Pricing Subcontracts to Win Work and Make a Profit

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2 Pricing Subcontracts to Win Work and Make a Profit Breakout Session C02 Rita L. Wells, PhD Senior Acquisition Executive, Suntiva Deidre A. Lee Consultant Date: Thursday, March 17, 2016 Time: 3:45pm 5:00pm

3 Overview Why is Cost/Price Analysis important in the Prime Contractor and Subcontractor relationship? Overview of Price/Cost Analysis. How can prime contractors comply with FAR requirements for analyzing subcontractor prices? What important pricing issues need to be addressed in teaming agreements and subcontracts? Questions and Discussion 2

4 Why is Price/Cost Analysis Important In the Prime / Subcontractor Relationship? Affects winning work and profitability for both! If not compliant, can have negative impacts on the Prime contractor... that can also affect the Subcontractor: Disallowed costs Defective Pricing / False Claims Act / Qui Tams Disapproval of Purchasing System (and withholds from invoices) Claims / Disputes / Lawsuits 3

5 What is a Winner? For the Government Fair and Reasonable Price Compliance with Contract terms, schedule, standards For both the Prime Contactor and Subcontractor Winning work Making a profit Avoiding problems (claims, lawsuits, audits) And continuing to be sought out as a Prime or Subcontractor for future work. Primes seek Subcontractors and Subcontractors seek Primes they can work with. 4

6 The Basics: What is Price / Cost Analysis? Price Analysis evaluates the total price including profit. Cost analysis evaluates the individual elements of a price including: Labor Material Other Direct Costs Fee (Profit) Overhead General and Administrative Costs (G&A) Cost of Money 5

7 What methods are used for Price Analysis? Preferred: (FAR (b)) 1. Adequate Competition 2. Comparison to historical prices paid Other: 3. Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound) 4. Comparison with competitive published price lists 5. Independent Government (or Prime contractor) cost estimates. 6. Comparison to prices obtained through market research 7. Data other than certified cost or pricing data 6

8 How is Cost Analysis Performed? Detailed analysis of each element of cost to determine if the cost is allowable based on: Reasonableness Does the cost exceed what a prudent person would pay in the normal course of business? Allocability Is it properly charged to a cost objective based on relative benefits received? Accounting Practices & Standards Is it compliant with Cost Accounting Standards (CAS) or Generally Accepted Accounting Principles? Applicable Cost Principles Is it compliant with FAR Part 31? Contract Terms Can be more restrictive than other factors. Cost analysis must be verified by also performing price analysis. 7

9 When is Price Analysis of Subcontract Costs Required? Government expects documentation of price analysis: Whenever cost analysis is required. Important during business system reviews (CPSRs). Prime contractors are not otherwise required to perform subcontract price analysis. However, it is a best practice to ensure a well-priced proposal to avoid subcontract problems later. And to win work, make a profit and avoid problems. 8

10 When is Cost Analysis Required? Cost Analysis and a Certificate of Current Cost and Pricing Data are required for proposals over $750,000 if no exceptions apply. Exceptions: (See FAR (c)) Adequate competition Prices set by law or regulation Commercial items Modifications to contracts for commercial items When a waiver has been granted Exercise of options at price established at contract award 9

11 Cost Analysis for Modifications Unless exceptions apply, FAR requires cost analysis and a Certificate of Current Cost and Pricing Data for a modification of any contract or subcontract over $750,000. Applies regardless of whether the original contract was awarded by sealed bid or negotiation. Even if certified cost or pricing data were not initially required Adequate competition is not an exception for a modification. Price adjustment amounts must consider both increases and decreases (e.g., a $200,000 modification resulting from a reduction of $500,000 and an increase of $300,000 is a pricing adjustment exceeding $750,000). 10

12 Reference: Requiring certified cost or pricing data (10 USC 2306a and 41 USC chapter) (a)(1) The contracting officer shall obtain certified cost or pricing data only if the contracting officer concludes that none of the exceptions in (b) applies. However, if the contracting officer has reason to believe exceptional circumstances exist and has sufficient data available to determine a fair and reasonable price, then the contracting officer should consider requesting a waiver under the exception at (b)(4). The threshold for obtaining certified cost or pricing data is $750,000. Unless an exception applies, certified cost or pricing data are required before accomplishing any of the following actions expected to exceed the current threshold or, in the case of existing contracts, the threshold specified in the contract: (i) The award of any negotiated contract (except for undefinitized actions such as letter contracts). (ii) The award of a subcontract at any tier, if the contractor and each higher-tier subcontractor were required to furnish certified cost or pricing data (but see waivers at (c)(4)). (iii) The modification of any sealed bid or negotiated contract (whether or not certified cost or pricing data were initially required) or any subcontract covered by paragraph (a)(1)(ii) of this subsection. Price adjustment amounts must consider both increases and decreases (e.g., a $200,000 modification resulting from a reduction of $500,000 and an increase of $300,000 is a pricing adjustment exceeding $750,000). 11

13 Fee or Profit Prime Contractor Prime contractor s fee arrangements can take many forms depending on the type of prime contract. Fixed Price Prime Contract: Profit is included as part of the Prime s price. Cost Reimbursement Prime Contract: Fee is added to a Prime s costs: Fixed Fee Incentive Fee Award Fee. 12

14 Fee or Profit - Subcontractor Prime and Subcontractor fee/profit arrangements can be structured in different ways: Subcontractor s profit may be part of subcontractor s price. The Prime Contractor may negotiate a fee-sharing arrangement with the Subcontractor. Subcontractor s profit or fee is not evaluated by the Government unless it is passed on as part of the price. Prime Contractors and Subcontractors must have a clear understanding of any fee-sharing arrangements If the Prime does not receive the full fee, what happens to the Subcontractor s fee? 13

15 Profit / Fee Considerations Profit or Fee by Type of Prime Contract or Subcontract Arrangement Prime Contract Fixed Price Contract Cost plus Fixed Fee Government Actions and Considerations Regarding Fee or Profit Is Prime s price (including profit) fair and reasonable? Negotiates Prime contract with Fixed Fee. Cost plus Incentive Fee Fee Varies with Incentives Cost plus Award Fee Subcontract Profit is included in the Subcontract price Prime s fee is shared with the subcontractor Government determines amount of award fee. Is subcontract price (including profit) fair and reasonable? N/A 14

16 Important Points for Primes Good Subcontractor pricing can be key to winning work and profitability. Understand Requirements for Compliance it can impact profits. Understand and document how Subcontractor s prices/costs were determined to be fair and reasonable. Be prepared for audits and compliance reviews: DCAA DCMA: CPSR, Estimating, Accounting System Reviews GSA: Reviews before Schedule option is exercised. 15

17 Important Points for Subcontractors Know what the Prime needs from you to document price reasonableness. Market Pricing? Commercial Price Lists? Certificate of Cost and Pricing Data? Know how to respond to requests for your business confidential pricing information. Understand how the Prime will handle the Government's questioning or disallowance of your subcontract costs? Withhold payment from your invoices? 16

18 Teaming Agreements Formed during proposal stage before prime contract award. Can take one of following forms if the proposal is successful: Two firms agree to form a new corporate entity, or One firm agrees to be a subcontractor to the other. Teaming agreement often is only a general agreement. It is replaced by a subcontract with terms and conditions and price after award of the prime contract. Lack of specificity places significant risk on both Prime and Subcontractor. 17

19 Price / Cost Analysis: What Does It Take to Determine a Winner? Understand and comply with Government requirements for Price / Cost Analysis. Prime Contracts Subcontracts Modifications Primes and Subcontractors must work together as good business partners to: Develop a winning proposal. Comply with Government requirements Maintain profitability 18

20 Questions / Discussion 19