Thursday, September 20, 2012

Business Base Forecasting

We described in yesterday's post the difficulty that both contractors and the Government have in estimating future business - business that should be considered in establishing indirect rates for forward pricing purposes. Ultimately, its a contractor's responsibility to prepare and support those estimates but estimating future work is such a fuzzy area that the Government often seeks outside or third party assurance to help them assess whether contractors have fully considered all potential future business in their allocation bases. The larger the business base, the lower the indirect rates is the way it works.

Often times, contractors don't even attempt to project rates for anything beyond one or two years. Beyond that, contractor's tend to "straight-line" the rates to cover whatever period of performance they are proposing. Auditors began throwing these straight-line estimates back at the contractor, telling them to prepare discrete estimates for each year of proposed costs. Of course this was a ridiculous audit position because it was impossible for a contractor to have such a fine crystal ball.  DoD eliminated that "audit" problem by taking away the responsibility for determining forward pricing rates from DCAA (the auditors) and turning it over to DCMA (the contracting officer). DCMA's expectations were much more pragmatic but even that organization was not satisfied that contractors were telling the whole truth and nothing but the truth.

Earlier this month, DoD's Director of Defense Pricing issued a new directive designed to provide better insight into the purchasing plans by DoD's many buying commands. Each buying command must designate a point of contact that DCMA can easily reach out to for assistance in evaluating contractor business base forecasts. These contacts must be able to facilitate the business base evaluation requests and ensure that they are assigned, completed, and returned to DCMA in a timely fashion.

There's more. The second part of DoD's new directive will require that the buying commands share their POMs (Program Objective Memorandums, or, the final product of the budgetary process within DoD) with DCMA. This information will provide DCMA with business base data ahead of the indirect rate review process and perhaps facilitate negotiations of forward pricing rate agreements.

Contractors should not hesitate to ask for this same information concurrent with DCMA's receipt. Could help corroborate what the contractor is hearing from its own sources.

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