Pricing Subcontracts to Win Work and
Make a Profit
Breakout Session C02
Rita L. Wells, PhD
Senior Acquisition Executive, Suntiva
Deidre A. Lee
Consultant
Date: Thursday, March 17, 2016
Time: 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 Tams
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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The Basics: 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, it is a best practice to ensure a well-priced proposal 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 $750,000 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 $750,000.
• 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 $750,000).
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Reference: 15.403-4 Requiring certified cost or pricing data (10
USC 2306a and 41 USC chapter)
(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 $750,000. 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 $750,000).
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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
Prime
Contract
Government Actions and
Considerations Regarding Fee
or Profit
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
Subcontract Profit is included in the
Subcontract price
Prime’s fee is shared
with the subcontractor
Government determines amount
of award fee.
Is subcontract price (including
profit) fair and reasonable?
N/A
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Important Points for Primes
• Good Subcontractor pricing can be key to winning work and
profitability.
• Understand Requirements for Compliance – it can impact profits.
• 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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