Subcontractor Cost/Price Analyses Not Completed When Prime Proposal Submitted

DFARS (DoD FAR Supplement) 252.215-7009 is the Proposal Adequacy Checklist that companies should complete whenever a proposal to DoD requires the submission of cost or pricing data. The requirement is not mandatory, its only suggested as a means of facilitating submission of a thorough, accurate, and complete proposal (see DFARS 215.408(5). Although DFARS only suggests that it be prepared, often times procurement offices will make it a requirement for proposal submission thus making it effectively a mandatory document. Its a nice tool and we usually recommend contractors complete the checklist for any proposal. Whether prospective contractors choose to submit one or not, someone in the Government probably will prepare one so its best that contractors be prepared to respond to any queries that might result from a "no" answer.

One of the more problematic questions has been No. 17 which asks whether the prime contractor or higher-tier subcontractor has included the required cost or price analyses that establishes the reasonableness of each of its proposed subcontracts included with the Proposal. If not, the question further asks whether the offeror has included 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.

DCAA (Defense Contract Audit Agency) is playing hard-ball with this question. In recent guidance to its audit staff, it makes the following observation.

Question: If the prime contractor or higher-tier subcontractor has not completed the required cost or price analyses but has included a matrix identifying dates for receipt of subcontractor proposals, should Question No. 17 be marked as adequate or inadequate? Additionally, should the audit team consider the overall proposal adequate or inadequate for audit and proceed with the audit if this inadequacy exists?

Answer: FAR 15.404-3(b) requires the prime contractor or higher-tier subcontractor to conduct appropriate cost or price analyses to establish the reasonableness of the proposed subcontract prices and include the results of these analyses in the prime contractor’s proposal.

 As such, the inclusion of a matrix does not overcome the inadequacy of the prime contractor not submitting the cost or price analyses with the proposal. If the prime contractor or higher-tier subcontractor has not completed the cost or price analyses, as required by FAR 15.404-3(b), Question No. 17 ... should be marked as inadequate (i.e., answer “no” under “Adequate?”

We're not sure how the DCAA position serves any useful purpose. The DoD in its checklist has already allowed for a time-phased matrix when an offeror's cost/price analysis of subcontractor proposals cannot be completed by the proposal due date. If the offeror did not complete the cost/price analysis and did not supply a schedule for completing them, then the proposal might not be adequate for negotiating a price.

DCAA Jettisons Two of its Checklists

We're not sure when it happened. One day they were there and the next time we looked for them, they were gone. We're referring to DCAA's (Defense Contract Audit Agency) checklists for Contract Pricing Proposal Adequacy and Forward Pricing Rate Proposal Adequacy.

Here's what you see when you try to bring them up on DCAA's website.

Actually, this is a good thing. The dueling checklists, although very similar, were confusing for contractors. The auditors would go to contractors and use the DCAA checklists even though the contractor had run its contract proposal or forward pricing rate proposal through the DoD checklists.

The DoD checklists are improved over what DCAA was using. The DoD checklists have gone through the regulatory process where public comments were solicited, considered, and in some cases, resulted in changes to the proposed checklists. DCAA's checklists on the other hand were cobbled together in-house and carried a heavy dose of what DCAA considered necessary to achieve adequate proposals and rate proposals. Its not that DCAA's checklists were bad - they just needed some refinement.

Checklists have a place in proposal preparation but just because a proposal "passes" a checklist, does not mean that it is adequate. There can still be many deficiencies, inconsistencies, omissions, and illogical or nonsensical narrative to befall a proposal submission. The larger and more complex the proposal, the more chance for such stuff to sneak into the final cut.

These checklists are mandatory for DoD proposals so use them. Once a proposal passes the checklist, it will at least get to the next level of consideration.

Is the Data From Your Computer Any Good? - Part 2

Yesterday we asked the question "Is the data from your computer any good?" This is more than a rhetorical question - all auditors, including contract auditors and the independent public accountants that perform attest functions (e.g. those who audit your financial statements) must necessarily concern themselves with the validity of data produced by electronic means. There is always the specter of underlying fraud and auditors are required by Generally Accepted Auditing Standards (GAAS) or Generally Accepted Government Auditing Standards (GAGAS) to consider fraud when assessing risk and designing transaction plans. However, far more likely are simple errors. Sometimes these errors can be very significant. We just finished an audit where some revenue items were mapped to an expense account so that instead of increasing revenue, the transactions decreased expenses. That was caused by a fundamental misunderstanding of how the accounting software worked. It resulted a "material" error (in auditor jargon, that means significant). But it was not fraud.

So how do auditors assure themselves that evidence obtained during an audit, where such evidence is dependent on computerized information systems, can be relied upon? Well, it depends. At larger Government contractors, where contract auditors have a continuous presence, they most likely develop and apply specific testing procedures to determine whether management is taking the requisite approach to ensuring the accuracy of computerized information systems. The expectation here is that management will undertake the controls necessary to ensure reliability. These include

• Periodic internal and external reviews of IT operations to ensure that policies and procedures have been implemented and are working effectively.
• Duties and responsibilities should be adequately segregated so that no one person can perpertrate and conceal material errors or misstatements.
• System and application software should be consistent with management objectives, operate within specifications, tested prior to implementation, and not susceptible to unautorized modification.
• Ensure the integrity and reliability of all activities impacting the physical operation of the computer
• Access to computing resources should be limited to those individuals with a documented and authorized need for such access.
• Contingency plans should be developed to ensure data safety.

At the other end of the spectrum are the very small contractors - sometimes one or two persons. These contractors, of course, do not have resources to dedicate to any internal controls, much less those affecting computerized information technology. In those cases, the auditor, if he/she does not have the time or resources necessary to test for the accuracy of computerized data will most likely qualify the audit report. That's not the most desirable thing for a contractor but in most cases, has not practical implications. For example, when evaluating a price proposal, the auditor might state word to the effect that the audit results reflect data based on computerized information systems that have not been audited. That probably would not prevent a contracting officer from negotiating and awarding the contract but it does protect the auditor if subsequent events disclose that such data was unreliable.

At the end of the day however, no one likes qualifications so auditors will usually undertake some level of analysis to gain assurance that IT systems (Information Technology) are operating as designed. The auditor might track a few transactions from source document to general ledger, a timecard to payroll, a material receipt to billing document. Contractors might wonder why auditors perform audit steps that have no apparent relevance to the audit they are performing. Its not unheard of that auditors will stray far from their appointed tasks. However, it is more likely that they are trying to validate the reliability of one or more information systems. If its not clear to you, it is certainly appropriate to inquire of the auditor the purpose of what he/she is doing.

Is the Data From Your Computer Any Good?

It wouldn't be an overstatement, would it, to say that just about every kind of information and data is electronic (or based on electronic systems) these days - accounting data, budgets and forecasts, purchasing, estimating, direct and indirect rate development, tracking, EVMS, and on-and-on. We've all come to rely upon Word, and Excel, and proprietary accounting software. Even auditors these days utilize electronic working paper applications to compile, prepare, and report on their work.

So take the case of a typical proposal submission. It was probably submitted electronically, as per the instructions of most Request for Proposal (RFPs) or Request for Quotation (RFQs). The prospective contractor may have developed its estimates of material costs from historical purchases recorded in its electronic purchasing system. Its computation of direct labor rates would no doubt come from its timekeeping and payroll systems. Its indirect expense rate forecasts would come from data produced by the accounting software(e.g. QuickBooks) and perhaps some budgeting applications. Quantities (materials and labor), if there was useful production data for learning curve applications or other trends, would come from production schedules, also electronic.

So now comes the Government (cost/price analysts, contracting officers, contract auditors, etc) to review, assess, and render opinions on the acceptability of proposed costs. The Government reps might break the submission apart and ask the prospective contractor to support various items of its proposal. Invariably, the supporting data will ultimately drill down to data from one or more electronic (computerized) system.

How is the analyst or auditor to know, with reasonable assurance, that the underlying data is any good? What controls do contractors have to ensure the reliability and accuracy of their data systems? What is to prevent prospective contractors (like so many in unnamed foreign countries) to maintain two or three sets of books? Do contractors have trained and qualified individuals responsible for maintaining accurate data and records or has the task been seconded to someone who's skill set is in other areas (as is common in very small companies).

Tomorrow we will look at how contract auditors respond to the problem of ensuring that they can justifiably rely on the accuracy of contractor prepared and submitted electronic data.

NASA's Proposal Adequacy Checklist is Final

Last October, NASA published a proposed change to its NASA FAR Supplement (NFS) that would require prospective contractors to complete a proposal adequacy checklist whenever cost or pricing data is required. Click here to read our posting about that checklist and the differences between it and the DoD proposal adequacy checklist.

That proposed change has now become a final rule and has been incorporated into the NFS under 1852.215-85, Proposal Adequacy Checklist. So now, any company submitting cost or pricing data to NASA must also complete the checklist and submit it as part of its proposal. In publishing the final rule, NASA made it clear that it only applied in situations where cost or pricing data is required. That would exclude competitive bids, commercial items, and purchases made under the simplified acquisition threshold. NASA also dispelled concerns that this checklist was overly burdensome by passing the administrative burden and shifting the associated costs directly onto the contractor. NASA responded stating that the rule does not impose additional requirements over what is already required under the conditions when certified cost or pricing data is required. It merely provides a tool to ensure compliance with FAR Table 15-2.

There will undoubtedly be some growing pains with this checklist as we've already witnessed with DoD's version. The checklist requires contractors to identify the page number of the proposal where the checklist requirement is satisfied or an explanation as to why the information is not included. Sometimes the information is too voluminous to include with a proposal. In some cases, the information would cause the proposal to exceed the page limit specified in the solicitation. Some contracting officers and contract auditors have been satisfied with the phrase "too voluminous to include but will be provided upon request" while others have taken umbrage with that kind of statement. Eventually it will all get worked out.

The checklist does not apply to subcontractors - in other words, it is not a flow-down provision. However NASA strongly encourages prime contractors to have their prospective subcontractors use the same or similar checklist. We think its a good idea and recommend contractors incorporate the checklist requirement (either DoD's, NASA's, a hybrid, or one of their own making) into its purchasing system policies and procedures.

DoD Proposal Adequacy Checklist - New Revision

Last October, we reviewed the newly issued DoD Proposal Adequacy Checklist in some detail along. There was a lot of confusion on one question in particular, Question No. 19. You can read all about it by following this link.

The DoD has changed its mind concerning Question No. 19 and has now deleted it through a Federal Register Notice posted today.

Question No. 19 required price analysis for all commercial items offered that are not available to the general public. After further research, DoD determined that Item No. 19 is duplicative in nature. DoD concluded that items proposed with a commercial basis under subcontracts in the proposal require price analysis by the offeror. Furthermore, DoD also concluded that questions 14 and 17 currently address the requirement for price analysis of the proposed commercial item that is produced or performed by others.

Its going to take awhile before the revised checklists (i.e. checklists with Question No. 19 deleted) become readily available. Contractors and prospective contractors can expect to see old versions sent out with solicitations and through other means. That is unfortunate because companies might spend a lot of unnecessary time trying to understand exactly what the now-deleted Question No. 19 really requires and whether it is applicable to them.

The online versions of the checklist have not yet been updated, even though this changed is effective immediately.

DoD's Proposal Adequacy Checklist - A Clarification from DoD

As we work through and gain more experience with DoD's new proposal adequacy checklist, we find elements that just don't make sense. Checklist Item No. 19 is one of those.

Checklist Item No. 19, one of three questions falling under the subheading "Exceptions to Certified Cost or Pricing Data, asks, "Does the proposal include a price analysis for all commercial items offered that are not available to the general public?". The source for this requirement is specified as FAR 15.408, Table 15-2, Section II, Paragraph A.

If anyone checks the reference for this requirement, they'll be confused because FAR 15.408, Table `5-1, Section II, Paragraph A says nothing about providing price analyses of commercial items offered but not available to the general public. It states:

Provide a consolidated priced summary of individual material quantities included in the various tasks, orders, or contract line items being proposed and the basis for pricing (vendor quotes, invoice prices, etc.). Include raw materials, parts, components, assemblies and the services to be produced or performed by others. For all items proposed, identify the item and show the source, quantity, and price. Conduct price analyses of all subcontractor proposals. Conduct cost analyses for all subcontracts when certified cost or pricing data are submitted by the subcontractor. Include these analyses as part of your own cost or pricing data submissions for subcontracts expected to exceed the appropriate threshold in FAR 15.403-4. Submit the subcontractor certified cost or pricing data and data other than certified cost or pricing data as part of your own certified cost or pricing data as required in paragraph II.A.(2) of this table. These requirements also apply to all subcontractors if required to submit certified cost or pricing data.

There's nothing in the foregoing that requires contractors to include price analysis for commercial items that are not available to the public.

We need to go back to the definition of "commercial item" in FAR 2.101 to find out what DoD means by commercial items not available to the public. Herein we find that "commercial items" includes any item, other than real property, that is of a type customarily used for nongovernmental purposes and that has been offered for sale, lease, or license to the general public. It also includes items that meet this definition but for minor modification of a type not customarily available in the commercial marketplace made to meed Federal Government requirements. Minor modifications cannot significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process.

So, what gives? When asked to clarify, DoD responded:

This is not a new requirement; it is a reminder that a price analysis is still required when certified cost or pricing data are not required.

Well, that's true of all costs. Contractors must be able to demonstrate the reasonableness of their proposed costs regardless of the basis of estimate. Why single out commercial items not available to the public and then why give it a nonsensical reference as authority? There is no FAR requirement to submit these justifications with the proposal and the omission certainly doesn't make the proposal inadequate.

Perhaps this confusion is why NASA left this question out of its draft proposal adequacy checklist.

NASA Wants Its Own Proposal Adequacy Checklist

Today, NASA published a proposed rule in the Federal Register which would require contractors (and prospective contractors) to complete and submit a proposal adequacy checklist along with its proposal whenever certified cost or pricing data is required. The proposed checklist is very similar to the DoD checklist which became effective last March and which we have already written about. The proposed NASA checklist has two fewer checklist items than DoD's checklist.

The objective of NASA's proposed rule, like DoD's before it, is to ensure that offerors submit thorough, accurate, and complete proposals. It is expected that by completing the checklist, offerors will be able to self-validate the adequacy of their proposals which will improve the quality of their initial proposal submissions. This, in turn, will reduce the need for contractors to rework their initial proposal submissions which will save the Government time and resources in performing the evaluation of the proposal.

The NASA checklist adds the following to Checklist Item #3: "If your organization is subject to Cost Accounting Standards (CAS), does the proposal identify the current status of your CAS Disclosure Statement". Otherwise, Item #3 reads the same in both the DoD and NASA versions.

The NASA checklist omits Items #15 and #19 in DoD's checklist. Item #15 reads:

Has the offeror identified in the proposal those subcontractor proposals, for which the contracting officer has initiated or may need to request field pricing analysis (DFARS 215.404-3)?

Perhaps the omission is because the requirement references a DoD FAR Supplement requirement or because that particular DFARS makes no such requirement as we reported here.

The other DoD Checklist item not found in NASA's proposed checklist is Item #19 which reads:

Does the proposal include a price analysis for all commercial items offered that are not available to the general public (FAR 15.408, Table 15-2, Section II, Paragraph A)?

There is a 60 day comment period that ends on December 27, 2013 should you care to comment.

DFARS Proposal Adequacy Checklist - Is Your Proposal Current, Complete, and Accurate?

Today we'll wrap up our series on DoD's proposal adequacy checklist which became effective last March and applies to proposals where certified cost or pricing data is required. This checklist came out of a project of the Department's Panel on Contracting Integrity and was designed to consolidate existing regulatory requirements into a common checklist with the goal of reducing the number of inadequate pricing proposals that the Department received, thereby making the acquisition process more efficient.

As we've stated before, the checklist should help contractors ensure that they haven't inadvertently forgotten to consider a requirement of FAR or DFARS, or the contract solicitation itself. Its to the contractors advantage as well as the Government's to expedite the contracting process. Efficiency in anything improves the bottom line and that goes for proposal preparation practices as well.

Today we want to address Checklist Question No. 4 and caution contractors (and prospective contractors) to be very careful when answering this question. The question states:

Does the proposal disclose any other know activity that could materially impact the costs? This may include, but is not limited to such factors as
1. Vendor quotations;
2. Nonrecurring costs;
3. Information on changes in production methods and in production or purchasing volume;
4. Data supporting projections of business prospects and objectives and related operations costs
5. Unit-cost trends such as those associated with labor efficiency
6. Make-or-buy decisions;
7. Estimated resources to attain business goal; and
8. Information on management decisions that could have a significant bearing on costs.

Some of you might recognize this listing as the examples of cost or pricing data found in FAR 2.101. It's the same list. And, by listing these items in the checklist, the Government is reminding contractors of their duty to affirmatively disclose current, complete, and accurate cost or pricing data including those items specifically identified.

But what happens is a contractor fails to disclose this information at the time of proposal preparation. It is well understood that cost or pricing data must be certified as of the date of agreement on price. But this places an emphasis at the beginning of the process when, perhaps, many of these facts and decisions have not yet been fully fleshed out. Answering questions wrongly in this checklist could help make the Government's defective pricing case or even result in a fraud referral.

Don't take this question too lightly.

DFARS Proposal Adequacy Checklist - Will One Noncompliance Render Your Proposal Inadequate?

For the past few days, we've been discussing various aspects of DoD's proposal adequacy checklist that, since last March, has been required of prospective contractors whenever certified cost or pricing data is required. As we've stated before, its not a bad checklist and can help contractors ensure that certain requirements are not inadvertently overlooked. With six months of experience under our belts, we thought we would take a look at how implementation is going.

There are 36 questions in the checklist. In most cases, not all of them will be applicable on any given pricing action. Some of the questions are objective requiring little or not judgment. For example, question 13 asks whether there is a Government forward pricing rate agreement. That's a simple yes/no question. However, most of the questions have a subjective element to them and require some thought and judgment in answering them. And that is where problems have arisen between contractors and contracting officers and/or auditors.

For example, question 26 asks, "Does the proposal indicate the basis of estimate for proposed indirect costs and how they are applied? (Support for the indirect rates could consist of cost breakdowns, trends, and budgetary data.)".  The question here is, how detailed must that basis of estimate be? A contractor might state that indirect rates are based on projections of year-to-date actual rates, adjusted for non-recurring type expenses. The contracting officer on the other hand may want to see all of the details behind that statement and narrative to explain the non-recurring expenses.

Invariably, there will be differences of opinion on what constitutes adequate responses to the questionnaire and contractors will be faced with the prospect of having their proposal determined inadequate. That raises the question of how many "no" answers can there be without having the proposal rejected. There is no concise answer to that question because we are dealing with people, personalities, experience levels, significance, risk, and bad hair days. We can report on the official DCAA policy when it comes to answering that question.

It depends on the significance of the noncompliance(s). Multiple "no" answers can result in an overall adequate proposal. Or multiple "no" answers can render the proposal inadequate. The auditor should apply professional judgment in making the determination by considering the materiality and significance of the noncompliance(s) identified and their relationship to the overall proposal.

Our advice when questioned about adequacy of a response to one of the checklist items follows:

• If the information is readily available, provide it.
• If the information is readily available but too voluminous to include in the proposal (remember, some solicitations have page limits), tell them and offer to make it available at your location.
• If the information is not readily available, look for alternative methods of satisfying the requirement.
• If the auditor is being unreasonable, elevate the disagreement to the contracting officer. Ultimately, adequacy determination are made by the contracting officer, not the auditor.

DFARS Proposal Adequacy Checklist - Subcontracts Requiring Audit

Last March, the DoD published a proposal adequacy checklist in their FAR Supplement (DFARS). This checklist must be completed by DoD contractors whenever they submit proposals where certified cost or pricing data is required. The checklist does not specifically apply to subcontractors however some contractors have flowed down the requirement as part of their own solicitation instructions. Additionally, some contracting officers and auditors are pushing it on to non-DoD contractors. Although not specifically required, its often easier to complete it than to fight over whether it is applicable. Its not a bad checklist nor is it onerous. It should help contractors to ensure certain things are not omitted due to oversight.

Now that the checklist has been required for about six months, we're beginning to see a pattern emerge on the level of detail required when responding to some of the checklist questions. As is typical, the Government has an insatiable appetite for details, supporting data, and explanations while contractors tend to look at things in a more "matter of fact" view - is it there? Yes or No.

One of those questions that is causing a bit of friction is Question No. 15. That question, referencing DFARS 215.404-3 asks: "Has the offeror identified in the proposal those subcontractor proposals, for which the contracting officer has initiated or may need to request field pricing analysis?"

The problem here is that DFARS 215.404-3 makes no such requirement. It merely tells contracting officers to refer to PGI (Procedures, Guidance, and Information) 215.404-3 when reviewing subcontract proposals. (PGIs are internal DoD policies and procedures and do not apply to contractors) PGI 215.404-3 states that contracting officer should consider the need for field pricing analysis and evaluation of lower-tier subcontractor proposals, and assistance to prime contractors when they are being denied access to lower-tier subcontractor records. It also offers some things for contracting officers to consider when deciding to accept the results of the prime contractor's review and analysis of subcontractor proposals. It may be that the Government is not comfortable with the results of the prime contractor's review and wants to go out and get its own field pricing support in addition to what the prime contractor has done.

Providing a list of subcontractors that need to be audited might facilitate the contracting officer's offer to assist prime contractors and may expedite the eventuality, but such a list is not required by FAR or DFARS.

Just saying.

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.

Proposal Adequacy Checklist - Redux

Back in March of this year, DoD added a new DFARS Proposal Adequacy Checklist at DFARS (DoD FAR Supplement) 215.408(6). This change requires contractors to complete the Proposal Adequacy Checklist (DFARS checklist) and submit it with their proposals whenever the submission of certified cost or pricing data is required.

DCAA (Defense Contract Audit Agency) recently published a version of the checklist with different column headings. The DFARS checklist has two columns; "Proposal page No." and "If not provided EXPLAIN (may use continuation pages)". The DCAA checklist has "Adeqate Yes, No, or N/A" and "Comments". DCAA is calling theirs an optional version of the DFARS checklist with modified columns to assist auditors with documenting contractor compliance with the DFARS requirements for an adequate proposal.

Contractors should not use the DCAA checklist in lieu of the DFARS checklist. The DFARS checklist contains a reference to a specific proposal section or page number where the checklist adequacy item is contained or documented. The DCAA checklist does not include it. The DFARS checklist also requires an explanation when a checklist item is not satisfied. In most cases, the explanation will be because the cost element is not proposed. For example, checklist items 15, 16, and 17 are going to be N/A if there are no subcontracts proposed. The DCAA checklist does not solicit such information.

Note that this DFARS requirement does not automatically flow down to subcontractors but contractors would be wise to flow it down as part of their subcontract solicitation requirements. Its not a bad checklist and should help contractors and subcontractors to ensure the adequacy of their proposals.

We would appreciate feedback from anyone who has experience in completing this new checklist. Particularly, we are interested in how long it takes to complete it, problems in cross-referencing to a particular page in the proposal, and difficulties in understanding the questions.

DCAA's new checklist is available here.

Proposal Adequacy - What Can Happen if You Don't Comply with Instructions

Last week we posted a four part series on the importance of ensuring that proposals comply with solicitation requirements, Table 15-2 of FAR 15.403, and other instructions. These are important issues and failure to comply can and probably will affect your chances of winning whatever contract you're bidding on. Lest you under-estimate the importance of complying, consider these recent appeal cases decided by the Comptroller General.

1. Compuline claimed that the Government did not reasonably evaluate its proposal. The Government argued that Compuline's proposal was appropriately rejected because it did not include some of the most basic information required by the RFP.

The Comptroller General (CG) evaluated the evidence and denied Compuline's appeal. The CG found that the Government appropriately rejected the proposal. Among other omissions, Compuline did not provide a required management or staffing plan, key personnel, past performance references, nor a cost proposal. In addition, the proposal did not follow the format required by the RFP.

2. Herman Construction submitted a proposal in PDF format when the solicitation very clearly required Excel format. Herman argued that PDF was an acceptable substitute for Excel. The CG did not sustain Herman's appeal because it deviated from clearly written solicitation instructions.

3. SMI challenged the Government's determination that its proposal was technically unacceptable. The CG looked at the evidence supporting the Government's action and sided with the Government. It found that SMI failed to provide a complete and realistic plan for satisfying performance objectives and that its proposal did not identify a plan and otherwise failed to address most of the requirements.

4. LC objected to the Government's evaluation of its proposal arguing that its proposal provided the Government with sufficient data and detail to demonstrate that it was technically capable of performing the contract. The CG looked at the evidence and found that LC had failed to demonstrate an acceptable technical approach in its proposal. LC insinuated that the Government was pretty dumb for not knowing the latest technology for producing the product. Had the Government understood, it would have properly evaluated the proposal (good way to win friends).

The CG sided with the Government stating, in effect, that LC's failure to comply with the requirements of the solicitation was reasonable grounds for rejecting the proposal.

These are just a few recent examples of cases where contractors failed to comply with the regulations and requirements and where their appeals were not sustained. It pays to follow instructions.

Proposal Adequacy - Table 15-2 - Formats

We are going to conclude our four part series on what constitutes an adequate forward pricing submission according to FAR (Federal Acquisition Regulations). Table 15-2 of FAR 15.804 lays out very specific requirements for prospective contractors to follow when submitting price proposals. These requirements have been in FAR for a long time but DoD has recently begun to enforce them and to reject proposals that are not compliant. In some cases, a proposal rejection could end a contractor's quest to bid on a particular solicitation.

Part 1 - Background
Part 2 - General Instructions
Part 3 - Cost Elements

Section III of Table 15-2 specifies how submissions should be arranged. There are three examples provided, one for new contracts, one for change orders, modifications, and claims and the third for price revision/redetermination. We will focus on just the first one - New Contracts (including letter contracts).

The format for new contracts looks like this:

(1) This column lists the various proposed cost elements (e.g. materials, subcontracts, labor, other direct costs, fringe, overhead, general and administrative, FCCM, etc).

(2) The instructions in this column require contractors to enter those costs necessary and reasonable that, in their judgment, will properly be incurred in efficient contract performance.

(3) This column is optional, unless required by the Contracting Officer. Note, many proposals do not lend themselves to unit costing.

(4) This column is a reference to information supporting the specific cost elements. Many rejected proposals do not include adequate supporting data.

Many contractors have pricing applications, either commercially available or self-developed. Some that are designed specifically for Government contracting include summary level information that complies with the requirements of Table 15-2. If your system does not, or if you use Excel and Word to prepare your proposals, just be certain to add a section that summarizes the proposal in a manner that complies with Government expectations.

Proposal Adequacy - Table 15-2 - Cost Elements

We're continuing our series on how to ensure your pricing proposal is adequate before submitting it to the Government. It wasn't that long ago when proposal adequacy was not such a big deal. It was always a big deal with the auditors, but complaints to contracting officers were often met with something akin to "Well, do the best you can". Recently however, contracting agencies, and especially the Department of Defense, have come to realize that poorly prepared and supported proposals really do cause delays in negotiating contracts, not to mention an expenditure of more human resources than the Department is willing to squander. This realization led to two new checklists incorporated into the DoD FAR Supplement; one for pricing proposals and the other for forward pricing rate proposals (the latter is still a proposed regulation but we expect it to become final very shortly). The regulations accompanying these checklists require that contractors complete and submit them with their proposals.

Today we want to briefly discuss the basic requirements for the various cost elements that typically comprise a prospective contractor's proposal. You can refer to Table 15-2 for more detailed information. You can also refer to the DoD checklists to see how the Government "interprets" some of these requirements.

Materials. Contractors are required to provide a consolidated priced summary of individual material quantities included in the various tasks, orders, or contract line items being proposed and the basis for pricing (e.g. vendor quotes, invoice prices, inventory, etc). This includes raw materials, parts, components, assemblies and services to be produced or performed by others.

For all proposed items, the regulations require that you identify the item and show the source, quantity, and price. Contractors are also required to conduct cost or price analyses of all subcontractor proposals, as appropriate and include the results of those reviews as part of their own proposal.

Labor. Contractors (or prospective contractors) are required to provide a time-phased (e.g. monthly, quarterly, etc) breakdown of labor hours, rates, and cost by appropriate category and furnish bases for estimates of both required hours and hourly rates.

Other costs. Contractors must list all other costs not otherwise included in other categories. These would include special tooling and test equipment, travel, computer and consultant services, preservation, packaging and packing.

Indirect costs. Contractors must indicate how they computed and applied indirect costs, including cost breakdowns. They must show trends and budgetary data to provide a basis for evaluating the reasonableness of proposed rates. They must indicate the rates used and provide an appropriate explanation.

FCCM (Facilities Capital Cost of Money). When contractors elect to claim facilities capital cost of money as an allowable cost, they must also submit Form CASB-CMF and show the calculation of the proposed amount. We often see instances where contractors do not propose FCCM. Those that don't, are leaving money on the table.

Recently, we've seen a significant increase in the number of proposals rejected because they did not meet one or more of these requirements. Don't give the Government an excuse for rejecting one of yours.

Proposal Adequacy - Table 15-2 - General Instructions

This is the second in our series on pricing proposal adequacy. Table 15-2 of FAR 15.804 contains detailed instructions to prospective contractors on how to prepare and submit adequate proposals. These requirements are more than guidance or mere formality. Failure to comply with with the regulations risks the Government rejecting your proposal as inadequate. Although Table 15-2 applies to solicitations that require the submission of certified cost or pricing data, it has been called out by contracting officers for other types of procurements as well (e.g. data other than certified cost or pricing data).

The first general instruction requires the following information to be included on the first page of your pricing proposal. This might seem linke a somewhat mundane requirement but it is a requirement and it is the Number 1 item on DoD's adequacy checklist.

• Solicitation, contract, and/or modification number
• Name and address of offeror
• Name and telephone number of point of contract
• Name of contract administration office (if available)
• Type of contract action (i.e. new contract, change order, price revision, letter contract, etc)
• Proposed cost, profit or fee and total
• Whether you will require the use of Government property in the performance of the contract, and if so, what property
• Whether your organization is subject to CAS, has submitted a CAS Disclosure Statement, whether it has been determined adequate, and whether you have been notified that you are or may be in noncompliance
• The following statement

This proposal reflects our estimates and/or actual costs as of this date and conforms with the instructions in FAR 15.403-5(b)(1) and Table 15-2. By submitting this proposal, we grant the Contracting Officer and authorized representative(s) the right to examine, at any time before award, those records, which include books, documents, accounting procedures and practices, and other data, regardless of type and form or whether such supporting information is specifically referenced or included in the proposal as the basis for pricing, that will permit an adequate evaluation of the proposed price.

• Date of submission
• Name, title, and signature of authorized representative.

The second general instruction is a requirement to include an index, appropriately referenced, of all the certified cost or pricing data and information accompanying or identified in the proposal. In addition, you must annotate any future additions and/or revisions, up to the date of agreement on price, or an earlier date agreed upon by the parties, on a supplemental index (Item #3 on the DoD Adequacy Checklist).

Solicitations generally require specific information that must be included in the proposal. Often this information is unique to each solicitation. In addition to these specific requirements, the third general instruction requires an explanation of your estimating process including

1. The judgmental factors applied and the mathematical or other methods used in the estimate, including those used in projecting from known data; and
2. The nature and amount of contingencies included in the proposed price.

There are a few other general requirements to keep in mind; costs by contract line item (and a total of all line items), incurred costs, if any, and whether you have an FPRA (Forward Pricing Rate Agreement)

Don't take these requirements lightly. As we stated earlier, the Government, especially DoD, has been requiring a much higher level of compliance with these requirements. Save yourself time and grief by getting it right the first time.

Proposal Adequacy - Table 15-2

We're going to spend the next few posts discussing Table 15-2 under FAR 15-804. Table 15-2 is the instructions for submitting cost/price proposals when certified cost or pricing data are required. Some solicitations that require data other than certified cost or pricing data will specify the use of Table 15-2.

There is a very strong emphasis by the Government these days on ensuring that proposals and rate proposals are adequate. These are not new requirements - they've been around since the inception of the FAR in 1984. What is new about this requirement is the increased emphasis on compliance. According to DoD, adequate and well-supported proposals will

• facilitate the timely and efficient completion of the audit,
• reduce contractor effort needed to support an audit, and
• facilitate the negotiation process. 

DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) as well as procurement contracting officers will often cite Table 15-2 as an authoritative source when commenting on a proposal's inadequacy. If deficiencies are significant enough, the forward pricing proposal or forward pricing rate proposal may even be rejected as inadequate.

The new DFARS checklist for Proposal Adequacy and the proposed DFARS checklist for Forward Pricing Rate Proposal Adequacy both source Table 15-2 as the basis for most of the checklist items.

The first section of Table 15-2 is a reminder of contractor's obligation to submit rather than make available. It states:

There is a clear distinction between submitting certified cost or pricing data and merely making available books, records, and other documents without identification. The requirement for submission of certified cost or pricing data is met when all accurate certified cost or pricing data reasonably available to the offeror have been submitted, either actually or by specific identification, to the Contracting Officer or an authorized representative. As later data come into your possession, it should be submitted promptly to the Contracting Officer in a manner that clearly shows how the data relate to the offeror's price proposal. The requirement for submission of certified cost or pricing data continues up to the time of agreement on price, or an earlier date agreed upon between the parties if applicable.

This is pretty straight-forward but the many defective pricing cases have been lost because contractors failed to "submit" data. It's not a defense to suggest that if the Government wanted something, all they had to do was ask.

The next section of Table 15-2 is a reminder that by submitting the proposal, the contractor is giving the Government access to its books and records.

By submitting your proposal, you grant the Contracting Officer or an authorized representative the right to examine records that formed the basis for the pricing proposal. That examination can take place at any time before award. It may include those books, records, documents, and other types of factual data (regardless of form or whether the data are specifically referenced or included in the proposal as the basis for pricing) that will permit an adequate evaluation of the proposed price.

Companies that cannot abide by the access to records requirement should probably not be bidding on Government contracts that require the submission of cost or pricing data.

Tomorrow we will look at the information required to be included on the first page of the proposal.

Another DoD Checklist - This Time For Forward Pricing Rates

Back in March, the DoD published a final rule in its FAR Supplement (DFARS) to require contractors to complete and submit a proposal adequacy checklist whenever a solicitation requires the submission of certified cost or pricing data. You can read more about this 37 item checklist by following this link.

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.

Proposal Adequacy Checklist - Final

To see the final checklist, click here.

More than a year ago, December 5, 2011 to be precise, DoD published a proposed rule to incorporate the concept of a checklist for determining whether a proposal had been adequately prepared. We reported on that proposed checklist here and here and compared it to a DCAA adequacy checklist that had been kicking around for awhile at that time. Adequate proposals, as everyone knows, facilitates their evaluation and negotiation.

The purpose for the adequacy checklist, according to DoD, is to ensure offerors take responsibility for submitting thorough, accurate, and complete proposals. The final checklist has only 36 items compared to 47 items in the proposed rule. That's the right direction. Also, just because this new rule appears in the DoD FAR Supplement, doesn't limit its potential applicability. DCAA will undoubtedly pull it out no matter which Agency's proposal they're auditing.

But as the checklist pertains to DoD contractors, whenever certified cost or pricing data is submitted, the offerors must complete the checklist and provide it with their proposals (DFARS 252.215-7009). There is also a flowdown requirement for subcontractors to use the same or similar checklist.

October 11, 2013 Correction: There is no flowdown requirement. The Q&A accompanying the rule states as follows: 

13. Subcontractor Flowdown

Comment: Several comments were received regarding the applicability of the checklist to subcontractors as the proposed rule has no guidance on this. One of the respondents noted that flowdown to require subcontractor to use the checklist would add a significant amount of time to proposal preparation.

Response: The checklist is not required to flow down to subcontractors, but prime contractors may elect to use it for their prospective subcontractors' proposals.

This new checklist applies to solicitations issued after March 28, 2013.