New Standards for Should-Cost Reviews

Should-cost reviews are a specialized form of cost analysis. Should-cost reviews differ from traditional evaluation methods because they do not assume that a contractor's historical costs reflect efficient and economical operation. Instead, Should-cost revews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

Should-cost reviews are performed by a multi-functional team of Government contracting, contract administration, pricing, audit, and engineering representatives. The objective of such reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts. Additionally, by providing rationale for any recommendations and quantifying their impact on cost, the Government is in a better position to develop realistic objectives for negotiation.

There are two types of should-cost reviews; program and overhead. Program should-cost reviews are used to evaluate significant elements of direct costs while overhead should-cost reviews are used to evaluate indirect costs, including fringe benefits, shipping and receiving, real property, and equipment depreciation, plant maintenance, security, taxes, and G&A activities.

Under FAR 15.407-4, the Government has a right to perform should-cost reviews but since they are very costly and time-consuming to carry out, such reviews are usually limited to major weapons system acquisitions. From the contractors' perspective, should-cost reviews are also costly to support and sometimes, in the contractors' view, do not offer tangible benefits to either the Government or the contractor.

Under the Fiscal Year 2018 NDAA (National Defense Authorization Act), the Defense Department was required to amend its regulations to ensure that the use of should-cost reviews were performed in a manner that is "transparent, objective, and provides for the efficiency of the systems acquisition process". This week, the Defense Department finally got around to finalizing its regulations accordingly. Under the revised regulations, DoD must consider the following:

1. A thorough review of each contributing element of the program cost and the justification for each cost
2. An analysis of non-valued added overhead and unnecessary reporting requirements.
3. Benchmarking against similar DoD programs, similar commercial programs and other programs by the same contractor at the same facility.
4. An analysis of supply chain management to encourage competition and incentive cost performance at lower tiers.
5. A review of how to restructure the program team in a streamlined manner. The program team in this context include both Government and contractor representatives.
6. Identification of opportunities to break out Government-furnished equipment versus prime contractor-furnished materials.
7. Identification of items or services contracted through third parties that result in unnecessary pass-through costs.
8. Evaluation of ability to use integrated developmental and operational testing and modeling and simulation to reduce overall costs.
9. Identification of alternative technology and materials to reduce developmental or life-cycle costs for a program.
10. Identification and prioritization of cost savings opportunities
11. Establishment of measurable targets and ongoing tracking systems.