Breakout Session # 206 Janie Maddox, President, Corporate Learning Solutions

2. Contract Pricing“Understand the principles of contract pricing from the buyer (Both Federal Govt. and Contractors) perspective” Breakout Session # 206 Janie Maddox, President, Corporate Learning Solutions Date April 24, 2007 Time 3:20 – 4:20 PM

3. Objectives • Understand the objectives of pricing • Recognize the differences between price and cost analysis and cost realism and when to use • Know how to employ and document price analysis comparisons • Understand the basics of performing cost analysis

4. Definitions and Acronyms • CER - Cost Estimating Relationship • Commercial prices: Prices being paid by the general public for a product • Competitive prices: Offers received under conditions of adequate price competition • Cost Analysis: The review and evaluation of the separate cost elements and profit in an offeror’s proposal • Fair price: Price that is fair to the buyer, fair to the seller, and reasonable, under market conditions • Price analysis:The process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit • Reasonable price: Price that a prudent and competent buyer would be willing to pay, given available data Introduction

5. Contract Pricing and The Contracting Process Pre-Award and Solicitation Evaluation and Award Market Research Acq Planning Requirements Determination Competitive Or Sole Source Evaluation/ Negotiation Selection Award RFP PROPOSAL PREPARATION BUSINESS PLANNING . . . MARKETING NEGOTIATION CONTRACT ADMINISTRATION Completion / Payment / Closeout Performance Monitoring Contract/System Compliance Contract Modifications Kick off . . . SUBCONTRACTING . . . DELIVERY & COMPLIANCE . . . CHANGES, . . .. . . INVOICING . . . SCHEDULING MONITORING ACCEPTANCE CLAIMS & DISPUTES CLOSEOUT & COLLECTION Note: Shaded area represents contractors activities during each Phase

6. Definition of Price and Pricing • Price: FAR definition (FAR 15.401) Cost plus any fee or profit (applicable to the contract type) • Pricing: The process of establishing a reasonable amount or amounts to be paid for supplies or services

7. Pricing Objectives • To seller, contract pricing has two primary, related objectives: • To cover costs • To contribute to attaining corporate operational objectives

8. KEY POINT Market conditions, not the supplier’s cost, usually determine selling price.

9. Buyer’s Pricing Objectives The buyer’s pricing objective for all procurement actions is to acquire supplies and services from responsible sources at fair and reasonable prices

10. What is a Fair and Reasonable Price? • A Reasonable Price • A price a prudent buyer would be willing to pay, given knowledge of: • Market conditions • Supply and demand • General economic conditions • Competition • Market definition • Relative pricing • A Fair Price • Fair to both parties (buyer and seller) under market conditions

11. Establishment of Fair & Reasonable • Market Research: • This is critical. To establish reasonable prices, it is important to understand the market • In establishing the reasonableness of the offered prices, the You must obtain sufficient information to make a “fair and reasonable determination”.

12. Price Negotiation • Whether analyzing cost or price— • The primary concern is the overall price that You will actually pay • The negotiation objective is to: • negotiate a procurement action of a type and with a price that provides supplier with the greatest incentive for efficient and economical performance

13. Primary Techniques to Proposal Analysis • Price analysis • Cost analysis

14. Cost Analysis • The review and evaluation of the separate cost elements and proposed profit/fee of: • An offeror’s cost or pricing data or information other than cost or pricing data and • The judgmental factors applied in projecting from the data to the estimated costs • Cost analysis shall be used when cost or pricing data are required in accordance with FAR 15.403 (Truth in Negotiations Act)

15. Truth & Negotiation-Cost & Pricing Data Requirement • The threshold is $550,000 under the following when no exceptions apply: • The award of any negotiated contract • The award of a subcontract if prime or higher tier was required • Modification of a any sealed bid or negotiated contract where the the aggregate change exceeds $500,000

16. Exceptions to TINA/Cost & Pricing Data Requirements • Adequate Price Competion • Prices set by law or regulation • Acquisition of a commercial item • Where a waiver has been granted • Modifications for commercial items

17. Price Analysis • The process of examining and evaluating a proposed price to determine if it is fair and reasonable, without breaking down the price and evaluating its separate cost elements and proposed profit. • Price Analysis shall be used when cost or pricing data are not required. However, should be used always to verify overall price reasonableness when cost analysis is performed

18. Cost Realism Analysis-(Additional analysis) • Is the process of independently reviewing and evaluating specific elements of each offeror's proposed cost estimate to determine whether the cost elements--- • are realistic for the work to be performed • reflect a clear understanding of the requirements • are consistent with the unique methods of performance and materials described in the offeror's technical proposal. • Cost realism analyses shall be performed on cost-reimbursement contracts to determine the probable cost of performance for each offeror.

19. Price Analysis Comparisons

20. Price Analysis- A Comparison with other Prices • Price Analysis is essentially “Value Comparison” • Price analysis always involves some form of comparison with other prices. • Price Analysis comparisons are dependent up available data. • You are responsible for gathering the pricing data available and selecting the appropriate comparisons that you will use in determining if a price is fair and reasonable.

21. Price Analysis Comparisons • Comparison of proposed prices with: • proposed prices received in response to a solicitation;  • previously proposed prices and contract prices for the same or similar items; • estimates made through the application of CERs (such as dollars per sq. ft.);  • published price lists or established market prices; • independent cost estimates; • prices obtained through market research for the same or similar items. • When limited/no pricing data available: • Analysis of pricing information provided by the offeror. [The first two comparisons listed are preferred]

22. Comparison of Proposed Prices • Comparison of Proposed Prices is a method by which the analyst compares offers received in response to a solicitation. • Selecting the best value based on comparing the offers usually results in a reasonable price • Analyst is looking for Adequate Price Competition(APC)

23. Adequate Price Competition • Must receive at least two offers • Each offeror must be competing independently of one another. • Proposals must satisfy government requirements. • Best value award, price and other factors must be considered. • Price offered should not be unreasonable. • Price is a substantial factor.

24. Compare to Previous Prices • Validate a price by looking at a previous price that was paid for the same or similar item and was determined to be reasonable. • It is important to consider the following: • Was it a competitive price? • Was it sole source or commercial? • How long ago was that price paid? • What was the quantity? • Were there technical or market changes that would affect price? [With the answers to these questions, the previous price will need to be adjusted to make it useful and valid for comparison ]

25. Comparison of Previously Proposed Prices and Contract Prices • Validate a price by looking at a previous price for the same or similar item and it was determined to be fair and reasonable. • It is important to consider the following: • Was it a competitive price? • Was it sole/single/brand name source or commercial? • How long ago was that price paid? • What was the quantity? • Were there technical or market changes that would affect price? • What is the historical price and can it still be obtained? • Was that historical price fair and reasonable, making sure the circumstances are similar [Generally, the previous price will need to be adjusted accordingly in order to make it useful and valid for comparison ]

26. Cost Estimating Relationship (CER) An analytic expression relating product costs to physical and performance parameters

27. Container A Container B Parametric Calculations in developing a Cost Estimating Relationship (CER) Container X CER 15 Cost ($K) 1000 Square Feet

28. Comparison with Published Price Lists or Published Market Prices (Commercial Prices) • Commercial prices are prices being paid or could be paid by the general public for a product and/or service. • Data on commercial sales provides valuable information for contract pricing.- for same or similar items. • Commercial prices can be classified into the following categories: • Catalog prices • Market prices

29. Commercial Pricing • Catalog prices are prices taken from: • A catalog; • A price list; • A price schedule • Other verifiable and established record • Regularly maintained by a manufacturer or vendor • Published or otherwise available for customer inspection.

30. Comparative Analysis • Side by side comparison of price lists • Printed Price lists • Online Web Services

31. Commercial Pricing • Market prices: • Established in the course of ordinary and usual trade • Between buyers and sellers free to bargain • Can be substantiated from sources independent of the offeror or manufacturer.

32. Comparison to Independent Cost Estimates • A independent cost estimate is usually developed for budgetary purposes, and should not automatically be considered reasonable • If the independent estimate significantly varies from the proposed prices, try to identify and quantify the primary reasons for the difference. These may include: • Technical differences • Market conditions • Budget constraints [Least preferred technique unless well developed]

33. Comparison of Proposed Prices with Prices Obtained through Market Research for the Same or Similar Items • As a comparison it means: • pricing of same or similar items offered in the commercial marketplace that may or may not be offered to KBR. • the conditions and environment surrounding the price must be evaluated for similarity to purchase • Contact other buyers/companies: • Often, other buyers/companies will have bought the same or similar item and can provide advice or comparisons.  • Document your market research. • Make sure to document who you talk to, what you discussed, and what information about prices you found.

34. Analysis of Pricing Information from Offeror • If other techniques do not provide support for a reasonable price, you can request “information other than cost or pricing data”. • This may include information on labor rates and hours, material costs and similar details. • The information will not be certified under the Truth in Negotiation Act. • This information could be part of the proposal or a separate fact-finding request. • The information will usually be in company format. • Keep in mind that Supplier may refuse to provide this info. • Limit the request to only what is needed to support the missing pieces of the offer. • This info should only supplement your price analysis • It is not a cost analysis • Technical Evaluation should be obtained on any support data provided by the supplier [Obtaining information other than cost or pricing data is the least preferred way of obtaining support for a reasonable price because it is the most intrusive on the supplier]

35. Price Analysis Evaluation and Documentation • “Price analysis is a subjective evaluation. For any given procurement, different bases for price analysis may give you a different view of price reasonableness. Even given the same information, different buyers might make different decisions about price reasonableness. • You must document the file concerning the rationale used in making the pricing decision. Otherwise, the individuals who may review your file later may not know or understand the factors that affected your decision.” Quote from: JA White & Assoc.

36. Price Analysis Documentation • The level of detail required for each analysis is relative to the the complexity and circumstances of each acquisition • Documenting the details of analysis is critical! • Address each fact and input used to develop the price. • Use appropriate details but don't simply ignore any data. • If the data is not usable, state that and explain why

37. Info to Document in Comparing Prices • Escalation: • Time, rate, where it came from • Basis and currency of previous price: • Competition, cost analysis, etc. • Similarity of items: • Justify any difference affecting price • Explain differences or adjustments: • Quantify price differences • Provide appropriate documentation on the previous or similar prices paid, adequate for evaluating the reasonableness of the previous price • Copy of previous price analysis

38. Cost analysis the review and evaluation of the separate cost elements and profit in a proposal and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency

39. Cost Proposal elements: • Material • Bill of Material • Purchased Parts • Subcontracts • Labor • Labor Mix • Labor Hours and Rates • Overhead Rates • Profit/Fee

40. Cost Allowability • A cost can be properly charged to a contract when it is-- • Reasonable • Allocable • IAW Appropriate Accounting Practices • IAW Terms of the Contract • and not disallowed by FAR Part 31 Cost Principles

41. Direct and Indirect Costs • Direct Costs- Any cost that can be identified specifically with a final cost objective • Indirect Costs-Any cost that cannot directly be identified with with a single, final cost objective

42. Composition of Indirect Costs • In general, indirect cost accounts fall into two broad categories: • Overhead-These are indirect costs related to support of specific operations. Examples include: • Material Overhead • Manufacturing Overhead • Engineering Overhead\ • Field Service Overhead • General and Administrative (G&A) Expenses-These are costs related to the general management and administration of the business unit as a whole. Examples of G&A Expense include: • Salary of the executive staff of the corporate or home office • Salary of staff services such as legal, accounting, & public relations, • Selling and marketing expenses

43. Allocation of Indirect Cost • Indirect Costs are charged to a particular product though the use of indirect cost rates • Indirect Cost Rate = Indirect Cost Pool/Indirect Cost Allocation Base • Calculated by dividing a pool of indirect costs(e.g. Overhead,G&A) for the period by the allocation base (e.g. direct labor hours, direct labor cost) for the same period

44. Wrap Up

45. Thank You for Attending!