FDA Business Management Team Business Proposal Evaluation.

FDA Business Management Team

Business Proposal Evaluation

Reasons for Business Analysis Common Definitions Common Business Proposal (SB) Issues Price Analysis

– Exercise 1

Cost Analysis– Exercise 2

Technique Determination & Other Considerations– Possible scenarios

Business Analysis Report Outline Pivot Table Demonstration Questions

Agenda

Reasons for Business Analysis

FAR 15.402(a) – Pricing Policy states

The contracting officer shall purchase supplies and services from responsible sources at fair and reasonable prices.

WARNING! FAR Cites Ahead!

FAR 15.304(c)(1) states

Price or cost shall be evaluated in every source selection.

Contracting Officers and Contract Specialists are business advisors

• Assist customers to make good business decisions.

• Be prudent but fair with contractors.

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Importance of Solicitation Language

Brain teaser – Which takes precedence, the FAR or the Solicitation?

The FAR States Review Solicitation Language Carefully

Separate and Independent

• Analysis must be performed in accordance with the solicitation language to avoid protest FAR - 15.305(a).

• Shall evaluate competitive proposals and then assess their relative qualities solely on the factors and subfactors specified in the solicitation – FAR 15.305(a).

• Proposal instruction - Section L

• Evaluation factor - Section M

• Price each contract separately and independently - 15.402(b).

• Do not use proposed price reductions under other contracts as an evaluation factor; or consider losses or profits realized or anticipated under other contracts.

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Common Definitions

Fair – Fair market value, reasonable profit for offeror.

Realism - whether the estimated proposed cost elements are realistic for the work to be performed,

FAR 15.404-1(d)(1).

Reasonableness - Does not exceed that

which would be incurred by a prudent person in the

conduct of competitive business, FAR 31.201-3.

Underbidding, usually in a competitive environment

Overbidding, Sole-source & Competitive

environments

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Common BA Issues - Small BusinessesFDA Specific

SB Cost Proposal Considerations

– Gov’t must verify that SB Offerors have an adequate accounting system for any cost-type proposal (FFP exempt)

– Verification must be based on an independent Gov’t accounting system audit Absence of assumptions

– Can result in confusion / misunderstanding between Industry and the Government

– Small Business vs. Large Business Pricing

– At times small businesses do not provide a basis for their proposed pricing

– Consequently this makes it difficult for the Gov’t to determine if prices are fair, realistic, and reasonable.

Labor Rates (LRs)

– Small businesses have a greater tendency to propose LRs not aligned to commercial rates (i.e. GSA Schedules)

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Common BA Issues - Small BusinessesGeneral

Mentor-Protégé program not widely understood– Mentor may be treated as subcontractor with a misunderstood 50%

performance requirement though SBA has not expressly set a performance requirement. This is supported by allowing the Mentor to create a JV and perform as a Prime.

FAR 19.1307 Price evaluation preference for HUBZone

– The contracting officer shall give offers from HUBZone small business concerns a price evaluation preference by adding a factor of 10 percent to all non-HUBZone offers.

Responsibility Determination

– CO may defer to SBA for the “Certificate of Competency”. However, Small Businesses can provide this in response to the RFP => reduces overall processing time.

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Price Analysis

Price analysis shall be used when certified cost or pricing data are not required - FAR 15.404-1(b)  note the different FAR cite!

Key of Price Analysis

• Differences of Price vs Cost

• Evaluated without reviewing separate cost elements of a proposal.

• Price analysis should be used to verify that the overall price offered is fair and reasonable.

• FAIR and Reasonable normally established by adequate price competition.

• FAR 15.404-1(b)(2)(i)

Price Analysis Techniques

• Comparison of proposed prices with independent Government cost estimate (IGCE).

• Comparison of the proposed prices to historical prices paid.

• Use of parametric estimating methods/application of rough yardsticks.

• Comparison with competitive published price lists.

• Comparison of proposed prices with prices obtained through market research for the same or similar items.

• Analysis of data other than certified cost or pricing – can be very useful.

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Price Analysis Exercise (1)

  Offeror 1 Offeror 2 Offeror 3 Offeror 4 Offeror 5

Delivery Time 20 days 20 days 20 days 30 days 30 days

OSHA Compliance Yes Yes No Yes No

Small Business Yes Yes Yes No Yes

T/C Exception None None None None None

Unit Price $68 $70 $77 $79 $80

Volume Discount 4% 5% 7% 7% 6%

Extended Pricex 1,000 Units Please Calculate Please Calculate Please Calculate Please Calculate Please Calculate

Payment Terms 1%/20 days, Net 30 days

5%/15 days, Net30 days Net 30 days 3%/15 days, 

Net 30 day2%/10 days, Net 30 days

A requisition is received for 1,000 first-aid kits for an emergency planning exercise. The kits must be Occupational Safety & Health Administration (OSHA) compliant and received within 21 days. Who would you award the delivery order to?

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Price Analysis Exercise (2)

  Offeror 1 Offeror 2 Offeror 3 Offeror 4 Offeror 5

Delivery Time 20 days 20 days 20 days 30 days 30 days

OSHA Compliance Yes Yes No Yes No

Small Business Yes Yes Yes No Yes

T/C Exception None None None None None

Unit Price $68 $70 $77 $79 $80

Volume Discount 4% 5% 7% 7% 6%

Extended Pricex 1,000 Units $65,280 $66,500 $71,610 $73,470 $75,200

Payment Terms 1%/20 days, Net 30 days

5%/15 days, Net30 days Net 30 days 3%/15 days, 

Net 30 day2%/10 days, Net 30 days

After Payment Discount $64,627 $63,175 $71,610 $71,266 $73,696

1. After payment discount Offeror 2 has the lowest proposed price, but what is the risk for the Government?

2. Why do some vendors offer payment term discounts?

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Cost Realism Analysis

The process of independently reviewing and evaluating specific elements of each Offeror’s proposed cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed - FAR 15.404-1(d)(1)

Key of Cost Realism Analysis

• Must be performed on all cost reimbursement contracts.

• Process of evaluating the methodology used by the offeror (contractor) to estimate proposed costs.

• Use information other than cost or pricing data to evaluate – FAR 15.404-1(a)(4)

• Similar to a cost analysis, less extensive and not as exact.

Cost Realism Analysis Techniques

• Perform a technical analysis of the proposed types and quantities of materials, labor, processes, etc..

• Examine the types and quantities of labor and material proposed.

• Evaluate pricing related to similar or commercial items requiring minor modifications to determine magnitude of changes.

• Compare Government’s “probable” cost of performance with each offeror’s proposed costs to determine best value

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Cost Analysis

Review and evaluation of any separate cost elements and profit or fee in an Offeror's proposal, as needed to determine a fair and reasonable price or to determine cost realism, and to determine how well the proposed costs represent the contract - FAR 15.404-1(c)(1)

Key of Cost Analysis

• Must be performed on sole-source contracts.

• More laborious than price analysis and cost realism analysis.

• Similar to a cost realism analysis, but more extensive and more exact.

Cost Analysis Techniques

• Comparison of costs proposed by the offeror for individual cost elements with:

• Actual costs previously incurred by the same offeror

• Previous cost estimates from the offeror or from other offerors for the same or similar items.

• IGCEs.

• Forecasts of planned expenditures.

• Other cost estimates received in response to the Government’s request.

• Review to determine whether any additional cost data or pricing data, necessary to make the Offeror's proposal suitable for negotiation.

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Key Cost Elements – Direct Costs

Labor hours that are direct support and within scope of the contract.

• Proposed labor should be based on the requirement

• Hours and rates clearly shown by specific category.

• The annual hours that vendor used to define an FTE should be reviewed

Direct Labor ODC/Material

Travel costs, including airfare, per diem, etc.. may be allowed in direct support of the contract.• Details should be requested if travel cost is

expected to be a factor• The contractor may not have to adhere to the JTR

if such language is not included in the contractG&A may be assessed on travel costs.

Travel

Costs used in direct support of the contract and may include:• Subcontractor costs• Consultant costs• Lease of equipment• Computer Hardware• Software licensesItem descriptions, quantities and cost estimates can be obtained using catalogs, price quotes, historical data, etc.. • Emphasis in estimating ODCs is accuracy in type

and quantity

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Productive Hours Calculation Example:

Starting Point 2,080 hours

Less:Holiday 80 hours

Annual Leave 80 hours

Sick Leave 40 hours

Training, misc. 40 hours 240

hours

Productive Hours: 1,840 hours

Full-Time Equivalent Example

*Sample calculation. Productive hours varies depending on individual vendor accounting systems.

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Key Cost Elements – Indirect Costs (1)

An indirect rate for the purpose of allocating items such as:

• Health insurance• Payroll taxes• Holiday and vacation time• Pension & etc..

Fringe rate is applied to total direct labor proposed. The rate may vary significantly from vendor to vendor

Fringe Benefits

An indirect rate that pertains to a department or cost center that benefits two or more projects/contracts such as: • Depreciation• Indirect labor• Telephone and computers etc..• Usually structure related

OH rate is applied to total direct labor only or total direct labor plus fringe benefits*

Overhead

An indirect rate that pertains to activities such as:• Salary for administrative assistants• Human resource department• Usually activities related and benefits the entire

company/cost center

G&A rate is applied to total direct labor plus fringe benefits, overhead, material handling (if applicable), and all direct costs.

G&AMaterial Handling

An indirect rate that usually applies to ODC/Material costs.• Typically a rate significantly lower than the G&A• For newer companies and/or small businesses,

sometimes the G&A rate is used. Verify through proposal and billing consistency

• MH costs may include appropriate indirect costs allocated to direct materials based on contractor accounting procedures and must not include any fee or profit

Material Handling rate is typically applied to all ODC and Material costs.

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Key Cost Elements – Indirect Costs (2)

FCCM

Facilities Capital Cost of Money• Facilities capital cost of money is an imputed

cost related to the cost of contractor capital committed to facilities

• Calculated by multiplying the net book value of the business-unit's facilities investment by a cost of money rate based on the interest rates specified semi-annually by the Secretary of the Treasury under Public Law 92-41

• Usually not a significant cost and profit is not allowed

Note: Each vendor may apply their indirect rate differently based on how their accounting system is set up.

Important Note!

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Fully Burdened Rate Build-Up Example

*All indirect rates used herein are fictitious and for demonstrative purposes only

Labor Category IT Specialist 1 Rate Calculation

Direct Labor Rate $26.83 A 

Fringe Benefits $8.05 B30%

B= A x 30%

Overhead $12.21 C35%

C= (A+B) x 35%

G&A $6.59 D14%

D= (A+B+C) x 14%

Profit $3.76 E7%

E = (A+B+C+D) x 7%

Fully Burdened Hourly Rate $57.44 F   F = Sum of A, B, C, D, E

For this example, the total burden to direct labor is approximately 114%

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Key Cost Elements - Fee

Question – What determines the level of fee rate/%?

FAR 15.404-4(c) – Profit states

CPFF fee is limited at 10% - FAR 15.404-4(c)(4)(i)(C)CPFF fee is limited at 15% for R&D requirements- FAR 15.404-4(c)(4)(i)(A)

FAR does not provide specific guidance on fee for fixed-price and other cost reimbursement contracts, but competition can help the determination.

HHSAR 315.404-4 provides detailed guidance on a structured approach for establishing profit objective for negotiation.

Typically, the fee rate/% is dependent on the amount of risk, market factors, and any other unique factors that may affect the operation or location of the effort.

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Cost Realism Analysis Exercise (1)

OAGS is contracting for 1 year of computer server maintenance services. A CPFF contract is intended. Assuming all Offerors are technically equal and acceptable,

1) Who appears to be underbidding?2) What adjustments need to be made for cost realism analysis? 3) Who offers the best value?

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Cost Realism Analysis Exercise (2)

Offerors’ Proposed Costs

Cost Element Offeror 1 Offeror 2 Offeror 3

Direct Labor            

IT Specialist I $60,000    $55,000    $65,000   

Program Analyst II $75,000    $65,000    $70,000   

Computer Engineer II $90,000    $80,000    $85,000   

Project Manager $100,000    $90,000    $95,000   

Subtotal $325,000 $290,000 $315,000

Fringe Benefits $130,000  40% $101,500  35% $129,150  41%

Overhead $182,000  40% $137,025  35% $168,777  38%

Subtotal $637,000 $528,525 $612,927

Material $60,000    $57,500    $48,000   

Travel $4,000    $3,500    $5,000   

Total Cost Input $701,000 $589,525 $665,927

G&A $77,110  11% $58,953  10% $79,911  12%

Total Cost $778,110 $648,478 $745,838

Profit $54,468  7% $19,454  3% $89,501  12%

Total Price $832,578 $667,932 $835,339

Assumptions

1. FTE based on 1880 hours2. Material includes warranty

1. FTE based on 1840 hours2. Material includes warranty

1. FTE based on 1920 hours2. Material excludes warranty

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Cost Realism Analysis Exercise (3)

Governments’ Probable Costs

Cost Element Offeror 1 Offeror 2 Offeror 3 Direct Labor            IT Specialist I $60,000    $56,196  1.022 $63,646  0.979Program Analyst II $75,000    $66,413  1.022 $68,542  0.979Computer Engineer II $90,000    $81,739  1.022 $83,229  0.979Project Manager $100,000    $91,957  1.022 $93,021  0.979Subtotal $325,000 $296,304 $308,438 Fringe Benefits $130,000  40% $103,707  35% $126,459  41%Overhead $182,000  40% $140,004  35% $165,261  38%Subtotal $637,000 $540,015 $600,158 Material $60,000  0% $57,500  0% $57,600   20%Travel $4,000    $3,500    $5,000   Subtotal Cost Input $701,000 $601,015 $662,758 G&A $77,110  11% $60,101  10% $79,531  12%Total Cost $778,110 $661,116 $742,289 Profit $54,468  7% $19,833  3% $74,229  10%Total Price $832,578 $680,950 $816,517

Assumptions:

1. FTE based on 1880 hours, offeror 1 not adjusted2. Material warranty is estimated at 20% for Offeror 33. Profit adjusted to 10% for Offeror 3 as this is the max fee for CPFF

Material Warranty estimated at 20% for Offeror 3

Fee adjusted to

10% for Offeror 3

Labor Costs adjusted based on 1 FTE = 1880 annual hours

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Key Cost Elements – Direct Costs

Most significant element that drives the overall cost in most cases

• Proposed labor should be based on the requirement.

• Hours and rates clearly shown by specific category.Direct Labor

• From vendor to vendor, review the hours for a FTE carefully.

• Caution - each vendor may define an FTE differently based on their business practices and accounting system.

Full-Time Equivalent(FTE)

• A FTE is calculated from total available hours:• 40 hours/week, 52 week in a year = 2,080 hours• Use 2,080 hours as the base and deduction of the following:

vacation days, sick leave, holidays and training allowance etc., which defines the actual FTE for the vendor.

• Calculated “productive” hours can vary based on how each vendor accounts for their indirect activities. i.e. Some vendors may observe 8 Federal holidays or does not allocate hours for training.

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Technique Determination

The analysis technique is generally determined based on contract type and can be confirmed by the necessity of certified cost and pricing data. Note: BMT uses a hybrid technique, which includes Price Analysis and Cost Realism.

Certified Cost or Pricing Data - 15.404-1(a)(2)

Contract Type

TechniqueSelection

Technique Determination

Fixed-Price Contract Actions• FFP / FPIF - cost realism & price analysis• Sole-source – cost analysis

Cost Reimbursement Contract Actions• Competitive - realism, (lower LCAT mix, fee

rate) vs. cost analysis for sole-source (higher LCAT, fee)

Price analysis when not required – FAR 15.404-1(a)(2)

• Under SAT• Adequate competition - 15.403-1(c), • Price set by law or regulation (i.e. public

utility)• Commercial items• HCA Waivers

Cost analysis when required – FAR15.404-1(a)(3)

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Scenarios and possible technique

Type of Contract Action Possible Technique Reason

GSA/FSS Schedule Price Analysis Competition, Commercial Item

BPA Cost Realism, Price Analysis CR for Base, PA for calls

Competitive Solicitation, including Set-Aside

Cost Realism, Price Analysis Depending on Contract Type

IDIQ/Multiple award Cost Realism, Price Analysis Depending on Contract Type

GWAC/NIH NITACC Price Analysis Competition, Commercial Item

Sole-Source over SAT (including single source directed 8(a))

Cost Analysis No Competition, Certified CP data required (TINA $700K)

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Other Important Considerations

• Review each assumption in a proposal carefully as they may have significant cost impact. i.e. “Assuming software licenses will be provided by the government with annual renewal.”

Proposal Assumptions

• Ensure all required documents are submitted (adherence to Section L).• Check for math errors and all other inconsistencies. • Pricing information is included for all contract years.

Review Proposals in Detail

• If you feel something is wrong, peel the onion!• Why is a proposal particularly high or low?• Put yourself in the shoes as the decision-maker. What would help you

make a decision?

Trust Your Instinct

• In reviewing the proposals, including the proposal assumptions, document every finding that may impact the proposed price or cost.

• Incomplete submission or missing section• Calculation errors• Assumptions that may have price or cost impact

• Prepare a list of findings that can be used for clarification.

Document! Document! Document!

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Business Analysis Report – Sample Structure Background (reference RFP)

Evaluation Methodology (reference RFP & FAR)

Competition Adequacy (reference RFP & FAR)

Evaluation Findings (IDIQ / Task Order)

– Price Analysis

– Cost Realism Analysis (labor rates)

Level of Effort (LOE) Analysis

– Hours and/or FTEs

Issues and Clarifications

– Assumptions reviewed (reasonable / realistic)

Summary

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PIVOT Table Demonstration

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Contact Information:Andrew D. McKenna

Email: [email protected]

Phone: 240-402-7541

Questions?!