Estimating - Use of Percentages and Conversion Factors

When preparing price proposals, many - perhaps most - contractors attempt to develop discrete estimates for each direct cost element and for required activities or purchases within those cost elements. These methodologies, while sometimes unavoidable, require a great deal of judgmental estimates or engineering estimates that have no basis other than someone's imagination. It also leads to inefficiencies during the negotiating process if the Government requires additional support or specificity.

There might be a better way to estimate certain direct costs however - especially when historical cost data is available. That would be through the use of percentages and conversion factors.

Take, for example, the category of sustaining engineering. Sustaining engineers is loosely defined as the continuing engineering and technical support that follows release of requirements, specifications and drawings for fabrication, assembly, testing, and delivery of an end product. Everyone would acknowledge that some level of sustaining effort is required. But how much? Trying to discretely estimate the number of sustaining engineering hours requires a great deal of judgment. However, you might be able to develop a relationship between engineering hours and sustaining engineering hours; or between manufacturing hours and sustaining engineering hours, assuming your timekeeping system is adequate and these is sufficient historical experience. Now instead of wild judgmental estimates, you have tangible support for your estimate.

Other areas where application of percentages and conversion factors are commonly used are in packaging, field services, tooling, desktop IT support, and reproduction.

When using percentages and conversion factors, the Government will undoubtedly request support. In fact, for the contract auditor, guidance on auditing percentages and conversion factors is found in the DCAA Contract Audit Manual at 9-604.1. The auditor's focus in reviewing percentages and conversion factors is to evaluate the propriety of the percentage and conversion factors for applicability in the current proposal.

Contractors should consider how the use of percentages and conversion factors can improve their own estimating practices and procedures.