Presented by Shene Commodore

1. JUNE 19 – 21, Bethesda, MD

2. Overview
•Background
•Cost Elements & Price Analysis
•Identifying Cost Drivers
•Conclusion, and Closing Remarks

3. Background & Key Regulations
1. FAR – federal acquisition regulation (FAR Part 31)
2. Ethics and Compliance
3. TINA – Truth in Negotiation
4. DCAA, DCMA
5. Limitation of Costs - FAR 52.232-20 “Limitation of Costs”
6. Limitation of Funding - FAR 52.232-21 “Limitation of Funds”

4. Limitation of Cost clause
 Limitation of Cost clause
 FAR 52.232-20
 Whenever the Government share
of contract costs is expected to...
 Exceed a stated percentage
(normally 75 percent) of
estimated contract cost within a
stated period (normally 60 days);
or
 Be either greater or substantially
less than previously estimated.
 Contractor must provide a
revised estimate of the total
cost of performing this
contract.

5. Unallowable Costs
 FAR 31.201-3 – unallowable costs must be excluded from bills,
claims, or proposals for a Government contract
 FAR 52.242-3 – imposes penalties if indirect rate proposal
contains unallowable costs
 FAR 52.242-4 – certify indirect rate proposal does not contain
unallowable costs

6. Profit
 Profit (FAR 15.4)
 Be prepared to identify the profit proposed and the methodology used in
computing the profit.
 • Experimental or R&D Contracts: 15% of estimated costs
 • Architect & Engineering (AE): 6% of project value
 • Cost plus fixed fee contracts: 10% of estimated costs
 • Firm fixed price and other types of cost contracts: no limitation fee

7. Cost Elements and Price Analysis
7

8. Contract Pricing
2–8
Price Analysis Process of examining and
evaluating a proposed price
without evaluating the separate
cost elements and profit
Cost Analysis Process of examining and
evaluating the reasonableness of
individual cost elements and profit
Cost Realism Analysis Process of independently
reviewing and evaluating specific
elements of proposed cost
(probable cost)
*Must always check for price reasonableness

9.  FAR Part 15, Table 15-2 – Instructions for
submitting cost/price proposals when certified cost
or pricing data are required.
 DFARS 252.215-7009 Proposal Adequacy
Checklist - New Requirement - Provides location
of requested information or an explanation of why
the requested information is not provided.
9
Proposal Adequacy

10. The Process of Cost Analysis
2–10
Know what you are “”selling” or buying”
• Use FAR Table 15.2 to verify if you have a good proposal
• Review data from market research, stakeholders,
etc.
• Map the proposal
• Model the proposal
• Fact-find the proposal
• Evaluate the proposal
• Document assumptions, notes
Note: Some portions of the process may happen concurrently

11. Proposal Modeling: Required for
Contracting by Negotiation
Objective
– Given a contract proposal, demonstrate an
understanding of the relationships between the
elements and sub-elements of cost and profit by building
a spreadsheet that models those relationships.
Must Include a review of:
– Price Analysis
– Cost Analysis
– Cost Realism
11

12. • Break down the proposal, tab where things are
located, sources
• Trace the cost elements back to the source of the
estimate
• Is all the supporting data provided? Is it relevant?
Is it verifiable? Accurate?
• Identify who is covering the review of each cost
element
• Identify the major cost drivers
• Consider which costs are more “risky” from a pricing
standpoint, e.g. negotiated supplier may be considered
less risky than supplier not negotiated
Map the Proposal
12

13. Proposal Modeling Example
Resources Proposed
2018 2019 2020
Rates and Factors
2018 2019 2020
(e.g. hour, task, sq. feet)
Cost Breakdown
Summary
2018 2019 2020
Raw Material Design Eng. $80 $85 $90
Material &
SubK
Sub Contracts Test Eng. Material O/H
Design Eng. Manufacturing Engineering
Test Eng. Engineering
O/H
Manufacturing Mfg. / Mfg OH

14. Cost
Eleme
nt
Contract
or
Proposal
Government
Reconciliatio
n of
Proposal
Resource
s
Rates &
Factors
Cost
Breakdown
(CBS) by Year
Organizing the Proposal Spreadsheet
Government
Reconciliation
of Proposal
Verifying that the data, supporting information, and
pricing methodologies described in the proposal
support the contractor’s top level cost breakdown.
14

15. Cost Drivers
15

16. Cost Driver Defined
A cost driver is the
 Root cause of why a cost is incurred
 Cost at issue is the “cost object”
 Must be both accurate and easy to use

17. Cost Driver Process
1. Identify the cost object.
2. Investigate potential cost drivers.
3. Determine cost driver correlation.
4. Analyze the management control effect.

18. Key Activities Related to Costs
Alternatives
Processes
Capability & Capacity
Estimates
PACE

19. Cost Drivers: Getting Started
Identify activity that best correlate with the
cost object
Benefit: Better use of limited resources for
managing costs than devoting more
resources to develop complex cost
measurements.

20. Cost Drivers: Processes
 Testing Turn Around Times
 Deliverables and Reports
 Repairs and rework
 Order Fill Rate
 On-time Delivery
 Problem Resolution
.

21. Identify Cost And Schedule Variances
Be sure to review how
contract terms
 Allocate risks and
 Impose changes to
the project schedule
PRICE
DeliveryRequirements
Risks Laws

22. How to Identify Cost Drivers
 Using the work breakdown structure (WBS), conduct an analysis of
 Organizational category & key personnel
 Materials, scrap, and spare parts
 Subcontractor costs
 Test requirements
 Delivery and shipping requirements
 A time-phased cost baseline for contract completion;
 A time-phase manpower loading estimate for change in work, technology
changes or learning curves
 Document assumptions and information used justify costs and analysis
 Beware of any significant cost or schedule variance

23. Cost Driver Example

24. How to Identify Cost Drivers
 What is causing the variability of costs, if any?
 What various cost/pricing methodologies were used?
 How were costs classified?
 What costs were identified?
 What are the correlating relationships?

25. Consider the Need for Adjustment
Beware:
Don’t forget
to re-
calculate the
total price.
 Price the “required” work in a consistent
manner with the “sequence” of work
 Identify significant task interdependencies
required to meet the requirements of the
program.
 Identify physical products, milestones,
technical performance goals, or other
indicators used to justify price and
measure progress.

27. What are you Certifying to?
 To the best of one’s knowledge and belief, the
cost or pricing data is Accurate, Current,
Complete
 Must be Produced
 Must be Up-to-Date
 Must be Truthful

28. Element Amount Ref ¶
Material and Subcontracts $1,535,908 (1)
Engineering Labor 1,652,054 (2)
Engineering Overhead 1,683,918 (5)
Manufacturing Labor 285,960 (3)
Manufacturing Overhead 588,062 (5)
Other Direct Cost 8,110 (4)
Subtotal Production Cost $5,754,012
General and Administrative Cost 873,835 (5)
Facilities Capital Cost Money 62,279 (5)
Profit 1,325,569
Total Price $8,015,695
Gaulding Proposal
How is profit calculated and what makes up the base for profit?
Answer: Profit is calculated using the DoD Form 1547
28

29. DD Form 1547 Weighted Guidelines Method:
Numerical approach to calculating fee based
on:
 Performance Risk (technical, mgt., schedule)
 Contract Type Risk
 Facilities Capital Cost of Money
 Cost Efficiency

30. 30

31. DOCUMENT – DOCUMENT - DOCUMENT

32. Evaluation Review Questions:
 Did you identify all costs related to the problem, scope, purpose of the project, and
evaluation criteria to adequately demonstrate complete understanding of the intent
and requirements of each task?
 Did you identify any potential problems that may be encountered during the
planning, preparation and performance of each task and related pricing?
 Did you review the CLIN structure to make sur all costs/ pricing were included?
 Did you review costs/pricing of your organization's proposed technical approach to
comply with each of the requirements specified in the Statement of Work ?
 Did offeror's proposal provide for a detailed plan inclusive of project schedule for
proposed various recruiting efforts and hiring options ? Raw materials and
manufacturing? that would be used for each task within sample task to adequately
demonstrate complete understanding of the intent and requirements of each task?

33. Evaluation Review Questions:
 Did you consider the cost of the organization's plan
or procedures on transition of current contractors
from expiring contract(s)?
 Does the proposed amount of time for key staff
match the estimated pricing, specified via
percentages how much time is spent in each task?
 Identify assumptions that could change scope: You
can even explain, “If one of these circumstances
takes place, it could dramatically change the scope
of the engagement and the cost would increase.”

34. Thing to Watch Out For:
• Identify all costs elements
• Monitor cost drivers
• Document related costs for managing different levels of risks
• Review Reasonableness of Subcontractor Costs
• Non recurring costs
• Technology Maturity
• Indirect rate changes
• Adequate basis of estimates for materials and scrap or rework
• Document minimum buys, etc. passed from supplier
• Unallowable costs

35. Do Your Best

36. Contact Information
Ms. Shené Commodore, CPCM,
Fellow
President-Commodore Consulting,
LLC
Shene@commodoreconsulting.com
770-590-5147