Cost & Price Analysis: Not Just Protest Avoidance

Breakout Session #: B16

Kathlyn Hopkins and Janie Maddox

Date: Monday, July 25

Time: 2:30pm–3:45pm

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Cost & Price Analysis: What Will You Get from This?

• Basics of how to do a meaningful analysis (and when)… • Cost Analysis • Price Analysis • Cost Realism • Price Realism

• Benefits of rigorous analysis • Better understanding of other parties’ needs • Stronger grasp of offer details • Insight into how the work will be done • Increased investment in programmatic success • Enriched job satisfaction!

Cost and Price Analysis: Key Ingredient of Successful Source Selections and Proposal Evaluations!

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Cost & Price Analysis: Why Do It?

• Because it’s required by the FAR • To cover ourselves in the event of a protest • To ensure fair and reasonable pricing (analysis) • To safeguard against cost risk (realism) • To get an early indicator of risks

• Performance risk • Schedule and cost risk

What else? • Once we know the what and the how, we can better

articulate how much! • By understanding the work and processes involved, we

are better business advisors (for the immediate contract and beyond)!

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Why? The FAR Says So… • FAR subpart 15.4: “the heart of the FAR”

• FAR 15.402(a) sets forth “fair and reasonable” standard

• FAR 15.404-1 covers proposal analysis techniques

• FAR 15.404-1(a)(2) covers Price Analysis

• FAR 15.404-1(a)(3) & (a)(4) covers Cost Analysis

• FAR 15.404-1(d) covers Cost Realism • FAR 15.404-1(d)(3) addresses Price Realism (concept evolved

from case law) • Any discretionary analysis must meet the standards of

mandatory analysis.

https://www.acquisition.gov/sites/default/files/current/far/html/Subpart%2015_4.html#wp1208372

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What Does the FAR Say? • Price Analysis shall be used when certified cost or pricing data

are NOT required (commercial items, competition, etc.) • Cost Analysis shall be used when certified cost or pricing data

ARE required. • Price Analysis shall be used to determine that the overall price is

fair and reasonable.

• Cost Analysis may also be used to evaluate other than cost or pricing data.

• Cost Realism shall be used in competitive awards of cost-reimbursement contracts.

• Price Realism may be used in competitive fixed-price incentive contracts (or in other competitive fixed-price contracts with risk).

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Why? In Case of Protests… Government Accountability Office: 7 “Right” Reasons • Failure to follow evaluation criteria • Unreasonable technical evaluation • Unreasonable cost or price evaluation • Inadequate documentation of the record • Unequal treatment of offerors • Unreasonable past performance evaluation • Flawed selection process

“[Protests] provide the public with a safety value for integrity….”

– Elliott Branch, ASN(RDA), 2016

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What has Case Law Revealed? Cost Realism must be conducted to determine extent to which offeror’s proposed cost reflects what actuals will be under that unique technical approach, assuming reasonable economy and efficiency (B-281274.2, 1999). Cost Realism aims to determine whether proposed costs resonate with work scope, as well as methods and materials employed. (B-283650, 1999). Cost Realism need not achieve scientific certainty, but methodology must be adequate (i.e., using “informed judgment”). (B-294722.4 & B-295744, 2005). Evaluated cost, not proposed cost, forms the basis for the source selection decision. (B-298912, 2007)

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What has Case Law Revealed? Cost Analysis must not improperly normalize labor hours and labor mix, effectively ignoring unique technical approaches, when offerors were given latitude for proposing such approaches (B-408575, 2013). When the RFP indicates that Price Realism will be conducted, the agency may use a number of techniques to determine whether prices are reasonable and realistic, including a comparison of proposed prices with each other and with an IGCE (B-409705.2, 2015). Cost Analysis must be reasonably based and not arbitrary. It may consider prior estimates and historical data. Any significant reductions to proposed cost must be explained (B-407332.5, B-407332.8, B-407332.9, 2015).

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What has Case Law Revealed? When the RFP states that “unrealistically” low prices may serve as basis for rejection of offers, agency must conduct said Price Realism evaluation (B-407947; B-407947.2, 2013). When the RFP states that cost/price will be evaluated to ascertain the offeror’s understanding of requirements, and to assess the validity and credibility of the basis of estimate (consistent with the technical approach), price realism must be done – and documented (B-408543; B-408543.3, 2013). Discussions, in negotiated procurements, must be meaningful, equitable, and not misleading. However, price discussions are not improper when the agency in good faith provides accurate information to an offeror, even when the offeror uses it to its own competitive detriment (B-411242; B-411242.2, 2015).

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Why? Get Early Indicator of Risks • Identify performance risks

• Link requirements to the analysis • Link market research to the analysis • Find areas of misunderstanding or uncertainty

• Identify schedule and cost risks

• Align cost proposal with technical / management volume • Isolate areas of potential schedule expansion • Validate sequencing assumptions & dependencies • Isolate areas of potential cost growth

• Commodities, labor rates, indirect rates • Mitigate cost, schedule, performance risks, if possible

• Estimate impact and timing • Document findings; make them available for contract

execution team! Increase realism; avoid disappointments!

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Price Analysis: How and When? • When to Conduct Price Analysis

• Certified Cost or Pricing Data are NOT required • To complement Cost Analysis or Cost/Price Realism to

verify that overall price is fair and reasonable • Sealed Bidding • Commercial Items • Competitive Environments

• Possible Comparisons

• To commercial price lists • To similar, historical procurements • To prices paid by other customers • To IGCE

• Document your findings!

Protects against prices that are too high!

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Cost Analysis: How and When? • When to Conduct Cost Analysis

• Certified Cost or Pricing Data ARE required • Other than Certified Cost or Pricing Data are submitted to

support reasonableness or cost realism assessment

• Things to Consider • Direct Labor & Direct Materials • Subcontractor Pricing • Other Direct Costs (ODCs) • Indirect Costs; Facilities Capital Cost of Money

• Profit/Fee Analysis • Statutory limitations; other factors affecting profit or fee • Structured approach to profit analysis

Protects against costs that are too high!

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Cost or Price Realism: How and When? • When to Conduct Cost or Price Realism

• Competition exists • Contract type is cost-reimbursement, fixed-price

incentive, or fixed-price with heightened performance risk (see FAR 15.404-1(d)(3))

• Things to Consider: • Are Cost Elements Realistic for the Scope?

• Direct Labor, Material, ODCs • Subcontracts, Consultants • Indirect Costs; Facilities Capital Cost of Money

• Techniques • Escalate labor costs to midpoint of future year(s) • Review contractor forecasts of planned expenditures • Compare to actuals incurred under analogous efforts • Regression & parametric modeling • Learning curve analysis; normalization

• Protects against proposed costs that may be too low!

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Cost & Price Analysis: Other Considerations • Contingencies – reopener clauses may provide for price

adjustment based upon the occurrence of a contingency • Potential delays in delivery of GFP • Government-directed schedule changes

• Incentive pricing • Award Fee pools • Incentive Fees (minimum/maximum) • Share ratios

• Contract financing • Performance-based payments • Progress payments

• Coordination costs • Joint ventures • International efforts • Directed subcontracts

• Currency conversions What else?

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Cost & Price Analysis: Application Time!

• Break into four groups • Each takes handout detailing a scenario • Use flipcharts to collect your thoughts • Regroup in 15 minutes to discuss

• Group 1 => Scenario #1 • Group 2 => Scenario #2 • Group 3 => Scenario #3 • Group 4 => Scenario #4

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Concluding Thoughts: Cost & Price Analysis • Pre-award analysis: a risk-reduction measure

• Enhance credibility as acquisition agent • Reduce likelihood of protests • Increase likelihood of “winning” protests

• Pinpoint risks early; avoid surprises • Post-award analysis also helpful as effort matures Establishes funding requirements Final negotiated price or cost ceiling Time-phasing of work

• Documentation of cost and price experience

• Key to future, similar efforts • Knowledge management system • Transition to Future!

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• Kathlyn Hopkins, CPCM General Services Administration 1800 F Street, N.W., Washington, D.C. Kathlyn.Hopkins@gsa.gov 202-549-7147

• Janie Maddox Naval Postgraduate School 1 University Circle, Monterey, California Janie.Maddox@nps.edu 831-656-7646

Contact Information

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Air Force Materiel Command Guide: Writing a Good Price Negotiation or Price Competition Memorandum (Oct 2004). Wright Patterson Air Force Base, Ohio. Battle, J.J., Jr. (2008). Fair and Reasonable Price Justification: Judgment or Market-based. National Contract Management Association. DCAA, Contract Audit Manual, Ch. 9 (Feb 2016). Fort Belvoir, Virginia http://www.dcaa.mil/cam.html DCMA, Instruction: Pricing and Negotiation (Mar 2016). http://www.dcma.mil/policy/ DoD Proposal Adequacy Checklist; DFARS 252.215-7009 (Feb 2014). http://www.acq.osd.mil/dpap/dars/dfars/html/current/252215.htm#252.215-7009 Defense Acquisition University. Contract Pricing Reference Guides, Vols I-V (Feb 2012). https://acc.dau.mil

Additional Resources

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Executive Office of the President. Memorandum on Government Contracting (Mar 2009). https://www.whitehouse.gov/the-press-office/ Federal Acquisition Regulation. http://www.acquisition.gov/Far/ Government Accountability Office. Bid Protests & Appropriations Law. http://www.gao.gov/legal/ Rocholl, E. & Loudin, K. (2008). Best Practices for Program Offices. http://handle.dtic.mil/100.2/ADA505606 Virtual Acquisition Office. ASI Government, Inc.: Protest Lessons. https://www.gotovao.com Where in Federal Contracting? WIFCON, LLC: Rules and Tools. http://www.wifcon.com/

Additional Resources

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CPFF – Cost Plus Fixed Fee DoD – Department of Defense DCAA – Defense Contract Audit Agency DCMA – Defense Contract Management Agency DFARS – Department of Defense Supplement to the Federal Acquisition Regulation FAR – Federal Acquisition Regulation FFP – Firm Fixed Price ID/IQ – Indefinite Delivery Indefinite Quantity IFB – Invitation for Bids MAC – Multiple Award Contract ODC – Other Direct Costs O&M – Operations and Maintenance PWS – Performance Work Statements RFP – Request for Proposals

Acronyms

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• XYZ, a Government agency, intends to award a single ID/IQ contract allowing for placement of CPFF task orders. The PWS tasks are integrally related and will be performed concurrently, so a multiple award contract isn’t viable. Further, it is anticipated that a single-award IDIQ will encourage potential offerors to maintain a suitable, highly qualified technical staff to ensure technical capability and flexibility in meeting XYZ’s dynamic needs.

• The effort entails developing and presenting courses on Government- and DoD-unique security topics (with no commercial equivalents), according to XYZ’s market research. FAR Part 12 procedures will not be used.

• The IGCE for the effort (ID/IQ CPFF ceiling) is $700,000. • Contract will be awarded on a Best Value basis. XYZ will evaluate

proposals based on Factor I -Technical Capability, Factor II - Past Performance and Factor Ill – Cost (descending order of importance).

• What would you ask for in your RFP to evaluate Cost/Price? Then how would evaluate it?

• Solution – details on cost estimate, historical labor hours and rates, LOE, Labor Mix, type of instructors/presenters/researchers. Representative task orders. Other than Certified C/P Data. Cost proposal for a sample task order.

Scenario #1: Agency XYZ

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• ABC, a Government agency, intends to secure qualified personnel with security clearances and special materials via a FFP order under a MAC. Specifically, the order will be for systems maintenance and enhancement of an analytical tool for the intelligence community.

• ABC will award on a Best Value basis, considering two evaluation factors: Price and Technical/Management. Of the two factors, Technical/Management is significantly more important than Price; however, the importance of price will increase as relative differences in technical/management ratings of offers decrease.

• ABC will evaluate the price to determine the reasonableness of the proposed total evaluated price, as well as the price’s compatibility with the required scope. ABC may reject a proposal if the price reflects a lack of understanding of the task complexity and risk. ABC will also evaluate price reasonableness relative to the IGCE, and may conduct price realism analysis. (The IGCE is $950K.)

• What would you ask for in your Task Order Proposal Request Instructions to evaluate Cost/Price? Then what techniques would you use evaluate it?

• Solution – For price analysis, details on other customers and prices paid for similar services. Other than C/P data. For price realism analysis, rationale linking proposed cost to management/tech approach, as well as actuals that strongly demonstrate that no quality or service shortfalls will result.

Scenario #2: Agency ABC

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• RST, a Federal agency, is issuing an IFB to supply canned goods for school lunches and other food assistance programs. The IFB will seek bids on a variety of tomato products, including salsa, catsup, tomato sauces, tomato paste, and tomato juice.

• RST anticipates that there will be plenty of competition from sources throughout the United States. Market analysis reveals that some potential bidders are large businesses who grow tomatoes and then process, pack, and ship tomato products directly from their facilities. Others are small businesses who do not grow tomatoes, but instead must purchase the tomatoes to produce the desired products. Each company’s cost of obtaining its ingredients is a factor in its overall bid price.

• There will be dozens of line items in the IFB -- for the various quantities of tomato products, and for delivery on different dates to different locations. The CLINs will be organized by delivery date, starting with the earliest.

• What should the IFB require the bidder to provide? • Solution: The bids will be FFP, with total price for each item (including procurement of

tomatoes, if applicable, and processing, packing, and shipping to the final destination).

• Therefore, sufficient detail for the contracting officer to determine fair and reasonable pricing, including historical data. Bidder should submit their prices per case for each CLIN, and include delivery costs as part of each price. Since the companies responding to the IFB are located in different places, the shipping costs will vary with the company’s location – and this could be a significant discriminator.

Scenario #3: Agency RST

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• JKL, a Government agency, is planning to release an RFP for O&M support to the agency’s mission to combat narcotics production and trafficking.

• The IGCE (CPFF ceiling) is $16 million. • JKL contemplates the award of a CPFF base plus four option years

for O&M services to support the an air wing (which consists of 50 fixed-wing and rotary aircraft) in various countries in South America and Asia. To prospective offerors, JKL will provide detailed information on the number and type of aircraft; the flying hours, crew factors and missions per aircraft per country, as well as a monthly deployment schedule. JKL will ask offerors to provide personnel and material to support the RFP requirements.

• Award will be made on a Best Value basis, with technical and management factors ascribed more importance than cost .

• What should JKL ask for in terms of technical and cost proposals? • Solution: Show how costs track to technical/management evaluation

factors, whether the costs were rationally supported, cost realism, and overall cost. Demonstrate understanding of risk inherent to these operations.

Scenario #4: Agency JKL