Thursday, January 28, 2016

What are Cost Estimating Relationships (CERs)?

A cost estimating relationship (CER) is a technique used to estimate a particular cost or price by using an established relationship with an independent variable. If you can identify an independent variable (driver) that demonstrates a measurable relationship with contract cost or price, you can develop a CER.

Many contractors develop and use CERs in their cost estimates to avoid the time consuming necessity to prepare discrete estimates for every cost. Most CERs used in pricing Government contracts are cost-to-cost relationships. By establishing a relationship between different elements of costs, contractors can use a CER to reduce its estimating or analysis effort and at the same time, increase accuracy. For example, if a contractor can establish a relationship between senior engineering hours and engineering technician hours, it doesn't need to discretely estimate the number of engineering technician hours - it simply applies a rate.

The Government generally likes and often encourages the use of CERs because it makes everyone's tasks easier. During negotiations, the parties are less likely to get bogged down in minutia - arguing over a few hours here and a few hours there.

While widely accepted as estimating techniques, the Government will still evaluate the propriety of CERs. The Government will probably test the correlation between independent and dependent variables by running regression analysis techniques against the data.

Once a CER is established, contractors must use them consistently in their pricings. Since CERs are basically averages, it wouldn't be equitable to use CERs in one case and discrete estimates in another. Some jobs would be expected to cost more and others less.

There have been situations where a Government contract negotiator objected to contractors' use of CERs when others have accepted them. If that happens, contractors need to ensure that various components of the Government are talking to each other. In that regard, its useful to include CERs as part of negotiated Forward Pricing Rate Agreements.

You can read more about CERs by clicking here.

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