Government Contracts Pricing
Strategies and Rate Structures
Presented By:
Brandon Smith
Jon Levin
[email protected]
[email protected]
Provisional Billing Rates
▼Provisional, Target, Budget, Billing, etc.
▼Used in connection with cost-type contracts and contracts for
which progress payments are authorized
▼Established based on contractor’s fiscal year
▼Approved by contracting officer or auditor
▼May be voluntarily submitted
▼Should be submitted prior to beginning of fiscal year
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Invoices may be rejected until provisional rates are established
Provisional Billing Rates (cont.)
▼To establish provisional billing rates, a contractor must provide:
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proposed rate calculations with brief rationale for both pool and base,
prior fiscal year pool and base,
current year to date pool and base, and
analysis and explanation of any variances.
▼The contractor may be asked to provide additional trends showing
budget to actual.
▼Monitoring provisional billing rates:
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Throughout the year (monthly)
After year-end adjustments and close
Submission of the final indirect rate proposal (ICE)
Provisional Billing Rates (cont.)
▼Adjustments
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Proposed adjustments during year are acceptable
Budget to actual reconciliation at year end
Adjusting invoices
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Know contract ceilings and provisions
Know your relationships
Pricing Strategies - Budget
▼Known or reasonable expected
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Current contracts and volumes
Option years with high expectations of award
▼Development of Direct Costs
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Labor
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Labor mix
Escalations
Subcontractors
Materials
Travel
Other Direct Costs
Pricing Strategies – Budget (cont.)
▼Developing Indirect Costs
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Labor
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Known changes
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Labor mix
Escalation
Leases, software licenses, training, certifications
Estimated changes
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Health insurance, utilities, office supplies
Pricing Strategies – Rate Structure
▼Service Centers
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Can be allocated to direct costs, intermediate cost pools, final cost pools
Allocation methods vary – labor, headcount, square footage, etc.
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Reasonable and consistent
▼Intermediate Pools
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Allocates indirect costs to final indirect cost pools
▼Final Pools
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Allocates indirect costs to the final cost objective (direct costs)
Pricing Strategies – Rate Structure (cont.)
▼2-tier vs. 3-tier
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Primarily refers to labor and how fringe is applied
3-tier
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2-tier
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Fringe is a final indirect cost pool and is shown separately from OH and GA
Direct labor burden includes FR + OH + GA changed to (FR * OH) * GA
Fringe on direct labor is allocated to the OH cost pool
Direct labor burden includes OH + GA changed to OH * GA
No difference in calculated wrap rate
Pricing Strategies – Rate Structure (cont.)
▼Overhead Pools
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How many do I need?
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Logical and consistent groupings
Not separating causes an unequitable allocation of costs
Avoid having OH pools for each contract
▼Total Cost Input (TCI) vs. Value Added (VA)
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Burden on material and subcontracts
Total Cost Input
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Direct materials and direct subcontracts are in the G&A base
Burdened with G&A
Pricing Strategies – Rate Structure (cont.)
▼Total Cost Input (TCI) vs. Value Added (VA) – (cont.)
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Value Added
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Costs associated with procuring and administering direct materials and direct subcontracts are a
separate cost center – Subcontractor/Material Handling Pool (S/MH)
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Direct materials and direct subcontracts are in the S/MH base rather than the G&A base
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S/MH pool is included in the G&A base
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Your G&A will be likely be higher
Pricing Strategies – Cost Impact Analysis
▼How will this award affect my indirect rates?
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Direct costs
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Additional labor, subcontracts, materials, travel
Add additional base to my indirect cost rates
Indirect costs
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Unique benefit requirements, Service Contract Act
Additional facility space required
Additional indirect help (accounting, contracts, program management)
▼Must have sufficient information on both direct and indirect costs
to make a fair and reasonable determination of costs
▼Remember the objective is to cover costs and contribute to
obtaining corporate operational objectives
Pricing Strategies – Negotiations
▼A fair and reasonable price does not require that agreement be
reached on every element of cost (FAR 15.405)
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Primary concern is overall price
▼Contracting Officer will determine reasonableness of
subcontracting costs
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May require adjustment if subcontract prices have been negotiated before
prime contract is negotiated
▼Certified cost and pricing data may be required during negotiations
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$650,000
Exceptions: adequate competition, commercial item, prices set by law,
expressly waived
Pricing Strategies – Negotiations (cont.)
▼Even if the contract is one for which the Government is prohibited
from requiring certified cost or pricing data (e.g., a commercial item
contract), the Government has broad discretion in requesting
“other than certified cost or pricing data.” See FAR Subpart 15.4
▼Also, in DoD contracts, when the Government is prohibited from
requiring certified cost or pricing data, it can require other types of
data and can audit these data submissions. See DFARS Subpart
215.4.
Cost and Price Analysis
▼Cost Analysis
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Review and evaluation of separate cost elements
Judgment call
▼Price Analysis
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Review and evaluate the overall price without regard to separate cost elements
and profit
Judgment call
Cost and Price Analysis: Realism
▼The Government is required to perform costs realism analysis in all
procurements for cost-type contracts. See FAR 15.305(a)(1);
15.404-1(d)(2).
▼After finishing this analysis, it will determine each offeror’s most
probable cost (MPC). Thus, in the event the Government
determines that an offeror’s proposed cost is unrealistically low,
the Government will raise the offeror’s proposed cost.
▼In fixed-price contracts, the Government may perform price realism
analysis as a way of determining whether offerors under the
requirements contained in the solicitation. Unlike in cost-type
contracts, however, the Government will not make a MPC
adjustment.
Cost and Price Analysis: Realism (cont.)
▼In competitive procurements, after the competitive range is
established, the Government may engage offerors in discussions.
▼If the Government decides to hold discussions, it must discuss all
deficiencies and significant weaknesses to which the offeror has
not yet had an opportunity to respond.
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If an offeror’s proposed price or cost was determined to be unrealistically low,
this is something the Government is required to discuss.
Truth in Negotiations Act (TINA)
▼TINA is codified at 10 U.S.C. 2306a, and its implementing
regulations are at FAR Subpart 15.4.
▼It is designed to combat “defective” pricing by putting the
Government in the same position as a contractor with respect to
the contractor’s cost and pricing data.
▼When certified cost or pricing data is required, the contractor must
certify that, to the best of the contractor’s knowledge and belief,
the data is accurate, complete, and current as of that date.
▼From a practical perspective, it is fairly difficult to enforce, because
much of a proposal is “judgment” instead of “fact.”
Progress Payments
▼In fixed price contracts, FAR Subpart 32.5 authorizes contract
financing by use of progress payments based on the contractor’s
costs.
▼Progress payments are generally limited to 80% of the contractor’s
total costs (or 85% for small businesses) and, of course, are further
limited to the fixed price of the contract.
▼The Government may authorize progress payments before or after
contract award. Thus, a contractor may wait to request after award.
▼If progress payments are authorized, the contractor’s costs are
subject to audit.
Advanced Payments
▼In certain instances, FAR Subpart 32.4 authorizes the Government
to finance performance of contracts by making advance payments.
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Advance payment is the least preferred method of contract financing. Thus, if
there are reasonably available alternatives, the Government should not use.
In addition, the contractor must provide adequate security, the advance
payments must not exceed the unpaid contract price, and the Government
must determine that the advance payment is in the public interest or facilitates
the national defense.
▼Small businesses with limited access to alternative financing and
strong technical expertise are strong candidates for this for
advance payments.
▼The Government will generally charge interest on all outstanding
advance payments.
Forward Pricing Rate Agreements (FPRA)
▼FAR Section 42.1701 sets out the procedures for establishing
FPRAs.
▼A FPRA is requested by Contracting Officer or Administrative
Contracting Officer.
▼The Government shall establish a FPRA with contractors whose
sales to the Government are expected to exceed $200 million in the
contractor’s next fiscal year.
▼Auditors and contracting offices with significant interest assist in
review and negotiations.
▼Price Negotiation Memorandum (PNM) is issued which specifies
expiration, application and monitoring requirements.
▼A FPRA is a bilateral agreement.
Forward Pricing Rate Recommendations
(FPRR)
▼A FPRR is unilaterally set by the Administrative Contracting Officer
when:
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A FPRA has not been established with the contractor (e.g., when the contractor
will not agree to terms of FRPA) or
The contractor’s FPRA has been invalidated (e.g., because the ACO
determines invalidation should occur because of changed conditions).
Limitation of Cost / Funds
▼Government agencies are granted funds by Congress. For this
reason, the Government’s authority to obligate funding and make
payments is limited. One of these limitations is reflected in the
FAR’s limitation of costs / funds clauses, which are required in all
cost-type contracts.
▼FAR 52.232-20, Limitation of Cost – required in all cost-type
contracts that are fully funded.
▼FAR 52.232-22, Limitation of Funds – required in all cost-type
contracts that are incrementally funded.
▼Under no circumstances is a contractor entitled to reimbursement
of its costs in excess of the limitation of cost /funds indicated in
the contract. For example, a cost overrun caused by an overrun in
a contractor’s indirect rates will not be reimbursable.
GSA Price Reductions Clause
▼552.238-75, Price Reductions – Provides that the Government and
the contractor will agree on (a) a commercial customer (or category
of customers) that will be the basis of award and (2) the
Government’s discount relationship to the identified customer(s).
▼The Government will receive a price reduction if the contractor:
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Reduces its pricing in its commercial catalog,
Grants more favorable discounts or terms than those contained in its
commercial catalog, or
Grants special discounts to the customer (or category of customers) that
formed the basis of award, and the change disturbs the previously agreed
discount relationship.
▼The Government is not entitled to a price reduction for sales to
Government agencies.
False Claims Act (FCA)
▼Pricing Considerations
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Review G&A rates and other indirect pricing to ensure no unallowable costs
are included
Ensure that pricing reflects the most accurate, complete and current data
Develop pricing based upon approved labor categories
False Claims Act (FCA) (cont.)
▼Billing Considerations
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Charge only costs incurred in connection with that specific contract
Base charges only upon costs actually incurred
Ensure that timesheets for direct charge employees accurately reflect time
spent on that contract