CON 170, The Fundamentals of Cost and Price Analysis

STUDENT GUIDE

CON 170

Fundamentals of Cost & Price Analysis

Unit 5, Lesson 6

Weighted Guidelines / Profit / Fee

April 2019

STUDENT PREPARATION

Required Student Preparation

Read FAR 15.404-4, DFARS 215.404-4CPRG Vol 3, Chapter 11 Planned Academic Time Required: 3.5 hours

Student performance will be informally evaluated during class discussions, and formally evaluated on Exam 2

Lesson Presentation

When negotiating profit or fee, FAR 15.404-4 requires contracting officers to use a “structured approach.” Per DFARS 215.404-4, DoD Contracting Officers “shall use the weighted guidelines method” as the structured approach for establishing profit or fee objectives, unless certain circumstances warrant another approach.

This lesson introduces the requirements for using the weighted guidelines (WGL) method, provides some practice scenarios to establish prenegotiation profit objectives with the WGL, and drives practitioners to understand the step-by-step WGL instructions, established by DFARS 215.404-4 and DFARS 215.404-70.

Pursuant to DFARS 215.404-71, contracting officers must complete the following DD Form 1547, “Record of Weighted Guidelines Application.” The DFARS PGI 215.404-71(3) states, “the contracting officer shall use and prepare a DD Form 1547 whenever a structured approach to profit analysis is required by DFARS 215.404-4(b),” and “ensure the DD Form 1547 is accurately completed.”

Note, DFARS 215.404-4(c)(2)(E) states contracting officers “shall document the profit analysis in the contract file.” The DD Form 1547 is a critical element of the contracting officer’s profit analysis. Generally, this form is completed and reviewed by the contracting officer before entering negotiations, reviewed and signed after negotiations, and included in the contract file pricing documentation.

“OLD” version of DD1547 (line 24 has changed)

“NEW” version of DD1547 (corresponds with DFARS changes to line 24)

This lesson will briefly explain each element of the DD Form 1547, then provide students with scenarios to practice completing the form.

First, the buyer must complete blocks 1-20. Blocks 1-12 will be filled in for the specific action you are working on, with the name of the contractor and their pertinent information. In this course, we will begin by completing blocks 13-20. Each block’s amount is the Government team’s objective for the proposed amounts, based on the Government team’s cost and/or price analysis. Block 20 is the “Total Cost,” (again, the Government team’s objective for total cost) which becomes the basis for the profit objective analysis and many of the calculations that follow.

Next, blocks 21-35 must be completed per the specific instructions in DFARS 215.404-71. This section of the DFARS is like a HOW-TO guide for completing the DD Form 1547 and should always be available and consulted when developing a profit/fee position. The following slides briefly explain the different considerations and calcualtions used in completing a WGL. However, the best way to really understand the method is practice – so several exercise scenarios will follow to give you adequate practice with the weighted guidelines method.

More On Contract Type Risk and UCAs

Remember the Mandatory assessment of reduced risk for costs incurred under UCAs that the DFARS requires us to consider? It is important to read and understand DFARS 215.404-71-3. Specifically, paragraph (d)(2) requires contracting officer’s to “assess the extent to which costs have been incurred prior to definitization.” In a situation where costs have already been incurred, there is inherently less risk. For that reason, this specific paragraph in DFARS requires CO’s to consider that in their WGL calculations. This is NOT to say the contractor should be awarded NO profit, but the allowance for profit under the contract type risk calculation should be reduced accordingly. And recently, line 24 of the DD1547 was revised to help account for this issue – you will see there are separate lines for costs incurred (Line 24a; generally considered lower risk) and the estimate to complete (Line 24b; probably more risk) under a UCA

This lesson provides a brief overview of UCAs. As explained in DFARS subpart 217.74, a UCA is any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun; the contractor is authorized to begin work based on a letter contract or some other form of direction from the contracting officer which is not based on a firm, negotiated proposal. After the UCA is issued, the Government and contractor follow up by negotiating and awarding a “definitized” contract action, based on price and/or cost analysis, clear terms and conditions, and firm pricing arrangements. “Definitization” means the agreement on, or determination of, contract terms, specifications, and price, which converts the undefinitized contract action to a definitive contract.

Under a UCA, the NTE value is typically a worst-case estimated dollar value. The NTE is provided by the contractor in a time-critical situation, when work must start as soon as possible, and there is not time for the contractor to conduct extensive cost estimates. Therefore, when working under a UCA, the contractor has little incentive to control costs, because all allowable costs will be paid up to the NTE amount. With respect to this risk, working under a UCA is similar to working under a cost-reimbursement contract, which presents lower risk to the contractor. Therefore, the Government should decrease contractor’s profit objective to account for this lower cost risk. Per the DFARS, these considerations for the lower risk are required to be considered by contracting officers when evaluating a contractor’s Contract Type Risk.

Exercise: Calculating Profit by Completing a DD Form 1547

Learning Objective

Calculate a profit objective with the WGL.

Introduction

This exercise will require the student to use the given procurement scenarios in order to calculate profit objectives on the DD Form 1547.

Assessment

This activity is not scored or graded.

Student Instructions: You will now be given information for several procurement scenarios in order to calculate a profit objective for them. First, review the following slide and pages to understand the acquisition which is the basis for the scenarios you will analyze to calculate profit. You can access the DD Form 1547 tool under the Student Resources tab of Blackboard.

The next few pages present ACME’s proposal, with insight into the Government’s cost and price analysis. Your task is to review the following proposal, and complete a DD Form 1547 for each of the scenarios.

Proposal Rates and Factors:

Base

Year 1

Year 2

Year 3

Material Scrap CER

4.0%

Engineering Escalation

9.0%

9.0%

Design DL

$75.83

$75.83

$82.65

$90.09

Integration DL

$65.74

$65.74

$71.66

$78.11

Test DL

$68.33

$68.33

$74.48

$81.18

Prog Spt DL

$60.82

$60.82

$66.29

$72.26

FTE Hrs/Yr

2080

Prog Spt CER

5%

Manufacturing Escalation

9.0%

9.0%

Fabrication DL

$56.90

$56.90

$62.02

$67.60

Assembly DL

$55.98

$55.98

$61.02

$66.51

Quality Assurance DL

$53.45

$53.45

$58.26

$63.50

Indirect Cost Rates

Engineering OH

101%

103%

102%

Manufacturing OH

204%

205%

206%

General & Admin

15%

15.5%

15.25%

FCCOM Factors

Engineering

.02250

.02250

.02250

Manufacturing

.03750

.03750

.03750

General & Admin (TCI)

.00250

.00250

.00250

CON 170, The Fundamentals of Cost and Price Analysis

1Reference FPRP submitted to DCMA ACO, day before yesterday.

Notice: the G&A base in this example is TCI, as stated in the FCCOM Factors G&A element

14CON 170, Unit 5, Lesson 6, The Weighted Guidelines

CON 170, Unit 5, Lesson 6 – Profit – Page 1

CON 170, Unit 5, Lesson 6

16 CON 170, Unit 5, Lesson 6

·

ADDITIONAL PRACTICE SCENARIOS– (answers also provided)

SCENARIO A:

Complete another ACME objective WGL, given the following changes:

· This is a technologically advanced effort justifying the alternative technology range

· Technical/Management risk is shared 70/30, respectively

· Contract Type is CPFF

· Assign weightings not requiring any additional explanation in your PNM documentation

ADDITIONAL PRACTICE - SCENARIO ‘A’ SOLUTION:

· Lines 21 and 22 – Per DFARS 215.404-71-2(c)(2), only the technical factor gets the higher assigned value %, not the management factor. Common mistake to enter an assigned value of “9” for both technical and management factors. However, the assigned value of “9” is for the technical factor ONLY.

· Line 23 – The Performance Risk Composite is a weighted average calculation. See DFARS 215.404-71-2(b)(3). The CPRG, Vol 3, Ch 11 also provides an example with explanation of the weighted performance factor calculation.

· No other changes are required.

· However, note that the fee comes out to be over 10% on a CPFF contract and that exceeds the statutory limitation. In this scenario, the negotiator would likely use 10% because that's as high as we can go on a non-R&D CPFF contract.

SCENARIO B:

Complete another ACME objective WGL, given the following changes:

· This is a technologically advanced effort justifying the alternative technology range

· Technical/Management risk is shared 70/30, respectively

· Contract Type is FFP

· There is no contract financing being provided by the Government

· Assign weightings not requiring any additional explanation in your PNM documentation

ADDITIONAL PRACTICE - SCENARIO ‘B’ SOLUTION:

· Line 24 - Notice the boost in value for this FFP scenario with no contract financing being provided.

· See DFARS 215.404-71-3 and notice the “lower risk contract types” offer significantly lower factors.

· On the flip side, even without calculating a working capital adjustment, notice how high the Contract Type Risk Profit objective is when NO financing is being provided.

· Since this is a FFP contract, there are no statutory fee limitations that need to be considered

LESSON SUMMARY

TLO - Given a proposal evaluation scenario, calculate a negotiation profit objective using the Weighted Guidelines (WGL) method.

ELO(s) -

· Describe the WGL method

· Describe the key elements for calculating profit and fee objectives with the WGL

· Calculate a profit objective with the WGL

CON 170, Unit 5, Lesson 6 – Profit (Weighted Guidelines) – Page 38

CON 170, Unit 5, Lesson 6 – Profit – Page 21

6

9

Ktr. ProposedGov't Obj.

Mat & Sub K1,535,908$ 1,535,908$ Raw & PP267,849$

Scrap10,714$ Scrap4.00%

AJAX SubK1,257,345$

1,535,908$

Hrs/Year2080

Prog Spt4.40%

FTE-Year 1Year 2Year 3Hrs-Yr 1Yr 2Yr3

Yr 1Yr 2

Calc. Esc.

Yr 3

Calc. Esc.

Eng Lbr1,652,054$ 1,297,145$ Design211416020802080Design57.37$ 58.34$ 1.7%59.22$ 1.5%

Integration416020802080Integration59.17$ 60.16$ 1.7%61.06$ 1.5%

Test020802080Test61.50$ 62.52$ 1.7%63.45$ 1.5%

832062406240

Program Supt366.08274.56274.56Program Supt57.78$ 58.75$ 1.7%59.64$ 1.5%

Eng OH1,683,918$ 1,321,955$ Eng OH101%103%102%

Mfg Lbr285,960$ 181,548$

0300500

Yr 1Yr 2Yr 3Yr 1Yr 2Yr 3Yr 1Yr 2Calc. Esc.Yr 3Calc. Esc.

Fabrication0.002.762.5008281250Fabrication56.9058.11$ 2.1%59.24$ 2.0%

Assembly0.001.161.000348500Assembly55.9657.17$ 2.1%58.29$ 2.0%

Quality0.000.240.23072115Quality53.4554.60$ 2.1%55.66$ 2.0%

Mfg OH588,062$ 363,128$ Mfg OH200.76%200.26%199.86%

ODC8,110$ 8,110$ # TravelorsDestination# DaysDFWSTLDPWSTLDCA

2Dallas/Ft.Worth5Airfare1,450$ 1,250$ Airfare725625

2Washington5PerDiem1,740$ 2,970$ PerDiem174297

Rental Car350$ 350$ Rental Car350350

3,540$ 4,570$

S/T Fact Cost5,754,012$ 4,707,794$

Yr 1Yr 2Yr 3

G & A873,835$ 714,069$ G & A15.00%15.50%15.25%

FCCOM62,279$ 47,763$ FCCOM

Eng2.250%2.250%2.250%

Mfg3.750%3.750%3.750%

G & A0.250%0.250%0.250%

ResourcesRates

Sub Total Eng Hours

Quantity XXXX

Hrs/Unit

total of $278,563 in Blk13insert total of $1,478,693into Blk 15insert total of $1,685,083 into Blk16insert intoBlk 14insert into Blk 17insert into Blk 18insert total of $5,421,863 into Blk 20insert into Blk 32 under Gov't Obj Column