Cost Analysis requires a special skillset that differs from what we do in Price Analysis. This webinar focuses on Direct Labor Hours. Over the course of the training sessions, we will work through the process from start to finish. We will talk about the hierarchy of the different types of BOE’s (bases of estimate) and the data needed to support them. We will also discuss documenting our findings in the written report.
Thanks for joining us here today. This is the second video in a series that we’re doing on cost analysis. And I’m Patrick Mathern. I’m the President of SpendLogic.
I’m going to be leading you through this here today. And a little bit about what we’re going to be doing. So, first I’m going to start off, just like last time, talking about some disclaimers. And then we’re going to really get into this thing. So, I’m going to tell you a little review from session one, but then we get into, you know, what is the definition of direct labor? What are we actually talking about here today?
Give you some basics of labor analysis, how to determine estimate adequacy, documenting your analysis, and then go over some common pitfalls. So, by the end of this here today, you should be able to do a basic documentation and a cost analysis report of direct labor, all right. So let’s get into it.
First of all, disclaimer. This discussion is going to be based on our experience, okay? And I noted this last time, I’m going to note it each time. If you really want to get into the nuts and bolts of what the FAR says, then, by all means, go do that. Some great resources are the contract pricing reference guides as well as FAR 15.408 Table 15-2. This is exactly the process that we go through.
We’ve been doing it for a long time. It definitely results in a great analysis, and it’s something that primes contracting officers and auditors all have accepted throughout the years. So, this works may not be exactly to the tee what’s in the FAR, but it’ll get you there. Who are we?
Who’s SpendLogic? Who am I? What am I doing here? So, SpendLogic is a group of industry experts, okay? And we focus on cost and price analysis. We have software, we have training, and we have services. Our software focuses on the big hitters in CPSR that’s price analysis, commercial item determination, and source justification, whereas we provide training and services around those as well as cost analysis.
Today, we’re talking cost analysis, not price analysis. So, as a refresher, okay? What is the purpose of cost analysis? Why are we talking about this? So, first and foremost, the purpose is to set forth an opinion of price reasonableness. This is also the purpose of price analysis. Cost analysis just gets deeper into it.
We have to meet the requirements of TCOPD, the Truthful Cost or Pricing Data, okay? When certified data is required, certified cost, or pricing data is required, then you have to do a cost analysis. There are exceptions in the FAR, we talked about that last time. And last but not least, it’s to set forth your negotiation objective, right? It is not justifying something that is done behind you.
It’s not justifying the price that is proposed. It’s analyzing the cost data so that you can come up with an objective of what is fair and reasonable so that you can get into negotiations, okay? As you go through this, maintain the proper focus, okay? Focus on cost or pricing data, and focus on the facts. Avoid getting into the witch-hunt mentality where you’re looking for something wrong and you’re trying to nail the supplier, you’re trying to save money, or whatever it is.
Just the facts, right? And last but not least, trust, but verify. So, your supplier may say something like, “Today we’re going to talk about actual hours.” They may talk and say that they provided or that they based their estimates on actual hours, great. Just provide those to me so that I can look at them, okay? That’s a lot of what you do in cost analysis is trust, but verify, get the data and present it in a report, all right?
So, carry forward from last time, where we left it with direct labor hours specifically the supplier said, “Well, we proposed direct labor hours based on actuals and engineering judgment.” And we said, “Okay, great, but we’re going to need more information.” So, what we did is, in RFI 1, we sent them a question and we said, “Okay, listen, we’re going to need to see what those actual hours are, what the calculations are, and this detailed engineering judgment that you used, whatever that might be,” okay?
To the right, you also see a picture of where we left the cost analysis, right? We document the cost analysis as we go, and we’re just going to talk about systems engineering here today. There were multiple…there are three labor categories here. But what we basically said was we needed more information. We requested additional data in RFI 1.
We did not have an analysis position, so our analysis and conclusion are still blank. So, that’s where we left it, and that’s where we’re going to pick up on it today. Here’s what the supplier sent back. They sent back a basis of estimate sheet, also known as a BOE sheet, okay? Basis of Estimate, BOE.
And there’s a lot of information on here, okay? The basic idea is, well, let’s just go through it real quick. So, the task description, they talk about, here’s what is going on, here’s what we did, or here’s what we’re going to be doing. Here’s my estimate methodology and rationale, okay? Every good Basis of Estimate, that’s the purpose of it, is to talk about the basis of their estimate.
So, here’s what it was based on. Here’s the methodology that we used. Moving on, it talks about some source data. So, what is our source data? And you can see it down here at the bottom. In a nutshell, what they’ve told us here, and you can read it on the screen, but they’ve said, “Okay, this particular one, systems engineering, is based on actual hours from a prior experience.”
And here’s what the actuals look like. Here’s why these actuals are appropriate. And so, therefore, we just use the same exact hours. We didn’t use any calculations, we didn’t use any engineering judgment in this particular estimate. Okay.
So, now we get into, okay, is this going to be okay? Is this… you know, how do we analyze this? How do we move forward? In order to get into that, I want to take a quick step back, not a quick step, it’s going to take a little while, and talk to you a little bit about what is direct labor. You know, let’s talk about what are some of the methodologies that people use for, you know, estimating direct labor.
What are, you know, how acceptable is that direct labor, direct labor estimate? So, here we go. First and foremost, what is considered direct labor? What we’re talking about here today is ours, okay? They may have told you that they have $10,000 in direct labor. Well, that doesn’t tell me anything in a cost analysis. I need to see the hours separated from the rate, or the dollars, okay?
So, what we’re talking about here today is just the hours, okay? And these hours are direct charge to the contract, okay? So, what does that mean? Direct charge versus indirect charge, right? If it’s direct, then these are hours that can be segregated by contract. So, the work that they’re doing is very specific to the contract that they’re working on.
This is, you know, as opposed to something like let’s say janitorial hours, okay? The janitor of the building is, you know, incurring hours and incurring costs, but they’re not doing it for any specific contract. They’re doing it for the company as a whole.
So, the janitor’s hours are going to be an indirect charge, whereas the engineer that is doing the drawings or in this case, systems engineering specific to this project, that’s going to be direct, okay? Another way to understand direct and indirect in another test that you can apply is look at the effort and how is it performed on prior contracts.
So, if it was performed as a direct charge on prior contracts, then it should probably be direct this time. If it was indirect last time, and now it’s being direct, then you probably need to dig a little bit more because they should be doing the same thing under the same categorization on each of their contracts. Now, there are cases where they can be doing something different and one day it’s direct, and one day it’s indirect.
But it’s very, very specific to that task in that contract that you’re working. So, some examples of direct labor are, like you see on the screen, engineering, manufacturing, production, you know, the technicians on the line and things like that, all right? So, that’s what we’re talking about here today. The method that you use to do a cost analysis, and really this is the method that you use for every cost element .
So, by cost element, I mean direct labor, I mean direct material you get into it in rates. If you have travel or other direct costs, anything like that, this is the method that you’re going to apply. It’s a little different how you do it each time, but in essence, this is what you do. So, first and foremost, you’re going to look at what was proposed and trace it back to the contract requirements.
So, as an analyst, you get the proposal from the supplier. And what you need to do is you need to, I mean, this sounds kind of remedial and basic, but you need to make sure that what they’ve proposed is actually required so that there’s nothing extra and there’s nothing missing, okay? You got to make sure that everything is there. The way that you do that is you look at the RFP, you look at the proposal, and you draw lines between them.
And you don’t have to physically draw lines, you just review them and make sure that they’re equivalent. Number two, understand the proposed Basis of Estimate. So, now that you have… When we first got the proposal, we didn’t have the Basis of Estimate. They said, “Oh, it’s based on actuals and engineering judgment.” That doesn’t tell us enough. So, we ask them questions.
Cost analysis is an iterative process. You’re going to ask questions, you’re going to get answers. You may ask more questions, okay? So, what you’re aiming to do with number two is understand the methodology and rationale and obtain and review source data. If you didn’t get it the first time, then you go back and ask until you do get it. Number three, develop an opinion of the estimate. So now you’re doing your analysis, right?
Look at the estimating method that was used. Is it the most effective and appropriate estimating method that they should have been using? Okay, this is part of your judgment and your rationale. Request additional data required. And if you can identify trends in the data, if it makes sense. If they’re coming down a learning curve and they’re doing repetitive production, then you would graph these and you would see, okay, they’re coming down, or they’re going up in their hours, and this is how this, you know, makes sense for the future.
Last but not least, document your position in the cost analysis report . I’ve set these out as 1, 2, 3, 4, but they don’t actually work in exact order. It’s an iterative process. Sometimes you’re going to get some information, you know, in number two, you’re going to understand the Basis of Estimate. But in order to develop the opinion, you’re going to have to ask for more information and get a better understanding, maybe you go up to one.
And then once you get something, maybe you jump down to four and get it into your cost analysis report, okay? All of these, kind of, they work out of order until you finally get to the point where you have a full cost analysis on all the cost elements. Over in the side. In the sidebar here, keep in mind a couple of things. Number one, technical evaluations.
As you go through the Basis of Estimate, and you go through the proposal and you’re understanding what’s going on, you’re not expected to be the expert in all cases. You shouldn’t be the expert. If you’re the expert in all cases of the analysis then you may be in the wrong job . You should probably be running the shop or doing something else. But what you’re really looking for is, okay, what information have they provided?
What do I have the expertise to weigh in on and create an analysis position? And what do I need to farm out? A technical evaluator is… and I’m going to show you a little bit about a technical evaluation here today. I’m not going to get into the nitty-gritty details, but basically, you’re asking engineers for their opinion.
I don’t know if what they’re saying is true. I don’t know, you know, if the two are truly equivalent, I need somebody else to weigh in on that for me, okay? The other tool that you have at your disposal is the RFIs, the Request for Information. We already did RFI 1. We sent that to them and said, “Hey, we need more data on the labor estimate and the Basis of Estimate. So, what else can you give us?”
They sent back something you can always go back and forth with those RFIs. RFI 1 is just the initial, you know, time that you send it out, but you can fill that out and send it back to them and, you know, have that conversation going back and forth. And most likely, you will. I’ve never been in a cost analysis where I did one RFI, got one response, and we were done. It’s always in the iterative process.
So, of these four steps, I’m going to dig into each one. Again, they don’t happen in perfect order. But you need to understand, you know, what’s happening in each of them. So, first and foremost is trace the effort to contract requirements. Again, we already talked about this. Is the effort required?
Have they answered the mail? Have they proposed what’s required? And you just got to get an understanding of the proposal, look at their basis of estimate, look at their proposal, look at the RFP, and make sure that it’s a one-for-one. If you don’t know, again, go back to your technical evaluator, or go and send them an RFI with any questions that you have. Don’t move on, you know, too far until you get an understanding of this.
If you don’t know if they’ve proposed enough, or if they proposed too much, then you really can’t do an effective cost analysis. This is where we’re focused on labor. This is what we would be looking at just this top section of hours and comparing this to the RFP to make sure that they hit what they needed to hit.
Second, understand the proposed BOE, okay? We’re going to get into this here. So, the first thing that you need to do is identify and understand the method that the supplier used. If you can’t repeat back how they proposed it and what the methodology was that they used, then you don’t have enough information and you need to obtain that from the supplier, okay?
You also need to review the source documentation that they utilized. So, oftentimes the supplier will say, “Well, this is based on actuals from the prior program, and we adjusted it by a factor,” okay? And then they don’t give you any of that data. You need to get the exact data so that you can replicate exactly what they did, okay ? In this particular case, here’s their Basis of Estimate, and this is probably a little bit difficult to see, but what they’re saying here is their methodology was they used actuals from the lot two upgrades, which occurred in 2000xx.
It’s assumed to be equivalent. And here’s why. So, since the lot two upgrades concern functionality upgrades, which are highly similar it’s been assumed that the systems engineering effort will also be equivalent. Examples of similarities include the fact that both upgrades affected the input module, the output module, and system connectivity.
Additionally, both upgrades concern swapping out the same sub-assembly, the flux capacitor. Okay, that’s a great Basis of Estimate. Okay, we know exactly what they’ve based it on, we know the program, and they gave us some rationale as to why they think that the two programs are equivalent. It’s not often that you’ll get something this complete.
Companies like the larger OEMs, so Boeing, Northrop Grumman Raytheon, some of the bigger ones have a formal basis of estimate sheet or program that they use, and they’ll get into this level of detail. Lesser experienced suppliers, if you’re doing a cost analysis on them, will not include this much information, and you need to pull until you get it.
Now, for the folks out there that are watching this, and when you’re at a smaller supplier and you’re trying to understand the cost analysis process so that you can anticipate what your prime is going to be asking you, take note of this. This is the type of data that they’re going to be looking for. You’re best off providing it right up front and using it as your Basis of Estimate in your proposal.
If you can provide these sheets with your proposal, it just cuts out a ton of work, okay? Continuing on down here it talks about calculations. Any judgment and factors applied, and it says NA. Furthermore, it shows what the actual hours were spread by month in a total of 575.4 hours, okay. They proposed 575 hours, so there is no adjustment.
They’ve told us exactly where these hours came from. They’ve also told us why they feel these hours are appropriate. So, I have a very solid basis for understanding what their position is. I don’t have to agree with it, but I now understand where they came up with their proposed value, okay ? So, now I’m jumping down to step four for a second, right?
I’m going to document along the way. This is a tip that took me a long time to learn, okay? As a junior analyst, what I would do is I would go through my analysis, I’d create tons of spreadsheets and notes, and I’d have all this stuff pulled together. And then when I felt like I had enough, I would go in and I would start writing my report. And the report writing would take a week or a week and a half sometimes.
It’s, you know, morning till night. I’m writing this report and pulling my notes together, doing the analysis, and it was the worst part of the job. I hated it every single time. Now, as we evolve and we mature, we see that there’s probably a better way to do it, and this is the better way that I’ve come up with, okay?
If you can document along the way, update your spreadsheets, and update your cost analysis report, that does a couple of things, it’s going to make things go faster , okay? You’re not going to have a week and a half of writing time. It’ll make your life a lot more pleasant, because, again, you don’t have that heads-down time at the very end.
But what it also does is it highlights where you still have holes and where you can continue forward and stop asking questions. There are a lot of times when I would do the analysis at the very end and document it at the end, that I would find that, “Oh, geez, I forgot, you know, the follow-on effort for engineering too, or something like that.”
And I would have to go back, you know, to the supplier and continue fact find again. Whereas had I understood that at the beginning and along the way, we could have had that iterative process and not, you know, had the downtime of waiting for their response. So, document along the way. What you see on the screen here is, I’ve now documented…you’ll recall from last time we created a cost analysis report.
And for every single cost element, we created a section called proposed analysis and conclusion. So now in my proposed, I have a lot more information that I’ve received from the supplier. You can see that I now know that they’ve based their systems engineering a lot to upgrades, which occurred in 20xx. They assumed that it would be equivalent.
The supplier noted, and then I just pasted exactly what the supplier said, okay? There’s no need to paraphrase what they’re saying. If you can copy and paste, this is another time saver, okay? Sometimes you’re not going to be able to, you’re going to have to infer, and you’re going to have to paraphrase what they’ve got. But if you have it, put it in there. Now, you’ll notice that my analysis and conclusion are not completed.
That’s fine, okay? I haven’t done my analysis, so I don’t know my conclusion. Just do what you’ve got and continue forward. Now, if I wasn’t able to fill this in all the way, then it means I need to go back to my RFI and send it back to them and get some more information. So, you can see how this all works together. Third, develop an opinion.
This is your analysis, okay? And this is a complicated… obviously, you know, this is the most complicated part of it. How do you do an analysis of their hours? Well, let’s get into it. So, these are the questions that you need to ask. What is the best estimating method to use?
Okay, I know what they have, but what, in my mind, what do I know about this? What should they be using? And then compare the two of them. Obtain documentation, conduct your data analysis, and document an opinion. So, the mindset that you should have every time you’re looking at one of these cost elements and getting into analyzing it, is on the left here, you see, is the proposal based on the strongest evidence possible, okay?
Well, I’m going to get into how you make that determination. And then number two, has the appropriate supporting documentation been provided, all right? So, first and foremost, what is the strongest method that’s available to you? Okay. We’re going to talk about this as we move on into material and into rates. And, you know, Other Direct Costs, ODCs. This is the same information that you’re going to see for every single cost element, okay?
The estimating methodology, there’s lots of ways to estimate things, okay? They fall into some basic categories that I’m going to go over here in a second, and they are on a sliding scale of perceived fidelity, okay? From low to high. So, some of these are going to be very strong cases for supporting an estimate, and other methodologies are going to be very poor or very weak, okay?
So, I’ll read through these and then I’m going to go through each and every one of these. So, at the very top, you have incurred costs. You know, these are costs that they’ve already incurred for this project, this current project, we’ve already done it. Here’s the cost. It is what it is, right? Second down is actual cost for the same effort previously, Okay.
Third, actual cost for a similar effort. Fourth, actual costs, but no documentation. They’ve given us nothing . Fifth is prior experience, “prior experience.” And then last is judgment. They just say, “This is based on engineering judgment. We have nothing to back it up. We just feel it in our gut, so you should trust us.”
You can understand why that’s at the bottom of the list. So, let’s go through each one of these, okay? And then now we’re going to talk about, okay, these are all of the methodologies, and you want to go up as high as possible, all right? So, what is the supporting documentation and how do I get it? These are some of the questions that you’d be asking. You know, these apply to all methodologies or all cost elements, but we’re going to make this specific to labor.
So, the very top incurred costs, okay? Now, to be clear, this is not costs that I’ve incurred last time, I’m talking about, we’ve already started this contract maybe they have a UCA, an undefinitized contract or something, and they’ve already, you know, spent hours, in this case, okay? So, the documentation that they’ve got to show, what were the hours incurred, and how do they fit within this required effort?
So, I would go back to the supplier and I would say, “Okay, you’ve told me that you have incurred actuals. I need to see all the actuals to date, and I need to see what your estimate to complete is.” Right? How does it fit into the total effort? Here’s what I’ve done. Here’s what the total is, You know, now I can see the whole picture. Anything that’s already been done, if they’ve been authorized to do it and if it fits within the effort, then it’s really kind of irrefutable.
That’s why it’s the highest perceived fidelity . You can’t say, “No, it shouldn’t cost that.” Well, it did. They’ve already spent it, and it is what it is. This is why you don’t want to go out on UCA very often, right? Or close it down as much as possible. You want to make sure that you’re negotiating what’s going to happen, not getting stuck with a bill for what already has happened.
Next, actuals for costs for the same effort previously. So, if they’re doing the same thing tomorrow that they did yesterday, okay? The actual cost that they incurred yesterday should be a good measure of what they’re going to be doing tomorrow, right? So, what you want to get from them is the actual hours that were used last time or incurred and why they are considered valid or are they required to be adjusted?
Okay, sometimes they’ll say, “We did the same thing last time, but, you know, because of, you know, climate change, or COVID, or something like that we need to adjust these upward with a factor of 0.25 or something.” Okay, we need to know all of that stuff, you know, what are the adjustment factors ? What are the actuals?
Show us what you’ve got. Next down is actual cost for a similar effort. It’s not exactly the same as what we did last time, but it’s similar, okay? So, again, you need to show me which hours were used, why are they considered valid, and how are they adjusted. It’s the same basic concept, okay? We’re getting lower on the perceived fidelity. It’s not the exact same thing, okay?
So, there’s some subjectivity that’s being introduced here. We’re not exactly sure how closely related they are. We’re probably going to need some help from a tech evaluator as we move down. Next, I’ve got actual costs, but I have no documentation, okay? Okay, so you’re telling me that you did this before, you can’t document the hours, but you’re telling me that it’s the same, all right?
Or it’s highly similar. I got to get some sort of data, okay? Why are you considering this valid? It’s the same questions, but now we’re moving down that perceived fidelity, they can’t prove it, right? They can’t give you sourced documentation. So, now we’re going to be asking more and more questions and, you know, we’re trying to chase out the subjectivity.
Next is, okay, it was based on prior experience, okay? I don’t have actuals. I can’t tell you much about it. But I have experience doing it, and you just need to trust me that it’s going to be x number of hours. Okay, wait a second. Tell me what your experience is. What is this based on?
Have you been doing this for 35 years? Okay, and tell me a little bit about that, okay? What is it about this item that you think it’s going to take this many hours? Specifically, how did you come up with that? Oftentimes, you’ll have a supplier that says, “Well, I can’t tell you how, I know it’ll be that many hours. I just know that it’s going to take an engineer, you know, over the course of four weeks, they’re going to spend half their time on it.”
Oh, great. Now I can start getting into hours, right? You’re giving me data that I can start digging into and building a case for it. I’m not trying to catch you in a slip-up. I’m just trying to figure out what the facts are and how I can document it and remove as much subjectivity as possible.” And down here on the bottom, last but not least, is I just based it on engineering judgment. So, you’ve got somebody that can’t say that it’s really based on prior experience, and, you know, they’ve got 35 years in the industry or whatever.
They just basically said, “I just think this is what it’s going to take. We really have no idea whatsoever, okay?” You’ve got to have some explanation of the judgment. There is a reason that they proposed it at the hours they did, and not 4 million hours, okay? How do you make that jump? How can you get closer to understanding their methodology? All right?
As I’ve mentioned here, as you go further down this list, the requirement for getting data is going to go up. You’re going to have more questions, and you’re probably also going to need to get some of that technical expertise. You’re going to have to go out to a technical evaluator and get an engineer to help. If you don’t, if it’s based on judgment and you don’t…
maybe in a prior life you were a manufacturing engineer, so, you know, you have all the experience and expertise, you just need to explain that so that a reviewer, typically a contracting officer, or a CPSR auditor, or maybe a prime contract person, they need to understand that, okay, you do have the expertise, or whoever’s writing this, whoever is doing the analysis has that expertise that’s required so that there’s a good read on what these hours are, and it’s a valid conclusion.
So, once I’ve gone through that, okay, I understand exactly what the supplier has proposed. I’ve now come up with, in my own mind, what the best methodology is. So, I’m going to flip back for just a second. There are no incurred costs on this project, okay?
So, the highest fidelity does not apply, okay? We don’t have that. Actual costs for the same effort previously. Well, what I have is, pretty similar, but I can’t say that it’s exactly the same. We’re affecting the same modules, but this is slightly different, there’s some difference here.
So, I have to go down to the third. Now, I’m three down. You know, there’s some scrutiny that needs to happen. It’s a similar effort. So, I’m probably going to need some help on this. So, what I’ve done is, in my analysis position, I’ve already reached out to my technical evaluator. I basically, I said that I’ve requested and received the actuals from lot two.
They proposed 575.4 hours, which supports the hours proposed, okay? I’m explaining my work. I talked about what I did. This is one of the hardest concepts to get across to new analysts. You have to write down what it is that you’re doing, you have to show your work, right? Tell them exactly what happened and how you did it .
The next step down here is, I noted that the analyst has also requested technical assistance, okay? I went to my technical, no, my technical evaluator, and I let them know, you know, I showed them the Basis of Estimate I needed them to give me feedback on it. So, I also, by the way, set up in here that Gareth Courtney is the lead engineer on this project, okay?
This gives them some credibility. It’s not like the buyer that sits next to me or something like that. This is a lead engineer. So therefore they are in a position to understand what’s going on. And then it talks about what process Mr. Courtney went through. So in this case review the efforts, agreed they’re highly similar.
And here’s why. Since the same upgrades are occurring to the same sub-assembly, and therefore he noted that it’s reasonable, expect the hours to be similar as well. This is a very, very buttoned-up example, and very, you know, succinct. But what I wanted to show you here is that the engineer, I don’t just say the engineer accepted the hours as proposed, okay?
That’s not acceptable. You’ll get dinged for it every time. You need to say, “The engineer reviewed the hours, and based on this rationale, X, Y, and Z, okay?” It can be simple like it is here, but based on this rationale, the engineer accepted the hours as proposed or whatever. Okay? Make sure that you give that line of thought or that line of thinking in your documentation. So now at the bottom, I have enough to make it a conclusion.
Based on the actuals provided and the feedback from the technical evaluator, the hours have been accepted as proposed, okay? In this particular case, we accepted the 575 hours. That’s not always going to be the case. You may have determined that the actuals, you know, were 600 hours and they proposed 575. You can put 600, you can be higher or lower in your cost analysis position, okay?
Next, make sure that you update your spreadsheets . So, I just showed you, here’s our analysis report. This is the word report, but at the same time, you need to go back and update your spreadsheets. So, let me pull those up. Here is my spreadsheets.
Here we go. So, you recall this from last time. I’ve already pre-built the pricing modules so that I can update it as I go. I go down to my labor hours section, and for systems engineering, I’ve now accepted their 575 hours as proposed. You can see that this is now updates.
My total is 575 hours. You can also see that this pulls through to my analysis position in my cost element summary. Note that my dollars are still zero. I haven’t done an analysis of labor rates yet, so that’s not going to update until I do that. I will go through and do an analysis for each of the labor categories and document it appropriately. And all of these spreadsheets will update as I go.
So, that’s it in a nutshell, okay? There are some common pitfalls that you should avoid or look to avoid. And I’ll go through each one of those. These are the biggest ones. There’s lots of things that can happen, but here you go. So, first and foremost, always ask for prior actuals, okay? If you know that this company is in the business of doing this, maybe they do it for other companies, or maybe they do it for your company, they’ve done it in the past.
If you’re analyzing hours, ask for those actuals, that should be the first thing. If they won’t provide the actuals for some reason or aren’t able to, then it’s something that you need to dig into. Anytime the government buys something that they’ve purchased in the past or that they know is not the very first time that it’s ever been purchased, they’re always going to look for those labor actuals, and you should too .
Next, don’t use engineer’s opinion, okay? So, in your write-ups, you’ve got to remove as much subjectivity as you possibly can. If you just use engineer’s opinion, there’s no way to be objective to, you know, and figure out if that’s accurate.
A reviewer can’t go and bounce that against their own knowledge. It’s just opinion. And when you put it into a report, it’s a red flag for, “Hey, check it out, I’ve got a soft spot you should dig into it.” Third, fully explain any adjusting factors. In this particular case, we didn’t have any, but let’s say that last time it was 575 hours, and this time we included a 25% increase because of complexity.
So, not only do you have to explain why it’s more complex, but you also need to explain where that 25% came from. Not just that you applied it, but how did you determine that 25% is the correct complexity adjustment? You’ve really got to dig into the nitty gritty details, and this is what makes cost analysis so time-consuming. Fourth, ensure that the estimate is traceable to the cost element summary, okay?
So, I’ll flip back here for a second. Make sure that their 575 hours that they’ve proposed can be traced upwards through the report. So, that’s why we’ve built the spreadsheets the way that we did. I’ve got 2,135 total hours. The 575 is part of that.
And I can see in my cost element summary that it truly is 2,135 hours. Also with my analysis position, you can see that my 575 hours is tracing, okay? There are a lot of times where the numbers just don’t add up and there’s a mess In your formulas, you can save yourself a lot of time by making sure, going through with a fine tooth comb, and making sure that the numbers all align throughout your report .
Fifth, validate that any supporting rationale provided matches what’s actually described in the BOE. So oftentimes the Basis of Estimate will say, “Hey, we base this on actuals from such and such program between these dates.” And then they give you data. When you try to match that data to what they actually said in the Basis of Estimate, they don’t match. The two are talking about two completely different subjects.
So, make sure that you go back, and even though they said one thing and they provided you data, don’t be so sure that the two match. You got to trust but verify. Just do that extra step to make sure that they talk to one another. And last but not least, take into account any trends in the source data. In this particular case systems engineering, there really was no trend.
It probably shows an increase and a decrease over the life of the program. But let’s say that you had manufacturing data, you’ve got hours per unit, right? What you’d want to do, is hours per unit in manufacturing data is great for figuring out improvement curves. How much faster are they doing it each and every time?
So, if you’ve got hours by unit, throw it on a graph, okay? That’s the easiest way to do it. And you can even use Excel tools to then add a trend line to that. And now you’ve got your own improvement curve, and you can apply that to future production as well. So, whenever you get the chance, look for trends in the data, and oftentimes just don’t forget that a great way to do that is to put it onto a graph.
That’s all that I’ve got here for you today. That kind of wraps up the labor analysis portion. That was a quick and dirty overview, but it’s also, if you apply those concepts to each and every one of your labor cost elements, you know, we have three in this example, then you’re going to get yourself to a position where you can complete an analysis and document it appropriately.
If you have any questions reach out to us at [email protected]. You can go to our website, spendlogic.com/events, and you can check out previous webinars, maybe you missed Session 1. This is the second session. Go back and check that out. And last but not least, don’t forget to click Subscribe so that you can be notified when we have new content that is posted.
Thanks for watching, and I look forward to seeing you on the next webinar that we hold.