Monday, October 14, 2013

Proposed Subcontract Costs - Cost/Price Analyses

Last week, we wrote on DoD's  new proposal adequacy checklist. This week, we'll dig deeper into some of the questions with the intent of explaining why a particular question is relevant to determining the adequacy of a proposal using certified cost or pricing data.

Question 17 of the proposal adequacy checklist, referring to FAR 15.408, Table 15-2, Note 1, Section II, Paragraph A, requires that contractors include a price/cost analysis establishing the reasonableness of each of the proposed subcontracts included with the proposal. If Those are not completed at the time the prime contractor submits its own proposal to the Government, the proposal must include a matrix identifying (i) dates for receipt of subcontractor proposal, (ii) completion of fact finding for purposes of price/cost analysis and (iii) submission of the price/cost analysis. Failure to provide this matrix will render the proposal inadequate.

At the end of the day, the Government needs to ensure that the cost or price proposed by the contractor is fair and reasonable. It cannot make such a determination if a contractor's proposal includes significant subcontract costs and the contractor has not performed any kind of analysis to ensure, in turn, that its subcontractor prices are fair and reasonable. On the other hand, sometime the procurement timeline does not allow sufficient time for prime contractors to complete their subcontractor cost/price analysis. In those cases, the Government wants to see the timeline for completing those, so at a minimum, they'll be completed by the time prime contract negotiations commence.

If the completion of subcontractor cost/price analysis will occur before negotiations, as per the matrix, the contractor's proposal will be determined to be adequate for this checklist item. That doesn't mean that the auditor, during his/her audit will not take exception to the subcontract costs. Those costs may be categorized as unsupported because the contractor has not completed its cost/price analyses. In addition to unsupporting the costs, the auditor might also apply "decrements" to proposed subcontract costs to reflect anticipated reductions that contractors typically achieve when negotiating subcontracts. Usually, these positions disappear once the cost/price analysis is completed.

Everyone's life is a bit easier if subcontract cost/price analysis is completed prior to the proposal submission date; the Contracting Officer's, the auditor's, and the prime contract negotiator's. Repeated incidences of incomplete cost/price analyses could lead to an estimating system deficiency, particularly where there is sufficient time in the contracting schedule for prime contractors to complete their analyses.

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