Yesterday, May 16th, DoD published another checklist, this time as a proposed rule. This 27 item proposal adequacy checklist will be required of contractors submitting forward pricing rate proposals (FPRPs) to the Government. FPRPs are the precursor to FPRAs (Forward Pricing Rate Agreements). FPRAs greatly facilitate contract negotiations because the parties do not have to haggle over the indirect rates. FPRAs are most beneficial at contractors with a significant number of pricing actions every year. Refer to FAR 42.1701 for more information concerning FPRAs.
One of the greatest challenges in forecasting indirect expense rates is trying to reasonably estimate future workload or volume. Indirect rates can swing significantly depending upon future events (e.g. winning a particular bid) where there is some uncertainty. One of the checklist questions tries to pin that down. It asks:
Does the proposal disclose known or anticipated changes in business activities or processes that could materially impact the costs? For example
- Management initiatives to reduce costs;
- Changes in management objectives as a result of economic conditions and increased competitiveness;
- Changes in accounting policies, procedures, and practices including:
- reclassification of expenses from direct to indirect or vice versa;
- new methods of accumulating and allocating indirect costs and the related impact and
- advance agreements;
- Company reorganizations (including acquisitions or divestitures);
- Shutdown of facilities
- Changes in business volume and/or contract mix/type.
Contractors need to take special care when answering these questions. Failure to disclose anticipated changes in business activities could lead to allegations of defective pricing.