Activity 21: Cost Analysis

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Formation | Cost Analysis 1

Contract Formation

The review and evaluation of the separate cost elements and profit or fee in an offeror’s or contractor’s

proposal to determine a fair and reasonable price or to determine cost realism.

Related Flow Charts: Flow Chart 21

Related Courses: CLC 056: Analyzing Contract Costs; CLC 058: Introduction to Contract Pricing

Related Tools: Acquisition Gateway Hallways, GSA Contract-Awarded Labor Category (CALC), GSA Dashboards and Prices

Paid Tools, GSA eLibray, Contract Pricing Reference Guides

Tasks

FAR Reference(s)

Additional Information

1. Based on the solicitation

requirements and type of contract,

determine if cost analysis is

appropriate.

FAR 15.404-1(c) Cost analysis

[proposal analysis techniques].

FAR Table 15-2—Instructions for

submitting cost/price proposals when

certified cost or pricing data are

required.

Cost analysis is:

 The review and evaluation of any of the separate cost

elements and profit or fee in an offeror’s or contractor’s

proposal as needed to determine a fair and reasonable

price or to determine cost realism; and

 The application of judgment to determine how well the

proposed costs represent what the cost of the contract

should be, assuming reasonable economy and efficiency.

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Tasks

FAR Reference(s)

Additional Information

2. Collect and review government cost

estimates, reports, analyses, and

other data related to the cost

analysis.

FAR 15.404-1(c)(2)(iii) Cost analysis

[proposal analysis techniques

Identify and collect all relevant data relating to each major cost

element, such as but not limited to:

 Historical data and actual costs;

 Data from previous estimates from the offeror or other

offerors for the same or similar items;

 Technical evaluation reports;

 Any applicable forward pricing rate agreements;

 Any applicable forward pricing rate recommendations;

 Audit reports, including any audit of contractor indirect

cost rates within the last 12 months (if any; and

 Any reports from Government monitoring of actual

contract costs for similar work.

3. Determine the level of cost analysis

required to evaluate the

reasonableness of cost elements or

cost realism.

FAR 15.305(a)(1) Cost or price

evaluation [proposal evaluation].

FAR 15.404-1(c) Cost analysis

[proposal analysis techniques].

The Government may use various cost analysis techniques and

procedures to ensure a fair and reasonable price, given the

circumstances of the acquisition. Such techniques and

procedures include the following:

 Verification of cost data or pricing data and evaluation of

cost elements, including:

o The necessity for, and reasonableness of,

proposed costs, including allowances for

contingencies;

o Projection of the offeror’s cost trends, on the

basis of current and historical cost or pricing

data;

o Reasonableness of estimates generated by

appropriately calibrated and validated

parametric models or cost-estimating

relationships; and

o The application of audited or negotiated indirect

cost rates, labor rates, and cost of money or

other factors.

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Formation | Cost Analysis 3

Tasks

FAR Reference(s)

Additional Information

 Evaluating the effect of the offeror’s current practices on

future costs. In conducting this evaluation, ensure that

the effects of inefficient or uneconomical past practices

are not projected into the future. In pricing production of

recently developed complex equipment, perform a trend

analysis of basic labor and materials, even in periods of

relative price stability.

 Comparison of costs proposed by the offeror for

individual cost elements with:

o Actual costs previously incurred by the same

offeror;

o Previous cost estimates from the offeror or from

other offerors for the same or similar items;

o Other cost estimates received in response to the

Government’s request;

o Independent government cost estimates by

technical personnel; and

o Forecasts of planned expenditures.

 Verification that the offeror’s cost submissions are in

accordance with the contract cost principles and

procedures in FAR Part 31 and, when applicable, the

requirements and procedures in 48 CFR Chapter 99

(Appendix to the FAR looseleaf edition), Cost Accounting

Standards.

 Review to determine whether any cost data or pricing

data, necessary to make the offeror’s proposal suitable

for negotiation, have not been either submitted or

identified in writing by the offeror. If there are such data,

the contracting officer must attempt to obtain and use

them in the negotiations or make satisfactory allowance

for the incomplete data.

 Analysis of the results of any make-or-buy program

reviews, in evaluating subcontract costs (see FAR

15.407-2).

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Formation | Cost Analysis 4

Tasks

FAR Reference(s)

Additional Information

4. Evaluate each cost element.

FAR 15.404 Proposal analysis [contract

pricing].

Price each contract separately and independently, and do not:

 Use proposed price reductions under other contracts as

an evaluation factor; or

 Consider losses or profits realized or anticipated under

other contracts.

Do not include in a contract price any amount for a specified

contingency to the extent that the contract provides for a price

adjustment based upon the occurrence of that contingency.

4a. Evaluate direct labor costs.

FAR 15.408 Solicitation provisions and

contract clauses [contract pricing].

FAR Table 15-2—Instructions for

submitting cost/price proposals when

certified cost or pricing data are

required.

For direct labor, provide a time-phased (e.g., monthly, quarterly,

etc.) breakdown of labor hours, rates, and cost by appropriate

category, and furnish bases for estimates.

A direct labor cost is any labor cost that can be identified

specifically with a final cost objective (e.g., a particular contract).

Labor costs identified specifically with a particular contract are

direct costs of the contract and must be charged to that contract.

Labor costs must not be charged to a contract as a direct cost if

other labor costs incurred for the same purpose in like

circumstances have been charged as an indirect cost to that

contract or any other contract.

All labor costs specifically identified with other contracts are

direct costs for those contracts and must not be charged to

another contract directly or indirectly.

Identify and evaluate the methodology used by the offeror to

estimate direct labor cost.

4b. Evaluate labor hours.

FAR 15.408 Solicitation provisions and

contract clauses [contract pricing].

Determine whether the estimating method is appropriate for the

estimating situation.

Determine whether the estimating method was properly applied.

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Tasks

FAR Reference(s)

Additional Information

4c. Analyze labor rates for each labor

category listed in each proposal.

FAR 15.408 Solicitation provisions and

contract clauses [contract pricing].

Consider the following questions when determining labor rates

fair and reasonable:

 Is the proposed labor rate and related compensation

reasonable based on comparisons with the

compensation practices of other firms of the same size?

 Is the proposed labor rate and related compensation

reasonable based on comparisons with the

compensation practices of other firms in the same

industry?

 Is the proposed labor rate and related compensation

reasonable based on comparisons with the

compensation practices of other firms in the same

geographic area?

 Is the proposed labor rate and related compensation

reasonable based on comparisons with the

compensation practices of firms engaged in

predominantly nongovernment work?

 Is the proposed labor cost reasonable based on

comparisons with the cost of comparable services from

other sources?

Consider the effect of the following factors on those comparisons:

 Government labor-rate requirements;

 Skill mix of labor effort;

 Time period of labor effort; and

 Company-unique labor factors.

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Tasks

FAR Reference(s)

Additional Information

4d. Analyze the indirect costs in each

proposal.

FAR 15.408 Solicitation provisions and

contract clauses [contract pricing].

Indirect costs are costs that cannot be specifically identified with

the production or sale of a particular product or completion of a

single contract. Indirect costs normally fall into two categories:

overhead and general and administrative costs

Overhead costs are indirect costs related to support of specific

operations.

General and administrative (G&A) expenses costs are

management, financial, and other expenses related to the

general management and administration of the business unit as

a whole. To be considered a G&A expense of a business unit, the

expenditure must be incurred by, or allocated to, the general

business unit.

In analyzing indirect costs consider how the costs were computed

and applied, including cost breakdowns. Verify the trends and

budgetary data provided as a basis for their reasonableness

rates. Ensure that an appropriate explanation for each rate was

provided. Use the following questions to assist in the evaluation

of the indirect rates.

 Is the type of cost generally recognized as necessary in

conducting the contractor's business?

 Is the cost consistent with sound business practice, law,

regulation, and the principles of "arm's-length"

bargaining?

 Does the contractor's action reflect a responsible

attitude toward the Government, other customers, the

owners of the business, the employees, and the public

at-large?

 Are the contractor's actions consistent with the

contractor's established practices?

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Formation | Cost Analysis 7

Tasks

FAR Reference(s)

Additional Information

4e. Analyze other direct costs in each

proposal.

FAR 15.408 Solicitation provisions and

contract clauses [contract pricing].

Other costs are costs not otherwise included in the categories

described above (e.g., special tooling, travel, computer and

consultant services, preservation, packaging and packing,

spoilage and rework, and Federal excise tax on finished articles)

and provide bases for pricing.

In evaluating the other direct costs, determine if other direct

costs are:

 Properly proposed in accordance with the offeror's

estimating and accounting practices, as well as

accounting standards applicable to the contract; and

 Determine if the proposed other direct cost is

reasonable, considering any points identified for special

emphasis.

5. Develop a prenegotiation position.

FAR 15.406-1 Prenegotiation objectives

The prenegotiation objectives establish the Government’s initial

negotiation position. They assist in the contracting officer’s

determination of fair and reasonable price. They should be based

on the results of the contracting officer’s analysis of the offeror’s

proposal, taking into consideration all pertinent information

including field pricing assistance, audit reports and technical

analysis, fact-finding results, independent Government cost

estimates and price histories.

The contracting officer must establish prenegotiation objectives

before the negotiation of any pricing action. The scope and depth

of the analysis supporting the objectives should be directly

related to the dollar value, importance, and complexity of the

pricing action. When cost analysis is required, the contracting

officer must document the pertinent issues to be negotiated, the

cost objectives, and a profit or fee objective.

FEDERAL ACQUISITION INSTITUTE | Contracting Professionals Smart Guide | Contract Formation | Cost Analysis 8

Tasks

FAR Reference(s)

Additional Information

6. Negotiate.

FAR 15.405 Price negotiation.

The purpose of performing cost or price analysis is to develop a

negotiation position that permits the contracting officer and the

offeror an opportunity to reach agreement on a fair and

reasonable price. A fair and reasonable price does not require

that agreement be reached on every element of cost, nor is it

mandatory that the agreed price be within the contracting

officer’s initial negotiation position. The contracting officer is

responsible for exercising the requisite judgment needed to reach

a negotiated settlement with the offeror and is solely responsible

for the final price agreement.

When significant audit or other specialist recommendations are

not adopted, provide rationale that supports the negotiation

result in the price negotiation documentation.

7. Document the contract file.

FAR 15.406 Documentation [contract

pricing].

When cost analysis is required, document the pertinent issues to

be negotiated, the cost objectives, and a profit or fee objective.