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Patrick Mathern

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Posts posted by Patrick Mathern

  1. 1 hour ago, VipinOwl said:

    It is my understanding that when awarding a CPFF prime contract, even given adequate price competition, cost realism must be performed, and as such cost or pricing data must be obtained, so price analysis alone will not suffice.

    Depends on what you mean by "price analysis."  If you consider analysis of other than certified cost or pricing data to fall under cost analysis, then so be it...you're conducting cost analysis instead of price analysis.  Just note that you're NOT required to obtain certified cost or pricing data and conduct a full FAR 15 compliant cost analysis.

    Cost Realism is very different from Cost Analysis.

  2. You’ve mentioned cost analysis here - if you’ve documented adequate competition, per FAR 15.403-1, you alleviate the certification requirements. The contracting officer wouldn’t be required to do a cost analysis unless the competition is somehow determined inadequate. 

    Your cost reimbursable contract type will subject you and your sub to accounting system adequacy questions. That’s potentially a much bigger issue than price reasonableness, although the two go hand in hand. 

  3. The only reason I can surmise that the COO would want to talk Contribution Margin is that you're currently heavy on indirect (fixed) costs.  If you have had a sudden downturn in business or if you missed winning a large contract that was already figured into annual revenue, then the COO is going to be very concerned with covering that shortfall.  H2H is correct in the defective pricing comment, but based on what you're saying, I'd guess (and yes, it's a complete guess) that your COO is covering shortfall rather than building a windfall.

    As for the difference in Gross versus Contribution, this site does a good job of explaining it:  https://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-contribution-margin.asp

    An excerpt:  "In comparison with gross profit margin, [contribution margin] is a per-item profit metric, as opposed to the total profit metric given by gross margin." 

  4. I believe the point that Retread's making here (and in which I'm also interested) is as follows: 

    Assume the Prime is exempt from submitting certified cost or pricing data due to competition at the Prime Contract level.  Now assume that the Prime has a subcontract on this same prime contract that exceeds the TCOPD threshold and is not subject to FAR exemptions.

    What will the CPSR team expect to see if they pull this file down the line?  A cost analysis and cost or pricing data cert from the sub?

  5. Just took a look at ERI Salary Assessor - it doesn't appear to me that it has any insight into markup.  This appears to just be salary...please correct me if I'm misreading this, general_correspondence.  SpendLogic is (still) the only tool I know of that provides automated bottoms-up analysis of rates including markup (indirects and profit).

    1 hour ago, general_correspondence said:

    I'm aware GSA rates are not always reliable to stand audit, but as someone pointed out in this forum some years ago, price reasonableness concerns itself whether the price you pay is too high. Write your price analysis under that premise, and blend a comment or two about the GSA schedule if the GSA is paying a comparable price its hard to argue the price is too high, or unreasonable for prudent  people to pay.  

    Also, I disagree with this comment regarding using GSA.  The problem with GSA is that it DOESN'T show what GSA pays...

  6. I've seen the DCMA reject the use of GSA in a CPSR and issue findings.  Most large companies know this and have notes in their procedures that GSA data cannot be used as a basis for price analysis.  CALC is a great tool when used in conjunction with other methods, but relying on it or basing a price analysis on the data is inadvisable from an audit perspective.

    I probably don't have to say this, and I don't believe general_correspondence mean it to be used as such, but applying a random multiplier is also something that will get you dinged by the DCMA and DCAA.

     

    General_Correspondence:  What is ERS?  Can you provide a link?

  7. Posting back and forth always loses something in translation, so thanks for being patient. 

    I'm still missing something here.  How was your client "approved" to do the work?  Do they have written documentation from someone at the Prime that carries contractual authority?  If so, and if they worked for 90 days based on that approval, then there doesn't appear to be an issue with getting paid for it.  Or does the "authorization" refer to the Gov authorizing the Prime?

  8. 53 minutes ago, primealpha said:

    "My client has signed an FFP LOE contract with a prime who is on a CP contract."  

    "Apparently, there were issues on the task order that required a modification, after my client had already been approved to work and working for almost 90 days..."

    Based on the above quotations, I don't understand your final point of "not signing and [then] not getting paid."  It appears that they already have a contract with the Prime.  Since it's LOE, there's no deliverable required other than their effort toward a specified objective.  I'd recommend getting solid on their existing contract and then going from there.

    If they don't have a contract with the Prime, what was the "approval" they were working under?

  9. H2H is correct. To figure this out for your company, you first need to know how the rate was originally calculated. You must then apply that rate the exact same way. 

     

    If that satisfies your question, stop reading here. If you want to see this concept in action, here you go...

     

    Imagine a company with annual labor costs of $500K (we will use this as a base for overheads in this example).

     

    They have fringe of $150K, overhead cost of $50K and G&A of $25K.  In a perfect world, they will have forecast revenues such that they recoup exactly $725K at the end of the year (this is the sum total of all their cost, but excludes profit for this example).

     

    Fringe = $150/$500 = 30%

    Overhead = $50/($150 + $500) = 7.69%

    G&A = $25/($50 + $150 + $500) = 3.57%

     

    Assume they nail their forecast labor cost of $500K. 

     

    Wrap Option 1

    (1+Fringe Rate + OH Rate) * (1+G&A Rate)

    = 500 *(1+0.3 + .0769) * (1+.0357)= 713

    Since it’s not equal to $725, we know this is wrong.  Adding fringe and overhead rates in this way suggests the rates are both only applied to direct cost. OH should be applied to direct plus fringe. 

     

    Wrap Option 2

    1 + Fringe Rate + OH Rate + G&A Rate

    500*(1 + 0.3 + .0769 + .0357)=706

    Wrong again. This implies all rates are applied only against direct. Again a violation of how they were calculated. 

     

    Wrap Option 3

    (1+ Fringe Rate)*(1+ OH Rate)*(1+G&A Rate)

    = 500*(1+ 0.3)*(1+ .0769)*(1+.0357) =725

    Fringe is applied against direct. OH against fringe plus direct. G&A against fringe plus direct plus OH. This is how they were calculated to create the rate, so this is correct. 

     

    Now for the kicker...

     

    Let’s re-calculate our rates using a different method. Same cost assumptions.  We will change the Overhead rate in alignment with Wrap Option 1:

     

    Fringe = $150/$500 = 30%

    Overhead = $50/$500 = 10%

    G&A = $25/($50 + $150 + $500) = 3.57%

     

    Now we re-apply using the new rates....

     

    Wrap Option 1

    (1+Fringe Rate + OH Rate) * (1+G&A Rate)

    = 500 *(1+0.3 + .1) * (1+.0357)= 725 

     

    We could do the same thing for Wrap Option 2. This is why H2H says that you need to understand how the rate is calculated in order to determine the “right” way to do it.

     

    HAVING SAID THAT...Wrap Option 3 is most common because of a concept that says indirect costs should be tied to the direct costs which they’re related to. 

     

    But that’s a whole other post...

     
  10. Obligation?  No, but be prepared for the consequences if you decide not to play ball (i.e. contentious negotiations, difficulty in other contracting issues, etc.)

    If you have a definitized agreement (Purchase Order most likely) that is a contractual commitment including price, it appears that perhaps your Prime is a bit upside-down.  You have no obligation...unless you want to help your Prime out of a tough spot.  

    On the other hand, consider that this request happens prior to PO placement.

    All of a sudden this becomes an opportunity to weigh in on a process that is too-often a one-sided conversation.  Think of it this way:  your Prime has determined that you are NOT commercial and that price reasonableness cannot be determined without Other Than Certified Cost or Pricing Data.  Yuck!  Show them why you're commercial and give them several market comparables with rationale for any adjustments, to explain why your price is reasonable.

    All of a sudden, you've made their lives easier, which means you've made life easier for yourselves.  They still have an obligation to write their price analysis, but you've now framed the conversation with objective facts.

  11. I think I'm suffering from the same lack of information that Vern is, Corduroy...maybe you can shine just a little more light on the situation.  Which of these applies in your case (in line with Joel's comment above):

    • If the Government is saying that they expect 1,920 hours of work, then your client will need to show 1,920 hours...not 1,860 hours plus 60 hours of vacation.  Reducing the rate to $48.44 seems like it will cause a hit to their profit.
    • If the Government is saying that they expect one devoted head and they're willing to pay their salary for a year, then your $93K argument seems to hold.
  12. Hey there Corduroy,

    From the contractor's perspective, think of it this way:  if you had an FPLOE task that was estimated at 1,920 hours (assume that's accurate) and you responded with a rate and estimate of 1,860 hours, explaining that vacations and sick leave were the reason that 1,860 was appropriate is not sufficient.  You still have 1,920 hours of work to complete.  Based on this explanation, the government would always adjust upward.  However, if your proposal stated that due to the skill mix and your unique approach, you believe you could save 140 hours, then you may have success in reducing the estimated hours.

    My thinking on why the government makes sense of this is that in an FPLOE, what really matters from a competition standpoint is the bill rate.  The government's independent estimate has determined that 1,920 hours will be required based on the work and skill levels required.  Multiplying these hours times each bid rate results in their budget estimate.  In their opinion, this is the only way to fairly evaluate potential bidders.  

    As for billings, I'm not following what you're saying.  Your proposed bill rate will be the rate at which are paid, not the (rate * 1920/12) result. I don't understand the overbilling comment.  The adjustment made by the government is just for comparison purposes.  It does not change what you'll be paid.

  13. Hi Brian -

    I can give you my experience in helping primes work with subs.  If you're an agency CO, then someone else may be able to provide better information.

    Document, document, document.

    1.  Consult your company's policies and procedures.  What I have below will still ding you in a CPSR if it's not aligned with your company's P&P's.

    2.  Make sure your commercial item determination and non-competitive source justifications are ROCK SOLID.  At $850K, this is going to set off alarm bells.

    3.  Assuming you have a solid CID, look again at price analysis.  Although this was last purchased in the 90's, are there current versions of the item to which price could be compared?

    4.  If the answer to 2 is no, proceed from your current position by communicating your findings with the supplier.  Show them what you came up with and ask them what you're missing.  It's up to them to support the price they're offering.  You'll have the most success with this approach if you come to the table with objective, verifiable, fact-based data such as...

    • Rates:  Use salary.com or calc.gsa.gov and add a % for overheads and profit
    • Hours:  Get expert opinions that break tasks down to the lowest level possible.  Use engineers if possible, but regardless of whose opinion it is, provide support for WHY those hours were determined reasonable. 

    You want to give them something to argue against.  As they provide additional facts, your price should come up.

    5.  If you get to the point where you have no other choice but to place the contract and cannot determine the price reasonable, then you need to document your efforts.  Include a very thorough negotiation memorandum that clearly shows the effort you put into getting a reasonable price from the supplier.

    If you're a Prime with a certified procurement system, audit teams are going to scrutinize this package closely, so make sure your documentation is top-notch.

  14. I agree with Joel - in certain circumstances this makes sense.  Specifically, when the contract includes a direct requirement, then these can be direct charges (think FFP follow-on contracts, for example).  See FAR 31.205-18(a) and CAS 9904.402-61(c) for more info.

    However, your post (and response) actually deal with the purchasing function, not proposal prep.

    In that case, as Neil notes, you REALLY have to understand the supplier's accounting practices.  If they are organized such that purchasing is a direct charge function, there's nothing wrong with that if it's done properly.  If they have a Disclosure Statement, start there.  If not, run an audit program focused on allocability.  I know that at least one of the top 5 defense contractors is organized this way.

    In general, this isn't an "unallowable" method of collecting and charging for Purchasing labor.

  15. I've seen this before.  Let me pose a scenario for you:

    You have a requirement to buy 100 boxes of Tide detergent.  On Amazon, there are 5 sellers of the product you need.  They all vary by 1-2% except for Seller 5, who has a price that is 10% lower than everyone else.  Your due diligence leads you to question whether this is the same item and you discover that yes, it is.  Seller 5 explains that they receive favorable pricing from Tide because they buy it by the truckload.

    Do you have competition?

    Let's modify it slightly and say that all sellers 1-5 price the product essentially the same.  Does this change the answer?  Why?

    In my book, the punchline here is that if you have an active distribution marketplace for an item, then price is set by the laws of supply and demand.  If you notified the bidders that this would be awarded competitively, then they will be motivated to put their best foot forward and meet the requirements of adequate competition.

    The caveat:  I have seen a case where a manufacturer tried to sell through two "distributors" in order to skirt TINA.  In this case, there was no "active marketplace" responsible for setting price.  Price was dictated by the manufacturer and zero sales had occurred.  Distribution model was a sham...didn't qualify as competition.

  16. I have a client that is hiring a sales agent in a foreign country.  This agent's territory will likely include contracts subject to FMF rules, sales will be direct commercial.  This particular client compensates all of their sales agents with a commission plan.  I've never worked with FMF before - it appears that commissions are allowed, but they have to be disclosed, they cannot be in violation of Anti-Kickback regulations, and it appears that commissions may need to be split out and paid by the Purchaser's national funds.

    My questions:

    1. I'd like to wrap my head around this better.  What is the purpose of the FMF rules on commissions/contingent fees?

    2. What does the last provision (paid by Purchaser's national funds) mean?

    3. Where can I find the source document that discusses FMF commission requirements from a contractor's perspective?

    Thanks in advance!

    Patrick

  17. Hi Jennifer -

    You will get a far more complete answer from some of the other folks in this forum, I focus my efforts on cost and price analysis.  From that perspective, you will want to determine whether what you're buying qualifies as a commercial item/service (as defined in FAR 2.101).  If it does prove to be commercial, it will simplify your flowdowns and possibly the cost/price analysis requirements.

    If it's not commercial, you'll want to know if your subcontract will be >$750K.  This will have implications for cost vs. price analysis.

    Questions to you then:  does this qualify as a commercial item/service and is it >$750K?

    Patrick

  18. Hi Vern -

    I think so, but help me walk through this.  That citation references FAR 15.408 which references Table 15-2.  In Table 15-2, it notes that "The requirement for submission of certified cost or pricing data continues up to the time of agreement on price..." Therefore, if the Prime has already agreed to price with the Customer, Certification does not apply.

    Since Certification applies between Customer and Prime (then waterfalls through the applicable subs,) alleviating the Cert at the Prime would then alleviate any benefit at the sub level.

  19. If price negotiations between the Prime and customer are not yet complete, certification is still required.  However, if the prime has already negotiated and received award, then certification by the sub should not be required.

    POST-SUBMITTAL EDIT:  Based on what Vern has posted below, I no longer hold this belief.  If 52.215-12 is included in the Prime flowdowns, cert at the sub level is required regardless of timing.

  20. 1 hour ago, DGJDKO said:

     Thank you... that's actually usefulto know. But my challenge is this: since we don't have privity of contract with the subcontractor; I.e. relationship is between the prime and the sub;  aren't there factors that the prime may be considering that we have no reason to know? Couldn't there be lots of valid reasons why a prime considers a fee reasonable but inure to no direct benefit to the government?

    in my mind the weighted guidelines assume a direct contractual relationship ,  making it a less valuable tool for a subcontract.  And does the primes analysis/rationale for the subcontracter  Play any role in evaluating the fee? It seems to me that would be the primary point of analysis – with the  weighted guidelines as a supplement. 

    Have you ever heard this point of view in your  15 years?

    Absolutely - here's the deal with profit/fee (as long as you're calculating as a % of cost, we're basically talking about the same thing):  It's the one area of a subcontractor's proposal that doesn't require any support or substantiation.  A sub can propose an exorbitant profit/fee rate and there's no requirement that they explain it to you.  Same goes between the Prime and the government.  Where things get sticky is when the Prime sets forth an opinion of reasonableness in a cost/price analysis.  If that opinion is not supported with a systematic method of evaluation, then it's going to be subject to challenge.

    In other words, you can analyze and support profit in any way you see fit.  It requires no additional information from the sub and there's no requirement that you have to use the Weighted Guidelines.  It just so happens that the Weighted Guidelines is a systematic approach that is generally accepted in the industry.

    I echo Neil's question above - what is your role?  Is this a TCOPD (formerly "TINA") procurement?

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