Thursday, December 29, 2011

Subcontract Price/Cost Analysis

When Government contractors (or prospective Government contractors) include subcontracts as part of their proposal, they have an affirmative duty to ensure that the proposed subcontract prices are fair and reasonable. This usually means that the contractor will perform some kind of cost or price analysis of the subcontractor proposal. The Government has a pretty good idea of what it takes to perform adequate subcontractor cost/price analyses - they perform them all the time at the prime contract level. There is a general expectation that prime contractors will apply the same procedures in evaluating subcontract prices as the Government does when evaluating prime contract prices.

An adequate estimating system will include policies and procedures related to subcontract cost/price analyses. In assessing adequacy of those policies and procedures, the Government will look for requirements to

  • conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices
  • include the results of these analyses in its own price proposal
  • when required in accordance with FAR 15-404-3(c), submit subcontractor cost or pricing data to the Government as part of its own cost or pricing data.

Adequate and timely subcontract cost/price analysis is critical to the negotiation of fair and reasonable prime contract prices. For this reason, the contractor should have policies and procedures in place to accomplish such analyses prior to the submission of its own cost or pricing data.

Due to time and other constraints, the contractor may be unable to perform a detailed price/cost analysis prior to submission of its own cost or pricing data. In these instances, the contractor's policies and procedures should require that a plan be in place to complete the required analysis and provide it to the Government negotiator prior to negotiation of the prime contract price.

In some exceptional cases, the contractor may be unable to obtain adequate cost or pricing data and/or perform the required analysis prior to negotiation of the prime contract price. Regardless of the circumstances, the prime contract still has the responsibility for demonstrating fair and reasonable subcontract pricing. The contractor's policies and procedures should provide for the timely identification f such circumstances and submission of a request, to the contracting officer, to be excused from the submission of subcontractor cost or pricing data and related analysis. This request should be supported by

  • the explanation as to why the data and analysis cannot be submitted in a timely manner, and
  • an alternate analysis such as application of a negotiation reduction factor based on the historical difference between the initial subcontractor proposed amount and the ultimate negotiated amount.

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