The United States government has unlimited resources to undertake a cost analysis of a prime contractor’s bid. Unfortunately, contractors do not have the same access. This article outlines a simple method for contractors to ensure they have what it takes to conduct a cost analysis on a supplier’s bid as needed. Cost analysis files are pulled and examined during a purchasing system review, as explained in our CPSR guide.
Step 1: Ensure your Request for Proposal (RFP) is thorough and complete
If a supplier’s proposal requires Truthful Cost or Pricing Data, the RFP should specify that the pricing be delivered in a format compatible with FAR 15.408, Table 15-2. FAR 15.408, Table 15-2. In addition, the RFP should require the supplier to complete the DFARS 252.215-7009 Proposal Adequacy Checklist
252.215-7009 Proposal Adequacy Checklist. Do not underestimate the importance of the RFP. The RFP communicates the project’s criteria as well as other relevant terms and conditions.
Step 2: Ensure the Supplier’s proposal is COMPLIANT and RESPONSIVE to the RFP.
If Supplier’s proposal is incomplete or non-responsive to the RFP, the supplier should immediately be notified that their proposal is rejected as non-compliant. If Supplier failed to provide supporting documentation, including the Proposal Adequacy Checklist, or if the Supplier’s proposal fails to demonstrate a clear understanding of the requirements, it should be rejected.
Step 3: Fact-Finding
Assuming Supplier has submitted a complete and responsive proposal, contractor should then begin the Fact-Finding and Analysis process. Depending on the cost elements being analyzed, the fact-finding process may involve other stakeholders in the company, e.g. technical, program managers, project managers, project control, etc. This technical support provides the cost analyst with an understanding and bases of the proposed activities and costs since technical evaluators have the benefit of knowledge, training, and skill to understand what is or is not required.
Analysts compile a list of questions, requests for clarification, or additional information for submission to the supplier. The back-and-forth fact-finding process is an essential component of the Cost Analysis process.
Step 4: Audit Support
A cost analysis examines not just direct costs, (labor, material, ODCs) but also Indirect Costs. An Indirect Cost is “any cost not directly identified with a single final cost objective but identified with two or more final cost objectives or at least one intermediate cost objective.”[1] Indirect Costs are commonly referred to as “overheads” or “burdens”. Generally, indirect costs fall into the following categories: (1) Indirect Costs related to specific functions, i.e. Material Overhead, Production Overhead, Engineering Overhead; (2) General and Administrative Expenses such as management, financial, and other expenses related to the general management and administration of the business as a whole; and (3) Other Rates and Factors such as Facilities Capital Cost of Money (FCCoM).
Unless a supplier grants Full Audit Rights, the contractor must seek audit support from the government. If you’re not sure how to get Audit Support from the government, visit DCMA’s Pricing Support page DCMA Pricing Support.
Step 5: Write your Cost Analysis Report
After receiving a compliant proposal, doing fact-finding, and, if applicable, receiving an audit report from DCMA, the Cost Analysis Report (CAR) will be prepared.
The CAR should:
- Communicate the results of the analysis
- Present the price determined “fair and reasonable”
- Discuss each cost element and profit individually
Step 6: Prepare for and document Negotiations
After analyzing each individual cost element, including profit/fee, the contractor should develop a pre-negotiation position. This pre-negotiation position should be verified through a price analysis. The pre-negotiation position should be documented and address the procurement situation, the supplier’s estimating rationale, the contractor’s analysis and differences with the supplier’s rationale, and the contractor’s intended negotiation positions. This documentation will provide the contractor with an audit trail.
Step 7: Price Agreement/Certification
Following the conclusion of negotiations, the parties should agree on price. At that time, the supplier should submit a Certificate of Current Cost or Pricing Data (CCCoPD) pursuant to FAR 15.406-2. FAR 15.406-2, CCCoPD.
SpendLogic is currently developing a Cost Analysis module that will aid contractors in preparing a Cost Analysis Report. The Cost Analysis module will complement SpendLogic’s existing Price Analysis module. We also have free tools on our website to assist contractors with profit analysis and escalation. We invite you to check us out and sign up for a free no-obligation demonstration.
[1] FAR 2.101