The basics of cost analysis ppt @ mba

1. The Basics of Cost
Analysis

2. 2

3. Contents of this Module
 Section 1 - Cost Analysis
 Section 2 – Defining Costs
 Section 3 – Source Selections
 Section 4 - Cost Data Requirements
 Section 5 – Field Pricing Support
 Section 6 - Cost Allowability
3

4. Section 1 - Cost Analysis
Definition

5. Definition of Cost Analysis
The review and evaluation of the separate
cost elements and profit in an offeror’s or
contractor’s proposal (including cost or
pricing data or information other than cost
or pricing data), and the application of
judgement to determine how well the
proposed costs represent what the cost of
the contract should be, assuming
reasonable economy and efficiency (FAR
15.404(c)(1)). 5

6. Price and Cost Analysis
Compared
 Price Analysis is the process of examining and
evaluating a proposed price without evaluating its
separate cost elements and proposed profit.
 Determines whether the price is fair and reasonable.
 Cost Analysis
 Evaluates the separate cost elements, profit, and facilities
capital cost of money (if proposed).
 Used to evaluate/determine any or all of the following:
 cost and/or price reasonableness
 cost realism
 most probable cost and/or price
 It is the more costly method in terms of time and manpower.
6

7. Cost Analysis: When to apply it.
 It is performed if certified cost or pricing data are required.
 It may be used to evaluate information other than cost or
pricing data, e.g., non-certified cost data.
 Normally, it is not needed if adequate price competition
exists. In this case, it still may be used if the price is
determined to be unreasonable or you are considering a cost
realism evaluation [see FAR 15.305(a)(1)].
 Cost analysis is one of the approaches that should be used
when a cost realism evaluation is required.
 When you perform a cost analysis, you should also include a
price analysis to verify price reasonableness.
7

8. Section 2
Defining Costs
Performing a Cost Analysis
Examples: Proposed Price by
Major Cost Element

9. Contract Price = Cost + Profit
C o n tr a c t P r ic e
cost p r o f it
d ir e c t c o s t in d ir e c t c o s t
d ir e c t la b o r odc d ir e c t m a te r ia l b u r d e n (O /H ) G&A F C C M (C O M )
e n g in e e rin g tra v e l ra w m a te ria l e n g in e e rin g e n g in e e rin g
m a n u fa c tu rin g vendor p u rc h a s e d p a rts m a n u fa c tu rin g m a n u fa c tu rin g
fie ld s e rv ic e to o lin g s ta n d a rd c o m m e rc ia l fie ld s e rv ic e fie ld s e rv ic e
IL S ite m s IL S IL S
s u b c o n tra c ts m a te ria l m a te ria l
h a n d lin g h a n d lin g
G&A
9

10. Total Contract Cost
(FAR 31.201-1)
 …is the sum of the direct &
indirect costs allocable to the
contract, incurred or to be
incurred, less any allocable
credits, plus any applicable cost of
money (Cost Accounting Standard
414). 10

11. Direct Costs (FAR 31.202)
 Definition: Direct costs are identifiable to a final
cost objective (a particular contract).
Examples: direct material and direct labor.
 All costs identified specifically with a contract
are direct costs for that contract and shall not be
charged to another contract directly, or indirectly.
 No cost shall be charged to a contract as a direct
cost, if other costs incurred for the same purpose
in like circumstances have been charged as an
indirect cost.
11

12. Indirect Costs (FAR 31.203)
 Definition: Indirect costs are not directly
identifiable with a final cost objective (e.g. a
particular contract), but identified with two or
more final cost objectives.
 The distribution of indirect costs to various
contracts should roughly be based on the benefits
received on each contract.
 No cost shall be charged to a contract as an
indirect cost if other costs incurred for the same
purpose in like circumstances have been charged
as a direct cost to that contract or any other
contract.
12

13. Alternative Direct Cost
Treatment (FAR 31.202)
 For practicality, any direct cost of minor
dollar amount may be treated as an indirect
cost if this treatment:
 Is consistently applied across all contracts,
and
 Produces substantially the same results as
treating the cost as a direct cost
13

14. Proposal Major Cost Elements
 Direct Labor Cost Indirect Costs
 Labor Categories Material Handling
 Labor Rates Fringe Benefits
 Labor Hours Overhead (or burden)
 Direct Material Cost G&A Expenses
 The Actual Materials Other Direct Costs
 Raw material Nonrecurring costs
 Purchased parts and/or Subcontracts
assemblies
Travel
 Subcontracts
 Miscellaneous material Profit or Fee
 Discounts, Scrap, Cost of Money
Inventory Shrinkage, & Escalation
Freight-in 14

15. Cost Analysis: First Step
 Pre-solicitation involvement by the price/cost analyst
(FSO) and engineer (ESO) is recommended
 Price/cost input
 Section B set-up, Price/Cost Evaluation Template, Section L
price/cost data requirements, and Section M price/cost evaluation
factors
 Engineering and price/cost input
 SOW/PWS
 Read the solicitation, section B, and SOW/PWS
 What is being purchased?
 Not as easy as looking at the Section B CLINs and/or SLINs
 What are the solicitation requirements for the contractor and the
government?
15

16. Cost Analysis: Second Step
 Read the contractor’s proposal price/cost
narrative
 It will discuss the contractor’s proposal structure,
assumptions, rationale, etc.
 The length and quality will vary
 An important source of proposal information
 Study/know the proposal set-up
 Check the math:
 Is the arithmetic correct? The Section B unit prices multiplied by
the quantities result in the total amounts?
 Do the amounts “foot”? Do they add-up and/or calculate
correctly?
 Do the numbers “track”? Can the figures be traced among the 16
support schedules?

17. Cost Analysis: Third Step
 What is the basis of the proposed cost?
 How did you come up with this number?
 What is your rationale?
 What are your assumptions?
 What are the calculations you used?
 The contractor’s responses provide the
answer to the question:
 Why is this price and/or cost reasonable?
17

18. Cost Estimating Methods Used
by the Contractor
An offeror may use any generally accepted estimating
methods that are equitable and consistently applied in
similar situations.
 Common methods:
 Round Table: Experts get together and make
judgments on projected costs
 Comparison: Adjustments are made to a past or
current item to derive the cost
 Parametric: Projections are based on formulas, or cost
estimating relationships
 Detailed: A thorough review is made, with detailed
information comprising the estimate
18

19. Basic Cost Element Breakdown
Proposed Price By Cost Element
Item/Service:
RFP:
CLIN:
SLIN:
Date/Time: 4/21/2006 13:43
File Name:
Base Period
Cost Element: Hours Rate Base Amount
Material:
Direct Material 100
Scrap/Discount/Miscellaneous 1% 100 1
Material Handling 2% 101 2
Total Material 103
Direct Labor:
Labor Category 1 5 5.00 25
Labor Category 2 6 2.00 12
Total 11 3.36 37
Fringe Benefits 3% 37 1
Overhead 4% 38 2
Other Direct Costs (ODC's)
Subcontracts 100
Travel 50
Total ODC's 150
Subtotal 193
G&A Expenses 5% 193 10
Total Costs 202
Profit 1% 202 2
Unit Price 204
Quantity 2
Total Price 409
19

20. Basic Cost Element Breakdown
Cost Element: Hours Rate Base Amount
Material:
Direct Material 100
Scrap/Discount/Miscellaneous 1% 100 1
Material Handling 2% 101 2
Total Material 103
Direct Labor:
Labor Category 1 5 5.00 € 25
Labor Category 2 6 2.00 € 12
Total 11 3.36 € 37
Fringe Benefits 3% 37 1
Overhead 4% 38 2
Other Direct Costs (ODC's):
Subcontracts 100
Travel 150
Transportation 50
Total ODC's 300
Subtotal 193
G&A Expenses 5% 193 10
Total Costs 202
Profit 1% 202 2
Unit Price 204
Quantity 2
Total Price 409
20

21. Example: Loaded Labor Rate
Cost Element Breakdown
Loaded Labor Rate Calculation Template
Item/Service:
RFP:
CLIN:
SLIN:
Date/Time: 2/28/2006 11:08
File Name:
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
(3)*(4) (5)*(6) (5)+(6) (7)*(8) (7)+(8) (8)*(9) (8)+(9) (11)*(12) (11)+(12) (13)*(14) (13)+(14) (15)*(16)
Rates: 1.00% 2.00% 3.00% 4.00% 1% Est Est
Base Composite Adj Labor Total
CLIN/SLIN Labor Category WGT Lbr Rate L Rate Esc LR FB ST O/H ST G&A TC Profit LLR Hours Price
Automotive Mechanic 40% 1.00 € 0.40 €
Metal Body Repairman 20% 2.00 € 0.30 €
Elec Tech/Mechanic 30% 3.00 € 0.20 €
Fuel/Elec Sys Mechanic 10% 4.00 € 0.10 €
0001AA Composite 100% 1.00 € 0.01 € 1.01 € 0.02 € 1.03 € 0.03 € 1.06 € 0.04 € 1.10 € 0.01 € 1.11 € 100 111.46 €
21

22. SAMPLE COST BREAKDOWN
2001 2002 2003 Total
Material
Direct Material 90 90 108
Handling 5 5 6
Shrinkage
Shop Supplies 2 2 3
Scrap 3 3 3
Total Mat’l 100 100 120 320
Labor
Labor Rate 25 30 35
Labor Hours 4 4 4
Total Labor 100 120 140 360
Labor O/H 10 10 10 30
ODC 5 5 5 15
S/T 215 235 275 725
G&A 20 20 20 60
Profit/Fee 15 15 15 45
COM 5 5 5 15
Total Price 255 275 315 22 845

23. Cost Analysis: Profit/Fee
23

24. FAR 15.404-4(c) Contracting
Officer Responsibilities: Profit
 Contracting officer responsibilities.
 (1) When the price negotiation is not
based on cost analysis, contracting
officers are not required to analyze profit.
 (2) When the price negotiation is based on
cost analysis, contracting officers in
agencies that have a structured approach
shall use it to analyze profit.
24

25. DFARS 215.404-4(b)(1) Profit
 Departments and agencies must use a
structured approach for developing a pre-
negotiation profit or fee objective on any
negotiated contract action when cost or
pricing data is obtained, except for cost-plus-
award-fee contracts or contracts with
Federally Funded Research and
Development Centers.
 DFARS 215.404-70 DD FORM 1547
 DFARS 215.404-71 Weighted Guidelines Method
25

26. FAR 15.404-4(c)(4):
Fee - Statutory Limitations
 For R&D work performed under a CPFF contract, the fee
shall not exceed 15% of the contract’s estimated cost,
excluding fee.
 For architect-engineer services for public works or
utilities, the contract price or the estimated cost and fee
for production and delivery of designs, plans, drawings,
and specifications shall not exceed 6% of the estimated
cost of construction of the public work or utility,
excluding fees.
 For other CPFF contracts, the fee shall not exceed 10% of
the contract’s estimated cost, excluding fee.
26

27. Profit-Miscellaneous
 FAR 15.404-4(c)(5). The contracting officer shall not
require any prospective contractor to submit breakouts or
supporting rationale for its profit or fee objective but may
consider it, if it is submitted voluntarily.
 FAR 15.404-4(c)(6). If a change or modification calls
for essentially the same type and mix of work as the basic
contract and is of relatively small dollar value compared
to the total contract value, the contracting officer may use
the basic contract’s profit or fee rate as the pre-
negotiation objective for that change or modification.
27

28. Profit and Fee Reporting
 PGI 215.404-76(1):
 send completed DD Forms 1547 on actions that exceed
the cost or pricing data threshold, where the contracting
officer used the weighted guidelines method, an
alternate structured approach, or the modified weighted
guidelines method, to designated office within 30 days
after contract award.
 PGI 215.404-76(2):
 use Army Weighted Guidelines Software for reporting DD Form
1547 data.
 PGI 215.404-76(4):
 Contracting offices outside the United States and its outlying
areas are exempt from reporting.
28

29. Section 3 –
Source Selection:
- Price Reasonableness
- Cost Realism
- Completeness
Cost Realism Analysis

30. (Best Value) Source Selection:
Sect M Cost/Price Evaluation
Criteria
 Three price/cost evaluation factors
 Price reasonableness
 No FAR definition
 Price Reasonableness is determined by the results of a
price analysis.
 Cost Realism
 Defined in the FAR
 Completeness
 No FAR definition
 Also Unbalanced Pricing
30

31. Source Selection Sect M:
Cost/Price Evaluation Criteria
 Price Reasonableness: No FAR definition – see next slide
 Cost Realism: Measure of the appropriateness of a cost to its
corresponding work element. The Government will determine if the
proposed costs/price(s) are realistic for the work to be performed,
reflect a clear understanding of the solicitation’s requirements, and
are consistent with the various elements of the Offeror’s technical
proposal (FAR 15.404-1(d)).
 Completeness (non-FAR definition): An accurate reflection, within
the cost/price proposal, of all aspects of the technical proposal;
compliance with the cost/price preparation instructions in the RFP
Section L – Instructions, Conditions, and Notices to Offerors; and
compliance with any other applicable directions.
31

32. How to Define Price
Reasonableness?
 A cost (substitute “price” for cost) is reasonable if, in its
nature and amount, it does not exceed what a prudent
person would pay in the conduct of competitive business
[FAR 31.201-3(a)].
 Price reasonableness will be determined based on:
 the results of a price/cost analysis
 the results of the application of the price analysis techniques
detailed in the FAR
 a comparison to the IGCE
 a comparison of the competing offers
 A combination of any of the above
 Price reasonableness will be determined based on the results of a
price/cost analysis, including a comparison to the IGCE and
32
comparisons of the competing offers.

33. Reasonableness Per ESI’s
Advanced Source Selection
 Are the offeror’s cost estimating methods
reasonable and accurately prepared?
 What is the level of quality and credibility
of the offeror’s basis of estimates?
 For example, are costs based on actual data or
engineering judgment?
 Are the offeror’s cost metrics and methods
logical and appropriate for the product?
33

34. Completeness Per ESI’s
Advanced Source Selection
 Has the offeror captured all proposed effort in the
cost estimates?
 Did the offeror provide all information required
by the RFP?
 Did the offeror claim some performance in
technical or management not included in the
cost?
 Are the technical assumptions used in the cost
proposal traceable to the technical volume and
vice versa?
34

35. Cost Realism Analysis: General
FAR 15.404-1(d)
 Review the specific elements of each
offeror’s cost estimate to determine:
 If it’s realistic for the work to be done
 If the offeror clearly understands the
requirements
 If it’s consistent with the unique aspects
of their technical proposal
35

36. Cost Realism Analysis FAR 15.404-1(d)(2)
(Cost Reimbursement Contracts)
 The following apply to both competitive and sole source
environments:
 Government shall perform cost realism analyses for cost-
reimbursement contracts.
 Individually determine the probable cost of performance of each
offeror.
 Probable Cost is the government’s best estimate of the cost of any
contract that is likely to result from the offeror’s proposal.
 Probable cost determined by adjusting each offeror’s
costs, and fee when appropriate, to reflect any
understatements or overstatements based on the results
of the cost realism analysis.
 For a CPFF contract, the fee would not be adjusted.
 Probable cost is used in deciding best value.
(Competitive environment only). 36

37. Cost Realism Analysis FAR 15.404-1(d)(3)
(Competitive Fixed Price Contracts)
 May be performed on Fixed Price Incentive contracts.
 Situations where cost realism analysis may be done on
competitive fixed price contracts:
 When new requirements may not be fully understood by
competing offerors, or
 There are quality concerns, or
 Past experience indicates that contractors’ proposed costs have
resulted in quality or service shortfalls
 You cannot adjust offered prices as a result of the cost
realism analysis.
 Results of the analysis may be used in performance risk
assessments and responsibility determinations. 37

38. Cost Realism Analysis
and Cost Analysis
 There is a difference between the two, but
 Confusion between the terms
 Often used interchangeably
 Cost Realism Analysis applies to source
selections
 Used to verify that the contractor’s technical approach
has been priced in the proposal
 Used mainly on cost reimbursement type contracts
 Used to determine the Probable Cost of Performance
(Most Probable Cost)
 Cost Analysis methods/procedures are used to 38
determine Cost Realism.

39. Section 4 - Cost Data
Requirements
Certified Cost or Pricing Data
Information Other Than Cost or
Pricing Data

40. Obtaining Information to Establish
Price Reasonableness [FAR 15.402(a)]
(and Cost Realism)
 Order of preference for type of data required and/
or requested:
1 No additional information
2 Information other than cost or pricing data
3 (Certified) cost or pricing data
 Do not obtain more info than necessary
 Rely first on information available within the
Government.
 Second, on information obtained from sources other
than the offeror.
 If necessary, on information obtained from the offeror.
40

41. Introduction to Cost Data
 Two types:
1 (Certified) Cost or pricing data
2 Information Other than Cost or Pricing Data
 Both can be the exact same information
 What is the difference between the two?
 For the first, the contractor certifies that the
data is current, accurate, and complete.
 For the second, the contractor does not certify
that the data is current, accurate, and complete.
41

42. (Certified) Cost or Pricing Data
Defined [FAR 2.101]
 All facts that, as of the date of price agreement or,
if applicable, an earlier date agreed upon between
the parties that is as close as practicable to the
date of agreement on price, prudent buyers and
sellers would reasonably expect to affect price
negotiations significantly.
 Are factual, not judgmental, and are verifiable.
 Includes data forming bases of judgements.
 More than historic accounting data.
 All facts contributing to soundness of estimates. 42

43. Certification of Cost or Pricing Data
[FAR 15.406-2]
 When cost or pricing data are required, the
contracting officer shall require the contractor to
execute a Certificate of Current Cost or Pricing
Data.
 “To the best of my knowledge and belief, the cost or
pricing data submitted, either actually or by specific
identification in writing, to the Contracting Officer or
the Contracting Officer’s representative in support of
(the proposal) are accurate, complete, and current as
of (date negotiations completed or price agreement
reached).” 43

44. Certification Implications for the
Contractor
 Emphasis on non-certified data was an Acquisition
Streamlining change:
 To reduce lead-times and costs to the Government & Contractors
 Facilitate evaluations and reduce post award administration
 Certification is expensive for the contractor in terms of
time, manpower, and cost to assemble, prepare, check,
and present the certified data package.
 Administrative and legal problems for contractors with
certification:
 Truth In Negotiations Act (TINA)
 DCAA post award audits
 Potential defective pricing 44

45. Defective Cost or Pricing Data
(FAR 15.407-1)
 If, after award, cost or pricing data are found to be
inaccurate, incomplete, or non-current, as of the date of
final agreement on price or an earlier date agreed upon by
the parties given on the contractor’s/subcontractor’s
Certificate of Current Cost or Pricing Data,
 the Government is entitled to a price adjustment, including profit
or fee, of any significant amount by which the price was
increased because of the defective data (Clauses 52.215-10 &
52.215-11).
 Audit Tracking
 Contract Audit Follow Up (CAFU)
 Resolving the issue may involve repayment of disputed
amount plus penalty and interest.
45

46. Thresholds/Awards Where Certified
Cost or Pricing Data Are Required
 Per 15.403-4(a)(1):
 Award of any negotiated contract over $650K
 Award of a subcontract over $650K at any tier, if
contractor and each higher-tier subcontractor also
have to submit certified data
 Modification worth over $650K, of any sealed bid or
negotiated contract (consider absolute value of both
cost increases and decreases)
46

47. Subcontract Cost or Pricing Data
FAR 15.404-3 (1 of 2)
 The contractor shall submit (or cause to be
submitted by the subcontractor (s)) cost or pricing
data to the Government for subcontracts that are
the lower of :
(1) $11.5 million or more; or (2) Both
more than the pertinent cost or pricing data
threshold ($650K) and more than 10% of the
prime contractor’s proposed price, unless the
Government believes such submission is
unnecessary.
47

48. Subcontract Cost or Pricing Data
FAR 15.404-3 (2 of 2)
 The PCO may require the contractor or subcontractor to
submit to the Government subcontractor cost or pricing
data below the thresholds that the PCO considers
necessary for adequately pricing the prime contract.
 The subcontractor cost or pricing data shall be current,
accurate, and complete as of the date of price agreement,
or, if applicable, an earlier date agreed upon by the parties
and specified on the contractor’s Certificate of Current
Cost or Pricing Data. The contractor shall update
subcontractor’s data, as appropriate, during negotiations.
48

49. Certified Cost or Pricing Data for
Actions Under $650,000
 FAR 15.403-4(2): The head of the
contracting activity, without the power of
delegation, may authorize the PCO to
obtain cost or pricing data for pricing
actions below the pertinent threshold.
 Shall justify the requirement with written
documentation and supporting facts, that cost
or pricing data are necessary to determine
price is fair and reasonable.
49

50. Exemptions from (Certified) Cost or
Pricing Data Requirements
Per FAR 15.403-1(b), five exemptions:
1 Adequate price competition
2 Prices set by law or regulation
3 Commercial items
4 Waivers (HCA approval, documentation with support)
 DFARS: Canadian Commercial Corp (CCC) & Nonprofit
organizations with cost reimbursement/no fee contracts
5 Modifying commercial item contract or subcontract
 FAR 15.403-2 adds the exercise of options if the price
was established at contract award or initial negotiation.
50

51. Information Other than Cost or
Pricing Data Defined [FAR 15.402]
 Any type of information that is not required to be
certified IAW FAR 15.406-2 and is necessary to
determine price reasonableness or cost realism.
 Such information may include pricing, sales, or
cost information, and includes cost or pricing
data for which certification is determined
inapplicable after submission.
 Again, certification is the difference between the
two categories of cost/price data!
51

52. Information Other than Cost or Pricing Data,
with Adequate Price Competition -
FAR 15.403-3(b)
 Generally, no additional info is needed,
unless the price is unreasonable.
 If due to unusual circumstances
additional info is needed to determine
reasonableness, to the maximum extent
practicable obtain it from sources other
than the offeror.
 You may request information to determine
the cost realism of competing offers or to
evaluate competing approaches. 52

53. Situations Where “Non-Certified Cost
Information” May be Needed
 In general, you don’t expect certified data will be
required, but you need cost information to
determine price reasonableness or cost realism.
 For example, you:
 Expect adequate price competition on a source
selection but don’t expect to be able to rely on
comparisons between offers to determine price
reasonableness (e.g. offerors may use different
technical approaches).
 Have determined the action is below the cost or
pricing data threshold ($650,000), but you need cost
information to determine price reasonableness. 53

54. Instructions for Submission of Information
Other than Certified Cost or Pricing Data -
FAR 15.403-5
 In the solicitation, you should specify any
information other than certified cost or pricing
data that is required (Section L).
 It may be submitted in the offeror’s own format,
unless the contracting officer decides use of a
specific format is essential and the format is
described in the solicitation.
 If you didn’t specify the info in the solicitation,
you can still request and obtain the needed
information after initial proposals are submitted.54

55. Info other than Cost or Pricing Data:
Limitations on Commercial Items
- FAR 15.403-3(c)
 Requests for offerors’ sales data is
limited to data for the same or similar
items during a relevant time period.
 To the maximum extent practicable,
limit any request for info to include
only info that is in the form regularly
maintained by the offeror.
55

56. Things the Solicitation Must Specify on Cost or
Pricing Data, or Info Other than Cost or Pricing
Data (FAR 15.403-5) - P. 1 of 2
 Whether certified cost or pricing data are required
 That offerors may submit a request for exception,
instead of submitting certified data
 Any information other than certified cost or
pricing data that is required
 The required format for the cost or pricing data or
information other than cost or pricing data
 Necessary pre-award or post-award access to
offeror’s records, if not provided by one of the
standard clauses
56

57. Things the Solicitation Must Specify on Cost or
Pricing Data, or Info Other than Cost or Pricing
Data (FAR 15.403-5) - P. 2 of 2
 Standard Clauses are 52.215-20, and
52.215-21 (mods)
 Called out in FAR 15.408(l) & (m)
 You may use these if reasonably certain cost
or pricing data (or “Info Other than….”)
needed
 These cover the requirements and allow
offerors to request one of the exceptions from
submitting the data
 If you want specific data without exception, 57
don’t use the standard clause

58. Section 5 –
Field Pricing Support

59. Field Pricing Services
FAR 15.404-2(a)(2)
 Technical, audit, and special reports associated with the cost elements
of a proposal, including subcontracts.
 Information on related pricing practices and history.
 Information to help contracting officers determine commerciality and
price reasonableness:
 verify sales history to source documents
 identify special terms and conditions
 identify customarily granted or offered discounts for the item
 verify the item to an existing catalog or price list
 verify historic data for item to qualify as commercial
 identify general market conditions affecting determinations of
commerciality and price reasonableness
 Information relative to the business, technical, production, or other
capabilities and practices of an offeror. 59

60. Field Pricing Support
FAR 15.404-2(a)(b)(c)
 Defense Contract Audit Agency (DCAA)
 Trained in accounting, finance, and auditing
 Access to contractor accounting records
 Auditors (on-site/off-site) & Financial Advisors (FA)
 Provide proposal analysis of material, labor, indirect rates,
G&A, COM, etc.
 Defense Contract Management Agency (DCMA)
 Pricing and/or Technical Personnel: production
specialist, engineer, etc.
 Provide technical analysis and/or pricing support
60

61. Defense Contract Audit Agency
(DCAA)
 DCAA provides the following:
 Proposal audits by request
 “Agreed Upon Procedures” Assignment
 Forward Pricing Rate Agreements (FPRAs)
 Direct labor and indirect rates w/DCMA ACO as lead
 Incurred cost audits: on going
 Qualifications/requirements:
 Formal proposal request
 Formal contractor proposal in a structured/auditable
format
 Minimum 30 to 45 day request processing time
61

62. Other DCAA/DCMA Reviews
 Accounting system reviews
 Pre-award/post award
 FAR/DFARS 9.106/209.106
 Estimating system reviews
 DFARS 215.407-5 Estimating systems
 DCAA performs but DCMA/ACO function
 Compensation System Reviews (CSR)
 Contractor Purchasing System Review (CPSR)
 Reference FAR 44.3 and DFARS 244.3
 DCMA/ACO function with DCAA assistance
62

63. Technical Analysis
[FAR 15.404-1(e)]
 Evaluation performed by personnel having specialized
knowledge, skills, experience, or capability in
engineering, science, or management on proposed
material types and quantities, labor, processes, special
tooling, facilities, reasonableness of scrap and spoilage,
and other factors in the proposal in order to determine the
need for and reasonableness of the proposed resources.
 At a minimum:
 examine the types and quantities of material (“kinds and
quantities” evaluation)
 and the need for the types and quantities of labor hours and the
labor mix (skill and category)
63

64. Field Pricing Support & the
Cost or Pricing Data Threshold
 DFARS 215.404-2(a):
 PCO should consider field pricing support for
 Fixed price proposals exceeding $650K
 Cost type proposals exceeding $650K from offerors with
significant estimating system deficiencies
 Cost type proposals exceeding $10 million from offerors
without significant estimating system deficiencies
 PCO should not request field pricing support for
proposals less than $650K; exceptions:
 lack of knowledge of particular contractor
 sensitive conditions/problem areas
64

65. Points to Consider When
Requesting Field Pricing Support
 Per FAR 15.404-2(a)(1):
 The contracting officer should request field pricing assistance
when the information available at the buying activity is
inadequate to determine a fair and reasonable price; tailor
requests to reflect the minimum essential supplementary
information needed to conduct a technical or cost or pricing
analysis.
 Consider cost risk!
 Contract type: there is more risk on a FFP than CPFF or CPAF
contracts.
 Proposal total dollar value
 The DCAA PLA or FA can help determine the type of
65
field pricing support/audit services needed.

66. FSO is the POC for DCAA
 Request DCAA audits through the FSO
 Submit audit request to DCAA
 Receive/file DCAA audit reports
 Tracking/report status of DCAA audits
 AFARS 5142.1-90-2
 Contract Audit Follow Up (CAFU) Program
 DoDD 7640.2
 AFARS 5142.1-90-2
 SOP Number 25
66

67. Contract Audit Follow Up
(CAFU) Program (1 of 2)
 Track/provide status of “reportable audits”
 Reportable Audits
 Estimating/accounting system and internal control
reviews
 Incurred costs including final indirect cost rates
 Claims
 Defective pricing reviews
 Termination settlements
 CAS issues/cost impact statement reviews
67

68. Contract Audit Follow Up
(CAFU) Program (2 of 2)
 Recent revision: DCMA database now used
 Rules/procedures?
 Reviewed/updated:
 March 31st
 September 30th
 Overage Audit Review Board
 Discuss unresolved DCAA audits over 6 months old
with the Commander
 Bottom Line: reportable audits must be resolved
in a timely manner
68

69. Section 6 - Cost Allowability

70. Factors Affecting Cost
Allowability (FAR 31.201-2)
 Reasonableness
 Allocability
 Accounting Principles &
Standards
 Contract Terms 70

71. Reasonableness - (FAR 31.201-3)
 Definition: A cost is reasonable if, in its
nature and amount, it does not exceed what
a prudent person would pay in the conduct
of competitive business.
 Considerations
 Is the cost necessary?
 Is the cost consistent with sound business
practice and law?
 Are the contractor’s purchases done on an
“arm’s-length basis”?
71

72. Allocability - (FAR 31.201-4)
 Definition: A cost is allocable to one or more
cost objectives (e.g., contracts) if it is charged
based on the relative benefits received or some
other equitable relationship.
 A cost is Allocable to a Government contract if:
 It is incurred specifically for the contract, or
 It benefits the contract and other work (e.g. it’s
an overhead cost), and can be fairly distributed
based on benefits received, or
 It is necessary to overall operation of the
business (e.g. certain G&A expenses).
72

73. The Most Common Ways Costs are
Incurred
 Expend Cash - Actual outlay of dollars (by cash,
check, etc.) in exchange for goods or services.
(e.g. Pay a vendor for raw materials)
 Accrue Expense - For accounting purposes,
because a future obligation is being incurred or
an asset is being used. (e.g. Incurring an
obligation to current workers, for their future
pensions)
 Use Inventory - For example, contractor buys
inventory in advance and charges it to contracts
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as inventory is used.

74. Sources of Accounting
Principles & Standards
 Generally Accepted Accounting
Principles (GAAP)
 Cost Accounting Standards (CAS)
 FAR Part 31 Contract Cost Principles
and Procedures
74

75. Accounting: Financial & Cost
In semi-plain English:
 Accounting is the process of identification, measurement,
and communication of financial information about
economic entities to interested parties. Two types:
 Financial accounting focuses on measuring the results of an
organization’s operations for a period of time, reflected in the
financial statements.
 Cost (or management) accounting focuses on cost allocation to
a product, service, or contract; management uses the information
to plan, evaluate, and control within its organization and to assure
appropriate use of, and accountability for, its resources.
75

76. Generally Accepted Accounting
Principles (GAAP)
 Generally Accepted Accounting Principles or GAAP
refers to the common set of accounting concepts,
standards, and procedures which represent a general
guide.
 GAAP principles are those that have substantial
authoritative support or are based on accounting practices
accepted over time by prevalent use.
 Financial Accounting Standards Board (FASB), American
Institute of CPAs (AICPA), Accounting Principles Board (APB),
etc.
 The end products of the accounting cycle, the financial
statements (balance sheet, income statement, etc.) are
prepared in accordance with GAAP.
76

77. Cost Accounting Standards (CAS)
(1 of 2)
 Purpose of CAS:
 Promulgate standards to achieve uniformity
and consistency in cost accounting practices
to be followed by contractors and
subcontractors for defense contracts. It is an
attempt to provide common ground between
the contractors and the federal government on
cost accounting issues during proposal
preparation, negotiations, etc.
77

78. Cost Accounting Standards (CAS)
(2 of 2)
 Currently, there are 19 standards.
 Cost Accounting Standards Board (CASB) administers
CAS: five members, includes representatives from
government, industry, and academia.
 CAS/CASB was originally established in August 1970
under the legislative branch.
 Ceased operations September 30, 1980 due to lack of
funds.
 Re-established in November 1988 under the executive
branch within Office of Federal Procurement Policy
(OFPP) which is under Office of Management and
Budget (OMB).
78

79. Exemptions From CAS (1 of 2)
 Eleven exemptions, with the most common (7)
below:
 Sealed bid contracts.
 Negotiated contracts/subcontracts less than $650,000.
 Contracts & subcontracts with small businesses.
 FFP & FFP with EPA contracts/subcontracts for the
acquisition of commercial items.
 FFP contracts & subcontracts awarded on the basis of
adequate price competition without the submission of
cost/price data.
79

80. Exemptions From CAS (2 of 2)
 Contracts/subcontracts in which the price is set
by law or regulation.
 Contract/subcontract executed and
performed outside the U.S., its territories, and
its possessions.
80

81. CAS Coverage
 Two types of CAS can be applicable, depending on the
dollar value of previous awards and current acquisitions.
 Full coverage: comply with all CAS in effect on the contract
award date and with any new standards.
 Modified coverage: requires contractor to comply with four
standards
 CAS 401, Consistency in estimating, accumulating, & reporting
costs.
 CAS 402, Consistency in allocating costs incurred for the same
purpose.
 CAS 405, Accounting for unallowable costs.
 CAS 406, Cost accounting period.
81

82. CAS - Disclosure Statement
 Firms that have contracts/subcontracts subject to
full CAS coverage should have submitted a
CASB Disclosure Statement, providing
information on how they charge specific types of
costs.
 Contractor discloses/documents company accounting
practices to the government.
 The ACO and cognizant DCAA auditor are
responsible for reviewing the contractor’s
Disclosure Statement for adequacy, and for
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compliance with FAR Part 31 and CAS.

83. GAAP vs. CAS
 GAAP and CAS are not the same.
 GAAP generally refers to financial, not cost,
accounting guidance.
 CAS is an attempt to extend GAAP-like guidance
to government cost accounting.
 CAS Objectives:
 Common cost treatment, same terminology, and the
avoidance of cost manipulation (gaming).
 Facilitate proposal preparation and negotiations.
83

84. CAS: FAR References
 FAR Part 30
 CAS Administration
 Policies and Procedures for applying
CAS to negotiated contracts &
subcontracts
 FAR Appendix B
 Contains the actual CAS
84

85. FAR 31.2 Cost Principles for
Commercial Organizations
 Applies to all contractors.
 Defines direct and indirect costs.
 Addresses specific kinds of costs as to
whether allowable, unallowable, or
allowable with restrictions.
 Examples of unallowable costs: interest
expense, bad debts, entertainment costs,
donations, attorney fees for claims.
85

86. FAR Part 31: Examples of
Unallowable Costs
 31.205-3 -- Bad Debts
 31.205-8 -- Contributions or Donations
 31.205-14 -- Entertainment Costs
 31.205-20 -- Interest and Other
Financial Costs
 31.205-51 -- Costs of Alcoholic
Beverages 86

87. FAR Part 31 Cost Principles for
“Other” Organizations
 Refer to FAR 31 for separate, unique
coverage of the cost principles for
contracts with:
 Educational institutions (FAR 31.3)
 State & local governments, &
federally recognized Indian tribal
governments (FAR 31.6)
 Nonprofit organizations (FAR 31.7)
87

88. Contract Terms & Cost Principles
 Specific costs may be addressed in RFP or
contract. (e.g. Although transportation
costs are generally allowable, the contract
may restrict them to a certain mode.)
 On cost allowability, contract terms can
only be more restrictive than other factors.
(e.g. Contract terms cannot make interest
expense allowable on the contract.)
88

89. Conclusion
89

90. Management/Cost Accounting
System
 Contractors’ have to manage their organizations,
products/services, and contracts
 There needs to be a system in place to determine
whether the service, product, or contract
 Is on schedule for completion
 Is at its budgeted cost
 And if not
 Why not?
 What is being done to correct the situation?
 All major companies have such a system!
90

91. Adequate Estimating System
 ACO estimating system approval means that the system
has the controls to consistently produce adequate and
reliable estimates.
 established policies, procedures, and practices to persons
responsible for preparing and supporting estimates
 A disapproved system is a red flag indicating that the
firm's estimating system does not consistently provide
adequate proposals.
 Normally, proposals from a firm with a disapproved system
should be subjected to closer scrutiny, particularly closer scrutiny
by audit professionals.
91

92. Adequate Accounting System
 Primary goal of an acceptable accounting system:
 Ensure that costs are appropriately, equitably, and consistently allocated
to all final cost objectives (i.e., individual contracts, jobs, or products).
 Pre-award accounting system survey performed by DCAA.
 System should answer affirmative to specific questions:
 IAW GAAP? (IAW CAS?)
 Identify & segregate direct from indirect costs, allocating these costs
equitably to specific contracts on a consistent basis?
 Timekeeping & labor distribution systems appropriately identify direct
and indirect labor charges to intermediate & final cost objectives?
 Accumulates costs integrated with, and reconcilable to, the general
ledger?
 Determine cost of work performed at interim points (at least monthly)
because of routine posting to books of account?
 If required by the contract, identify costs by CLIN/SLIN or by unit?
 Specifically: Are there accounting “controls” in place?
92