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AIR 2.0 Competency Training

Price Analysis TechniquesNCMA

20 January 2009Sandy Scharn-Stevens

& Warren Walch

References and dollar thresholds reflected in this training package are current as of the date shown above.  Recommend confirming references and thresholds with law, regulations and policy that may have been implemented after the above date

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Outline

1. Purpose—Overview & Intent2. Policy 3. Price Analysis Techniques 4. Estimating/Purchasing System Reviews5. Summary

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Overview & Intent

• Price Analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit.

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Overview & Intent

• Contractors conduct price analysis on subcontract cost for cost proposals and for obtaining subcontract consent in ongoing contracts

• PCO’s use price analysis to establish price reasonableness IAW FAR 13, 14 or 15 and consider contractor price analysis for proposal analysis and subcontract consent IAW FAR 44

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Policy

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Policy

FAR 15.408 and Table 15-2.II.A Contractor Proposal Instructions: For material and services proposed, identify the item and show the source, quantity, and price. Conduct price analyses of all subcontractor proposals.

FAR 15.404-3 Contracting Officer Proposal Analysis: PCO’s should consider whether a contractor has an approved purchasing system, has performed cost or price analysis of proposed subcontractor prices, or has negotiated the subcontract prices before negotiation of the prime contract, in determining the reasonableness of the prime contract price.

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Policy

FAR 44.202 Consent to Subcontract • Contractor Responsibilities: Obtain

consent to subcontract (defined as supplies or services at FAR 44.101)

• PCO/ACO Responsibilities: Evaluate subcontracts and supporting data considering the following:

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PolicyFAR 44.202-2 PCO/ACO Considerations

1) Is subcontract iaw/contractor’s make or buy plan?2) Is subcontract available from government source?3) Is selection technically justified? 4) Is there compliance w/subcontracting plan, purchase from JWOD?5) Adequate price competition?6) Alternate proposals considered?7) Sound basis for selection and responsibility determination?8) Adequate cost or price analysis?9) Contract type appropriate?10)GFP involved?11)Adequate description of technical requirements?12)Compliance with CAS?13)Not listed in excluded parties list?

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NAWC WD Contract Part 44 administration

Division Wide (STARS, ESS, WSISS) require:(1) COR or PCO approval of subcontracts with

non-team members >$2,500 (2) COR or PCO approval of hardware, software,

spare and repair parts purchase >$2,500 (3) COR or PCO approval of all vehicle purchases

and/or leases Other NAWCWD IDIQ contracts have similar

provisions depending on amount of material purchased or whether contractor has approved purchasing system.

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Price Analysis Techniques to Determine Prices Fair and

Reasonable

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Price Analysis Techniques FAR15.404-1(b)(2)

(i) Competition (preferred method)(ii) Historical prices (preferred method)(iii) Parametrics* (iv) Published price lists, published market prices

of commodities, indexes, discounts or rebates(v) Comparison with IGCE’s(vi) Market research (vii) Pricing information provided by offeror**All techniques except these two are also listed at 13.106-3 SAP

required for >$2.5K to $100K

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(i) Competition

Comparison of proposed prices received in response to a request for quote or request for proposal. Normally, adequate price competition establishes price reasonableness.

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(ii) Historical PricesA historical comparison with prices for same or similar items should be used whenever possible.

•Document why current purchase is similar to historical purchase and whether thorough analysis was performed to arrive at that historical price•Identify adjustments for differences in item (Have demand, volume, market forces changed?)

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(ii) Historical Prices (cont)– Not verifying that a previous analysis was

performed or the consistencies in quantities has been a recurring issue on sole source commercial items reported by GAO and DoD IG. Extra attention is required to verify that previous prices paid were sufficiently analyzed and determined fair and reasonable. From DAU CLC 131 Commercial Item Pricing

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(iii) Parametric Estimating

• Estimating technique that uses validated relationships between technical, programmatic, and cost with known historical values

• Examples:– Dollars per pound– Cost per flight hour– Cost of construction per square foot– Cost of software per line of code

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(iv) Published Price Lists, Catalogs, Published Market Prices

– Obtain a copy of the catalog, date, pages for the offered items, or

– Obtain current discount policies and price lists (published or unpublished), e.g., wholesale, original equipment manufacturer, or reseller.

– Obtain basis of each offered price and its relationship to the established catalog price.

– Describe how the proposed price relates to the price of recent sales in similar quantities

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(iv) Published Price Lists, Catalogs, Published Market Prices (cont)

– The fact that a price is included in a catalog does not in and of itself, make it fair and reasonable.

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• Compare offered price to catalog price of same or similar items

• Adjust for differences in quantities, characteristics, time, discounts, etc.

• Negotiate a fair and reasonable price– Request discounts, better terms, etc.

(iv) Published Price Lists, Catalogs, Published Market Prices (cont)

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(v) Comparison with Engineering Estimates

– Provide basis of the estimate • How was the estimate made?• What assumptions were made?• What information and tools were used?• Where was the information obtained?• When was the estimate done?

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(v) Comparison with Engineering Estimates (cont)

• Possible estimating problems: – Assuming market has not changed– Assuming most recent price is reasonable– Assuming stock list prices are valid– Estimate may have come from the offeror

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(vi) Market Research

• Techniques listed at FAR 10.002(b)(2)(i) Contact experts(ii) Review results of recent market research (iii) Publish formal requests for information (RFI’s)(iv) Query databases

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(vi) Market Research (cont)

(v) Participate in interactive, on-line communication among industry, acquisition personnel, and customers.(vi) Obtain source lists from other contracting activities, trade associations or other sources(vii) Review catalogs and product literature

(viii) Conduct interchange meetings

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(vii) Pricing Information Provided by the Offeror

Analysis of any other pricing information provided by the offeror

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Estimating and Purchasing System Reviews

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• Estimating System: Increased Government reviews if contractor has significant estimating deficiencies in the area of subcontract pricing.

• Purchasing System: Government reviews efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when subcontracting. Review includes contractor performance and documentation of price analysis on subcontracts. (Gov sales >$25M/yr)

Estimating/Purchasing System Reviews

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Summary

•Price analysis is required by contractors and government personnel•Documentation is key•The goal is fair and reasonable prices•Everything is negotiable including a catalog price

Oh by the way -- DFARS 215.404 Weighted Guidelines Profit policy allows for assigning below normal profit ratings for management and cost control if “contractor fails to provide an adequate analysis of subcontractor costs.”

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Other References:

• DAU CLC 131 Commercial Item Pricing• Contract Pricing Reference Guides

http://www.acq.osd.mil/dpap/cpf/contract_pricing_reference_guides.html

• DCAA website brochure “Information for Contractors”http://www.dcaa.mil