Understand How to Validate Your Cost Proposal Estimate. Tips and Strategies to Building Sound Cost Proposals.

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GOVERNMENT
CONTRACT PRICING
SUMMIT 2016

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Overview
• Background
• Company Policies and Government Accounting Requirements
• Labor Categories & templates
• Cost Elements
• Price Analysis
• Record Keeping
• Conclusion, and Closing Remarks

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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”

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Truthful Cost or Pricing Data
The DFARS will remain Truth in Negotiations Act (TINA)
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 Purpose: Federal Law whose purpose is to protect
the Government from defective pricing when
negotiating Sole Source, Non-Competitive Contracts
with an award worth $750,000 or more.
 Requires the contractor to submit cost or pricing
data that is certified to be Accurate, Current, and
Complete as of the date of agreement on price.

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Limitation of Costs/Funding
1. Limitation of Costs - FAR 52.232-20 “Limitation of Costs”
2. Limitation of Funding - FAR 52.232-21 “Limitation of Funds”
*written estimate is required with notice
• Must give written notice to the Contracting Officer (CO) when it has
reason to believe that:
a) Costs are expected to be greater than a certain threshold
(between 75% and 85%) of estimated costs within the next 30 –
90 days; or
b) Total costs at completion will be greater than or substantially less
than previously estimated costs.

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DoD requirement to report all contracted services procured
Submit Report labor hour data for contracted services via https://cmra.army.mil
Reporting Period: October 1 through September 30.
Inputs may be reported any time during the FY, but
All data shall be reported no later than October 31 of each calendar year.
Exclusions:
The four intelligence agencies
Construction and utilities
Contractor Manpower Reporting

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Labor Rates Mandated by Statute
Service Contract Act – must use DOL prevailing rates for
service employees in the locality
Davis-Bacon Act - For the construction, alteration, or
repair (including painting and decorating) of public
buildings or public works local prevailing rates & Fringe
Federal Contractor Minimum Wage

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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

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Company Policies & ACC System
• Make sure that the accounting system is capable of capturing and tracking ALL
COSTS (Direct and Indirect)
• Update contract costs estimates regularly
• Notify CO in writing of any potential cost increases as soon as they are known,
even if validity of costs are still in question.
**Accounting, Estimating, Budgeting, Forecasting should all match the same
source.

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Billing
 Important to review contract to identify billing
provisions, including but not limited to: -
 Restriction of billing frequency
 Special withholding provisions
 Contractual unallowable costs
 You must reconcile booked costs to billed costs.
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DCAA Areas of Concern
• Internal Control Systems
• Management Policies
• Adequacy and Reliability of
Contractor’s Records
• Financial Capability
• Accuracy and Reasonableness of
Costs

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Common Audit Mistakes
• Other Income:
• Overpayments (FAR 52.232-25(d)): requires
contractors to notify the Government when they
receive an overpayment
• Credits (FAR 31.201-5): any income, rebate,
allowance, or other credit relating to an allowable
cost shall be credited to the Government

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Check Company Policies on:
• Adequate documentation to establish allowability (FAR 31.202-1(d))
• Consultant costs – adequate documentation (FAR 31.205-33(f))
• Organization costs (FAR 31.205-27)
• Travel as an indirect cost (FAR 31.205-47)
• Executive Compensation
• Travel & entertainment
• Professional Associations
• Miscellaneous

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Pre-Award Phase Award Phase Post-Award Phase
Requirement Cycle Requisition Cycle
Solicitation
Cycle Award Cycle Contractual Cycle
Market Research
Cost Estimating
Verify Technical
Details of
Contract
Cost
Uncertainty
Analysis Milestones
Special Contract
Clauses
Monitor contract
compliance
Information/
Communications
Supporting
Documentation
Define
Specifications Cost Analysis
Review contract
language and level
of risk Performance
Past Performance Risk Analysis
Quality Control,
Schedule Control, Cost
Control
Payment Document
Ensure
proposal
conforms to
terms and
condistions of
RFP

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Importance of Price
Must always be Fair and Reasonable
Price
Schedule
Technology
(research and
development)
Services
Ts and Cs
Products
Customer
Obligations
Contract
type
Miscellaneous
contracting
elements

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Determining Fair and Reasonable Price
• Competitor contracts pricing
• Historical pricing,
• Currently available pricing (public)
• GSA
• Catalogs
• Market Research

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COST FIXED PRICE
PERFORMANCE DUTY
RISK TO CONTRACTORS
RISK TO GOVERNMENT
PERFORMANCE
PAYMENTS
PROGRESS PAYMENTS
ADMINISTRATION
FEE/PROFIT
Best Effort Must Deliver
Low High
High Low
As Incurred Upon Delivery
None % of Actual
Max Surveillance Min Surveillance
Max: 6/10/15% No Limit
Contract Family Characteristics

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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
Profit

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Contract Requirements vs.
Project Requirements
Defining the Job
• Requirement (urgent, unique, human
subjects)
• Technology updates or revisions (New or
Replace)
• System Interoperability (interface with other
applications, systems)
• New Technology
• Functional Complexity
• Warranties
• Licenses
• Software Modifications
Breaking Job Down
• Project size
• Project Locations
• Authorizations needed
• Team Size
• Proximity of Team Members
• Reliability of Personnel
• Contract vehicle
• Specific Policy requirements
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Contract Requirements vs.
Project Requirements
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• Getting Responsible Vendors
• Market Research, RFI, Pre-Bid
• Availability of staff or companies
• Company commitment and
resources
• Customer Knowledge
• Team Knowledge
• Change Procedures
• Stability of Business Area
• Economic Price (seasonal,
disaster, etc.)
• Organizational impact
• Tight timeframe
• Personnel turnover

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Contract Requirements vs.
Project Requirements
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Estimating
• Is there good, recent costs information
available? (historical data, recent data,
publications, GSA)
• Dependency on other projects
• Required End dates or costs
• Continued Budget availability
• Severable vs. non-severable
• High risk areas (facility certification, facility
accrediation, secret clearance, etc.)
Acceptance Criteria
• Approval (CO, budget, signatures,
etc?)
• Quality Plan
• Customer Participation
• Agreed to Acceptance Process
• Equal number of positive and
negative incentives
• Specific, measurable, reasonable
acceptance and evaluation criteria

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Cost Reasonableness Defined
 A cost is reasonable if it does not exceed the
amount that would be incurred by a prudent
person in the conduct of a competitive
business, considering AND MUST BE:
– Ordinary and necessary,
– Demonstrates accepted sound business practices and compliance with federal and
state laws and regulations,
– Consistent with the contractor’s responsibilities to customers, owners, and
employees? Marketplace?
– Conform to the contractor’s established practices?
 There is no presumption of reasonableness—
the burden of proof is on contractor.

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• Allowability can be determined by
examining reasonableness and
allocability
• Reasonableness (FAR 31.201-3)
• Prudent Person Test
• Adherence to generally accepted practices
• Incurred in compliance with industry business practices
• Burden of Proof Rests with the Contractor
Determining Allowability:
FAR 31.202-1(d))

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Cost Allocability Defined
 A cost is allocable if it:
 Is incurred specifically for the contract;
 Reasonably benefits both the contract and other work
distributed in a reasonable proportion to the benefits received;
or
 Is necessary to the overall operation of the business, even
without a direct relationship to any particular contact or cost
objective.
 Must be consistent throughout all business practices
 Document services included in indirect pool

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Allowable Costs Criteria Decision Process
Are the costs
reasonable?
Costs are allowed
• FAR Part 31, CAS
•OMB
•GSAM
•External Policies and Internal Policies
•Award Terms and Conditions
•Are the costs Allowable?
•Are the costs Allocable?
•Are the costs necessary, consistent,
sound?
No
Yes
Yes
Yes

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Is the cost estimating logical?
Are projected costs supporting that price are realistic of the work that is to be
performed.
Cost Realism
Account
Fixed
Cost
Variable
Cost
Payroll Wages x
Temp Labor x
Dues and
Subscriptions
x
Insurance x
Legal Fees x

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Cost analysis is reviewing the each cost element and profit/fee.
labor, materials, overhead) and profit.
Thus, cost analysis is a review of each element of cost and involves a “fair
and reasonable” analysis of each cost element. The Department of
Defense (DOD) defines cost analysis as:
“The review and evaluation of the separate cost elements and profit/fee 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
judgment used to determine how well the proposed costs represent what
the cost of the contract should be, assuming reasonable economy and
efficiency.”
Cost Analysis

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The government is able to determine the price to be fair and reasonable
without evaluating the separate cost elements and proposed profit
Competition in the market determines the price
Price analysis always involves some form of comparison with other prices
Price analysis must always be performed even if cost analysis is also
required
Price Analysis

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What Should Your Cost Model Include:
• Direct labor
• Direct support
• Direct vehicles or products
• Direct services & supplies & products
• Direct facility
• Indirect support
• Management support
• Other direct costs
• Reports, deliverables
• Special IT needs
• Travel
• Shipping and Handling

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What Should Your Cost Model Include:
OTHER DIRECT COSTS
• Materials
• Supporting Products
• Re-work
• Re-stock fees
• Specialized Equipment

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Direct labor hours:
Labor-hour history of the same or similar projects
Company or industry standards
Average labor rates from payroll data
Market wage or salary survey information
Example of Verifiable Proposal Supporting Data

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Direct materials:
Purchase history of same or similar items
Vendor quotations
Vendor catalogues Indirect rate:
Historical annual indirect rates
Budgetary/provisional rates
Example of Verifiable Proposal Supporting Data

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Labor Matrix
PWS Part II
Para,
Reference
SCLIN
LABOR
CATEGORY
Current
Positions
per PWS
Part I Para 5
Productive
Yield Hours
per Position
Base Year
Fully Loaded
Hr Rate (per
position)
10/1/15-
9/30/16
Option Year 1
Fully Loaded
Hr Rate (per
position)
10/1/16-
9/30/17
1
000101
000201
000301
000401
Engineer,
Mid/General
(includes all
sub categories)
22 1840

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Cost Buildup
8.3%
Labor Hourly Total Cost Pay Rate Sub Tot Profit COLA PM Total
Category Hours Pay rate Fringe OH Inputs Cost Inputs G & A Bill Rate Margin COLA Bill Rate
Program Manager 14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $84.55
14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $0.00
14.00% $ - $ - $0.00 8.30% $ - $0.00

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Fully Burdened Labor Rates
• Salary & Benefits
• Retirement (Including 457 match)
• Health Care
• Workers Compensation
• Sick leave
• Vacation & Holidays

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Pricing of Unilateral Change Orders
 Often Unilateral Change Orders contain an “Not to
Exceed” dollar value
 Contractors often object to this provision and include a
reservation of rights similar to the following:
“The contractor’s signature signifies only that receipt of this change order is acknowledged—
not that the contractor is bound by the ceiling price. The contractor will proceed with the work
as changed with the understanding that an equitable adjustment will be negotiated pursuant to
the Changes clause of the contract.”
 Reservation held to be binding even if CO crosses it
out before signing modification1
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1. Utley-James, Inc., GSBCA 5370, 85-1 BCA ¶17,816, a ’d,14 Cl. Ct. 804 (1988)

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Proposal Due Date and Time
 FAR 52.215-1(c)(3).
 (3) Submission, modification, revision, and withdrawal of proposals.
 (i) Offerors are responsible for submitting proposals, and any modifications
or revisions, so as to reach the Government office designated in the
solicitation by the time specified in the solicitation.
 If no time is specified in the solicitation, the time for receipt is 4:30
p.m., local time, for the designated Government office on the date that
proposal or revision is due.
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 Promotes mutual trust between each Party
 Ensures transparency
 Provides a clear audit trail
 Identifies risk factors
 Clear source of data for accounting, budgeting, estimating
 Good base to identify and make changes, when necessary
 Consistent, well document company polices
 Reasonable, allowable, allocable
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Best Practices

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Evaluation Criteria-Financial Capabilities
• Does your pricing demonstrate the organization's:
• Financial capability to perform a contract of this magnitude?
• Sufficient staff and an established payroll system that can accommodate up to 90+
employees per payday?
• Confirm availability of financial resources to pay staffing payroll that accommodates
90+ employees prior to reimbursement on invoices from the government?
• Procedures and financial resources that are in place to assure the government that
employees and subcontractors will be paid in a timely manner?

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Compliance
1) Contract File
2) Costs – Allowable, reasonable, allocable
3) Track government sales separately from commercial sales
4) Adequate Books and Records- FAR 52.215-2
5) Training – sales, accounting, marketing, contract
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Contact Information
Ms. Shené Commodore,
CPCM, Fellow
President-Commodore Consulting, LLC
Shene@commodoreconsulting.com
770-590-5147
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