Pricing and Cost Accounting

A Handbook for Government Contractors

Darrell J. Oyer

• Publisher: Berrett-Koehler Publishers
• Year: 2011
• ISBN:
  9781567263541
• Edition: 3
• Topic: Business
• Subtopic: Contabilità statale
• Index: Business

The essential reference to help federal contractors negotiate and maintain profitable contracts—Now in its third edition!This is the essential reference to help federal contractors negotiate and maintain profitable contracts—and remain in compliance throughout the life of the contract.
Government contracting rules and regulations have changed significantly over the past six years. This new third edition addresses these changes and more:
New thresholds for certification of cost and pricing data
Revisions in cost accounting standards
Implementation of commercial time-and-material and labor-hour contracts
New, stringent ethics requirements
Impact of stimulus funding
Revised cost principles, including excessive pass-through costs, post-retirement benefits, and travel costs
Redirected audit initiatives based on the GAO review of DCAA
Plus…changed requirements for bidding…pricing…cost accounting…subcontracting…contract modification…all the information you need to be in compliance with the new rules.
No other single book provides as much up-to-date federal procurement cost and pricing information in such a concise - yet comprehensive - format.

CHAPTER 1
Federal Government Procurement Methods

The federal government uses three primary methods for soliciting and awarding contracts: commercial items, sealed bids, and negotiations. Commercial items are addressed in Part 12 of the Federal Acquisition Regulation (FAR), with special coverage of Federal Supply Service (FSS) contracts in Part 38. Sealed bids are covered by FAR Part 14, Sealed Bidding. Negotiations, which usually involve some interface between the government and the contractor, are classified as either competitive or sole source and are subject to FAR Part 15, Contracting by Negotiation. The difference between FAR Parts 12 and 15 is often not fully understood. Part 12 pertains to commercial purchases by the government and Part 15 pertains to commercial purchases as exemptions from submission of cost or pricing data.

Effective April 1, 1985, the Competition in Contracting Act (CICA) of 1984 made sweeping changes to the government’s competitive procedures. Overall, the aim of CICA was to promote full and open competition in the acquisition process. More specifically, Congress intended to put competitive proposals on the same level with sealed bids, and to significantly limit the use of “other than competitive,” or sole source proposals. The Federal Acquisition Streamlining Act of 1994 set forth the government’s preference for the acquisition of commerical items by establishing acquisition policies more closely resembling those of the commercial marketplace and encouraging the acquisition of commercial items and components. Since these reforms in the mid-1990s, government procurement officials have gradually reverted to pre-1990s practices.

COMMERCIAL ITEMS

The federal government’s policy is to first conduct market research to determine whether commercial items or nondevelopmental items are available that could meet the agency’s requirements. Agencies are to acquire commercial items or nondevelopmental items when they are available to meet agency needs and are to require prime contractors and subcontractors at all tiers to incorporate, to the maximum extent practicable, commercial items or nondevelopmental items as components of items supplied to the agency.

A commercial item is defined in FAR Part 2.101 as:

(1) Any item, other than real property, that is of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes, and—

(1) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for—

(i) Modifications of a type customarily available in the commercial marketplace; or

(ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. Factors to be considered in determining whether a modification is minor include the value and size of the modification and the comparative value and size of the final product. Dollar values and percentages may be used as guideposts, but are not conclusive evidence that a modification is minor;

(4) Any combination of items meeting the requirements of paragraphs (1), (2), (3), or (5) of this definition that are of a type customarily combined and sold in combination to the general public;

(5) Installation services, maintenance services, repair services, training services, and other services if—

(i) Such services are procured for support of an item referred to in paragraph (1), (2), (3), or (4) of this definition, regardless of whether such services are provided by the same source or at the same time as the item; and (ii) The source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government;

(6) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions. This does not include services that are sold based on hourly rates without an established catalog or market price for a specific service performed or a specific outcome to be achieved. For purposes of these services—

(i) “Catalog price” means a price included in a catalog, price list, schedule, or other form that is regularly maintained by the manufacturer or vendor, is either published or otherwise available for inspection by customers, and states prices at which sales are currently, or were last, made to a significant number of buyers constituting the general public; and

(ii) “Market prices” means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors.

(7) Any item, combination of items, or service referred to in paragraphs (1) through (6) of this definition, notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor; or

(8) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments.

Agencies must use firm-fixed-price contracts, fixed-price contracts with economic price adjustment, or time-and-material/labor-hour contracts for the acquisition of commercial items. Use of any other contract type to acquire commercial items is prohibited. These contract types may be used in conjunction with an award fee and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost.

Although the contracting officer must establish price reasonableness, customary commercial terms and conditions should be used when pricing commercial items. Commercial item prices are affected by factors that include speed of delivery, length and extent of warranty, limitations of seller’s liability, quantities ordered, length of the performance period, and specific performance requirements. The contracting officer must ensure that contract terms, conditions, and prices are commensurate with the government’s need. Government agency guidance often limits the use of the commercial item classification.

The Federal Supply Schedule program is directed and managed by the General Services Administration (GSA). GSA may delegate certain responsibilities to other agencies. The FSS program provides federal agencies with a simplified process for acquiring commercial supplies and services in varying quantities while obtaining volume discounts. Indefinite-delivery contracts are awarded using competitive procedures to firms. The firms provide supplies and services at stated prices for given periods of time, for delivery within a stated geographic area such as the 48 contiguous states, the District of Columbia, Alaska, Hawaii, and overseas. The schedule contracting office issues publications that contain a general overview of the FSS program and address pertinent topics. Always remember that if an item is on a Federal Supply Schedule, it is conclusively a commercial item.

SEALED BIDS

The sealed bid method of contracting is used to select contractors solely on the basis of the lowest price, when certain FAR conditions permit. The sealed bid method can be used if: (1) time permits; (2) award is based on price (i.e., not cost) and price-related factors; (3) discussions with the bidders are unnecessary; and (4) more than one sealed bid is expected. The sealed bid method of contracting operates most effectively when two conditions exist:

1. The government is able to describe its needs in sufficient detail to permit bids to be prepared and evaluated on a common basis.
2. The number of competitors and the quantity being purchased are sufficient to ensure real competition.

The government’s requirements and the terms and conditions of the proposed contract are announced publicly and circulated widely to potential bidders by way of an Invitation for Bids (IFB). Formal advertising eliminates the need for the government to negotiate with competitors about their bids and provides an objective means for distinguishing among capable competitors. Essentially, the government feels confident that the established market price has been subject to arm’s-length transaction. Furthermore, the government is focusing on price and not on contractor cost and profit.

A sealed bid effectively serves as a contract offer. It may be withdrawn or modified before opening, but once opened, a bid generally cannot be revoked or modified. In developing a bid price under a sealed bid solicitation, the contractor is responsible for estimating cost and profit in any manner deemed appropriate to best accomplish its objectives. Contractors submit price information only; they do not have to disclose cost data and profit rates to the government.

The contractor’s bid need not be based on cost. Instead, it may be based primarily on the contractor’s assessment of its risk and its competitive position. For example, if the contractor has a unique item that no one else can sell, its price—and therefore its profit—might be higher. If the contractor is trying to break into a market, its price might be lower to meet or beat the competition. Similarly, a contractor operating at full capacity may decide to increase its estimated labor costs because overtime will be required to accomplish the work. In this case, the contractor may feel comfortable increasing its profit rate as well. Conversely, a contractor operating at less than full capacity, or one relatively new to the industry, may determine that a more aggressive price and lower profit are required to win the contract. Of course, the contractor must balance its form of pricing against the risk as well as its ability to absorb any potential loss.

When preparing a response to a sealed bid solicitation, a contractor must be sensitive to 41 U.S.C. 253(B)(e) and 10 U.S. C. 2305(b) (5). The objective of these laws is to ferret out antitrust violations—practices by contractors designed to eliminate competition or restrain trade. This order requires government agencies to report to the attorney general each sealed bid procurement over $10,000 that involves identical bids. Identical bids are defined as two or more bids that are identical in terms of unit price or total amount after giving effect to discounts and all other relevant factors. Contracts resulting from sealed bidding are to be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

CONTRACTING BY NEGOTIATION

Negotiation means contracting through the use of competitive or other-than-competitive (i.e., sole source) proposals. Simply put, a negotiated contract is any contract awarded without using sealed bidding. The single element that most distinguishes contracting by negotiation from contracting by sealed bid is the subjective judgment required in a negotiation to weigh quality and other factors against price. Overall, negotiation permits the government greater latitude in selecting contractors (see Figure 1).

The basic elements in a sealed bid procurement—the existence of an established price and a functioning marketplace—are not as well defined in negotiation. The procedures used in negotiating a contract vary depending on the competitive environment; specifically, multiple bidders vs. sole source awards. The government’s focus shifts from price analysis to a combination of price and cost analysis. And the contracts are subject to various complicated federal regulations that mandate how costs should be determined, accumulated, and allocated.

For each government acquisition, the relative importance of cost or price will likely vary. In acquisitions where the requirement is clearly definable and the risk of unsuccessful contract performance is minimal, cost or price may be dominant in source selection. The less definitive the requirement, the more development work required, or the greater the contract performance risk, the more dominant technical or past performance considerations will likely be.

If the acquisition selection is to consider award to other than the lowest priced offeror or other than the highest technically rated offeror, the solicitation will state the relative importance of all evaluation factors and whether all evaluation factors other than cost or price are together significantly more important than, approximately equal to, or significantly less important than cost or price. This permits tradeoffs among cost or price and non-cost factors, and allows the government to accept other than the lowest priced proposal. Any perceived benefits of a higher priced proposal must merit the additional cost.

Figure 1
Contracting by Sealed Bid vs. Negotiation

The lowest priced, technically acceptable source selection basis is appropriate when best value is expected to result from the process. Under this process, the evaluation factors and significant subfactors that establish the requirements of acceptability will be presented in the solicitation. Solicitations must specify that award will be made on the basis of the lowest evaluated price of proposals meeting or exceeding the acceptability standards for non-cost factors. Past performance need not be an evaluation factor in lowest price, technically acceptable source selections. If the government determines that a small business concern’s past performance is not acceptable, the matter is referred to the Small Business Administration for a Certificate of Competency determination. Proposals are evaluated for acceptability but not ranked using the non-cost/price factors.

Oral presentations by offerors as requested by the government may substitute for, or augment, written information at any time in the acquisition process, and are subject to the same restrictions as written information regarding timing and content. Prerecorded videotaped presentations are generally not considered oral presentations, although they may be included in offeror submissions. The solicitation may require each offeror to submit part of its proposal through oral presentations. However, certifications, representations, and a signed offer sheet (including any exceptions to the government’s terms and conditions) must be submitted in writing. Information pertaining to areas such as an offeror’s capability, past performance, work plans or approaches, staffing resources, transition plans, or sample tasks (or other types of tests) may be suitable for oral presentations. When oral presentations are required, the solicitation must provide offerors with sufficient information to prepare for those presentations.

The government must maintain a record of oral presentations. A copy of the record placed in the file may be provided to the offeror. When an oral presentation includes information that the parties intend to include in the contract as material terms or conditions, the information must be put in writing. Incorporation by reference of oral statements is not permitted.

Exchanges of information among all-interested parties, from the earliest identification of a requirement through receipt of proposals, must be consistent with procurement integrity requirements. The purpose of exchanging information is to improve the understanding of government requirements and industry capabilities. This allows potential offerors to judge whether or how they can satisfy the government’s requirements, enhances the government’s ability to obtain quality supplies and services at reasonable prices, and increases efficiency in proposal preparation, proposal evaluation, negotiation, and contract award.

An early exchange of information among participants in the acquisition process can identify and resolve concerns regarding the acquisition strategy. This includes proposed contract type, terms and conditions, and acquisition planning schedules; the feasibility of the requirement, including performance requirements, statements of work, and data requirements; the suitability of the proposal instructions and evaluation criteria, including the approach for assessing past performance information; the availability of reference documents; and any other industry concerns or questions. Early exchanges of information can be accomplished through industry or small business conferences, public hearings, market research, one-on-one meetings with potential offerors, presolicitation notices, draft Requ...