BUS 315 Cost and Price Analysis Week 5 Discussion 1, homework help

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Week 5 Discussion 1

"How to Forecast Costs" Please respond to the following:

  • Infer the main reasons for the high number of government contracting invitations extended for the purpose of obtaining certified cost or pricing data. Speculate on why the invitation is the last item in the gathering of cost and pricing process. Justify your response.
  • Provide two to three (2-3) examples of other strategies to use to obtain cost or pricing data in a more accurate fashion. Predict the manner in which these examples could be utilized to also save the government funds. Provide a rationale for your response.


bus315_w5_p1.pptx
bus315_week_5_scenario_script.docx

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Cost and Price Analysis BUS 315 Obtaining Cost or Pricing Data Topics • To cover this objective, we will discuss the following topics: – Obtaining cost and pricing data – Cost analysis – Cost realism – Obtaining cost information Obtaining Cost and Pricing Data: Preferences • Hierarchical Preferences – Contracting officers not to obtain more information than is necessary for determining the reasonableness of the price or evaluating cost realism – FAR establishes a general order of preference in determining the type of information required Exceptions to Cost or Pricing Data Requirements • Federal acquisition regulations prohibit contracting officers from obtaining cost or pricing data when the agreed upon price is: – Based on adequate price competition – Set by law or regulation Cost Analysis • Definition – The review and evaluation of the separate cost elements and profit in an offer’s or contract’s proposal – Application of judgment to determine how well the proposed costs represent what the cost of the contract should be • Cost analysis techniques and procedures – Evaluation of the effect of the offer’s current practices on future costs – Analysis of the results of any make-or-buy program reviews in evaluating subcontract costs Cost Realism • Cost Realism – The process of independently reviewing and evaluating specific elements of each offer’s proposed cost estimate – To determine whether the estimated proposed cost elements are: • Realistic for the work to be performed • Reflect a clear understanding of the requirements • Consistent with the unique methods of performance and materials described in the offer’s technical proposal Obtaining Cost Information • The solicitation to obtain cost information must specify: – Whether cost or pricing data is required and the format in which it is to be submitted – Whether information other than cost or pricing data is required, if cost or pricing data is not necessary – The necessary pre-award or post-award access to examine the offer’s records • Instructions for preparing a contract pricing proposal – General instructions – Cost elements - royalties, direct labor, and indirect costs – Formats for submission of line item summaries Check Your Understanding Summary • • • • Obtaining cost and pricing data Cost analysis Cost realism Obtaining cost information Slide # Slide 1 BUS315 Week 5 Scenario Script: Obtaining Cost and Pricing Data Topics Narration Scene 1 Semi-large building (VectorCal) and have avatar inserted to represent her entering the building Slide 2 Scene 2 Introduction to the week Takes place in Dominic’s office Dominic: Welcome back again Sally! I hope you had another positive experience with Jake last week! Sally: Thank you Dominic and yes Jake and I went over quite a lot of information last week pertaining to cost classifications used in his department. Dominic: I’m glad to hear you had another great experience and learned even more about several key concepts related to the production field. This week I will be assigning you to work with Luke. Like Jake, Luke is another great resource for information about our company and the industry as a whole. The main theme for this week’s lesson with Luke will revolve around cost and pricing data. Please pay attention to what Luke goes over with you this week as I will be asking you to participate in a project later down the line that uses these concepts. Sally: I’m really excited to get started and will definitely take notes on what Luke goes over. Dominic: I’m glad to hear that, let’s now make our way down to Luke’s office. Dominic then leads Sally down the hallway to Luke’s office Slide 3 Scene 3 Luke’s office to go over key concepts related to cost and pricing data Dominic: Good morning Luke! I have brought Sally here today to work with you on a special cost and pricing project we just got involved with. Can you work with Sally and educate her on the key concepts she needs to learn in order to work on this project? Luke: I would be delighted Dominic! Let me just get a few things in order first then Sally and I will begin our lesson. Dominic: Thank you Luke! I will talk with you later Sally, you are in good hands for now. Sally: Thank you both for your time! Dominic leaves Luke: First off nice to meet you again Sally and I hope you are ready to learn about some exciting topics. You may not know this Sally but my department is where the heart and soul of VectorCal resides! We are the reason VectorCal is so successful, with our painstaking practices of clean environments coupled with high quality detail orientated product staff. Sally: This is fantastic! I definitely noticed when I came into your office that there was a lot going on and I remember seeing several staff members draped in white jumpsuits. Your department must really pay attention to detail and promote cleanliness. Luke: I’m glad you observed this Sally. You are very correct, in my department we pay very close attention to detail and have our staff wearing these white jump suits to promote cleanliness while working on our navigation systems. I bet you didn’t know that our defect rate is less than point zero one percent for all units built. In the past eight years we have tested all of our navigation systems created here and not a single defective navigation system has departed from this floor to our very important customers. Sally: Wow those are really amazing statistics for such a high tech device that is created. I want to thank you again for making time for me this week so I can learn more about obtaining cost and pricing data. Dominic tells me you are the expert in this field at the company. Luke: I like to think of myself as an expert in a few areas here at VectorCal. What would you like to talk about first? Sally: One question I had was, what do you see as a key issue in your department? Luke: That is a great question! I feel that the most recent changes in the federal acquisition regulations significantly restricts the government’s ability to routinely request and obtain cost or pricing data is a large problem my department faces. Sally: I could see why that would be a large problem in your department. What about the fundamental changes from past practice. What is that allow about? Luke: Well there are two fundamental changes from past practices I’d like to share with you. The first is hierarchical preferences discouraging requests for cost or pricing data. You see that federal acquisition regulations concerning pricing policy contains a hierarchical preference for contracting officers to use in obtaining information to determine price reasonableness. This in turn has me spending a good part of my day providing this information to either the government contracting officer or the contracting office at General Atomics Aeronautical Systems. Sally: Very interesting! Can you explain in greater detail how you obtain the cost and pricing data? Luke: Sure! The current policy shows a marked preference for reliance on price analysis techniques, rather than on cost analysis. Contracting officers usually won’t obtain more information than is necessary for determining the reasonableness of the price or evaluating cost realism. Keep in mind that federal acquisition regulations establish a general order of preference in determining the type of information required. First, price is based on adequate price competition. Secondly, information is related to prices. Thirdly, information other than cost or pricing data is needed and lastly cost or pricing data is also required. Sally: That is a lot to remember for this process. I assume you have spreadsheets to track all of these? Luke: Yes, let me show you. Image of a spreadsheet containing data Slide 4 Scene 4 Luke’s office to go over key concepts related to obtaining cost and pricing data Sally: What are some of the other changes that have occurred, with the federal government, in the past few years? Luke: The second fundamental change from past practices is exceptions to cost or pricing data requirements. Please keep in mind that federal acquisition regulations prohibit contracting officers from obtaining cost or pricing data when the agreed upon price meets one of the following conditions: It is based on adequate price competition; It is set by law or regulation; Projector screen showcasing key items It is at or below the simplified acquisition threshold; It is for the acquisition of a commercial item; It is for the exercise of a contract option at the price established at contract award or initial negotiation; or It is used solely to fund overruns or interim billing price adjustments. Sally: That makes a lot of sense now! Are there any other changes? Luke: Why yes there are! The next change has occurred in the cost analysis area. Make a note that when completing either a cost analysis or cost realism analysis, the buyer must have enough information from the contractor to intelligently evaluate some or all of the proposed costs. Sally: Sorry to interrupt but I remember from my Strayer courses that federal acquisition regulations define cost analysis as the review and evaluation of the separate cost elements and profit in an offer’s or contract’s proposal. I also recall that the application of judgment is used to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency. Luke: Very right you are! To add to what you just talked about keep in mind that federal regulations list several cost analysis techniques and procedures. These federal regulations also include an evaluation of the effect on the offer’s current practices involving future costs and analysis of the results of any make-or-buy program reviews in the evaluating subcontract costs. Sally: Quite interesting! I have another question though, how do you obtain all of the cost information you need to meet the government’s requirements? Luke: Fantastic question! Well you see that when cost analysis is necessary to support a decision on price reasonableness or cost realism, the contracting officer may require an offer to submit cost information at any time prior to the close of negotiations. The preferred time for such a request is the original solicitation. Sally: I think I recall the three areas that the solicitation specifies! I know that the first area is whether cost or pricing data is required and the format in which it is to be submitted. The second area is whether information other than cost or pricing data is required, if cost or pricing data is not necessary. The last item deals with the necessity of pre-award or post-award access to examine the offer’s records. Luke: Great response, you know more than I expected! To add to your response, using information other than cost or pricing data means that any type of information that is not required to be certified in accordance with federal acquisition regulations is necessary to determine price reasonableness or cost realism. Keep in mind though that the submission requirements for information other than cost or pricing data are much less demanding than the certified cost or pricing data. Sally what do you recall about the federal acquisition regulations for these concepts? Sally: Well according to federal acquisition regulations, the cost or pricing data are all of the facts that serve as a reference to earlier dates that were agreed upon between the parties that were as close as practicable to the date of the agreement on price. I recall that as a result of this, prudent buyers and sellers would reasonably expect to affect price negotiations significantly. Luke: Great job with that explanation! I have one more thing to add though. The instructions for preparing a contract pricing proposal when cost or pricing data are required will contain sections for general instructions, cost elements, and formats for submission of line item summaries. Make a note that the section for cost elements, for example, specifies various cost elements including royalties, direct labor, and indirect costs that must be broken down in the proposal. Slide 5 Scene 5 Luke’s office to go over key concepts related to obtaining cost and pricing data Sally: How important is all of this information when you create a proposal for a new contract with the government? Luke: That’s a good question. It is extremely important to review and prepare proposals in accordance with the instructions for preparing a contract pricing proposal when the contracting officer specifies that those instructions are to be used. Keep in mind that price proposals are estimates of future costs plus the anticipated profits. However no reasonable person expects contractors to estimate the future exactly. Sally, what do you think these estimates are like? Sally: Well I think these estimates would be a combination of presently known information and judgments used to project expected costs from the presently known information. Luke: How right you are! To add to your response, the proposal should provide enough supplemental information about the cost figures to make it possible for the government to analyze the pricing proposal in detail. For example, we know that the labor costs to produce a specialdesign government product a year ago were two hundred and fifty dollars per unit. We also know that the previous labor cost is based on factual information that appears in the cost accounting records; however the information is now one year old. We can then determine we will have to raise labor pay so that each cost per unit is twohundred-and three dollars. Sally: That makes a lot of sense. You indicated earlier that you do have a rather small defect rate. What happens with the loss of profit from these navigation systems that will not be sent out to our customers? Luke: Well according to federal acquisition regulations, defective pricing exists when any price, including profits or fees, for any purchase action covered by a certificate of current cost or pricing data is increased by any significant amount because the data was not accurate, complete, or current. The action taken when there is reason to believe that submitted cost or pricing data is defective depends on whether the discovery is before or after the contract award. What do you think happens when defective data is detected? Sally: I believe if defective data is detected prior to an agreement on price, it must be pointed out, whether or not the correction of the data would increase or decrease the price. I recall that if the data is determined after the contract award that the data was defective at the date of final cost agreement, the government is entitled to a downward price adjustment, including profit, for significant overpricing caused by the defective data. Luke: Very good! Next I want to talk about the federal acquisition regulations for this concept. Federal acquisition regulations prescribe four clauses relating to cost or pricing data. The first is price reductions for defective costs or pricing data and it is used through contracting by negotiation and it is contemplated that cost or pricing data will be required. The second is price reduction for defective cost or pricing data modifications and it is used when it is contemplated that cost or pricing data will be required for modifications and the first clause is not in the basic contract. Sally what do you think the last two clauses are? Sally: Well based on some classes I took at Strayer I would say that the third clause deals with the subcontractor costs or pricing data and is used in conjunction with the first clause which applies to negotiation. I also think that the final clause will deal with the subcontractor cost or pricing data modifications and will be used in conjunction with the second clause. Am I correct on this? Luke: You are very correct. You did a great job going over these last two clauses. Sally: Luke thank you again for your time this week. I really appreciate everything that you shared with me. Luke: It was my pleasure! Now I would like for you to go through a review activity I have prepared to help you better grasp some of the concepts we covered. Slide 6 Scene 6 Tab interaction that will have audio for each tab. Users will click each item and be greeted with images and narration. Luke: Obtaining cost information involves three main processes. The first is whether cost or pricing data is required and the format in which it is to be submitted. The second is whether information other than cost or pricing data is required, if cost or pricing data is not necessary. The third item involves the necessary pre-award or post-award access to examine the offer’s records. Luke: Cost analysis is the review and evaluation of the separate cost elements and profit in an offer’s or contract’s proposal. The application of judgment then determines how well the propose costs represent what the cost of the contract should be, assuming reasonable economy and efficiency. Luke: Cost or pricing data deals with estimates that are a combination of presently known information and judgments used to project expected costs from the presently known information. Keep in mind that the proposal should provide enough supplemental information about the cost figures to make it possible for the government to analyze the pricing proposal in detail. Luke: Defective data is determined after the contract award determines that the data was defective at the date of final cost agreement. The government however is entitled to a downward price adjustment, including profit, for significant overpricing caused by the defective data. Slide 7 Scene 7 Check Your Understanding Drag and Drop with key concepts from this week’s lesson: Drop and drag match correct summary: • Obtaining Cost Information • Cost Analysis • Cost or Pricing Data • Defective Data Goes with #1 -- “The first is whether cost or pricing data is required and the format in which it is to be submitted. The second is whether information other than cost or pricing data is required, if cost or pricing data is not necessary. Third is the necessary pre-award or postaward access to examine the offer’s records.” Goes with #2 -- “Federal acquisition regulations define cost analysis as the review and evaluation of the separate cost elements and profit in an offer’s or contract’s proposal, and the application of judgment to determine how well the propose costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.” Goes with #3 -- - “These estimates are a combination of presently known information and judgments used to project expected costs from the presently known information. The proposal should provide enough supplemental information about the cost figures to make it possible for the government to analyze the pricing proposal in detail.” Goes with #4 – “If it is determined after contract award that the data was defective at the date of final cost agreement, the government is entitled to a downward price adjustment, including profit, for significant overpricing caused by the defective data.” Slide 8 Scene 8 Conference room with Luke to go over the week’s key points Luke: You did a really good job on the review materials I put together for you. I hope they helped fill in any gaps surrounding the concepts we discussed during our time together. I would now like to summarize everything we discussed while working together. Feel free to add on to anything I say as we go through. Luke: First, we discussed the fact that the most recent changes in federal acquisition regulations significantly restrict the government’s ability to routinely request and obtain cost or pricing data. We saw that contracting officers should not obtain more information than is necessary for determining the reasonableness of the price or evaluating cost realism. Sally: I’ll take this one Luke! I then remember that we identified exceptions to cost or pricing data requirements. I learned that federal acquisition regulations prohibit contracting officers from obtaining cost or pricing data when the agreed upon price meets one of the conditions specified by the FAR. I recall that the conditions we discussed included: If the price is based on adequate price competition, or if it is set by laws or regulations. Luke: Good job Sally! I then went over cost analysis and cost realism. I told you to make note that cost analysis is the review and evaluation of the separate cost elements and profit in an offer’s or contract’s proposal, and the application of judgment to determine how well the propose costs represent what the cost of the contract should be, assuming reasonable economy and efficiency. We then went over cost realism and learned that it is the process of independently reviewing and evaluating specific elements of each offer’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed. Sally: I believe after that we mentioned that the request to submit cost information should be made at any time prior to the close of negotiations, preferably in the original solicitation. I also remember that this request should also specify certain things like the format in which it is to be submitted, and whether information other than the cost or pricing data is required. Jake: I’m glad to see you were taking notes! We later covered price proposals and learned that they are estimates of future costs and profits, and we saw that it is difficult to estimate these prices exactly. I also recommended that you kept in mind that the proposal should provide enough supplemental information about the cost figures to make it possible for the government to analyze the pricing proposal in detail. Sally: I also recall from the lesson that discussed defective pricing. I learned that this exists when any price for any purchase action covered by a certificate of current cost or pricing data is increased by any significant amount because the data was not accurate, complete, or current. I also took some notes explaining that if such defective data is detected prior to agreement on price, it must be pointed out to determine whether or not the correction of the data would increase or decrease the price. Luke: Awesome job Sally! Finally, we concluded our time together by identifying the four clauses related to cost or pricing data and learned when these clauses are used. Sally: Thank you for the review Luke! I learned so much this week and can’t wait to put all of this new found knowledge to work on this project Dominic gave me. It has been a pleasure working with you! Jake: It was a pleasure working with you too! I look forward to working with you again in the future but until then don’t forget to complete your weekly discussion questions based on the key concepts we covered this week. Have a good rest of the day and I will see you soon!
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