Friday, December 30, 2011

Decrement Factors

The term "decrement" as used in Government contracting refers to the amount of a reduction or price reduction. It is most commonly used as an estimating technique for subcontract costs. For example, a decrement factor may represent a percentage by which a subcontractor has agreed to past quoted prices. When estimating subcontract costs, contractors apply the decrement factor to subcontractor quotations or proposals because they know, based on historical experience, that the final subcontract price is always lower than the proposed price.

While decrement factors are common in estimating procedures, it is not the preferable method of evaluating subcontract costs. Prime contractors are required to perform cost or price analysis of subcontract costs included in their proposals. Sometimes situations arise that make it difficult or impossible for contractors to complete their cost or price analysis by the time it is needed to negotiate the prime contract. In those cases, decrement factors might be a viable option.

DCAA (Defense Contract Audit Agency) guidance directs auditors to review the methodologies used by contractors in arriving at subcontractor price reductions, to ensure that the data used for decrements were reasonably accurate, current, and representative. The guidance explains that information concerning patterns of reductions from quotes to actual prices paid may be useful in evaluating a cost estimate.

When developing decrement factors, some contractors calculate decrements for each subcontractor. Others pool their subcontractor history and calculate a factor to be used across the board. If you plan to use decrement factors in your estimating system, be prepared to justify your methodology.


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