Is cost analysis required for competitive CR/CPFF type contracts?

[Bluewave]

One of the main concerns that has surfaced is that negotiators are expending too much time and energy on cost analysis on competitive cost reimbursement/CPFF type contracts vs. cost realism. The attached table developed by NIH provides a quick reference of the requirement for cost analysis and cost realism. The table clearly distinguishes on the first line, "Analysis Must be performed on all cost reimbursement contracts" and marks "YES" for cost realism and "NO" for cost analysis.

We completely understand that we must review the individual line items and that this is necessary for realism.

Question: What we are not clear about is whether or not we need to conduct a "cost reasonableness analysis" when we have adequate competition? Perhaps this is what NIH was trying to communicate?

The FAR triggers "cost analysis" for for certified cost and pricing 15.404-1 (a)(3) for reasonableness. The FAR triggers "cost analysis" again when price cannot be determined through price analysis alone (15.404-1(a)(4).

We frequently have cases where we have adequate cost competition without the need for certified cost and pricing data and negotiators are trying do "cost reasonableness" with cost analysis method for memory sticks on a $100 million program. The competition alone should take care of cost reasonableness without the need for cost analysis? Yes?

Excerpts from research: The Government Accountability Office (GAO) refers to cost analysis for the purpose of determining a fair and reasonable price as “cost reasonableness analysis”. However, in a competitive environment, cost reasonableness analysis is seldom needed to determine a fair and reasonable price-this can be accomplished through price analysis alone if adequate price competition has been obtained per FAR 15.403-1©(1), by merely comparing the overall proposed prices received in response to the solicitation pursuant to FAR 15.404-1(a)(2)(i).

Question: While we have labor, other direct costs, and fee; it's just a comparison of the overall price and not these individual cost line items -- correct with a competitive situation?

Thanks!

[Guest Vern Edwards]

The NIH table is a mess and reflects some fundamental misunderstandings.

Cost analysis is a method that entails looking at individual elements of cost. There is no single way to do cost analysis and every cost analysis is tailored to the acquisition. In other words, doing a cost analysis does not necessarily entail looking at each and every element of cost or looking at any individual element in excruciating detail. In short, the term "cost analysis" is not a label for any particular procedure. It is a name for a certain class of procedures.

When one must determine the realism of a proposed estimated cost, one usually must consider individual elements of cost, such as materials, labor, or G&A. However, one need not look at every individual element or look at any particular element in excruciating detail. The amount and depth of analysis involved in determining the realism of a particular cost proposal depends on the acquisition.

Thus, it does not make sense to talk in terms of doing a cost analysis or a cost realism analysis, because one usually does cost realism analysis by doing cost analysis. See FAR 15.404-1( c), Cost Analysis, subparagraph (1):

(1) Cost analysis is the review and evaluation of any separate cost elements and profit or fee in an offeror's or contractor's proposal, as needed to determine a fair and reasonable price or to determine cost realism....

Now compare that to FAR 15.404-1(d), Cost Realism Analysis, subparagraph (1):

(1) Cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror's proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed....

So it is not safe to conclude that there is not a requirement for doing cost analysis for a competitive CR contract and that you just need to do cost realism analysis. You must do a cost realism analysis, and in order to do that you usually have to do a cost analysis. I say "usually," because there are very limited circumstances in which cost realism analysis can be done without cost analysis. See Cibinic, Nash, and O'Brien, Competitive Negotiation: The Source Selection Process, 3d ed.

Also, your chart is wrong to say that you never get cost or pricing data for cost realism analysis. See FAR 15.403-3(a)(1)(ii). You don't have to get certified cost or pricing data, but you should get non-certified cost or pricing data. (FAR now makes a distinction between cost or pricing data and certified cost or pricing data. See FAR 2.101.) In fact, I would say that the NIH chart is wrong in several ways. Someone should sit down and read FAR 15.404 carefully.

[Retreadfed]

Bluewave, a curiosity question: if you do only a cost realism analysis, how are you determining that you are not agreeing to include unallowable costs in the estimated cost of the contract? Hopefully, the unallowable costs would not be reimbursed, but the fixed fee likely would be computed, in part, using those unallowable costs.

[Bluewave]

Thanks for your response! I further clarified the question by editing my original post.

We completely understand that we must review the individual line items for cost realism also addressing FAR part 31 for allowing costs.

Revised Question: What we are not clear about is whether or not we need to conduct a "cost reasonableness analysis" when we have adequate competition? The FAR triggers "cost analysis" for for certified cost and pricing 15.404-1 (a)(3) for reasonableness. The FAR triggers "cost analysis" again when price cannot be determined through price analysis alone (15.404-1(a)(4). We are concluding that "cost reasonableness" may be established through adequate competition. Yes?

[Guest Vern Edwards]

Your question seems to be asking for a response based on what the FAR requires of you. If that's what you want, then read FAR 15.404 for yourself and decide. You can read it, can't you? If you are asking for an opinion based on professional judgment, then the answer is complicated and will take some time to write. In light of your apparent interest in what the FAR requires, I won't take the time to give you an opinion based on my professional judgment.

[curiousgeorge]

Vern,

I'd be interested in hearing your professional opinion on this topic given your extensive experience with federal contracting. We are facing resource challenges at my Agency and we are looking to reduce lead time but yet do a quality analysis in a competitive environment.

Thanks!