Cost analysis

1. Price and Cost Analysis
Compared
1


Price Analysis is the process of examining and
evaluating a proposed price without evaluating its
separate cost elements and proposed profit.
 Determines whether the price is fair and reasonable.
Cost Analysis

 Evaluates the separate cost elements, profit, and facilities
capital cost of money (if proposed).
Used to evaluate/determine any or all of the following:



cost and/or price reasonableness
cost realism
most probable cost and/or price
 It is the more costly method in terms of time and manpower.

2. 5
Definition of Cost Analysis
The review and evaluation of the separate
cost elements and profit in an offeror’s or
contractor’s proposal (including cost or
pricing data or information other than cost
or pricing data), and the application of
judgement to determine how well the
proposed costs represent what the cost of
the contract should be, assuming
reasonable economy and efficiency (FAR
15.404(c)(1)).

3. Cost Analysis: When to apply it.


3



It is performed if certified cost or pricing data are required.
It may be used to evaluate information other than cost or
pricing data, e.g., non-certified cost data.
Normally, it is not needed if adequate price competition
exists. In this case, it still may be used if the price is
determined to be unreasonable or you are considering a cost
realism evaluation [see FAR 15.305(a)(1)].
Cost analysis is one of the approaches that should be used
when a cost realism evaluation is required.
When you perform a cost analysis, you should also include a
price analysis to verify price reasonableness.

4. engineering
m
anufacturing
field service
ILS
direct labor
travel
vendor
tooling
odc
raw material
purchased parts
standard commercial
items
subcontracts
direct material
direct cost
engineering
m
anufacturing
field service
ILS
m
aterial
handling
burden (O/H)
engineering
m
anufacturing
field service
ILS
m
aterial
handling
G&A
G&A FCCM (COM)
indirect cost
cost profit
Contract Price
Contract Price = Cost + Profit
4

5. Direct Costs (FAR 31.202)
5



Definition: Direct costs are identifiable to a final
cost objective (a particular contract).
Examples: direct material and direct labor.
All costs identified specifically with a contract
are direct costs for that contract and shall not be
charged to another contract directly, or indirectly.
No cost shall be charged to a contract as a direct
cost, if other costs incurred for the same purpose
in like circumstances have been charged as an
indirect cost.

6. Indirect Costs (FAR 31.203)
6



Definition: Indirect costs are not directly
identifiable with a final cost objective (e.g. a
particular contract), but identified with two or
more final cost objectives.
The distribution of indirect costs to various
contracts should roughly be based on the benefits
received on each contract.
No cost shall be charged to a contract as an
indirect cost if other costs incurred for the same
purpose in like circumstances have been charged
as a direct cost to that contract or any other
contract.

7. Alternative Direct Cost
Treatment (FAR 31.202)
7
 For practicality, any direct cost of minor
dollar amount may be treated as an indirect
cost if this treatment:
 Is consistently applied across all contracts,

and
Produces substantially the same results as
treating the cost as a direct cost

8. 14
Proposal Major Cost Elements
 Direct Labor Cost



Labor Categories
Labor Rates
Labor Hours
 Direct Material Cost
 The Actual Materials


Raw material
Purchased parts and/or
assemblies



Subcontracts
Miscellaneous material
Discounts, Scrap,
Inventory Shrinkage, &
Freight-in
Indirect Costs
Material Handling
Fringe Benefits
Overhead (or burden)
G&A Expenses
Other Direct Costs
Nonrecurring costs
Subcontracts
Travel
Profit or Fee
Cost of Money
Escalation

9. 15
Cost Analysis: First Step


Pre-solicitation involvement by the price/cost analyst
(FSO) and engineer (ESO) is recommended
 Price/cost input
 Section B set-up, Price/Cost Evaluation Template, Section L
price/cost data requirements, and Section M price/cost evaluation
factors
 Engineering and price/cost input
 SOW/PWS
Read the solicitation, section B, and SOW/PWS
 What is being purchased?
 Not as easy as looking at the Section B CLINs and/or SLINs
 What are the solicitation requirements for the contractor and the
government?

10. 16
Cost Analysis: Second Step
 Read the contractor’s proposal price/cost
narrative
 It will discuss the contractor’s proposal structure,
assumptions, rationale, etc.


The length and quality will vary
An important source of proposal information


Study/know the proposal set-up
Check the math:
 Is the arithmetic correct? The Section B unit prices multiplied by
the quantities result in the total amounts?
 Do the amounts “foot”? Do they add-up and/or calculate
correctly?
 Do the numbers “track”? Can the figures be traced among the
support schedules?

11. Cost Analysis: Third Step
11
 What is the basis of the proposed cost?




How did you come up with this number?
What is your rationale?
What are your assumptions?
What are the calculations you used?
 The contractor’s responses provide the
answer to the question:
 Why is this price and/or cost reasonable?

12. Cost Estimating Methods Used
by the Contractor
12
 Common methods:



 Round Table: Experts get together and make
judgments on projected costs
Comparison: Adjustments are made to a past or
current item to derive the cost
Parametric: Projections are based on formulas, or cost
estimating relationships
Detailed: A thorough review is made, with detailed
information comprising the estimate
An offeror may use any generally accepted estimating
methods that are equitable and consistently applied in
similar situations.

13. FAR 15.404-4(c) Contracting
Officer Responsibilities: Profit
13
 Contracting officer responsibilities.

 (1) When the price negotiation is not
based on cost analysis, contracting
officers are not required to analyze profit.
(2) When the price negotiation is based on
cost analysis, contracting officers in
agencies that have a structured approach
shall use it to analyze profit.

14. DFARS 215.404-4(b)(1) Profit
14
 Departments and agencies must use a
structured approach for developing a pre-
negotiation profit or fee objective on any
negotiated contract action when cost or
pricing data is obtained, except for cost-plus-
award-fee contracts or contracts with
Federally Funded Research and
Development Centers.


DFARS 215.404-70 DD FORM 1547
DFARS 215.404-71 Weighted Guidelines Method

15. FAR 15.404-4(c)(4):
Fee - Statutory Limitations
15



For R&D work performed under a CPFF contract, the fee
shall not exceed 15% of the contract’s estimated cost,
excluding fee.
For architect-engineer services for public works or
utilities, the contract price or the estimated cost and fee
for production and delivery of designs, plans, drawings,
and specifications shall not exceed 6% of the estimated
cost of construction of the public work or utility,
excluding fees.
For other CPFF contracts, the fee shall not exceed 10% of
the contract’s estimated cost, excluding fee.

16. Source Selection Sect M:
Cost/Price Evaluation Criteria
16



Price Reasonableness: No FAR definition – see next slide
Cost Realism: Measure of the appropriateness of a cost to its
corresponding work element. The Government will determine if the
proposed costs/price(s) are realistic for the work to be performed,
reflect a clear understanding of the solicitation’s requirements, and
are consistent with the various elements of the Offeror’s technical
proposal (FAR 15.404-1(d)).
Completeness (non-FAR definition): An accurate reflection, within
the cost/price proposal, of all aspects of the technical proposal;
compliance with the cost/price preparation instructions in the RFP
Section L – Instructions, Conditions, and Notices to Offerors; and
compliance with any other applicable directions.

17. 36
Cost Realism Analysis FAR 15.404-1(d)(2)
(Cost Reimbursement Contracts)
 The following apply to both competitive and sole source
environments:

 Government shall perform cost realism analyses for cost-
reimbursement contracts.
 Individually determine the probable cost of performance of each
offeror.
 Probable Cost is the government’s best estimate of the cost of any
contract that is likely to result from the offeror’s proposal.
 Probable cost determined by adjusting each offeror’s
costs, and fee when appropriate, to reflect any
understatements or overstatements based on the results
of the cost realism analysis.
 For a CPFF contract, the fee would not be adjusted.
Probable cost is used in deciding best value.
(Competitive environment only).

18. 37
Cost Realism Analysis FAR 15.404-1(d)(3)
(Competitive Fixed Price Contracts)


May be performed on Fixed Price Incentive contracts.
Situations where cost realism analysis may be done on
competitive fixed price contracts:
 When new requirements may not be fully understood by
competing offerors, or
 There are quality concerns, or
 Past experience indicates that contractors’ proposed costs have
resulted in quality or service shortfalls


You cannot adjust offered prices as a result of the cost
realism analysis.
Results of the analysis may be used in performance risk
assessments and responsib ility determ inations.

19. 38
Cost Realism Analysis
and Cost Analysis
 There is a difference between the two, but


Confusion between the terms
Often used interchangeably
 Cost Realism Analysis applies to source
selections
 Used to verify that the contractor’s technical approach
has been priced in the proposal
 Used mainly on cost reimbursement type contracts
 Used to determine the Probable Cost of Performance
(Most Probable Cost)
 Cost Analysis methods/procedures are used to
determine Cost Realism.

20. Technical Analysis
[FAR 15.404-1(e)]
20


Evaluation performed by personnel having specialized
knowledge, skills, experience, or capability in
engineering, science, or management on proposed
material types and quantities, labor, processes, special
tooling, facilities, reasonableness of scrap and spoilage,
and other factors in the proposal in order to determine the
need for and reasonableness of the proposed resources.
At a minimum:
 examine the types and quantities of material (“kinds and
quantities” evaluation)
 and the need for the types and quantities of labor hours and the
labor mix (skill and category)

21. Field Pricing Support & the
Cost or Pricing Data Threshold
21
 DFARS 215.404-2(a):
 PCO should consider field pricing support for


Fixed price proposals exceeding $650K
Cost type proposals exceeding $650K from offerors with
significant estimating system deficiencies
 Cost type proposals exceeding $10 million from offerors
without significant estimating system deficiencies
 PCO should not request field pricing support for
proposals less than $650K; exceptions:


lack of knowledge of particular contractor
sensitive conditions/problem areas

22. Points to Consider When
Requesting Field Pricing Support
 Per FAR 15.404-2(a)(1):
 The contracting officer should request field pricing assistance
when the information available at the buying activity is
inadequate to determine a fair and reasonable price; tailor
requests to reflect the minimum essential supplementary
information needed to conduct a technical or cost or pricing
analysis.
 Consider cost risk!
 Contract type: there is more risk on a FFP than CPFF or CPAF
contracts.
 Proposal total dollar value
 The DCAA PLA or FA can help determine the type of65
field pricing support/audit services needed.

23. FSO is the POC for DCAA
23
 Request DCAA audits through the FSO



Submit audit request to DCAA
Receive/file DCAA audit reports
Tracking/report status of DCAA audits
 AFARS 5142.1-90-2
 Contract Audit Follow Up (CAFU) Program



DoDD 7640.2
AFARS 5142.1-90-2
SOP Number 25

24. Contract Audit Follow Up
(CAFU) Program (1 of 2)
24


Track/provide status of “reportable audits”
Reportable Audits
 Estimating/accounting system and internal control
reviews
 Incurred costs including final indirect cost rates
 Claims
 Defective pricing reviews
 Termination settlements
 CAS issues/cost impact statement reviews

25. Contract Audit Follow Up
(CAFU) Program (2 of 2)
25



Recent revision: DCMA database now used
Rules/procedures?
Reviewed/updated:


March 31st
September 30th
 Overage Audit Review Board
 Discuss unresolved DCAA audits over 6 months old
with the Commander
 Bottom Line: reportable audits must be resolved
in a timely manner

26. Section 6 - Cost Allowability

27. 70
Factors Affecting Cost
Allowability (FAR 31.201-2)
 Reasonableness
 Allocability
 Accounting Principles &
Standards
 Contract Terms

28. Reasonableness - (FAR 31.201-3)
28


Definition: A cost is reasonable if, in its
nature and amount, it does not exceed what
a prudent person would pay in the conduct
of competitive business.
Considerations



Is the cost necessary?
Is the cost consistent with sound business
practice and law?
Are the contractor’s purchases done on an
“arm’s-length basis”?

29. Allocability - (FAR 31.201-4)
29


Definition: A cost is allocable to one or more
cost objectives (e.g., contracts) if it is charged
based on the relative benefits received or some
other equitable relationship.
A cost is Allocable to a Government contract if:



It is incurred specifically for the contract, or
It benefits the contract and other work (e.g. it’s
an overhead cost), and can be fairly distributed
based on benefits received, or
It is necessary to overall operation of the
business (e.g. certain G&A expenses).

30. 73
The Most Common Ways Costs are
Incurred



Expend Cash - Actual outlay of dollars (by cash,
check, etc.) in exchange for goods or services.
(e.g. Pay a vendor for raw materials)
Accrue Expense - For accounting purposes,
because a future obligation is being incurred or
an asset is being used. (e.g. Incurring an
obligation to current workers, for their future
pensions)
Use Inventory - For example, contractor buys
inventory in advance and charges it to contracts
as inventory is used.

31. Sources of Accounting
Principles & Standards
31
 Generally Accepted Accounting
Principles (GAAP)
 Cost Accounting Standards (CAS)
 FAR Part 31 Contract Cost Principles
and Procedures

32. Accounting: Financial & Cost
32

In semi-plain English:
Accounting is the process of identification, measurement,
and communication of financial information about
economic entities to interested parties. Two types:

 Financial accounting focuses on measuring the results of an
organization’s operations for a period of time, reflected in the
financial statements.
Cost (or management) accounting focuses on cost allocation to
a product, service, or contract; management uses the information
to plan, evaluate, and control within its organization and to assure
appropriate use of, and accountability for, its resources.

33. Generally Accepted Accounting
Principles (GAAP)
33


Generally Accepted Accounting Principles or GAAP
refers to the common set of accounting concepts,
standards, and procedures which represent a general
guide.
GAAP principles are those that have substantial
authoritative support or are based on accounting practices
accepted over time by prevalent use.
 Financial Accounting Standards Board (FASB), American
Institute of CPAs (AICPA), Accounting Principles Board (APB),
etc.
 The end products of the accounting cycle, the financial
statements (balance sheet, income statement, etc.) are
prepared in accordance with GAAP.

34. Cost Accounting Standards (CAS)
(1 of 2)
34
 Purpose of CAS:
 Promulgate standards to achieve uniformity
and consistency in cost accounting practices
to be followed by contractors and
subcontractors for defense contracts. It is an
attempt to provide common ground between
the contractors and the federal government on
cost accounting issues during proposal
preparation, negotiations, etc.

35. Cost Accounting Standards (CAS)
(2 of 2)
35





Currently, there are 19 standards.
Cost Accounting Standards Board (CASB) administers
CAS: five members, includes representatives from
government, industry, and academia.
CAS/CASB was originally established in August 1970
under the legislative branch.
Ceased operations September 30, 1980 due to lack of
funds.
Re-established in November 1988 under the executive
branch within Office of Federal Procurement Policy
(OFPP) which is under Office of Management and
Budget (OMB).

36. Exemptions From CAS (1 of 2)
36
 Eleven exemptions, with the most common (7)
below:





Sealed bid contracts.
Negotiated contracts/subcontracts less than $650,000.
Contracts & subcontracts with small businesses.
FFP & FFP with EPA contracts/subcontracts for the
acquisition of commercial items.
FFP contracts & subcontracts awarded on the basis of
adequate price competition without the submission of
cost/price data.

37. Exemptions From CAS (2 of 2)
37
 Contracts/subcontracts in which the price is set
by law or regulation.
 Contract/subcontract executed and
performed outside the U.S., its territories, and
its possessions.

38. CAS Coverage
38
 Two types of CAS can be applicable, depending on the
dollar value of previous awards and current acquisitions.
 Full coverage: comply with all CAS in effect on the contract
award date and with any new standards.
 Modified coverage: requires contractor to comply with four
standards



 CAS 401, Consistency in estimating, accumulating, & reporting
costs.
CAS 402, Consistency in allocating costs incurred for the same
purpose.
CAS 405, Accounting for unallowable costs.
CAS 406, Cost accounting period.

39. 82
CAS - Disclosure Statement
 Firms that have contracts/subcontracts subject to
full CAS coverage should have submitted a
CASB Disclosure Statement, providing
information on how they charge specific types of
costs.
 Contractor discloses/documents company accounting
practices to the government.
 The ACO and cognizant DCAA auditor are
responsible for reviewing the contractor’s
Disclosure Statement for adequacy, and for
compliance with FAR Part 31 and CAS.

40. GAAP vs. CAS
40




GAAP and CAS are not the same.
GAAP generally refers to financial, not cost,
accounting guidance.
CAS is an attempt to extend GAAP-like guidance
to government cost accounting.
CAS Objectives:
 Common cost treatment, same terminology, and the
avoidance of cost manipulation (gaming).
 Facilitate proposal preparation and negotiations.

41. CAS: FAR References
41
 FAR Part 30
 CAS Administration
 Policies and Procedures for applying
CAS to negotiated contracts &
subcontracts
 FAR Appendix B
 Contains the actual CAS

42. FAR 31.2 Cost Principles for
Commercial Organizations
42




Applies to all contractors.
Defines direct and indirect costs.
Addresses specific kinds of costs as to
whether allowable, unallowable, or
allowable with restrictions.
Examples of unallowable costs: interest
expense, bad debts, entertainment costs,
donations, attorney fees for claims.

43. FAR Part 31: Examples of
Unallowable Costs
43



31.205-3 -- Bad Debts
31.205-8 -- Contributions or Donations
31.205-14 -- Entertainment Costs
 31.205-20 -- Interest and Other
Financial Costs
 31.205-51 -- Costs of Alcoholic
Beverages

44. FAR Part 31 Cost Principles for
“Other” Organizations
44
 Refer to FAR 31 for separate, unique
coverage of the cost principles for
contracts with:
 Educational institutions (FAR 31.3)
 State & local governments, &
federally recognized Indian tribal
governments (FAR 31.6)
 Nonprofit organizations (FAR 31.7)

45. Contract Terms & Cost Principles
45


Specific costs may be addressed in RFP or
contract. (e.g. Although transportation
costs are generally allowable, the contract
may restrict them to a certain mode.)
On cost allowability, contract terms can
only be more restrictive than other factors.
(e.g. Contract terms cannot make interest
expense allowable on the contract.)

46. Conclusion
46

47. Management/Cost Accounting
System
47


Contractors’ have to manage their organizations,
products/services, and contracts
There needs to be a system in place to determine
whether the service, product, or contract



Is on schedule for completion
Is at its budgeted cost
And if not


Why not?
What is being done to correct the situation?
 All major companies have such a system!

48. Adequate Estimating System
48


ACO estimating system approval means that the system
has the controls to consistently produce adequate and
reliable estimates.
 established policies, procedures, and practices to persons
responsible for preparing and supporting estimates
A disapproved system is a red flag indicating that the
firm's estimating system does not consistently provide
adequate proposals.
 Normally, proposals from a firm with a disapproved system
should be subjected to closer scrutiny, particularly closer scrutiny
by audit professionals.

49. Adequate Accounting System
49
 Primary goal of an acceptable accounting system:
 Ensure that costs are appropriately, equitably, and consistently allocated
to all final cost objectives (i.e., individual contracts, jobs, or products).


Pre-award accounting system survey performed by DCAA.
System should answer affirmative to specific questions:






IAW GAAP? (IAW CAS?)
Identify & segregate direct from indirect costs, allocating these costs
equitably to specific contracts on a consistent basis?
Timekeeping & labor distribution systems appropriately identify direct
and indirect labor charges to intermediate & final cost objectives?
Accumulates costs integrated with, and reconcilable to, the general
ledger?
Determine cost of work performed at interim points (at least monthly)
because of routine posting to books of account?
If required by the contract, identify costs by CLIN/SLIN or by unit?
 Specifically: Are there accounting “controls” in place?