Contract Pricing Principles

2. Contract Pricing Principles Breakout Session # 303 Monday, April 14, 2008 Time: 3PM-4PM Presenter: Janie Maddox Corporate Learning Solutions

3. Objectives • Understand the objectives of pricing • Recognize the differences between price and cost analysis and cost realism and when to use

4. Definitions and Acronyms • CER - Cost Estimating Relationship • Commercial prices: Prices being paid by the general public for a product • Competitive prices: Offers received under conditions of adequate price competition • Cost Analysis: The review and evaluation of the separate cost elements and profit in an offeror’s proposal • Fair price: Price that is fair to the buyer, fair to the seller, and reasonable, under market conditions • Price analysis:The process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit • Reasonable price: Price that a prudent and competent buyer would be willing to pay, given available data

5. The Contracting Process When does pricing occur? Pre-Award and Solicitation Evaluation and Award Requirements Determination Market Research Selection/Consent/ Approvals Acq Planning Competitive Or Sole Source Evaluation/ Negotiation Award RFP BUSINESS PLANNING . . . MARKETING PROPOSAL PREPARATION NEGOTIATION CONTRACT ADMINISTRATION Performance Monitoring/ Payments Physical Completion/ Closeout Contract/System Compliance Contract Modifications Kick off . . . SUBCONTRACTING . . . DELIVERY & COMPLIANCE . . . CHANGES, . . .. . . INVOICING . . . SCHEDULING MONITORING ACCEPTANCE CLAIMS & DISPUTES CLOSEOUT & COLLECTION Note: shaded represents contractors activities during each Phase

6. Definition of Price and Pricing • Price: FAR definition (FAR 15.401) Cost plus any fee or profit (applicable to the contract type) • Pricing: The process of establishing a reasonable amount or amounts to be paid for supplies or services

7. Pricing Objectives • To seller, contract pricing has two primary, related objectives: • To cover costs • To contribute to attaining corporate operational objectives

8. KEY POINT Market conditions, not the supplier’s cost, usually determine selling price.

9. Buyer’s Pricing Objectives The buyer’s pricing objective for all procurement actions is to acquire supplies and services from responsible sources at fair and reasonable prices

10. Government Pricing Objectives Government Pricing Objective Purchase at fair and reasonable price Price each contract separately Exclude contingencies

11. What is a Fair and Reasonable Price? • A Reasonable Price • A price a prudent buyer would be willing to pay, given knowledge of: • Market conditions • Supply and demand • General economic conditions • Competition • Market definition • Relative pricing • A Fair Price • Fair to both parties (buyer and seller) under market conditions

12. Establishment of Fair and Reasonable • Market Research: • This is critical. To establish reasonable prices, it is important to understand the market • In establishing the reasonableness of the offered prices, You must obtain sufficient information to make a “fair and reasonable determination”.

13. Establishment of Fair and Reasonable Use this order of preference in obtaining information: • (1) No info if based on adequate price competition • (2)“Information Other Than Cost Or Pricing Data”: • When cost or pricing data is not required • Info related to prices (e.g., established catalog or market prices or previous contract prices), relying first on: • info available within the Government; • on info obtained from sources other than the offeror; and, if necessary, • on info obtained from the offeror. • unless an exception under FAR 15.403-1(b)(1) or (2) applies, the offeror shall include, appropriate info on the prices at which the same or similar items have been sold previously

14. Establishment of Fair and Reasonable • (3) Cost or pricing data. • Ascertain whether a fair and reasonable price can be determined before requesting c or p data • Do not require unnecessarily the submission of cost or pricing data, because it leads to: • increased proposal preparation costs, • generally extends acquisition lead time, and • consumes additional contractor and Government resources.

15. Contingencies

16. Price Negotiation • FAR 15.405(a) States that: • A fair and reasonable price does not require that agreement be reached on every element of cost • Whether analyzing cost or price— • The primary concern is the overall price • The negotiation objective is to: • negotiate a procurement action of a type and with a price that provides supplier with the greatest incentive for efficient and economical performance

17. 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

18. Primary Techniques to Proposal Analysis • Cost analysis • Price analysis • Secondary Technique • Cost Realism

19. Cost Analysis • The review and evaluation of the separate cost elements and proposed profit/fee of: • An offeror’s cost or pricing data or information other than cost or pricing data and • The judgmental factors applied in projecting from the data to the estimated costs • Cost analysis shall be used when: • cost or pricing data are required in accordance with FAR 15.403 (Truth in Negotiations Act)

20. Cost or Pricing Data Requirements: • The threshold is $650,000 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 $650,000

21. Exceptions to Cost & Pricing Data • Adequate Price Competition • Prices set by law or regulation • Acquisition of a commercial item • Where a waiver has been granted • Modifications for commercial items

22. 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.

23. Cost Proposal Elements • Material • Bill of Material • Purchased Parts • Subcontracts • Labor • Labor Mix • Labor Hours and Rates • Overhead Rates • Material • Direct Labor • G&A • Profit/Fee

24. Cost Analysis-An application of judgment • The review and evaluation of the separate cost elements and profit in a proposal and • The application of judgmentto determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency

25. Price Analysis • The process of examining and evaluating a proposed price to determine if it is fair and reasonable, without breaking down the price and evaluating its separate cost elements and proposed profit. • Price Analysisshall be used when cost or pricing data are not required. However, should be used always to verify overall price reasonableness when cost analysis is performed

26. Price Analysis Comparisons

27. Price Analysis- A Comparison with other Prices • Price Analysis is essentially “Value Comparison” • Price analysis always involves some form of comparison with other prices. • Price Analysis comparisons are dependent up available data. • You are responsible for gathering the pricing data available and selecting the appropriate comparisons that you will use in determining if a price is fair and reasonable.

28. Forms of Price Analysis Comparisons • Comparison of proposed prices with: • proposed prices received in response to a solicitation;  • previously proposed prices and contract prices for the same or similar items; • estimates made through the application of CERs (e.g. dollars per sq. ft.);  • published price lists or established market prices; • independent cost estimates; • prices obtained through market research for the same or similar items. • When limited/no pricing data available: • Analysis of pricing information provided by the offeror. [The first two comparisons listed are preferred]

29. Price Analysis Evaluation • Price analysis is a subjective evaluation • “For any given procurement, different bases for price analysis may give you a different view of price reasonableness. • Even given the same information, different buyers might make different decisions about price reasonableness.” Quote from: JA White & Assoc.

30. Cost Realism Analysis • 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. • Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.

31. Wrap Up

32. Thank You for Attending!