Thursday, July 20, 2017

Have Contractor's Been Complaining About DCMA's "Should-Cost" Reviews?

Unless you're a very large contractor, you may not have heard of "should-cost" reviews. Should-cost reviews are a specialized form of cost analysis. They differ from traditional evaluation methods in that they don't assume that historical costs reflect efficient and economical operation. Instead, should-cost reviews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

These reviews are conducted by a multi-functional team of Government contracting, contract administration, pricing, audit and engineering representatives. The objective of should-cost reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts.

There are two types of should-cost reviews - program reviews and overhead reviews. A program review focuses on significant elements of direct costs, usually associated with the production of major systems. You can read about should-cost reviews more fully in FAR 15.407-4.

We have not had direct experience with should-cost reviews but we've been around the fringes enough to know that contractor's dread them, not for the potential findings and recommendations but because they require a tremendous amount of contractor resources to support and the "team's" lackadaisical approach to completing the engagement is the exact antitheses to what the Government wants to accomplish - i.e. improvements in economy and efficiency.

Which brings us to the Senate's fiscal year 2018 National Defense Authorization Act (NDAA) and a provision designed to make the Government more accountable in performing should-cost reviews - to use the tool appropriately in a manner that his transparent, objective, and provide for the efficiency of the acquisition process.

The NDAA provision, if passed, will require DoD to amend its FAR Supplement (DFARS) to include the following:

  1. A description of the features distinguishing a should-cost review and the analysis of program direct and indirect costs.
  2. Establishment of a process for communicating with the contractor the elements of a proposed should-cost review.
  3. A method for ensuring that identified should-cost savings opportunities are based on accurate, complete, and current information and are associated with specific engineering or business changes that can be quantified and tracked.
  4. A description of the training, skills, and experience, including cross functional experience, that Department of Defense and contractor officials carrying out a should-cost review should possess.
  5. A method for ensuring appropriate collaboration with the contractor throughout the review process.
  6. Establishment of review process requirements that provide for sufficient analysis and minmize any impact on program schedule.
  7. A requirement that any separate audit or review carried out in connection with the should-cost review be provided to the prime contractor under the program.

We think these proposed enhancements to the should-cost program are reasonable and a positive step in ensuring that should-cost reviews are well-planned and staffed with trained and qualified individuals.

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