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Disclosure

Throughout this post the threshold from FAR 15-404-3©1 is referenced: (1) The contractor shall submit, or cause to be submitted by the subcontractor(s), certified cost or pricing data to the Government for subcontracts that are the lower of either?

(i) $12.5 million or more; or

(ii) Both more than the pertinent certified cost or pricing data threshold and more than 10 percent of the prime contractor?s proposed price, unless the contracting officer believes such submission is unnecessary.

However, throughout this post the above is referenced by stating greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price for writing/reading ease. It is recognized that it is the lower of the two.

Furthermore, it is recognized that a price analysis should be conducted after a cost analysis; however, this post addresses on when a cost analysis should be performed on subcontractor cost.

Summary

The Government is only required, at a minimum, to perform a cost analysis on the prime contractor?s subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price. The FAR requires that a cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data is required. Because the prime contractor is only required to submit cost or pricing data of its subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price, it is the burden of the prime contractor and the Government to conduct a cost analysis of these subcontractors; however, it is also the burden of the prime contractor to conduct a cost analysis for all of its subcontractors whose proposed cost are above the cost or pricing threshold. Because the prime contractor can?t always obtain cost or pricing data from its subcontractors, the prime contractor can request an assist or field audit. PGI 215.404-3 states the Contracting Officer (CO) should ?consider the need? and ?whether providing audit or field pricing assistance will serve a valid Government interest.? The Government has the right if the CO determines there is no need for an assist or field audit and/or the audit or field pricing assistance is not in the best interest of the Government to forego a cost analysis of the subcontractors whose proposed cost are above the certified cost or pricing data threshold but less than $12.5M or less than 10 percent of the prime contractor?s proposed price. Therefore, the Government, at a minimum, is only required by the FAR and DFARS to conduct a cost analysis on the prime contractor?s subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price.

Backup Information

The Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulations System (DFARS) provides guidance in determining if the Government should conduct, at a minimum, a price analysis or a cost analysis of the prime contractor?s proposed subcontractor cost. As stated in FAR 15.404-1, ?The complexity and circumstances of each acquisition should determine the level of detail of the analysis required.? This paper recognizes that each acquisition?s complexity and circumstances should be considered; however, the Government?s determination of needed analysis for the prime contractor?s proposed subcontractor cost in combination with the complexity and circumstances of a specific acquisition stems from FAR 15.404, Subcontractor pricing considerations. FAR 15.404-3(B)1 requires the prime contractor or subcontractor to conduct the appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices. FAR 15.404-3© requires a prime contractor, that is required to submit certified cost or pricing data, to obtain and analyze certified cost or pricing data if their subcontractor is expected to exceed the certified cost or pricing threshold, withstanding any exceptions in 15.403-1(:). Furthermore, the prime contractor is only required per 15.404-3 to provide, with their cost proposal, cost or pricing data for its subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price. Therefore, the Government, at a minimum, is only required by the FAR and DFARS to conduct a cost analysis on the prime?s subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price.

A price analysis is an accepted analytical technique for evaluating the reasonableness of the prime contractor?s proposed subcontractor?s cost when cost or pricing data is not required. FAR 15.404-1 states, ?The contracting officer is responsible for evaluating the reasonableness of the offered prices. The analytical techniques and procedures described in this subsection [price analysis, cost analysis, cost realism, technical analysis, unit prices and unbalanced pricing] may be used, singly or in combination with others, to ensure that the final price is fair and reasonable.? Because 15.404-3 only requires the prime contractor to provide, to the Government, with their cost proposal cost or pricing data for its subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price, at a minimum only a price analysis is required to be performed. This is because price analysis shall be used when certified cost or pricing data is not required and cost analysis shall be used when certified cost or pricing data is required. The cost or pricing data required to the Government is for only those subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price.

Although price analysis is only required for subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price, this assumes the prime contractor is adequately fulfilling their requirements of 15.404-3(B)1 and 15.404-3©:

? 15.404-3(B)1: The prime contractor or subcontractor shall? Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices.

? 15-404-3©: Any contractor or subcontractor that is required to submit certified cost or pricing data also shall obtain and analyze certified cost or pricing data before awarding any subcontract, purchase order, or modification expected to exceed the certified cost or pricing data threshold, unless an exception in 15.403-1(B) applies to that action.

Due to issues associated with subcontractors providing their company proprietary information to the prime contractor, in certain circumstances, the prime contractor is unable to adequately obtain and conduct a cost analysis for its subcontractors whose proposed price is above the cost or pricing data threshold. Therefore, if the Government only conducted a price analysis for subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price, the appropriate required analysis is not being conducted and the risk to the Government has not been appropriately evaluated or analyzed. The amount and/or risk to the Government would/could vary based on the specific proposed cost structure of the prime contractor; however, could be as high as approximately 70 percent. However, a price analysis still meets the minimum analytical requirements of the FAR and DFARS when the prime contractor is unable to obtain cost or pricing data from their subcontractors whose proposed cost are above the cost and pricing threshold but under $12.5M or 10 percent of their proposed price because PGI 215.404-3 recognizes situations where prime contractors are unable to obtain cost or pricing data from their subcontractors. PGI 215.404-3 states the following:

1. The contracting officer should consider the need for field pricing analysis and evaluation of lower-tier subcontractor proposals, and assistance to prime contractors when they are being denied access to lower-tier subcontractor records.

2. When obtaining field pricing assistance on a prime contractor?s proposal, the contracting officer should request audit or field pricing assistance to analyze and evaluate the proposal of a subcontractor at any tier (notwithstanding availability of data or analyses performed by the prime contractor) if the contracting officer believes that such assistance is necessary to ensure the reasonableness of the total proposed price. Such assistance may be appropriate when, for example

1. There is a business relationship between the contractor and the subcontractor not conducive to independence and objectivity;

2. The contractor is a sole source supplier and the subcontract costs represent a substantial part of the contract cost;

3. The contractor has been denied access to the subcontractor?s records;

4. The contracting officer determines that, because of factors such as the size of the proposed subcontract price, audit or field pricing assistance for a subcontract at any tier is critical to a fully detailed analysis of the prime contractor?s proposal;

5. The contractor or higher-tier subcontractor has been cited for having significant estimating system deficiencies in the area of subcontract pricing, especially the failure to perform adequate cost analyses of proposed subcontract costs or to perform subcontract analyses prior to negotiation of the prime contract with the Government; or

6. A lower-tier subcontractor has been cited as having significant estimating system deficiencies.

3. It may be appropriate for the contracting officer or the ACO to provide assistance to a contractor or subcontractor at any tier, when the contractor or higher-tier subcontractor has been denied access to a subcontractor?s records in carrying out the responsibilities at FAR 15.404-3 to conduct price or cost analysis to determine the reasonableness of proposed subcontract prices. Under these circumstances, the contracting officer or the ACO should consider whether providing audit or field pricing assistance will serve a valid Government interest.

Though FAR requires the prime contractor to conduct a cost analysis of their subcontractors when cost or pricing data is required for that subcontractor. Because this is not practical in all situations, the FAR permits prime contractors to request from the Government an assist audit. Furthermore, PGI provides the Government Contracting Office (CO) guidance when this occurs. As stated in the 3 points above, the CO should ?consider the need? and ?whether providing audit or field pricing assistance will serve a valid Government interest.? The following points substantiate the CO from electing to not provide audit or field pricing assistance for the prime contractor or conducting a cost analysis independent of the prime contractor and only conducting a price analysis of the aforementioned subcontractor costs:

1. Because in a sole source environment, the risk to the Government is that the prime contractor?s cost proposal is more likely overestimated compared to if the prime contractor?s cost proposal was submitted in the competitive environment, where the pressures of the competitive environment would have existed;

2. Subcontractors, whether formally or informally are competing against each other for work share

3. Cost analyst focuses on how realistic and reasonable the proposed cost are for the particular subcontractor; the FAR states after a cost analysis is conducted a, ?Price analysis should be used to verify that the overall price offered is fair and reasonable.?

4. FAR 15.403-1©iii states, ?Price analysis clearly demonstrates that the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in market conditions, economic conditions, quantities, or terms and conditions under contracts that resulted from adequate price competition.

Therefore, even for the evaluation of proposed subcontractor cost which can be approximately 70% of the prime contractor?s proposed price, the Government, at a minimum, is only required by the FAR and DFARS to conduct a cost analysis on the prime?s subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price if:

The CO determines that it is in the best interest of the Government to not provide audit or field pricing assistance for the prime contractor or conduct a cost analysis independent of the prime contractor because of the cost, time and effort associated for the Government, the prime contractor and the applicable subcontractors to produce cost and pricing data, obtain cost and pricing data and conduct a cost analysis evaluation. Furthermore, if the results of a cost analysis are believed not to result in a significant or materially different Government position than if a cost analysis was conducted by the prime and/or an independent cost analysis was conducted by the Government.

In conclusion, the Government, at a minimum, is only required by FAR and DFARS to conduct a cost analysis on the prime contractor?s subcontractors whose proposed costs are equal to or greater than $12.5M or equal to or greater than 10 percent of the prime contractor?s proposed price. The required minimum Government analysis of the proposed subcontractor cost as presented in this paper is that, the minimum analysis required. At any point, the same requirements setting the minimum analysis, allows as needed, to exceed the minimums in determining the reasonableness of the proposed cost/price.

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First, a suggestion to overcome this forum's quirky handling of parentheses and emoticons: Put spaces after a leading parenthesis and before a trailing parenthesis so the letters between the parentheses are not converted to emoticons or a copyright symbol. There are other ways, but this low-tech approach works for me.

IMHO you have overcomplicated this, to the point that the question is not clear. Here is what I think is one of the answers.

After 15.404-3( a ) talks about how the contracting officer must consider what the prime or higher tier sub has done to establish the fairness and reasonableness of the price of the subcontract action, the last sentence reads, "This does not relieve the contracting officer from the responsibility to analyze the contractor's submission, including subcontractor's cost or pricing data." OK, so we have established that the Government must perform some form of analysis of the subcontractor's proposal.

Continuing to 15.404-3( c ) ( 1 ), "The contractor shall submit, or cause to be submitted by the subcontractor(s), cost or pricing data to the Government for subcontracts that are the lower of either -- ..." etc. Now we have established when subcontractor cost or pricing data must be submitted to the Government.

Looking at 15.404-1( a ) (3), "Cost analysis shall be used to evaluate the reasonableness of individual cost elements when cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable." At this point the FAR has told us what form of analysis is needed. It has to be cost analysis, not just price analysis, if cost or pricing data are required. The level of detail of the cost analysis is a matter for judgment, but it has to be more detailed than broad-brush price analysis.

One area of confusion in the post is the attempt to read FAR Subpart 15.4 as requiring the prime contractor to do anything. Since I got into Government contracting in 1974, I have yet to see FAR Subpart 15.4 incorporated by reference into a contract. The parts of the FAR that apply to contractors are the parts within the four corners of the contract, usually clauses from Part 52. Yes, this includes portions of FAR Subpart 15.4, but only those portions called out in the applicable clauses, 52.215-12 and -13. The references in those clauses include the threshold for submission of cost or pricing data at FAR 15.403-4, exceptions under 15.403-1, and the certification form in 15.406-2. The rest of FAR Subpart 15.4 is guidance to the Government that is arguably not binding on contractors or subcontractors.

The clauses are fairly clear that cost or pricing data are required from the sub to the prime (or higher tier sub) for any subcontract action over $700,000 (the current TINA threshold), unless an exception applies (also note that a couple of key exceptions start "When the contracting officer determines that..." which means the prime has a duty to get a reading from the contracting officer before assuming it's OK to rely on the prime's determination that there was adequate price competition or prices were set by law or regulation).

In summary, if the subcontract action is over $700,000 and no exceptions apply, subcontractor cost or pricing data are required, and cost analysis is required by the prime. If the value of the subcontract action meets the higher thresholds in 15.404-3( c )( 1 ), cost analysis of subcontractor cost or pricing data is also required by the Government. Presumably the Subcontracts clause from 52.244-2 would kick in here as well, depending on how its blanks are filled in.

Oh, and if the prime or higher tier sub cannot get cost or pricng data from the lower tier sub, a unilateral change order to direct the work, with no prospect of payment until cost or pricing data required by the clause (and the statute), are usually effective motivators.

Maybe some older and wiser than I have a different view, but that's how it has always looked to me.

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