to determine whether any cost data or pricing data, necessary to make the proposal suitable for negotiations, have not been either submitted or identified in writing by the offeror Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs

17. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost Analysis and Cost Realism Analysis Cost realism means that the costs in an offeror’s proposal Are realistic for the work to be performed, Reflects a clear understanding of the requirements, and Are consistent with the various elements of the Offeror’s technical proposal

18. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost Analysis and Cost Realism Analysis Cost Realism Analysis Examination of proposed costs and/or prices to ensure the price the government will pay is consistent with the required contract effort Performed on cost reimbursement contracts to determine the most probable cost of performance for each offeror May differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal

19. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Cost Analysis and Cost Realism Analysis Two Objectives of Cost Realism Analysis Determine if the proposed cost/price realistically reflects the effort required to perform the contract Consider the risk in the award decision, i.e., if the offeror refuses to support the realism of the estimates and refuses to make changes, the contracting officer must assess the risk to the Government when making the award decision

20. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Indirect Rates and Competitive Rate Strategies Direct Costs Direct labor Subcontract Costs Travel Material Other Direct Costs (ODCs) Indirect Costs Fringe Overhead General and Administrative (G&A) Unallowable Costs

21. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Indirect Rates and Competitive Rate Strategies Indirect Rate Calculation = cost pools/allocation base Pools are defined by placing costs in logical groupings, e.g., fringe costs, overhead costs, G&A costs, unallowable, etc. The allocation base is defined as some measure of cost that can be used to allocate the pool cost, e.g., direct labor hours, direct labor dollars, machine hours, etc. Cost Pools

22. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Indirect Rates and Competitive Rate Strategies Indirect Rate Development Develop estimate on an account by account basis Identify increases in direct and indirect wages Identify increases to statutory fringes based on increased wages Additional 401k, medical, dental, vision, worker’s compensation Additional office space, dues and subscriptions, training, phones, etc.

23. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Indirect Rates and Competitive Rate Strategies Indirect Rate Development Cont’d Provide forecast of indirect rates for all years, converted from contractor fiscal year to contract year Explain how indirect costs and rates are computed Explain how indirect rates are applied Provide cost breakdowns, trends, and budgetary data

24. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Indirect Rates and Competitive Rate Strategies Create multiple fringe rates Create service centers Create multiple overhead rates Change from total cost input G&A to value added G&A Redefine the treatment of costs from indirect to direct Rate ceilings

25. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Best Practices Read RFP carefully to ensure it doesn’t violate CAS or FAR G&A on travel is allowable if it is consistent with the offeror’s accounting practices Review solicitation website often for changes Prepare, update, and delivery proposal using a compliance matrix that is updated as changes to the solicitation are made Clearly align technical proposal with cost/price proposal

26. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Best Practices Reduce math errors or inconsistencies in the cost/price proposal by Using rounding Use of an independent party to verify cost proposal on a calculator Negotiate proper subcontract types Beware of fixed fee dilution Be audit ready Due date/time Pricing resource: http://www.acq.osd.mil/dpap/cpf/contract_pricing_reference_guides.htm

27. TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org Questions Beverly Arviso, CPA, CPCM, CFCM, NCMA Fellow Arviso, Inc. beverly@arvisoinc.com 757-373-9536