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!
Purchase answer to see full
attachment