Pricing Service Contracts With Credibility in Small Business Federal Government Contracting

 

Introduction

Assuming a proposal to a government agency has an acceptable technical solution and past performance and management factors that convince the customer it is a viable candidate, then pricing may be the winning element in the source selection equation.

The mechanics of government contract pricing have been discussed previously at this site. The discussion relates how pricing should be a natural outgrowth of the organization structure, market strategy, competitive analysis, business system design and long range planning:

Pricing Service Contracts

The above article also explains how long and short term pricing factors should be integrated with the management and technical elements of any given proposal and that a total view of the business is best presented by integrating long-term company strategy with short term proposal objectives. 

The purpose of this article is to augment the above discussion with tips on establishing and maintaining credibility in pricing to a government customer.

Certified Cost or Pricing Data

Certified cost or pricing data under the “Truth in Negotiations Act” (10 U.S.C. § 2306a) or TINA statute is proposal pricing, which for procurements greater than $750,000, is certified by the contractor as accurate, complete and current as of the date of agreement on price. (Section 811 of the fiscal year 2018 NDAA includes a provision that increases the threshold up to $2,000,000). 

Truth In Negotiations Act (TINA)

The absence of a certificate does not eliminate defective pricing liability.

The statement underlined above is a key principle in relationships with the government and its auditors. TINA influences a government auditor’s thinking and it is in the back of the mind of every contract negotiator. They are taught and learn by experience to look for TINA faults.  

Thus, even if your procurement does not meet the above threshold for TINA certification you should price to establish a similar credibility with your customer, even though you may not have to sign a TINA “Certificate of Current Cost or Pricing”. Doing so is simply good risk management in business.

You may read more about cost and pricing data and the negotiation process at the following link:

Contract Negotiation

Remember Historical Data is Precedent Setting

All auditors, negotiators and pricing analysts are preconditioned to utilize historical data. The last or most favorable price offered a customer for a commercial off-the- shelf product is strong support for what is currently being quoted. This is particularly true of GSA Schedule negotiations, product updates or repetitive buying situations.  If you are a commercial supplier, a quantity factor will also enter into play.  In general, orders of higher quantity than historical pricing quantities undergo downward pricing pressure by the buyer unless some other factor such as a non-recurring tooling charge, learning curve interruption, obsolescent material or other upward factors can be offered as support for a higher unit price on a higher quantity buy.

Educate Your Auditor

An auditor who is familiar with your forward pricing rates, your business system and your product lines will understand your proposal cost and pricing data better than one who has not been briefed on the big picture of your company business operation.  Take the time to conduct briefings at that level and acquaint new government personnel with your operations.  Do not assume he or she has read prior audit reports.  They may have done so but a face to face courtesy briefing is much more effective than reading some other auditors view of a specific proposal. 

This factor can be a double edged sword, however. An auditor who knows the operation extremely well can also spot deviations in cost and pricing data and require explanations for anomalies in pricing based on observed trends.

Develop a Comprehensive Basis of Estimate (BOE)

A good BOE should have the following principal attributes:

* Clear identification of the products, services, skills, materials and performance factors required to complete the contract and material/subcontract quotes, labor categories and skill sets to perform the effort.

* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors that affect the hours or dollars quoted

* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery acceptance so that the cost data has boundaries.

* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor so that escalation and price expiration are established. 

* A precise description of government/customer furnished material or facilities required and when it will be made available to the contractor to bound the expectations of the client with respect to elements your company cannot or will not control. 

Insure Compliance with Cost Accounting Standards (CAS) Requirements

Small businesses are generally required to meet modified CAS coverage for service contracts. This requires consistency in the manner in which a small business quotes a proposal and the manner in which costs and billings are accounted after award.  You can read about these requirements at the following link:

What Small Business Should Know About FAR and CAS

Insure your proposal contains no unallowable costs and that your direct labor as well as your overhead and G&A rates are applied in accordance with your latest forward pricing agreement. If you do not have a forward pricing agreement, explain precisely how your rates were developed from a CAS compliant business system perspective:

FAR And CAS Compliant Business Systems

Utilize Weighted Guidelines as a Check to Prepare Support for the Profit Rate Quoted

Although policy in FAR Part 215-404-4 states that contracting officers ….” do not perform a profit analysis when assessing cost realism in competitive acquisitions”, it is wise to understand the contracting officer and his representatives are indirectly forming opinions of the risk to the contractor and the mix of cost elements in the proposal. That opinion directly effects profit negotiations and judgments.

Contractors should be aware that the Weighted Guidelines Method is mandatory for all negotiated procurements except Cost-Plus Award Fee Contracts and exceptions as approved by a higher authority. Contracting officers are to prepare their position using DD Form 1547 with associated backup and file it at the conclusion of negotiations.

Understanding the weighted guidelines method can assist in achieving a higher profit on a negotiation because a contractor can present a position at the table that logically supports the following elements required by FAR Part 215-404-4:

* Performance risk

* Contract type risk

* Facilities capital employed

Read more regarding the Weighted Guidelines Method at the following link:

Weighted Guidelines

Summary

A reputation for defective pricing leads to accusations of waste fraud and abuse in government contracting and is mostly about what a contractor knew regarding company prices at the time a bid was negotiated and what the contractor did not disclose in the supporting data regarding the likely cost outcome of the contract.  

Actions taken by the government and litigation resulting from defective pricing become part of the contractor past performance record and must be disclosed during competition for other programs. 

Avoid defective pricing accusations by establishing credibility with your customer through consistent, regulatory-compliant, cost and pricing in your proposal submissions and negotiations.

Don’t Overlook The Impact Of The Government Contract Data Requirements List (CDRL)

 

The CDRL is a register of the deliverable data items. Each data item has a discrete numeric identifier, a data item description (DID) number and a delivery schedule to the customer. 

Although it is unusual to negotiate separate pricing for contract data, your negotiated contract and resulting budget baseline must contain the resources to prepare and submit contractually required data items.

“The Contract Data Requirements List (CDRL) is usually contained in Part III, Section J of the government solicitation you are bidding and the executed contract upon award. 

The CDRL is commonly conveyed on DD Form 1423 by the Department of Defense (DOD) specifying the delivery address, number of copies required and the reviewing and approving authority for the data item within the government agency.  It also specifies electronic addresses if electronic data delivery is necessary. Forms other than a DD Form 1423 may be used to convey data item requirements by agencies outside DOD. That form may be as simple as a listing of requirements. 

You should review the listing to insure adequate definition and understanding exist for you to commit to the data requirements when you sign your contract. Data Item Descriptions (DID’s) are available at:

Data Item Description Library

On contracts for new products, data item submissions represent major benchmarks on the contract schedule. Results of study, research, engineering design and development are submitted in the form of data items to the government for approval. 

Once approved, data items form the specifications for continuing effort on the contract. Key design reviews on development programs are focused on the contents of data item submissions.

Data item submissions contain reports of contract cost and schedule performance, results of status meetings and records of ongoing deliveries. Data item deliveries are key factors in demonstrating successful performance under the contract.

In some instances, the number of data items and the level of detail in each are negotiable with the government. Such negotiations have a direct impact on cost even though data items are not normally priced separately in the contract.

The cost for data item preparation and submission is usually included in the pricing in Section B of the contract within the prices for contract line item deliverable to which the data items apply.

SDRL or “Subcontract Data Requirements List” is a prime contractor flow-down of the CDRL requirements to a subcontractor. 

Generally the prime will structure the SDRL to insure that subcontractor data submissions support the prime contract CDRL technical content, schedule and other parameters. 

The prime may also take the liberty to incorporate additional requirements to support their own internal systems of quality,cost and schedule control. 

As with CDRL requirements, SDRL’s should be carefully priced within the end item CLIN’s to which they apply to insure cost coverage.

What Small Business Should Know About FAR And CAS

 

Federal Acquisition Regulation (FAR) 

& 

Cost Accounting Standards (CAS) 

Rules Of The Game And Developing Your Game Plan

INTRODUCTION

Small businesses consistently encounter FAR and CAS requirements upon entering or growing into federal government contracting.   The purpose of these standards is to supply uniform regulatory guidance to all companies doing business with the government and to the agencies that buy from them. 

A  basic understanding of FAR and CAS is necessary to manage government contracts  as well as design business process approaches to meet the requirements.  

The FAR applies to the full acquisition cycle for all supplies and services the federal agencies buy. 

The CAS apply to consistency in estimating, pricing, job cost accounting, billing and closeout of financial data under the contracts for supplies and services regulated by the FAR. 

FAR and CAS are not "Rocket Science" but they are different than the commercial business sector.  

HOW TO DETERMINE WHAT FAR AND CAS MEAN TO YOU

No one ever reads the full body of FAR and CAS from cover to cover.  They are reference documents, maintained by the government to oversee the contracting process.  From time to time changes to the regulations are offered for public comment at the FAR web site. 

 Such changes are more common in the FAR than in CAS.  The CAS have been constant for several years and are not as dynamic as the detail processes in the FAR. 

The below table contains the principle FAR chapter titles and each of the 19 CAS clauses.  Linked below the table are the web sites that can be utilized to explore these documents. 

(Please Click Image To Enlarge)  

Federal Acquisition Regulation

Determine the regulation basics that apply to any given job considered for bidding.  Examine a few solicitations in your area of expertise at the SAM web site:

SAM Contract Opportunities

Glance through the terms and conditions of a given solicitation and note the FAR and CAS requirements sited.  Use the links to the FAR and CAS web sites as source documents to read in detail the clauses you must understand to effectively bid the job .  

Cost Accounting Standards

Small businesses are generally required to meet modified CAS coverage. Small businesses are generally required to meet modified CAS coverage.  The business system requirements for Modified Cost Accounting Standards (CAS) Coverage are defined by the government as follows: 

Standard 9904.401, Consistency in Estimating, Accumulating, and Reporting Costs

Standard 9904.402, Consistency in Allocating Costs Incurred for the Same Purpose

Standard 9904.405, Accounting for Unallowable Costs

Unallowable Cost Guidance

Standard 9904.406, Cost Accounting Standard―Cost Accounting Period

Modified, rather, than full, CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS-covered awards in the immediately preceding cost accounting period.

The following article contains practical business system guidance regarding building a Modified CAS Coverage Small Business System for federal government contracting:

Managing Risk In Small Business Federal Government Contracting Business System Development

If you have confusion regarding interpreting a requirement, seek assistance in the table of contents to the free book at this site offering guidance under the topic in question

SUMMARY

While assessing the impact of FAR and CAS on your company educate yourself on that what directly affects your company first in making the transition to federal government contracting and growing into the field.

Carefully  maximize your existing business processes and systems first before making changes and do not jump to instant fixes with exotic software tools a supplier or consultant has told you will make you compliant or competitive overnight in government contracting. 

FAR and CAS are generally logical bodies of regulation that have come about due to the need to control and make consistent the government and industry approaches to meeting prudent and sound contracting objectives with the necessary  transparency to govern. 

FAR and CAS do not impose business systems.  They do require that you disclose the way you meet regulatory requirements in the way you operate with your processes and tools. Plan the approach and learn to convey it to auditors, contracting officers and industry partners.

Grow into the business by exploring the venue and having it grow into you.  

Total Time Accounting In Small Business Government Service Contracting

In small business government service contracting, it is necessary to establish a written policy and procedure disclosing time keeping practices to government auditors and fact-finding teams. Included must be the company process for both pricing and accounting for overtime. In doing so, topics such as compensated and uncompensated time must be addressed.

Include in the policy/process for pricing and job cost accounting those steps required for compensated overtime to personnel who are non-exempt from the Fair Labor Standards Act (hourly who receive time and one half).

Also include the policy/ process for pricing and job cost accounting, those steps required for uncompensated overtime to personnel who are exempt from the Fair Labor Standards Act (salaried who receive pay at straight time for hours in excess of 40 and those who do not receive pay at all for hours in excess of 40) The former are usually engineers and technicians. The latter are usually management or staff).

I encourage "Total Time Accounting" to my clients to make all hours worked a part of the record and keeps records free from waste fraud and abuse or defective pricing allegations.

I believe the below article by Find Law contains the best approach to the issue of uncompensated overtime and I encourage my clients to make part of their policy the practice specified:

 "In our view, contractors performing labor-hour, time-and-material, or cost reimbursable contracts should avoid any timekeeping system that fails to accurately report the total time worked. Such a system under-bills clients for work performed and thereby affects a company’s bottom line. Moreover, any timekeeping system that by its very design under-reports actual hours worked invites labor mis-charging and false claim allegations.

A total time accounting system that accurately reports hours will generate the proper amount of revenue for contractors on each of their labor-hour and time-and-material contracts. Cost reimbursable contracts have an added twist. Many cost reimbursable contractors who report total time use a diluted hourly rate approach for distributing labor costs to projects. For example, if an employee is paid $1,000 per week and works 40 hours, the projects are charged $25 per hour. If the same employee works 50 hours the following week, the hourly rate is diluted and projects are charged $20 per hour. In this example the contractor gets no additional revenue for the extra 10 hours of effort — they are provided free of charge to the Government.

 Fortunately, acceptable standard cost approaches will negate this windfall to the Government and still allow the contractor to take advantage of uncompensated overtime. The most common of these approaches involves charging direct labor to projects at a standard hourly rate established annually for each direct labor employee. Actual hours are charged to projects at this standard rate.

For uncompensated overtime situations, the variance between labor charged to projects and actual compensation is credited to overhead. Such an approach allows contractors to account for their hours in an accurate, straightforward manner, bill for the hours actually worked, and effect a competitively beneficial decrease in their overhead rates. DCAA has recognized this as an acceptable method of accounting for labor costs, and we think that it generally beats just giving the Government hours of effort for free."

Risk Analysis and Provisional Indirect Rates In Government Contracting

Previous discussion has addressed FAR and CAS Compliant business systems for small enterprises undertaking federal government contracting:

Establishing FAR and CAS Compliant Business System

DCAA Audits and Small Business Job Cost Accounting Systems

Chapter 51 of the free book, 'Small Business Federal Government Contracting' contains an explanation and examples of a forward pricing budget plan from which provisional rates are established and negotiated with the government. Under "Management Factors" the book goes on to explain that it is not always possible to execute the plan as anticipated.

Programs and projects will come and go, entering and leaving the business base sometimes earlier and sometimes later than planned. Expenses do not always materialize as anticipated. For these reasons actual experience in terms of indirect rates may differ (+or -) from provisional rates.

There are three important points to remember regarding provisional bidding and billing rates:

1. Provisional rates are utilized for both pricing and billing and billed rates must be reconciled to actual rates at contract closeout for cost type contracts.

2. Provisional rates are audited by DCAA and negotiated with Administrative Contracting Officers. They are the baseline frame of reference for the government in reviewing cost proposals and billings until the contractor asks for a change. Provisional rates are used for billing existing contracts and for pricing new work. Provisional rates are approved by the government on an interim basis or they would not be "Provisional" by definition. A constant frame of reference is the actual running rate being experienced by a contractor as opposed to the current provisional rate.  The difference must be reconciled on cost type contracts at contract closeout. 

3. A request for change to provisional rates must be supported by data regarding actual running rate experience and may start a series of questions by DCAA or contracting activities regarding what sort of management corrective action is planned for differences between provisional and actual running rates (particularly if a provisional rate increase is proposed under time and material or cost type contracts or prices for outstanding proposals are increased due to rate changes prior to negotiation).

There are no industry average indirect rates in federal government contracting because there are wide swings due to many factors. Company indirect rates are managed based on the competition, the market and the funding availability of the customer. Site-unique indirect rates inside government facilities are always lower than company site operation rates because the government is paying a portion of the expenses (facilities occupancy, heat, light, etc.) on work occurring inside a government facility.

Assuming a small business pays roughly the same on the open market for labor, material and ODC as the competition, and has to offer the same fringe benefits to retain employees, the remaining overhead and G and A rate expenses are principal drivers in winning new business and have the most potential to lose a job, cause funding difficulties on an existing program or be responsible for a loss on projects negotiated at fixed rates.

Below are examples of a risk analysis thought process when evaluating whether or not to make a provisional rate change:

EXAMPLE 1

One could say that it may be a poor time to change a provisional rate when there are several FFP proposals outstanding and in negotiation or a major competition is coming up.

On the other hand if there is a wide unfavorable variance between the current actual running rate experience and the existing provisional rate and the future forecasted base and expenses do not show improvement, perhaps the rate should change to avoid signing up to prospective losses or ambitious funding profiles that may mislead a customer.

EXAMPLE 2

One could say that it is a good time to change a provisional rate if several cost plus and T&M contracts are pending closeout and there is a wide disparity between billed cost and actual cost due to rates. In fact, if the government is going to owe you money at closeout, the issue should be broached as soon as possible to the contract funding authorities to insure there are enough funds on the programs to cover the final bills.

Conversely, if you will owe the government money at closeout your forecasts should project the anticipated drop in final contract pricing that will be settled in the closeout actions with the government.

For most companies a provisional rate change comes about at the end of the calendar year and the beginning of the new calendar year. Accountable personnel perform a bottoms-up projection of the anticipated business base and associated expenses by cost center. The company then submits the results to DCAA to get them approved for the new year as revised provisional rates.

Nothing mandates a specific date for a provisional rate review. DCAA audits proposals and contract closeouts, fixed price progress billings and cost-plus and time and material billings. During those audits there may be questions regarding the comparison between bidding and billing and actual running rates.

The company takes the action for provisional rate changes by requesting them from the government as a function of an annual budgeting cycle or business developments. DCAA approves them.

Throughout, the data is very company private and closely held. No other company, to include prime contractors has the right to your rates and rate supporting data. When necessary they will see only fully loaded labor, material and ODC.

The term provisional implies subject to change and approved on an interim basis by DCAA. Provisional rate changes for billing and pricing can occur more often than annually if the business is changing on a volatile basis with work coming and going from the business base in an unplanned manner and expenses increasing or decreasing with economic changes.

I have seen some corporations that had several changes a year. It is a management call, but DCAA reserves the right to review and approve each one.

A provisional rate change is a delicate matter and should be approved by a management level of the company where authority to effect cost change resides (usually the CEO and CFO).

Management must make rate change decisions based on company-unique product and service lines, work location, forecasts, customer demands, competitive factors and contract status. It is a job that should be undertaken by executives who get paid for balancing such factors and who are accountable for successful outcomes from decision results.

Managing Risk Under 'The Truth In Negotiations Act (TINA)'

THE RISKS ASSOCIATED WITH DEFECTIVE PRICING 

INTRODUCTION:

 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:

Pricing With Credibility

Pricing Small Business Federal Government Contracts

Small Business Systems Development

DCAA Audits and Small Business Job Cost Systems

The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply with this law and avoid defective pricing claims by the US Government. 

THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:

• Defines requirements for obtaining cost or pricing data

•  Requires certification that data are current, accurate, and complete

• Delineates exceptions to the requirement

• Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”

•  Provides right of Government to examine contractor records

• Defines cost or pricing data

• Provides rules governing defective pricing

• Downward Contract price adjustment

• ·Recovery of overpayment (cost & profit) & interest (as of 1985)

• 2 M Threshold for contract actions (DOD recently increased from 750 K) Recent Procurement Reforms

• Contract actions include contracts, subcontracts, and modifications

•  TINA applicability is not affected by contract type

•   For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.

 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING

 
1)    The information in question fits the definition of cost or pricing data.

(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.

(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.

(4)    The Government relied on the defective data in negotiating with the contractor.

(5)    The Government’s reliance on the defective data caused an increase in the contract price.

MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM

 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.

Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.  

Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
 

Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.  

If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing. 

If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose. 

Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers. 

Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.

SUMMARY

 
Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations. 

Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government. 

A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.