Column: Cost and Pricing Proposals - An Adequacy Primer

by Michael Smigocki, Senior managing director, Federal Strategies Group LLC

Submitting a proposal to a solicitation is one of the first steps towards developing and growing a practice in the federal government contracting marketplace. However, many would-be contractors, as well as current contractors, have struggled with what constitutes an adequate cost or pricing proposal. How much detail information and backup documentation should be supplied? Will the proposal withstand government audit? This article will detail what constitutes an adequate cost or pricing proposal.

Cost and pricing data

In a proposal where cost or pricing data is required, the government seeks from the contractor’s proposal what the basis and rationale are for each of the elements of the proposed costs. In addition, the government wants to be assured that the information being provided by the contractor is current, accurate and complete. Finally, DFARS 252.215-7009 asks the contractor to provide where in the proposal various elements of cost or pricing are explained. If no explanation is provided, you are required to say why.

Basic elements

Costing proposals, whether for products or services, contain the same basic elements including direct labor, materials, subcontracts, other direct costs, indirect costs and profit. The following are some general guidelines as to what constitutes adequate support for each of the elements:

Direct Labor – You will want to disclose what the basis is for the hourly rates. Current compensation rates paid to employees? Market surveys? Offer letters to employees? Also, what was your labor escalator based on if this is a multi-year procurement? Finally, how were the hours proposed determined (if not already provided by the government)?

Materials – Individual material quantities and pricing should be included. It also should specify how the pricing was determined. Competitive bids? Vendor quotes? Internal costs? You also should identify whether any services need to be performed to the materials (i.e. building kits or assemblies), whether by your personnel or outsourced to others.

Subcontractors – It is important in negotiated awards that the company strive to achieve price competition from outside vendors. This is an area that many companies are challenged in a proposal audit. They generally have a favorite vendor or subcontractor that they turn to without consideration as to whether their pricing is cost competitive or not. As the prime contractor, you are responsible for managing the efforts and compliance of your subcontractors.

Indirect Costs – The company’s indirect rate methodology as well as the elements of indirect costs pertaining to this procurement should be described. Are the proposed indirect rates based on historical costing, forward pricing or an operating budget? The government prefers it being based on an operating budget or long-range forecast. What is the relation of these indirect rates to the growth/decline of projected revenues? Many contractors make the mistake of straight-lining their indirect rates without considering the impact of growing or declining revenues into the future.

Profit – How was the profit rate determined? Have the various elements of risk been analyzed for this particular procurement in the formation of a profit percentage. If the company is seeking higher profit rates than typically would be found for the type of contract to be let, it must be in a position to discuss these risk factors and convince the government of why a higher profit rate is warranted.

Cost or pricing data are required if the procurement is a negotiated award under FAR Part 15 and the procurement is above $700,000. A certification will be required of the contractor to attest that the cost or pricing data that is submitted is current, accurate, and complete. Failure to adhere to this provision can leave the contractor susceptible to an allegation of defective pricing.

The Defense Contract Audit Agency (DCAA) or other agency auditors may be asked to perform a proposal audit by the contracting officer. They will first assess whether the proposal contains the necessary information for which to perform the audit. The DCAA will generally use the checklist that is contained in FAR 15.408, Table 15-2 to make this assessment. Contractors should print out this checklist and use it as a guide when preparing its cost proposals.

They will then analyze the individual elements and their supporting data. Common deficiencies that contractors experience include:

• Inadequate cost or pricing data
• Lack of or inadequate budgetary data
• Failure to perform analysis of subcontractors cost or pricing data.

Preparing a cost or pricing proposal that provides the necessary backup data and information can greatly assist the Company upon government audit and the awarding of the contract in timely fashion.

Michael Smigocki, CPA, CVA, ABV is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony services to the government contracting and technology industries. He can be reached via email at MikeS@FedStrat.com .

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Column: Cost and Pricing Proposals - An Adequacy Primer

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