Contract pricing and pricing strategies
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TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org. Contract Pricing and Pricing Strategies. Beverly Arviso, CPA, CPCM, CFCM, NCMA Fellow Arviso, Inc. [email protected] 757-373-9536.

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Contract pricing and pricing strategies

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Contract Pricing and Pricing Strategies

Beverly Arviso, CPA, CPCM, CFCM, NCMA Fellow

Arviso, Inc.

[email protected]

757-373-9536


Learning objectives

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Learning Objectives

Planning the Pricing Strategy

Understanding the Requirements

Cost or Pricing Data

Price Analysis

Cost Analysis and Cost Realism Analysis

Indirect Rates and Competitive Rate Strategies

Best Practices


Planning the pricing strategy

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Planning the Pricing Strategy

Identify core business areas and what opportunities to pursue

Develop a bid/no bid decision process

Develop a Bid and Proposal (B&P) budget

Start the proposal activity early in the process

Identify the proposal team

Internal and external parties

FAR 52.219-14 Limitation on Subcontracting

Teaming Agreements

Non-Disclosure Agreements


Planning the pricing strategy1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Planning the Pricing Strategy

Develop a proposal schedule

Include due dates for the pricing team

Prepare a compliance matrix

Include assignments and responsible author with clear due dates

Schedule kick-off meeting with teaming partners


Understanding the requirements

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Understanding the Requirements

Obtain a clear understanding of the requirements

Read the solicitation (and read it again, and again, and again…..)

Determine the contract type(s)

Section B, Supplies or Services and Prices/Cost

Section C, Statement of Work

Section L, Instructions, Conditions, and Notices to Offerors

Section M, Evaluation Factors for Award

Clarifications, discussions, and negotiations

Evaluated price vs. proposed price


Understanding the requirements1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Understanding the Requirements

Pricing Policy (FAR 15.402)

Contracting Officers SHALL:

Purchase supplies and services from responsible sources at fair and reasonable prices

may require certified or other than cost or pricing data to make that determination

Price each contract separately and independently

NOT include any amount for a specified contingency to the extent that the contract provides for a price adjustment based on the occurrence of that contingency


Cost or pricing data

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost or Pricing Data

Policy on cost or pricing data

Do not obtain more information than necessary

Data collection and preparation is expensive

Order of preference for type of data required

No additional information is needed if the price is based on adequate price competition

Information other than cost or pricing data

(Certified) cost or pricing data


Cost or pricing data1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost or Pricing Data

Cost or pricing data (defined at FAR 2.101):

Factual, not judgmental and are verifiable

More than just historical data, cost or pricing data includes all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred


Cost or pricing data2

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost or Pricing Data

Cost or pricing data (defined at FAR 2.101):

Include, but not limited to, such factors as

Vendor Quotes;

Nonrecurring costs;

Information on changes in production methods and in production or purchasing volume;

Data supporting projections of business prospects and objectives and related operations costs;

Unit-cost trends such as those associated with labor efficiency;

Make-or-buy decisions;

Estimated resources to attain business goals; and

Information on management decisions that could have a significant bearing on costs.


Cost or pricing data3

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost or Pricing Data

Threshold for requiring certified cost or pricing data is >$700,000

Exceptions to certified cost or pricing data

Prices are based on adequate competition

Prices agreed upon are based on prices set by law or regulation

Commercial item acquisitions

When a waiver is granted

When modifying a contract or subcontract for commercial items


Cost or pricing data4

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost or Pricing Data

Other circumstances where certified of cost or pricing data are not required

Exercise of an option at the price established at contract award or initial negotiation

Proposals used solely for overrun funding or interim billing price adjustments


Price analysis

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Price Analysis

Examination and evaluation of a proposal without evaluating each separate cost element or proposed profit

Always involves some form of comparison

Competition in the market determines the price to be fair and reasonable

Price analysis is required in every acquisition


Price analysis1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Price Analysis

Price Analysis Techniques

Comparison to other proposals received

Comparison of previously proposed prices for the same or similar items or service

Commercial items or services

Prices set by law or regulation

Catalog prices

Independent Government Cost Estimates (IGCE)


Price analysis2

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Price Analysis

Price Analysis alone may not be sufficient for

Sole source procurements, including FFP

Modifications or changes to existing contracts


Cost analysis and cost realism analysis

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost Analysis and Cost Realism Analysis

Cost Analysis

The review and evaluation of separate cost elements and profit or fee proposed to determine a fair and reasonable price or to determine cost realism, 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


Cost analysis and cost realism analysis1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost Analysis and Cost Realism Analysis

Cost Analysis Techniques

Verification of cost or pricing data and evaluation of cost elements

Evaluate the effect of the offeror’s current practices on future costs

Compare costs proposed for individual cost elements

Verification that the offeror’s cost submissions are in accordance with FAR Part 31 and CAS (if applicable)

Review to determine whether any cost data or pricing data, necessary to make the proposal suitable for negotiations, have not been either submitted or identified in writing by the offeror

Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs


Cost analysis and cost realism analysis2

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost Analysis and Cost Realism Analysis

Cost realism means that the costs in an offeror’s proposal

Are realistic for the work to be performed,

Reflects a clear understanding of the requirements, and

Are consistent with the various elements of the Offeror’s technical proposal


Cost analysis and cost realism analysis3

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost Analysis and Cost Realism Analysis

Cost Realism Analysis

Examination of proposed costs and/or prices to ensure the price the government will pay is consistent with the required contract effort

Performed on cost reimbursement contracts to determine the most probable cost of performance for each offeror

May differ from the proposed cost and should reflect the Government’s best estimate of the cost of any contract that is most likely to result from the offeror’s proposal


Cost analysis and cost realism analysis4

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Cost Analysis and Cost Realism Analysis

Two Objectives of Cost Realism Analysis

Determine if the proposed cost/price realistically reflects the effort required to perform the contract

Consider the risk in the award decision, i.e., if the offeror refuses to support the realism of the estimates and refuses to make changes, the contracting officer must assess the risk to the Government when making the award decision


Indirect rates and competitive rate strategies

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Indirect Rates and Competitive Rate Strategies

Direct Costs

Direct labor

Subcontract Costs

Travel

Material

Other Direct Costs (ODCs)

Indirect Costs

Fringe

Overhead

General and Administrative (G&A)

Unallowable Costs


Indirect rates and competitive rate strategies1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Indirect Rates and Competitive Rate Strategies

Indirect Rate Calculation = cost pools/allocation base

Pools are defined by placing costs in logical groupings, e.g., fringe costs, overhead costs, G&A costs, unallowable, etc.

The allocation base is defined as some measure of cost that can be used to allocate the pool cost, e.g., direct labor hours, direct labor dollars, machine hours, etc. Cost Pools


Indirect rates and competitive rate strategies2

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Indirect Rates and Competitive Rate Strategies

Indirect Rate Development

Develop estimate on an account by account basis

Identify increases in direct and indirect wages

Identify increases to statutory fringes based on increased wages

Additional 401k, medical, dental, vision, worker’s compensation

Additional office space, dues and subscriptions, training, phones, etc.


Indirect rates and competitive rate strategies3

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Indirect Rates and Competitive Rate Strategies

Indirect Rate Development Cont’d

Provide forecast of indirect rates for all years, converted from contractor fiscal year to contract year

Explain how indirect costs and rates are computed

Explain how indirect rates are applied

Provide cost breakdowns, trends, and budgetary data


Indirect rates and competitive rate strategies4

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Indirect Rates and Competitive Rate Strategies

Create multiple fringe rates

Create service centers

Create multiple overhead rates

Change from total cost input G&A to value added G&A

Redefine the treatment of costs from indirect to direct

Rate ceilings


Best practices

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Best Practices

Read RFP carefully to ensure it doesn’t violate CAS or FAR

G&A on travel is allowable if it is consistent with the offeror’s accounting practices

Review solicitation website often for changes

Prepare, update, and delivery proposal using a compliance matrix that is updated as changes to the solicitation are made

Clearly align technical proposal with cost/price proposal


Best practices1

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Best Practices

Reduce math errors or inconsistencies in the cost/price proposal by

Using rounding

Use of an independent party to verify cost proposal on a calculator

Negotiate proper subcontract types

Beware of fixed fee dilution

Be audit ready

Due date/time

Pricing resource: http://www.acq.osd.mil/dpap/cpf/contract_pricing_reference_guides.htm


Questions

TIDEWATER GOVERNMENT INDUSTRY COUNCIL www.tasc-tgic.org

Questions

Beverly Arviso, CPA, CPCM, CFCM, NCMA Fellow

Arviso, Inc.

[email protected]

757-373-9536


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