Thank you for the informative presentation on team approaches to pricing risk. Please let me know if you need any other assistance.

1. JUNE 19 – 21, Bethesda, MD

2. Team Approach to Pricing Risk
Robert E. Jones,
CPA, CPCM, NCMA Fellow
Left Brain Professionals Inc.

3. Positive Share
"A person who never
made a mistake never
tried anything new."
~ Albert Einstein

4. Safety Check
Build relationships with the
members of your contract
management and proposal team.

5. Types of Risk
 Schedule
 Technical
 Financial
 Environmental
 Unknown
 Others

6. When to Identify Risk
 Responding to RFI
 Responding to RFP
 During Contract Performance

7. Who Identifies Risk
 Project/Program Manager
 Engineer
 Production Manager
 Controller
 Contracts Manager
 Empowered Official
 Facility Security Officer

8. How Risk is Identified
 Reading SOW/Spec
 Reviewing T&C
 Evaluating Production Schedule
 Calculating Costs and Prices

9. Mitigating Risk
 Add Buffer to Schedule
 Ask for Technical Deviation
 Employ Cost Control Measures
 Buy Insurance
 Hire Expertise
 Team or Subcontract
 Match Risk to Contract Type

10. Contract Type
 Align acquisition with appropriate contract type

11. Risk and Contract Type
 Spectrum of Risk Sharing
 Cost-type – More Risk on Buyer
 When requirements not as clear
 New technology challenges
 T&M
 Solution known, duration unknown
 Fixed Price – More Risk on Seller
 Requirements clear
 Existing product or solution

12. Pricing Risk
How do you price
the unknown?

13. Pricing Risk
 Cost of overtime to meet schedule
 Assume no technical deviation
 Assume limited cost control
 Cost of insurance
 Cost of subcontracting
 Cannot assume 100% worst case scenario

14. Escalation
 Use a reasonable factor for out years
 Factors for labor, benefits, & materials
 Factors by industry and region

15. Escalation
 IHS Global Insight
 Used by Government and large primes
 Includes forecasts
 Lots of data slices
 Fee to access
 BLS
 Historical data only
 Limited data slices
 Free

16. Escalation
 Flat rate not acceptable
 Staggered rate reflects reality
 Can justify some increase farther out

17. Risk Factor
 Can you apply a flat % as “Risk Factor?”
 “Risk” is not a cost element!

18. Fee
 Cost Plus Fixed Fee
 Cost Plus Award Fee
 Cost Plus Incentive Fee
 Fixed Price
 Fixed Price Incentive Fee

19. Fixed Fee
 Fixed!
 No additional fee when additional costs
approved

20. Award Fee
 Overall cost, schedule, and technical
performance must be satisfactory
 You can’t deliver early but fail on cost and
technical

21. Incentive
 Calculation applied to the target goal, not the
minimum requirements
 You don’t earn an incentive for delivering on-
time, you earn an incentive for delivering early

22. FAR Profit/Fee
(2) It is in the Government’s interest to offer
contractors opportunities for financial rewards
sufficient to stimulate efficient contract
performance, attract the best capabilities of
qualified large and small business concerns to
Government contracts, and maintain a viable
industrial base.
FAR 15.404-4(a)(2)

23. FAR Profit/Fee
(3) Both the Government and contractors should be concerned
with profit as a motivator of efficient and effective contract
performance. Negotiations aimed merely at reducing prices by
reducing profit, without proper recognition of the function of
profit, are not in the Government’s interest. Negotiation of
extremely low profits, use of historical averages, or automatic
application of predetermined percentages to total estimated
costs do not provide proper motivation for optimum contract
performance.
FAR 15.404-4(a)(2)

24. FAR Fee Limitations
 (4)(i) The contracting officer shall not negotiate a
price or fee that exceeds the following statutory
limitations, imposed by 10 U.S.C. 2306(d) and 41
U.S.C. 3905:
 (A) For experimental, developmental, or research
work performed under a cost-plus-fixed-fee
contract, the fee shall not exceed 15 percent of
the contract’s estimated cost, excluding fee.

25. FAR Fee Limitations
 (B) 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
percent of the estimated cost of construction of the
public work or utility, excluding fees.
 (C) For other cost-plus-fixed-fee contracts, the fee
shall not exceed 10 percent of the contract’s
estimated cost, excluding fee.
FAR 15.404-4(c)(4)(i)

26. Factors Affecting Profit
 Unallowable costs
 Unbillable costs
 Cost overruns
 Organizational costs such as taxes
 C-corp vs S-corp or other pass-through entity

27. Uses of Profit
 Reward owners and investors
 Grow business through R&D and investment
 Attract and retain talent through profit sharing
 Attract investors and owners

28. Weighted Guidelines
 Performance risk
 Contract type risk
 Facilities capital employed
 Cost efficiency
 Basis for negotiations

29. Negotiations
 It’s always open to negotiation
 Have solid evidence to support your claim

30. Contact
Robert E. Jones
robert@leftbrainpro.com
(614) 556-4415