Price Analysis Guide: How to
Determine a Winner
Breakout Session # C01
Rita Lappin Wells, PhD, CPCM
Senior Acquisition Executive
Suntiva
February 12, 2015
3:45pm – 5:00pm
Overview
Why is “Cost/Price Analysis” important in the Prime Contractor
and Subcontractor relationship?
Overview of Price/Cost Analysis.
How can prime contractors comply with FAR requirements for
analyzing subcontractor prices?
What important pricing issues need to be addressed in teaming
agreements and subcontracts?
Questions and Discussion
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Why is Price/Cost Analysis Important In the
Prime / Subcontractor Relationship?
• Affects winning work and profitability for both!
• If not compliant, can have negative impacts on the Prime
contractor . . . that can also affect the Subcontractor:
– Disallowed costs
– Defective Pricing / False Claims Act / Qui Tam
– Disapproval of Purchasing System (and withholds from
invoices)
– Claims / Disputes / Lawsuits
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What is a “Winner” ?
• For the Government
– Fair and Reasonable Price
– Compliance with Contract terms, schedule, standards
• For both the Prime Contactor and Subcontractor
– Winning work
– Making a profit
– Avoiding problems (claims, lawsuits, audits)
– And – continuing to be sought out as a Prime or
Subcontractor for future work.
Primes seek Subcontractors and Subcontractors
seek Primes they can work with.
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What is Price / Cost Analysis?
• Price Analysis evaluates the total price including profit.
• Cost analysis evaluates the individual elements of a
price including:
•
•
•
•
Labor
Material
Other Direct Costs
Fee (Profit)
• Overhead
• General and Administrative
Costs (G&A)
• Cost of Money
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What methods are used for Price Analysis?
.
Preferred: (FAR 15.404-1(b)
1. Adequate Competition
2. Comparison to historical prices paid
Other:
3. Use of parametric estimating methods/application of
rough yardsticks (such as dollars per pound)
4. Comparison with competitive published price lists
5. Independent Government (or Prime contractor) cost
estimates.
6. Comparison to prices obtained through market research
7. Data other than certified cost or pricing data
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How is Cost Analysis Performed?
• Detailed analysis of each element of cost to determine if the cost
is allowable based on:
• Reasonableness – Does the cost exceed what a prudent
person would pay in the normal course of business?
• Allocability – Is it properly charged to a cost objective based
on relative benefits received?
• Accounting Practices & Standards – Is it compliant with Cost
Accounting Standards (CAS) or Generally Accepted
Accounting Principles?
• Applicable Cost Principles – Is it compliant with FAR Part 31?
• Contract Terms – Can be more restrictive than other factors.
• Cost analysis must be verified by also performing price analysis.
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When is Price Analysis of Subcontract Costs
Required?
• Government expects documentation of price analysis:
– Whenever cost analysis is required.
– Important during business system reviews (CPSRs).
• Prime contractors are not otherwise required to perform
subcontract price analysis.
• However, if is a best practice to ensure a well-priced
proposal and to avoid subcontract problems later.
– And to win work, make a profit and avoid problems.
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When is Cost Analysis Required?
• Cost Analysis and a Certificate of Current Cost and Pricing Data
are required for proposals over $700,000 if no exceptions apply.
• Exceptions: (See FAR 15.403-1(c))
• Adequate competition
• Prices set by law or regulation
• Commercial items
• Modifications to contracts for commercial items
• When a waiver has been granted
• Exercise of options at price established at contract award
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Cost Analysis for Modifications
• Unless exceptions apply, FAR 15.403-4 requires cost analysis
and a Certificate of Current Cost and Pricing Data for a
modification of any contract or subcontract over $700,000.
– Applies regardless of whether the original contract was
awarded by sealed bid or negotiation.
– Even if certified cost or pricing data were not initially required
• “Adequate competition” is not an exception for a modification.
• Price adjustment amounts must consider both increases and
decreases (e.g., a $200,000 modification resulting from a
reduction of $500,000 and an increase of $300,000 is a pricing
adjustment exceeding $700,000).
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15.403-4 Requiring certified cost or pricing data (10 U.S.C. 2306a and 41
U.S.C. chapter 35).
(a)(1) The contracting officer shall obtain certified cost or pricing data only if the
contracting officer concludes that none of the exceptions in 15.403-1(b) applies. However,
if the contracting officer has reason to believe exceptional circumstances exist and has
sufficient data available to determine a fair and reasonable price, then the contracting
officer should consider requesting a waiver under the exception at 15.403-1(b)(4). The
threshold for obtaining certified cost or pricing data is $700,000. Unless an exception
applies, certified cost or pricing data are required before accomplishing any of the
following actions expected to exceed the current threshold or, in the case of existing
contracts, the threshold specified in the contract:
(i) The award of any negotiated contract (except for undefinitized actions such as letter
contracts).
(ii) The award of a subcontract at any tier, if the contractor and each higher-tier
subcontractor were required to furnish certified cost or pricing data (but see waivers at
15.403-1(c)(4)).
(iii) The modification of any sealed bid or negotiated contract (whether or not certified cost
or pricing data were initially required) or any subcontract covered by paragraph (a)(1)(ii) of
this subsection. Price adjustment amounts must consider both increases and decreases
(e.g., a $200,000 modification resulting from a reduction of $500,000 and an increase of
$300,000 is a pricing adjustment exceeding $700,000).
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Fee or Profit – Prime Contractor
• Prime contractor’s fee arrangements can take many forms
depending on the type of prime contract.
• Fixed Price Prime Contract: Profit is included as part of the
Prime’s price.
• Cost Reimbursement Prime Contract: Fee is added to a
Prime’s costs:
– Fixed Fee
– Incentive Fee
– Award Fee.
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Fee or Profit - Subcontractor
• Prime and Subcontractor fee/profit arrangements can be
structured in different ways:
• Subcontractor’s profit may be part of subcontractor’s price.
• The Prime Contractor may negotiate a fee-sharing
arrangement with the Subcontractor.
• Subcontractor’s profit or fee is not evaluated by the Government
unless it is passed on as part of the price.
• Prime Contractors and Subcontractors must have a clear
understanding of any fee-sharing arrangements
• If the Prime does not receive the full fee, what happens to
the Subcontractor’s fee?
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Profit / Fee Considerations
.
Profit or Fee by Type of Prime
Contract or Subcontract
Arrangement
Government Actions and
Considerations Regarding Fee
or Profit
Prime
Contract
Fixed Price Contract
Is Prime’s price (including profit)
fair and reasonable?
Cost plus Fixed Fee
Negotiates Prime contract with
Fixed Fee.
Cost plus Incentive Fee
Fee Varies with Incentives
Cost plus Award Fee
Government determines amount
of award fee.
Profit is included in the
Subcontract price
Is subcontract price (including
profit) fair and reasonable?
Prime’s fee is shared
with the subcontractor
N/A
Subcontract
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Important Points for Primes
• Good Subcontractor pricing can be key to winning work and
profitability.
• Understand Requirements for Compliance.
• Understand and document how Subcontractor’s prices/costs
were determined to be fair and reasonable.
• Be prepared for audits and compliance reviews:
– DCAA
– DCMA: CPSR, Estimating, Accounting System Reviews
– GSA: Reviews before Schedule option is exercised.
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Important Points for Subcontractors
• Know what the Prime needs from you to document price
reasonableness.
– Market Pricing?
– Commercial Price Lists?
– Certificate of Cost and Pricing Data?
• Know how to respond to requests for your business
confidential pricing information.
• Understand how the Prime will handle the Government's
questioning or disallowance of your subcontract costs?
– Withhold payment from your invoices?
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Teaming Agreements
• Formed during proposal stage before prime contract award.
• Can take one of following forms if the proposal is successful:
– Two firms agree to form a new corporate entity, or
– One firm agrees to be a subcontractor to the other.
• Teaming agreement often is only a general agreement.
– It is replaced by a subcontract with terms and conditions
and price after award of the prime contract.
– Lack of specificity places significant risk on both Prime and
Subcontractor.
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Price / Cost Analysis: What Does It Take to
Determine a Winner?
• Understand and comply with Government requirements for
Price / Cost Analysis.
– Prime Contracts
– Subcontracts
– Modifications
• Primes and Subcontractors must work together as good
business partners to:
– Develop a winning proposal.
– Comply with Government requirements
– Maintain profitability
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Questions / Discussion
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