NCMA Training:Price Analysis

forNon-Price Analysts

Jill L. Murphy

ESC/PKF

Senior Cost/Price AnalystMarch 2010

Price Analysis: A Step By Step Approach

• Analyzing Proposals• 14 Steps of Pricing

Why We Analyze Proposals

Per FAR 15.402:

Contracting Officers Shall --

(A) Purchase Supplies and Services From Responsible Sources at Fair and Reasonable Prices.

This Is the Basis for All Other Pricing Related Regulations and Policies.

General Considerations

• Objective of Proposal Analysis is to ensure that the final agreed-to price is fair and reasonable

• Contracting Officer is responsible for evaluating the reasonableness of offered prices:– Contracting Officer may request the assistance of other

experts to assist with the evaluation

General Considerations, Cont.

• Various analytical techniques may be used singly or in combination

• Complexity and circumstances of each acquisition determine the level of detail of the analysis required

Proposal Analyses

• Cost Analysis• Price Analysis• Cost Realism Analysis• Technical Analysis• Unit Prices • Unbalanced Pricing

Proposal Analysis Steps

Actions up to $10M - Buyer/PCO TasksActions up to $10M - Buyer/PCO TasksActions > Actions >

$10M$10M

1. Examine Proposal for Compliance with FAR Table 15-2 1. Examine Proposal for Compliance with FAR Table 15-2 and the RFPand the RFP

Price Analyst Price Analyst

2. Review Contractor’s “Groundrules and Assumptions” 2. Review Contractor’s “Groundrules and Assumptions” and/or “Terms and Conditions”and/or “Terms and Conditions”

Buyer/PCO Buyer/PCO

& Price & Price AnalystAnalyst

3. Request Field Pricing Support 3. Request Field Pricing Support

(DCAA Audit / DCMA Pricing & Tech Supt if needed)(DCAA Audit / DCMA Pricing & Tech Supt if needed)Price AnalystPrice Analyst

4. Request Technical Evaluation from Program Office4. Request Technical Evaluation from Program Office Buyer/PCOBuyer/PCO

5. Build Pricing Model5. Build Pricing Model Price AnalystPrice Analyst

6. Begin Preparing a Preliminary PNM6. Begin Preparing a Preliminary PNM Price AnalystPrice Analyst

7. Start Performing Price/Cost Analysis7. Start Performing Price/Cost Analysis Price AnalystPrice Analyst

Proposal Analysis StepsContinued

Actions up to $10M Buyer/PCO TasksActions up to $10M Buyer/PCO Tasks > $10M> $10M

8. Review Technical Evaluation for adequacy8. Review Technical Evaluation for adequacy Buyer/PCO Buyer/PCO

& Price & Price AnalystAnalyst

9. Review Audit results9. Review Audit results Buyer/PCO Buyer/PCO

& Price & Price Analyst Analyst

10. Incorporate Tech & Audit into Pricing Model10. Incorporate Tech & Audit into Pricing Model Price AnalystPrice Analyst

11. Perform Weighted Guidelines Analysis (unless 11. Perform Weighted Guidelines Analysis (unless CPAF)CPAF)

Price AnalystPrice Analyst

12. Final Price Analysis12. Final Price Analysis Price AnalystPrice Analyst

13. Prepare Business Clearance Pricing Charts 13. Prepare Business Clearance Pricing Charts Price AnalystPrice Analyst

14. Complete PPNM14. Complete PPNM Price AnalystPrice Analyst

15. Prepare Govt Offer Position for Negotiations15. Prepare Govt Offer Position for Negotiations Price Analyst Price Analyst

Step 1 Examine Proposal Data

• Does proposal contain Cost or Pricing Data in a format consistent with FAR Table 15-2 (FAR 15.408)?

• Does proposal comply with specific RFP instructions?

• If answer to either question is No, call contractor ASAP.

FAR Table 15-2 (Found under FAR 15.408(m))

• FAR Table 15-2 requires:– A Proposal Index of all Cost or Pricing Data – Cost Element Breakdowns for each CLIN consistent with

contractor’s cost accounting system– Total Summaries by Cost Element– Identification of Incurred Costs (Actuals)– Submission of FPRA if negotiated– Proposed use of Govt Furnished Property– If subject to Cost Accounting Standards (CAS), a statement on

adequacy of Disclosure Statement– Identification of any CAS non-compliances

FAR Table 15-2 - Continued

• Even though Cost or Pricing Data is factual not judgmental, per Table 15-2 I C, contractor must submit any information reasonably required to explain estimating process, including --– The judgmental factors applied and the mathematical

or other methods used in the estimate– The nature and amount of any contingencies included

in the proposed price.

FAR Table 15-2 Cost Elements

• Material - Contractor must provide:– a consolidated priced summary of individual material

quantities (Bill of Material) identifying the item, source, quantity, and price.

– Summary of cost analysis of Subcontracts over $650K if no exception applies and subcontract cost or pricing data if thresholds exceeded ($11.5M+ or 10%+ of total price)

FAR Table 15-2 Cost Elements - Continued

• Labor - Contractor must provide:– a time-phased (e.g., monthly, quarterly, etc.)

breakdown of labor hours, rates, and cost by appropriate category, and furnish bases for estimates

• Note: This where the contractor tells us “how and why” they bid the hours they did. It almost always includes judgmental factors

FAR Table 15-2 Cost Elements - Continued

• Indirect Costs - Contractor must provide:– how they computed and applied indirect costs, including cost

breakdowns. Show trends and budgetary data to provide a basis for evaluating the reasonableness of proposed rates. Indicate the rates used and provide an appropriate explanation.

• Note: In proposals with major contractors, indirect cost data is often limited to a description and listing of the rates. The details behind the rates are contained in the contractor’s forward pricing rate proposal submitted to DCAA & DCMA. We rely on DCAA & DCMA to analyze that data.

Step 2 Request Field Pricing Support

• DFARs 215.404-2 contains the following guidance:

(i)  The contracting officer should consider requesting field pricing assistance for—

(A)  Fixed-price proposals exceeding $650K;

(C)  Cost-type proposals exceeding $10 million from offerors without significant estimating

system deficiencies.

Step 2 Request Field Pricing Support

• Usually a full DCAA Audit but sometimes we tailor our request to specific elements of cost

• We rarely ask DCMA to perform a Technical Evaluation– But DCMA can be of assistance to our technical

evaluators

Step 3 Request Technical Evaluation

• Buyer/PCO will request tech eval– Tell them what needs to be evaluated

• Material (Types & Quantities)• Labor Hours• ODCs

• Person doing pricing should communicate to Tech Eval team on how they need the Tech Eval summarized.– e.g. Hours by Labor Category, by CLIN, by Year

Step 4 Build a Pricing Model

• Build a spreadsheet model to price the action– Includes all cost elements & Profit– Original Model will validate accuracy of contractor’s

proposed price• If model doesn’t produce same result as proposal (except

minor rounding errors), either your model is wrong or proposal is wrong (Hint: it is usually your model that is wrong)

• If Contractor’s proposal is wrong, contact contractor

Sample Pricing Model SAMPLE PRICING MODEL

BASE RATE $$$$ BASE RATE $$$$ BASE RATE $$$$Composite

GREAT RIVERPURCHASED PARTS B 6,867 1 6,867 754,679 1 754,679 761,546 ATTRITION (B) 6,867 0.0432 297 754,679 0.0460 34,715 761,546 0.046 35,012 MATERIAL OVERHEAD B 8,331 0.3160 2,633 917,680 0.4640 425,804 926,011 0.463 428,437

RC 21 MGT SUPT 991 22.89 22,684 1,126 23.26 26,205 2,118 23.09 48,889 RC 30 Q/C 62 19.39 1,204 549 21.80 11,965 611 21.56 13,169 RC 74 TOOL FAB 3 18.12 54 58 18.22 1,057 61 18.21 1,111

TOTAL GR DIR MFG 1,056 23,942 1,733 39,227 2,790 22.64 63,169

MFG OVERHEAD - GR 23,942 125.30% 29,999 39,227 116.70% 45,778 63,169 119.96% 75,777 MFG FRINGE - GR 23,942 53.60% 12,833 39,227 75.00% 29,420 63,169 66.89% 42,253

TOTAL GREAT RIVER 76,202 1,270,098 1,346,300

CLARKSBURGRC 20 PROD - 11.05 - 40,342 11.94 481,686 40,342 11.94 481,686 RC 21 MGMT SUPT - 12.72 - 7,273 13.68 99,496 7,273 13.68 99,496 RC 30 Q/C - 11.47 - 2,697 12.80 34,532 2,697 12.80 34,532 RC 40 TOOL DES - 17.78 - 2,522 18.80 47,424 2,522 18.80 47,424

CLARKSBURG DIR MFG - - 52,836 663,138 52,836 12.55 663,138

MFG OVERHEAD - CLARKSBURG - 125.30% - 663,138 116.70% 773,882 663,138 116.70% 773,882 MFG FRINGE - CLARKSBURG - 75.00% - 663,138 75.00% 497,354 663,138 75.00% 497,354

TOTAL CLARKSBURG - 1,934,374 1,934,374

TRAVEL - 1 - 4,231 1 4,231 4,231 PR PAY DIR MFG 23,942 9.20% 2,203 702,365 9.20% 64,618 726,307 9.20% 66,821

0 0G&A 71,241 41.10% 29,280 2,479,696 48.70% 1,207,612 2,550,937 48.49% 1,236,892

SUBTOTAL COST 107,685 4,480,933 4,588,618

COST OF MONEY MATERIAL 7,164 0.00231 17 793,625 0.00196 1,556 800,789 0.00196 1,573 GREAT RIVER 23,942 0.03478 833 39,227 0.05703 2,237 63,169 0.04860 3,070 CLARKSBURG - 0.03478 - 663,138 0.05703 37,819 663,138 0.05703 37,819 G&A 71,241 0.00439 313 2,479,696 0.00416 10,316 2,550,937 0.00417 10,629

TOTAL COST OF MONEY 1,163 52,584 53,753

TOTAL COST 108,848 5,145,466 5,317,949

PROFIT 107,685 12.00% 12,922 4,480,933 12.00% 537,712 550,634

TOTAL PRICE 121,770 5,683,178 5,868,583

20072006 TOTAL

Step 5 Begin Preparing Preliminary PNM

• A Preliminary PNM is not duplication of effort. – It is essentially 2/3 of the final PNM

• It can help avoid mistakes that may not be easily corrected after negotiations

– Knowing what you need to address in the PNM will force you to address those things during proposal analysis & negotiation

• At this point you can already prepare 1/3 of the PNM – Introductory info, Proposed amounts and Basis of Proposal sections of the Cost Element Summary portion of the PNM

Step 6Start Doing Price/Cost Analysis

• If we or someone else bought the same or similar item before:– What was the price?– How long ago? what quantity? delivery schedule?– Same Ts & Cs, financing methods?

• Did we ask for actual cost data from prior buy? (if not, do it now!)

• This is “cost analysis” not price analysis but make sure technical team is given access to this data for tech eval

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Price vs. Cost Analysis

• Price Analysis is…– Look at total price– Reasonableness is based on a comparison of

proposed prices to same or similar items– Profit is imbedded in price

• Cost Analysis is…– Look at detailed cost breakout– Reasonableness is based on a thorough

analysis of each cost element– Profit is evaluated

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Price vs. Cost Analysis

• Truth in Negotiation Act (TINA) says– MUST obtain cost or pricing data (certified) over

$650,000 UNLESS• Price Based on Adequate Price Competition

– Price analysis, usually comparison of offers• Law or Regulation (mainly utilities)• Commercial Item

– Price analysis • Modification of a commercial item• Waived by Head Of Contracting Activity

– Use cost analysis for procurements over $650,000 where an exception/waiver does not apply

Cost Analysis

• Per Far 15.404-1 (a)(3) Cost analysis shall be used to evaluate the reasonableness of individual cost elements when cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable

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Cost Analysis

• Analysis of each major cost element– Labor Hours– Labor Dollars– Indirect Costs (Fringes, Labor Overhead)– Materials – Subcontracts– Intra-Company Transfers– Other Direct Costs– Cost of Money– General and Administrative– Profit/Fee

• Other cost elements can be added when applicable

Cost Analysis (cont)

• Cost Analysis is a Team Effort– Your job is coordinate efforts of the entire team to

ensure a thorough analysis is performed.

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FAR Price Analysis Methods

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• COMPARE PROPOSED PRICES• PREVIOUS PRICES• Parametric • Catalog or published prices• Government estimates• Market prices• Pricing information provided by offeror

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Price Analysis Methods in FAR

• The first two techniques are the preferred techniques (15.404-1(b)(3)) – If CO determines that information on competitive proposed

prices or previous contract prices is insufficient to determine that the price is fair and reasonable

• May use any of the remaining techniques • Roughly listed: Least Intrusive to Most Intrusive

• But don’t ignore any pertinent information! – Government estimate– Market research– Historical prices– Explain what you concluded on any price information

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FAR Price Analysis Methods

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• COMPARE PROPOSED PRICES

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Comparison of Proposed Prices

• Comparison of proposed prices received in response to solicitation (competitive)

• Considered reasonable unless PCO has information to believe it is not– Especially if competition meets standard for Adequate

Price Competition in FAR

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Adequate Price Competition

• APC FAR reference 15.403-1(c)(1)

• Comparison to other proposed prices received is normally used as part of adequate price competition (APC) determination

• What conditions need to exist for APC?– Expected at least 2 offers– Compete independently– Can satisfy government requirements– Best value award– Price offered is not unreasonable– Price is a substantial factor in source selection

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FAR Price Analysis Methods

FAR 15.404-1(b)(2) includes the following examples of methods of price analysis:

• COMPARE PROPOSED PRICES• PREVIOUS PRICES

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Compare to Previous Prices

Price Analysis includes:• Validating basis of prior determination of fair and

reasonable– Competitive, sole source, commercial?– Prior award date– Quantity – Price

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Compare to Previous Prices

• Be Aware of:– New item vs. overhaul with same National

Stock Number– Urgent vs. normal delivery schedule– Technology change– Configuration change– Terms and conditions– Manufacturing process changes– Market conditions– Etc.

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Compare to Previous Prices

• Document details of analysis• For example:

– Escalation used• Time, rate, etc.

– Basis and currency of previous price• Competition, cost analysis, etc.

– Similarity of items• Any difference affecting price

– Explain differences or adjustments• Quantify price differences

Step 7 Review Tech Eval for Adequacy

• Does Technical Evaluation:– Address types and quantity of labor?– Provide sufficient rationale for all labor hour positions

(Objective & Going-In)?• If proposed numbers were accepted – why?• If reductions are recommended – why? • Are recommendations summarized correctly to allow Govt

Pricing Positions to be developed?

• Have all hours been evaluated?• Doubts about tech eval? - play “devil’s

advocate” with technical team on key issues

Step 8 Review Audit Report

• Did Audit review all costs?– What did we request?

• Are the results of the audit “qualified” for any reason?

• Are there “unresolved” or “unsupported” costs? If so why?

– You may need to contact contractor to insist they provide support to DCAA

– Utilize ESC Liaison Auditor (Zelma Calderon)

• What are the “Report Release Restrictions “• Do You understand Audit Results?

Step 9 Incorporate Tech Eval and Audit Results into

Pricing Model

• Double check your entries– Make sure you are not duplicating exceptions

taken by Tech Eval & Audit• e.g.

– Tech Eval deletes Part # NGX105 valued at $100,500– DCAA questions costs of $27,000 for Part # NGX105– If Tech Eval position is adopted you delete $100,500 from

Material (Don’t delete another $27,000)

• Does the total cost look right?– e.g. how did a 12% reduction in hours result in a

20% reduction in total cost? (probably not right)

Step 9 Incorporate Tech Eval and Audit Results into

Pricing Model (Cont)

• Analyze the Govt Position– Is it consistent with Price Analysis?– Top-Down look at hours

• How many equivalent full-time people are represented by the labor hours? Does it make sense?

Step 10 Perform Weighted Guidelines Analysis

• DFARS 215.404-4 the use of the Weighted Guidelines tool to develop a pre-negotiation profit or fee objective

– Except for:• Cost Plus Award Fee Contracts• Contracts with Federally Funded Research and

Development Centers (FFRDCs)

Step 10 Perform Weighted Guidelines Analysis

• Key Elements– Contractor Risk Factors– Contract Type Risk– Working Capital – Contractor Facilities Capital Employed– Cost Efficiency Factor

WEIGHTED GUIDELINES

Step 11 Complete Price Analysis

• This is the final cross check of the cost analysis.– Does our Objective Price make sense when

compared to the same or similar efforts all thing considered…• Quantities• Schedule• Escalation• Ts & Cs

Step 12 Prepare Business Clearance Charts

• Using Data from your Pricing Model, prepare Business Clearance charts. – Template for charts can be found on the

PK Homepage

– Local Process Guidance

- Documents Library

- Clearance

Step 13 Complete Preliminary PNM

• Everything but “Results of Negotiations” should be complete.

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What is a PNM?

“ A PNM is a document that summarizes the process of negotiating a contract’s price; the outcome of that process; and, serves as a record of the decisions made in determining a price to be fair and reasonable.”

Nash and Cibinic

“ A PNM is a document that summarizes the process of negotiating a contract’s price; the outcome of that process; and, serves as a record of the decisions made in determining a price to be fair and reasonable.”

Nash and Cibinic

*** Price Negotiation Memorandum ****** Price Negotiation Memorandum ***

Must be a complete summary of the negotiation process

What is a PNM?

• Every PNM should show the contractor’s proposed amounts, the Air Force Objective, and the negotiated amounts by cost element.

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Need for Documentation

• Why Document your pricing?– FAR 12.209

• …the contracting officer must establish price reasonableness in accordance with 13.106-3, 14.408-2, or Subpart 15.4, as applicable…

– FAR 13.106-3(a)(2)• If only one response is received, include a statement of price

reasonableness in the contract file

– FAR 15.406-3• CO…shall document in the contract file the principle elements of

the negotiated agreement

• What is the Documentation used for?– Providing information for future buyers/CO’s– Defending the Air Force in claims or protests– Supporting Defective Pricing efforts– Providing information for DoD IG, GAO, etc.

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Organize Your Thoughts

• Top-Level Pricing Impacts– CLIN Organization

• By Debit/Credit• By Contract Type• Flows to the modification/contract

• Set up a matrix– Picture of the pricing changes– Useful for Clearance Briefing– Outline for PNM writing

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What Makes a Good PNM

• What Makes a Good PNM– Documentation of analysis (crux of pricing and PNM)– Discussion of issues and positions– Negotiated terms and conditions– Logical flow:

• Proposal to Tech Eval• Tech Eval to Price/Cost Analysis• Price/Cost Analysis to PNM (& Negotiations)• PNM to Modification/Contract• All numbers consistent

– Understand how to develop pricing numbers• Have you convinced the reader that the Price is fair and

reasonable?– Achieved through complete and accurate price/cost

analysis and full discussion

Step 14 Prepare Govt Offer Position

• Prepare Government Offer Position– Both cost and profit/fee

• You need to be able to tell the contractor why your offer is less than the proposal (details) – Understand the key technical & audit issues and

be able to talk to them in “layman’s” terms

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Clearance Review & Approval

• Reference: AFFARS 5301.9000 Clearance– Ensures contract file and intended contract/modification

comply with law, policies and regulation; and result in fair and reasonable business arrangements

• Approval to begin negotiations with traditional pricing• We no longer use IPT Pricing! (Policy Memo 2009-PK-003)

Final Thoughts

• Proposal Analysis is a Team Effort– Everybody’s part is important– Use Available Resources

• When we have done a good cost analysis - Negotiations can be fun, challenging and very rewarding.

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Questions?