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Patrick Mathern

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Posts posted by Patrick Mathern

  1. The DCMA CIG Handbook does cite "uses same production line as commercial items" as support for an assertion of commerciality, but it is not an acceptable basis in and of itself for claiming commerciality.

    Your first big hurdle is to be able to draw a connection between the item and a commercial market for this or similar items.  If you can't do this, the likelihood of withstanding scrutiny of "the customarily used by non-government..." part of the definition is extremely low and it's likely to be rejected as invalid.  The supplier should walk through each phrase of the definition they're claiming and provide support on how they meet each.

  2. If your Prime is FFP, use the same with your subs and leave it to them to figure out their indirects and profit.  Your budget is what it is...they can either do the job for that price or they can't.  Their rates are irrelevant as long as they provide the contractual deliverable.  No need to get hung up on "mandating" rates...they are under no obligation to do the job if it loses money for them. 

  3. So the short answer is "likely yes."

    If you determine that it's subject to Certified Cost or Pricing Data (exceeds $2M and is not otherwise exempt based on flowdown or exemptions listed in 15.403-1 shown here) then you'll need to write a cost analysis.  That analysis covers each cost element separately as well as profit.

    Taking it one step further, if you need training on cost analysis or want to outsource this effort, this is something we do regularly on behalf of DoD Primes and would be happy to do so for your company as well.

    Patrick

     

  4. Question:  Why would you WANT to reduce G&A?

    If the answer is that you want your price to be competitive with other bidders, then simply reduce your fee.  Avoid screwing around with how you collect and report your costs.  G&A costs are real dollars.  Reducing the G&A rate means those costs have to be covered somewhere else.

    Also, if this Prime is eligible for cost-reimbursable work, it likely means that they have an accounting system that has been determined adequate.  You don't want to mess that up by playing games with costs.

     

  5. Hey there Gonzo -

    If I'm understanding correctly, you're looking to get to the point where you show up on the radar...you haven't been notified by the DCMA of a CPSR yet, correct?

    If that's the case, don't spend your time shoring up what's already been done, just fix things going forward.  CPSR's typically cover a 12 month period that ends as close as is practical to the date the CPSR happens.

    Time estimates are difficult to determine.  You could burn 500 hours just on policies and procedures if you're starting from scratch.  In a nutshell, you need to shore up your policies and procedures, implement new templates, and then train everyone on all of the above.  Your incremental effort will lie in the policy/procedure/template development as well as training and implementation time.

    My recommendation:  find a consultant that can sell you pre-packaged policies and procedures, then use in-house labor to implement tools that will get your folks up to speed (plug SpendLogic *here*) and train to the procedures and tools that you've implemented.

  6. Lots of good detail in the replies here. For the short and sweet (and actionable) version, here you go:

    The only way to “justify” this in a PAR is to get additional fact-based information from the supplier and to include these in the price analysis. It’s common to be directed by management to justify a price...but it’s hard to do. I’ve been there and don’t envy you.

    If these costs truly turn out to be contingency costs (which amounts to profit if they don’t come to fruition,) you’re going to have findings if this package is pulled in a CPSR. In this case, your best bet is to have a price adjustment clause in both your negotiated subcontract as well as your negotiated Prime contract. 

    One last option if these are contingent costs is to write the PAR on the price you truly believe to be fair and reasonable (excluding contingent costs) and then having Management provide an authorization to agree to the price offered. Cite it as “best obtainable” and get a Management signature from someone with sufficient authority to make this call. It’s a CYA game at that point, but will generally be accepted in a CPSR. 

    Patrick

  7. 1 minute ago, joel hoffman said:

    A cost realism analysis is discussed under 15.404-1 (c) as one form of COST analysis. 

    Take another look, Joel.  While it's discussed in 15.404-1(c), it's actually set forth specifically in 15.404-1(d) and is separate from either cost or price analysis.

    Having said that, and to your point Joel, it most closely resembles cost analysis in that you're evaluating separate elements of cost.  My original response aimed at avoiding confusing cost realism with cost analysis of certified cost or pricing data.

  8. Neil, in reference to...

    On 5/21/2019 at 7:04 PM, Neil Roberts said:

    As to the business practice, I still believe that all cost reimbursement contracts are essentially negotiated and therefore "adequate price competition" has no place in those awards whether there are one or more bidders. Therefore, certified cost or pricing data should be required when over the threshold. I could perhaps be persuaded  with a well reasoned case or interpretation otherwise.

    ...the purpose of competition is to motivate sellers to set forth a proposal based on the stated award criteria.  "Adequate competition" simply requires two or more bidders to respond with responsive and viable offers.  If that criteria is met, the bidders are relieved of the requirement for certified cost or pricing data.

    Hurdles:

    • 2 bidders (self explanatory and objectively determined)
    • Responsive offers (self explanatory and objectively determined based on comparison of proposal with RFP)
    • Viable offers (this is where cost realism comes into play)

    If the viable offers hurdle wasn't cleared, I would work with the bidder(s) to come to terms on that point.  They will likely be motivated to participate when given a choice between cost realism and submitting certified cost or pricing data.

  9. 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.

  10. 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. 

  11. 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." 

  12. 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?

  13. 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...

  14. 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?

  15. 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?

  16. 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?

  17. 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...

     
  18. 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.

  19. 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.
  20. 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.

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