Cost Analysis requires a special skillset that differs from what we do in Price Analysis. We at SpendLogic provide Cost Analysis services through our team of highly experienced professionals, although we will soon offer cost analysis as part of our software suite!
This webinar kicks off a Cost Analysis training block. Over the course of the training sessions, we will work through the process from start to finish. To begin with, in this session, we will talk through proposal adequacy and compiling our first set of questions, which we refer to as “RFI 1.”
My name is Patrick Mathern. I’m the president of SpendLogic. Today we are going to change gears a little bit. We’ve been talking about price analysis in the past and different methodologies that we use in price analysis. And today we’re going to kick off a little bit of a conversation about cost analysis.
So, SpendLogic is focused in our software on price analysis, but we’re building out our cost analysis capabilities. We as a company actually started as cost analysis consultants, and this is a service that we still provide today, both as consultants and then also just training our clients. So, if you need somebody to come in and pinch-hit and do a cost analysis on your behalf or if you just need some extra training, that’s something that we can provide to you.
So, today what we’re going to really talk about is the basics of cost analysis. We’re going to kick this off and talk to you about what is cost analysis? Why do we need it? And then get into the first steps in conducting a cost analysis. And those happen to be reviewing proposal adequacy and then getting into what we call RFI 1.
So, we’ll work through that here over the course of the session and see where we get. A quick disclaimer. So, what I’m going to be presenting here and talking about today is really based on our real-world experience.
Okay. It may or may not track 100% to what you read in the FAR. We’re not going to violate the FAR by any means, but if you really want to get technical and see what the true requirements are, please go to the FAR. FAR 15.408 Table 15-2 is a great resource. Or look at the cost, just go to Google and type in “Contract pricing reference guides,” and you’ll see guides on how to analyze every element of cost.
And that’s going to come more into play when we talk about individual cost elements in future sessions. But I just wanted to say that this is not..unlike a lot of courses that are out there that read through the FAR and tell you, in my opinion, what you can just read for yourselves, this is going to be more hands-on and more based on experience.
And when you leave, if you watch these courses, you should be able to actually do a cost analysis, not just know where to look for the information in the FAR. So, that’s the intent here, not going to regurgitate FAR, I’m not going to cite FAR a whole lot. And so if that’s what you’re here for, then this may not be the right course, but for the most part, I think you’ll get a lot of value out of this.
So, a little bit about us as a company, SpendLogic. You probably know we have software. Our software does price analysis, commercial item determinations, and source justifications. Really focuses on the big hitters in company CPSRs. As a whole, we are industry experts in cost and price analysis. We provide not only that software but also training and services.
And that kind of hints at what we’re talking about here today. So, our expertise is really focused on cost and price analysis. We are not CPSR specialists that dabble in cost and price analysis. It’s kind of the other way around. We really, really focus on cost and price analysis and the different elements of the CPSR that touch cost and price analysis, source justifications, commercial item determinations.
There are some obvious overlaps there that we also work with. So, if you have questions on any of those things, please reach out to us. All right. So, we’re going to get into the basics of cost analysis. Okay. First of all, why do we analyze price, to begin with? This is very high level.
We will get deeper into it very, very quickly, but I want to make sure that we touch the basic concepts. So, why do we analyze price? Okay. So, we conduct price analysis, not cost analysis, we conduct price analysis to determine price reasonableness and identify the negotiation objective. For those of you that are clients, whether it’s software or training, you’ll know that one of our biggest pet peeves is when people talk about justifying price.
Price analysis is not justifying, it’s analyzing. Justifying is something that you do after the fact, right? So, we’re always analyzing price so that we can understand what we should be negotiating to. Now, if we were to analyze price using cost analysis, it encompasses the same ideas as price analysis, but in this case, it also meets the requirements of public law, the Truthful Cost or Pricing Data, or TINA, as many of you know, Truth and Negotiations Act.
So, it basically does the same thing. It gets to the same goal as price analysis, but it goes about it in a different way, relying on certified cost or pricing data. So, a little bit about certified cost or pricing data. How do you know when you need it? How do you know when a cost analysis is required? Most of you on this will probably already know this.
Okay. Here’s a quick decision tree for folks that may be new or a little bit less experience. So, basically, start from the top. Is this procurement over the FAR threshold? And right now, that’s $2 million. If not, then certification is not required, and you’ll get away with a price analysis. Continue moving down this decision tree, and if you can’t get to the point where you have an out, these are the basic outs listed in the FAR, then you’re going to have to do a cost analysis.
Okay. Otherwise, the price analysis will be just fine. So, let’s take one step further and look closer at the cost or pricing data. So, what is certified cost or pricing data? The question to ask yourself is, is the data factual, or does it form the basis for making a judgment?
Okay. Let’s dig further into it. If it is factual or makes a judgment, is the data verifiable? Yes, or no. If so, would prudent buyers and sellers reasonably expect these facts to affect price negotiations? Or can the facts be reasonably expected to contribute to the soundness of estimates of future costs and validity of determinations of costs already incurred?
If you go down past this smell test, then it means it’s probably something that should be cost or pricing data. If it’s not factual data, if it can’t be verified, if it’s just hypothesis, then it probably isn’t certified cost or pricing data. You can get into the FAR and get much more scientific about this. If there’s a question as to whether it’s cost or pricing data, if you’re a supplier and you don’t know whether you should include it or not, either reach out to an expert or get into the FAR and figure it out, because this is really important.
If you don’t include something and you certify that you did include everything and you’re current, accurate, and complete, there are some big penalties. So, you don’t want to screw this up. From the other side of the table, if you’re a prime or a cost analyst, the mindset that you need to be in is you need to be looking to understand, form an opinion of, and document the facts and judgment, okay, so that you can get to an opinion of price reasonableness.
That’s it. What you’re not doing is you’re not getting into a witch hunt, right? You’re not searching for mistakes. You’re not trying to catch the supplier. They are not guilty until proven innocent. As cost analysts, and I’ve been a cost analyst for a long time, we tend to get into the mindset of…kind of an audit mindset, and we think of the IRS.
And if you get audited by the IRS, you get that feeling that they’re looking for something to catch you on, right? Your suppliers can feel the same way if you don’t set the tone appropriately. And sometimes that tone is set because of the way that we as cost analysts are approaching it. And if you’re always digging to find something, that will come across, it becomes quite obvious.
So, really set the tone as I’m looking for facts, I’m looking for the details as to how you created the proposal and any supporting documentation, okay, just the facts, right? The last point over here, what it is not, it’s not carte blanche on data requests.
Okay. You can ask for a lot, okay, as a cost analyst, but you really want to make sure that you ask for just enough to get to where you need to go. The more information you ask for, the suppliers are being taken away from what they do on a daily basis, what makes their business run.
So, you can really hurt the suppliers by asking for too much data. You can frustrate them, you can send them down these rabbit holes that really aren’t required. So, make sure that you ask for very succinct data sets and what you truly need. If you’re not sure if you need it or not, don’t ask for it until you know. All right.
So, all of this, what we’re going to be talking about and where we’re going with this is to create a “Cost Analysis Report.” okay. So, what the cost analysis report is is it’s literally a document, okay, and it’s typically signed by the cost analyst, and this is sent to or this is retained by the prime contractor. In some cases, if the prime contractor doesn’t have visibility, then it would be sent directly to the contracting officer or the DCMA.
But the basic idea is that it explains to a reviewer what your positions of fair and reasonable prices. It actually does a couple of things. It explains what the proposal is about and how the proposal came to its determination of fair and reasonable, including the basis of estimates and the information that was included. And then it gets into your analysis position on that proposed position and then gets into a conclusion.
So, here’s how it was proposed, here’s what my analysis is, and here’s my conclusion based on all of that. Okay. It’s typically 5 to 15 pages in length. There’s a lot of boilerplate in there and a lot of formatting. It peels like an onion.
So, you start at the very top of the cost analysis and with the big total price, and then you break it down into its pieces, and everything should flow upwards. When you look at the last section of the report, the numbers in the last section should be traceable up through the report to get to the very top number, the very highest price. You want to discuss each and every cost element as well as profit separately.
Again, many of you are already familiar with cost versus price analysis. The biggest difference is that cost analysis gets into cost elements and profit, whereas price analysis is really just focused on the top level. So, you know, cost analysis, you’re actually going to get into that position on profit as well.
So, what I’m going to do is I’m going to walk you through our process. Okay. Everything up to this point, the last few minutes have just been kind of discussing really basic concepts, right? Very high level that applies to everybody. From this point forward, this is actually what we do. You’re getting free consulting, I guess, here, and this is actually our process.
This is something that we’ve developed based on best practices that we’ve seen with clients. And we can do cost analysis typically much more quickly and much more efficiently than most of our competitors or even primes can do. So, the basic process here, very high level, is conduct a proposal adequacy review.
So, look at the proposal all up. Number two, document shortfalls in what we call RFI 1. And, again, this is specific to us, you’ll probably never hear that from anybody else. And then send RFI 1 to the supplier. This is going to kick off fact find.
Fact find is going back and forth with the supplier, asking questions, getting responses, asking for clarifications. At a high level, you know, Step 2, RFI 1 is really trying to create a very much all-encompassing RFI, request for information, that you can send to the supplier and really kick off the fact-find process.
We try to include as much as possible so that we don’t have the back and forth. What kills the process is too much back and forth. If you can’t get out of that loop where you’re waiting on data, you’ve at least got one down day, and it’s probably more like one down week every time you submit a request. So, RFI 1 is trying to capture everything in one RFI and sending it all at once.
Number three, review responses and iterate as required. That’s the fact-find process, which brings us to number four, writing and submitting the report. Writing the report, actually, I’m going to show you here in a second, that happens all throughout the process, but you’re going to have final touches once your fact find is completed.
So, Step 1 is your proposal adequacy review. Okay. And the objective of this is to really understand the proposal and determine whether there are areas that don’t meet requirements. Okay. For those of you that have worked in contracts, this is something the DCMA does to you as a prime. They go through your proposal, and the DCMA is tough.
They don’t do RFI 1. They will just send you back your proposal, and they’ll say, “It’s inadequate, you didn’t follow the pricing instructions. Try again.” Typically, when we’re doing cost analysis on subcontractors, those subs aren’t as familiar with the process, and so we go back to them with, “Okay, here’s where you’re deficient,” you know.
DCMA is not going to tell you those answers. But when we work with subs, we take that extra step and work with them to kick it off. There are some primes that don’t do RFI 1 and they simply push it back to the sub and say, “Try again. This isn’t good enough.”
In our experience, all that does is prolong the process. If you can give them specifics, then you’re going to have a much better opportunity to get this done more quickly. So, some of the best practices that we have, and I’ll walk you through these, read the entire proposal, review for commerciality, build a shell of the cost analysis report, build a pricing model, and attempt to document the supplier shortfalls.
And that’s RFI 1. Okay. I’m going to walk you through each of those steps. So, first of all, read the entire proposal. All right. This is a no-brainer, right? When you get a proposal, you’ve got to read through it.
You’d be surprised how often folks don’t read through the entire proposal and just start shooting off questions only to have the supplier come back a week later and say, “I already answered that. Look at paragraph such and such in our proposal.” So, I’m going to pull up a sample supplier proposal. And this should be behind me here. This is from ACME Corp.
This is going to be something that we continue through all of our webinars. We’re going to use this sample example. This sample example. Well, deal with that. So, we’re going to be using this example all the way through and doing kind of a mock fact find and working through the data to create a cost analysis report. So, this should look pretty familiar.
Sometimes you’ll get proposals that are many pages long, with lots of supporting data. This is from a supplier that’s not…they know what the process requires, but they haven’t really included everything that we need. So, we’re going to have some RFI questions. As we look through this and we’re doing our first pass and just kind of reading through the proposal, we can see that they’ve got their total cost price summary.
It includes all of their hours, their rates, all the pricing. It looks like they’ve broken out fee or profit here on a separate line. We’ve got overhead rates, we’ve got a lot of information. So, this is really good. This is all something that we can use when we get into our fact find.
As we scroll down, on the second page, we see that they also provided some information on their pricing methodology and their assumptions. This is really key. This is going to help us figure out what their basis of estimate is and how they got to the numbers that they got to.
So, it looks like they explained for labor hours, it was based on a mix of prior actuals and engineering judgment. They’ve given us hours, which is fantastic. I always do a quick little check. So, I’ve got 2,135 hours. I always go up and I look up here, do I have total? Okay, here’s total hours of 2,135. So, okay, at a high level, we’re tying.
See how you start at the high level and then you take everything that is included below and you check it up to the top. All right. So, I’m continuing forward. I’ve got some material. Okay, so they’ve broken out the material by line item, number required, pricing. These are costs.
Okay. This is great. And it talks about the fact that this is based on price history and supplier quotes. Again, there’s my $1,875,818. Let’s look at how that works, $1,875,818 for direct material. Great. So, everything seems to tick and tie.
They’ve got some labor rates proposed on straight averages, including fringe. Great. Indirect rates developed based on prior year actuals. Awesome. And I’ve got some contact information. Okay. And that looks like all that I have for the proposal.
As a cost analyst, my head is saying, right off the bat, “Okay, where did these hours come from? How do I know prior actuals and engineering judgment? How much of it is prior actuals, and how much is engineering judgment?” When I get down here into their material, I see that they’ve got…wow, half of their material is in one line item.
Okay. I’m going to be really interested in understanding where that came from. So, that’s a supplier quote. How old is the supplier quote? Okay. Did they apply escalation to it? I would have expected to see some sort of supporting documentation with the quote.
It’s not there. That’s okay. We’re going to get there. But this is the type of information that I look at when I get into a first pass of a cost analysis. Okay. So, now we’ve read the entire proposal. We have a basic understanding of what’s there.
In addition to just understanding the proposal, you should also know what you asked for, right? Does the proposal match what was requested in the RFP? This will come into play down the line when you send the cost analysis to your contracting officer. If they see the quantities are different or there’s different part numbers or whatever, then they’re going to come back to you.
So, right up front, you want to make sure that you are speaking apples to apples. Okay. If you have different quantities, different part numbers, or whatever, make sure that you document how that all fits together because, again, you’re going to be asked for that right away. Okay. My second thing is to review commerciality and audit rights. So, going back to understanding whether a cost analysis is required or not, one of the get-out-of-jail-free passes, okay, so that you don’t have to go down this path is determining the item to be commercial.
Most companies that I’ve worked with really rely on the supplier to assert commerciality. Okay. It’s not always… How do I say this? It’s in your best interest to, even if they haven’t asserted commerciality, review the product and understand whether it could be determined commercial or not.
Okay. Cost analysis takes a lot of time and a lot of expertise. It’s actually both at the prime and at the sub. So, there’s a ton of work that goes into a cost analysis. If you can avoid it for valid reasons, competition, commerciality being the two biggest, then you really should.
Okay. So, first step that we always do is we take a step back, we look at it, and we say, “Okay, is there any way that we could determine this to be commercial? Is this other type, right, that’s used by the general public? Can we make the case for that and make a strong case?” So, again, go down that path first. Okay. If you’ve come to the conclusion, which, in this case, we’ve concluded that we can’t go down the commerciality path, the next thing that we want to look at is audit rights.
Okay. Are we going to have audit rights? And audit rights, by the way, means are they going to let us get into the data that we need, that certified cost or pricing data that we’re going to need in order to write a comprehensive cost analysis? So, as I look into this, audit rights are not discussed in here. However, a good tip here is that they’ve given us visibility into all of their separate rates.
So, I’ve got all their labor rates, I’ve got their labor overhead, I’ve got a material overhead, and I’ve got their G&A. Okay. So, I don’t know if I have labor rates, but based on what I’m seeing here, I know that I don’t have a complete denial.
So, that means I’m probably going to need to get into their overheads, and I’m going to be sure to ask questions about their overheads in RFI 1. The next thing that I do once I become basically familiar, I’m going to create a couple of templates. The first is the shell of the CAR.
And as I say CAR, it’s cost analysis report. I’m probably going to say that a lot. That’s a term that we use very commonly within the company here. So, what this is going to do, if you can create this shell, it’s going to shorten the timeline. All right. As you look at the proposal, you understand all of the cost elements. If you build your shell and fill it in as you go, you’re going to know exactly where you’re missing data and where you need to continue.
You’re also going to know where you can stop. And that’s a key skill to have as a cost analyst, right? Knowing when enough is enough. Again, if you can fill out the CAR, the cost analysis report, as you go, it’s going to be very clear to you when enough is enough. I’ve already started this. So, I’m going to show you.
This is our format. There’s lots of different formats for cost analysis reports. This one works particularly well. We have submitted hundreds, I don’t know, maybe even thousands of reports by this point, and contracting officers have always been very supportive. All the primes have been supportive and appreciated our format.
Feel free to rip it off. Okay. I’ll walk through the basics of the format so you kind of see what we’re doing here. The front page is just background information. Okay. I’m going to have some attachments, I’m going to have some references. I always reference their proposal so that the contracting officer or the prime knows what it is that I’m analyzing.
If they had proposal updates, I would list all of their proposals in chronological order. I get into some general information. I always describe what we’re doing, okay, and then I get into price summaries. Okay. So, the very top-level price summary, that’s the highest level. Okay.
Let me go to their proposal. You can see that their proposal is for $3,578,000. That’s really what we’re talking about here. I’ve broken this into unit pricing because a lot of times it’s easier to analyze based on that, but I also make sure to show extended proposed pricing as well. I’ve got 200 units.
Here’s my price. My analysis is blank, so my variance is 100% for all of these. I have no analysis against the proposed. If there’s going to be fact-finding…all right, I see that I’ve got this in here already. That shouldn’t be there because I haven’t had fact-finding yet, right? But we’re working through this.
Anybody that was involved, I’d state whether it’s commercial. If it is commercial, then I go into depth, a great depth, as to why this is commercial even though it’s over TINA and why they should be let go of the cost analysis requirements. Cost accounting standards, accounting system adequacy, audit rights, okay, these are all things that we talk about right up front before we get into any analysis.
Okay. I’m going to skip ahead because what I really want you to focus on is the summaries, okay, and the cost element detail. This is really where the rubber meets the road. And this is the important part to set up right off the bat. So, my Section 3.3 is Summary by Cost Element. Okay.
You can see my $3,578,108. What I’ve done is…here we go, this is their proposal. I’ve taken their $3,578,108 and I’ve put it in a format that I can use in my analysis. Okay. It’s very similar. It has all the same elements. If you can match this exactly, then I would recommend you do it.
This just happens to be the template that we use most often. And so, I use this this time. You can see the proposals here. As my analysis is completed, it will be filled in here. I’ve got a separate spreadsheet, and I’ll show you that in a second, where all of this stuff is housed.
Okay. Over here on the references side, you can see, I’ve got references to other sections in the report. So, each of these, labor hours, labor dollars, labor burdens, each of these need to be discussed in detail. Again, these are all just things that are in their proposal. And these are the cost elements that the contracting officer is going to expect you to explain.
And it’s not explaining total hours at 2,135, it’s where did 575 come from? Where did 709, where did 851? And then getting into each of the labor rates, okay? This is why cost analysis is so time-consuming. There’s a lot of information that needs to be conveyed. So, as I scroll down, okay, recall at the very top, I’ve got this very high-level summary, it’s just total price.
The next thing that happens, I scroll down, and I explode that total price, and now I can see the cost elements. Okay. As I continue down into the report, you’re going to start to see that my cost elements then get blown out. So, now I’m getting into direct labor hours. I’ve set up my proposal or my cost analysis so that I get into each of the individual labor hour categories. Let me go back to their proposal.
I’ve got Systems Engineering, Engineering Level 3, and Project Management Level 5. So, 184.108.40.206 is Systems Engineering, I’ve got Engineering Level 5 and Project Management Level 5. Okay. We’re going to have to get into each and every one of these categories of labor. Now, what you’ll also notice is that for each of these, I have a section for Proposed, I have a section for Analysis, and I have a section for Conclusion.
This is very specific to SpendLogic. This is just the way we do it, but it makes it very clear. A lot of primes that we’ve seen just create paragraphs and paragraphs of information, and when you’re reading those, it’s hard to understand what the conclusion is or what’s being spoken about.
If there’s so much information and so much verbosity, you get lost in the words a lot of times. So, we found that by creating these subcategories, reviewers are much more comfortable with understanding, okay, I’m thinking about systems engineering, I’m learning about how they proposed it, or then I’m moving on to here’s how the analyst analyzed it, and then, okay, using all of that, here’s my conclusion.
Okay. And we do that for every cost element. Okay. So, here’s our labor, but then we get into direct material. Okay. And I’ve got reminders here, Insert Table, Needs Completed. Okay.
So, this is how I’m organizing myself to conduct my cost analysis over time. I’ve got my other direct costs if they exist. I’ve got rates, direct and indirect. You can see I got direct labor rates. I’ve already set it up because I know I’m going to need Systems Engineering, Engineer 3, and Project Management Level 5. Okay. Then I get into my indirect labor rates, my G&A.
Okay. As I continue down, then I have to… Section 4 is profit. I’m going to have to get into their profit. Did they break profit out? Yes, they did. Profit is 18% here.
So, I’m going to have to do an analysis and understand what my analysis position is on profit. Section 5 is a Price Analysis. Even though this is a cost analysis, in the FAR, it talks about you should conduct a price analysis if you’re doing cost analysis. Now it says should, but when you have a contracting officer that looks at this, they’re going to require it.
Okay. Especially if they’ve purchased this in the past and you’re able to compare the current cost analysis to price history, it’s going to be something that they require in order to move the ball down the road. So, even though the FAR says should, you can interpret that as a shall unless it’s not possible.
Most cases, it should be possible. And then last but not least, we’ve got our conclusion, and I’ll insert a table that talks about, okay, here’s my analysis position. This is what should be used for negotiations and fair and reasonable. Okay. In a very large nutshell, that’s the cost analysis report. Okay.
And that’s how it works. Just always keep in the back of your mind that as you get deeper into the report, it should always tie up to higher-level sections in that report. So, next, I mean, this could be 3A and 3B, but I’ve said it as Item number 4 or Step number 4, Build a pricing model.
So, you saw that there were some tables in there that were already included. I’ve already created that pricing model. Okay. The first thing… Everything that I say here today is the first thing, apparently. But really, all of this happens kind of at the same time upfront here. What we always do is create a Excel-based pricing model that matches what the proposed prices are.
And that does a couple of things. When you recreate their pricing model, okay, a lot of times you’re going to find mistakes, and it’s not hunting for mistakes or whatever, but it will uncover things that were maybe not looked at or calculated incorrectly, and these are things that you need to talk to the supplier about to make sure that you get an accurate representation of their costs.
Let me show you what the detail sheets look like. So, this is how we build it. You’re going to notice down here, I got a whole bunch of sheets. That’s for future courses, okay, later on, and how we get into each of the cost elements. But here’s their basic proposal. You’ll recognize this.
This is the proposed position. My analysis is empty as of right now. You can also see my top-level summary here. Notice that in my analysis, it refers to other cells, okay? M21 is down here. So, my total analysis per unit refers to this cell.
Now, this cell is linked to all of these. All of this is tied together. This is a key best practice, okay? When you’re building your pricing sheets and your summary sheets, make sure that they’re all linked by formulas because if you don’t, anytime you need to go back and update something, let’s say you get some more information in fact find, you’re going to have to remember all the places that that shows up and you’re going to have to update it in all those places, whereas if you link all of your spreadsheets, then it’ll flow through.
And I’ve done this with…you can see my total labor hours. So, let’s go look at total labor hours. I’ve created a table here of all of my labor hours. Okay. My analysis position is just the sum of all of these positions. Okay. I’ve copied these from the proposal.
Same thing with labor rates, same thing with indirect rates, and I also have profit. So, as I go through this… And sometimes, by the way, we’ll highlight these in yellow so that we can quickly see at a high-level first glance, what are we still missing. And then once we get in and complete these things, then we can turn them white or whatever.
As those are filled in, this table will get filled in, and you’ll have your price analysis price just based on the data that you put in those worksheets. Number 5, document your proposed basis of estimates. Okay. So, now we’re really getting into the details of the cost analysis.
The first step, and really, this goes back to your proposal adequacy review, you’re looking at your proposed basis of estimate. So, how did they propose what they proposed? Let me go back up here to… Where’d it go? Here we go, Systems Engineering.
This is one example, okay. And, in this case, you know what? I’m going to rewrite this. So, their proposal, ACME Co. proposed their systems engineering based on…what did they base it on? So, let’s go to their proposal and look at their systems engineering.
Their labor hours were based on a mix of prior actuals and engineering judgment. Okay. So, that doesn’t tell me a whole lot, but I’m going to use it. Based on a mix of prior actuals and engineering judgment. Okay. So, I know what their basis of estimate is, all right, but it leaves a lot to be desired, right? And I talked to this briefly previously.
How much of this is actuals? How much of this is engineering judgment? What calculations were applied? Okay. So, there’s more to know. I’m going to say, “Needs more information.” I’m just going to highlight this.
Okay. This is my own practice, but this tells me, okay, I need to build this out. I’m going to jump ahead to Step number 2, create and send RFI 1. Okay. This happens hand-in-hand with figuring out what your basis of estimates are. Okay. So, RFI 1 is a concept that we developed that tries to get all of these shortfalls in the suppliers’ proposal down on one document right up front.
So, everything that we’ve just done, okay, we go through, we build the pricing template, we build the cost analysis template, we go through the proposal, you know, we do all this, and in the background, we always have this sheet up. What this is going to be is your guiding light for fact find. Okay.
As you get into discussions with the supplier and understanding where you need more information, what information you need, you’re going to have to document that and send it back and forth to them. If you simply do fact-find by sending emails back and forth, okay, number one, you’re going to lose information.
You’re going to lose track of whether or not they’ve responded. And number two, there is a very high likelihood that you’re not going to have a complete picture and you’re going to have to continue to go back and forth. You’re going to think of something later, or you’re going to forget, or it’s going to be incomplete, or whatever it is. So, our best practice is to create one document that has all of the RFIs in it. We’ve seen other folks that use, like, Excel and use a different page in the Excel.
We just find that that doesn’t work as well as we’d like. If I’m tabbing through the workbook and trying to figure out which sheet has been answered and which hasn’t and what the data is and whatever, it just kind of is a mess. We just keep a running tally of all of our questions and all of the suppliers’ responses, and this is how we do it.
So, for a template on RFI 1, I always go in and try to mimic, for the most part, what the supplier has proposed. Okay. I always have a General section in RFI 1 that’s basically…in this case, I’m going to ask them what their audit rights are. Okay. There are certain things that don’t fall into any category of cost that we just need to ask anyways.
So, I include a General section. Then we have Direct Labor, Direct Material, and Rates & Factors. I think that that’s pretty much everything that they’ve got. Oh, no, they also have Other Direct Costs. So, I would also include, before my Rates & Factors, Other Direct Costs. Okay.
And I would include an item on there for that as well. So, as I go through the proposal, I’m going to figure out what I have enough information for and what I don’t. We’ve just identified one section. Let me go back to the cost analysis. So, we’re talking about systems engineering, and we’re really talking about all their labor. Okay. They’ve proposed based on prior actuals and engineering judgment.
Okay. We’re going to need some more information about that. So, that’s where we get into those types of questions on RFI 1. I would go to direct labor, I would state that “ACME Co. has noted that labor hours were proposed based on a mix of actuals and engineering judgment. Please provide the specific data utilized to create these estimates. This includes the following: Actual hours relied upon, calculations to modify those hours, and any engineering judgment applied.”
This is very high level. This is kind of a stream of consciousness here, but this gives you the basic idea of something that I would write.
I’m going to go into more detail on each of these sections in follow-on sessions. So, I’m not going to go through Material, and ODCs, and the Rates & Factors at this point. But just know that in the background, we are going to be creating this document. Before we go back to the supplier, we’re going to have all of these items filled in. Okay.
Furthermore, if you can, have somebody go and do a peer review, okay? We do that internally here at SpendLogic. Before we send RFI 1, we have somebody internally look at your RFI 1, look at the proposal, make sure that there’s no holes in it, make sure that we haven’t missed anything. Once you get responses back from RFI 1, the theory is that you should have enough to do your cost analysis.
Now I say should. When they provide you data, in some cases, it may not be complete, in other cases, it may raise actually more questions. So, the back and forth will continue to some extent, but by trying to get everything in one RFI right upfront, you’re going to have a better chance of cutting that time required down by quite a bit. Again, some best practices on RFI 1, organize it the same way you do the report so that as you go through the report, it’s easy to identify the questions, and you can go to RFI 1 and fill it in as required.
Pass it back and forth as fact find continues on. So, don’t make it just the initial submittal. You can go back and forth and submit it multiple times. Another key, and we’ll get into this further down the road, but I tend to use color coding. So, if it’s been asked and it’s been responded to appropriately, then I’ll gray it out.
I don’t delete it, but I leave it there so we can all refer to it, but I gray it out so that they know that they don’t have anything outstanding. I then put anything in yellow if it’s something that’s been asked but not responded to, and if it’s brand new in this round of RFIs, then I’ll color it in green. You can do it any way that you want, but I find that making it quick to identify what’s new and old and done and making a visible key for that helps everybody get through the process much more quickly.
And last but not least, have a peer reviewer check it out. Did you miss anything? All right. So, that’s what I’ve got here for today. This is very high level. This is the first portion of cost analysis. Let’s see.
It looks like we have one question. What about NRA charges? Do they need to be in the cost analysis? Great question. Absolutely, your NRA charges… Let me go back here. That’s a good question.
I should have touched on that. In this particular case, it doesn’t appear that I have any non-recurring. Everything here appears to be recurring. Now, as we get into our material costs and some of the other…maybe there’s some labor and things, we might find that there is non-recurring. Okay. Make sure that you break out your recurring and your non-recurring separately.
And the reason for this, if you don’t know, if you’re not familiar with this…let me go to the cost analysis report. So, the way that this has been set up, my proposed dollars per unit is $17,891. Okay. The way to think about that is, this is for 200 units, if I want to buy another 50 units, okay, that $17,891 should be usable as a basis for those 50 units.
Now, we’re going to have to modify the price for quantity and all that stuff, but in theory, that whole $17,891 should be usable. Now, if there is non-recurring, if there are lot charges built into that, okay, or something else, maybe it’s a $10,000 lot charge spread over 200 units, it’s a very small cost. However, if I buy 5 next time, okay, my cost isn’t really $17,891 per unit, it’s something lower, but I am also going to incur a huge $10,000 lot charge.
So, making sure that you break out your recurring from your non-recurring and analyzing them separately is going to be key to make sure that your estimating system is accurate and that future proposals and future negotiations are also accurate. Great question. Thanks for asking that. All right.
So, that kind of wraps up for today. It looks like that’s all of our questions. If you haven’t seen our previous webinars, mainly focused on price analysis but also some cost analysis concepts, go to spendlogic.com. You can sign up there for a free trial license of SpendLogic. And if you need any help with services or training, you need somebody to do a cost analysis or whatnot, or you want to learn about our software, just send an email to [email protected].
Last but not least, don’t forget to click Subscribe so that you can be notified anytime we have new content coming out. Thank you for taking time to learn a little bit about cost analysis. Watch out for future sessions. We’re going to go into this in great detail and talk about each of the labor elements or each of the cost elements that we talked about here today.
So, look forward to those, and I look forward to talking to you soon. Thank you.