Government Contracts Pricing Strategies and Rate Structures

Presented By:

Brandon Smith bsmith@anglincpa.com

Jon Levin jlevin@maynardcooper.com

Provisional Billing Rates

▼Provisional, Target, Budget, Billing, etc. ▼Used in connection with cost-type contracts and contracts for

which progress payments are authorized ▼Established based on contractor’s fiscal year ▼Approved by contracting officer or auditor ▼May be voluntarily submitted ▼Should be submitted prior to beginning of fiscal year

▼ Invoices may be rejected until provisional rates are established

Provisional Billing Rates (cont.)

▼To establish provisional billing rates, a contractor must provide: ▼ proposed rate calculations with brief rationale for both pool and base, ▼ prior fiscal year pool and base, ▼ current year to date pool and base, and ▼ analysis and explanation of any variances.

▼The contractor may be asked to provide additional trends showing budget to actual.

▼Monitoring provisional billing rates: ▼ Throughout the year (monthly) ▼ After year-end adjustments and close ▼ Submission of the final indirect rate proposal (ICE)

Provisional Billing Rates (cont.)

▼Adjustments ▼ Proposed adjustments during year are acceptable ▼ Budget to actual reconciliation at year end ▼ Adjusting invoices

▼ Know contract ceilings and provisions ▼ Know your relationships

Pricing Strategies - Budget

▼Known or reasonable expected ▼ Current contracts and volumes ▼ Option years with high expectations of award

▼Development of Direct Costs ▼ Labor

▼ Labor mix ▼ Escalations

▼ Subcontractors ▼ Materials ▼ Travel ▼ Other Direct Costs

Pricing Strategies – Budget (cont.)

▼Developing Indirect Costs ▼ Labor

▼ Labor mix ▼ Escalation

▼ Known changes ▼ Leases, software licenses, training, certifications

▼ Estimated changes ▼ Health insurance, utilities, office supplies

Pricing Strategies – Rate Structure

▼Service Centers ▼ Can be allocated to direct costs, intermediate cost pools, final cost pools ▼ Allocation methods vary – labor, headcount, square footage, etc.

▼ Reasonable and consistent

▼Intermediate Pools ▼ Allocates indirect costs to final indirect cost pools

▼Final Pools ▼ Allocates indirect costs to the final cost objective (direct costs)

Pricing Strategies – Rate Structure (cont.)

▼2-tier vs. 3-tier ▼ Primarily refers to labor and how fringe is applied ▼ 3-tier

▼ Fringe is a final indirect cost pool and is shown separately from OH and GA ▼ Direct labor burden includes FR + OH + GA changed to (FR * OH) * GA

▼ 2-tier ▼ Fringe on direct labor is allocated to the OH cost pool ▼ Direct labor burden includes OH + GA changed to OH * GA

▼ No difference in calculated wrap rate

Pricing Strategies – Rate Structure (cont.)

▼Overhead Pools ▼ How many do I need?

▼ Logical and consistent groupings ▼ Not separating causes an unequitable allocation of costs ▼ Avoid having OH pools for each contract

▼Total Cost Input (TCI) vs. Value Added (VA) ▼ Burden on material and subcontracts ▼ Total Cost Input

▼ Direct materials and direct subcontracts are in the G&A base ▼ Burdened with G&A

Pricing Strategies – Rate Structure (cont.)

▼Total Cost Input (TCI) vs. Value Added (VA) – (cont.) ▼ Value Added

▼ Costs associated with procuring and administering direct materials and direct subcontracts are a separate cost center – Subcontractor/Material Handling Pool (S/MH)

▼ Direct materials and direct subcontracts are in the S/MH base rather than the G&A base

▼ S/MH pool is included in the G&A base

▼ Your G&A will be likely be higher

Pricing Strategies – Cost Impact Analysis

▼How will this award affect my indirect rates? ▼ Direct costs

▼ Additional labor, subcontracts, materials, travel ▼ Add additional base to my indirect cost rates

▼ Indirect costs ▼ Unique benefit requirements, Service Contract Act ▼ Additional facility space required ▼ Additional indirect help (accounting, contracts, program management)

▼Must have sufficient information on both direct and indirect costs to make a fair and reasonable determination of costs

▼Remember the objective is to cover costs and contribute to obtaining corporate operational objectives

Pricing Strategies – Negotiations

▼A fair and reasonable price does not require that agreement be reached on every element of cost (FAR 15.405)

▼ Primary concern is overall price ▼Contracting Officer will determine reasonableness of

subcontracting costs ▼ May require adjustment if subcontract prices have been negotiated before

prime contract is negotiated ▼Certified cost and pricing data may be required during negotiations

▼ $650,000 ▼ Exceptions: adequate competition, commercial item, prices set by law,

expressly waived

Pricing Strategies – Negotiations (cont.)

▼Even if the contract is one for which the Government is prohibited from requiring certified cost or pricing data (e.g., a commercial item contract), the Government has broad discretion in requesting “other than certified cost or pricing data.” See FAR Subpart 15.4

▼Also, in DoD contracts, when the Government is prohibited from requiring certified cost or pricing data, it can require other types of data and can audit these data submissions. See DFARS Subpart 215.4.

Cost and Price Analysis

▼Cost Analysis ▼ Review and evaluation of separate cost elements ▼ Judgment call

▼Price Analysis ▼ Review and evaluate the overall price without regard to separate cost elements

and profit ▼ Judgment call

Cost and Price Analysis: Realism

▼The Government is required to perform costs realism analysis in all procurements for cost-type contracts. See FAR 15.305(a)(1); 15.404-1(d)(2).

▼After finishing this analysis, it will determine each offeror’s most probable cost (MPC). Thus, in the event the Government determines that an offeror’s proposed cost is unrealistically low, the Government will raise the offeror’s proposed cost.

▼In fixed-price contracts, the Government may perform price realism analysis as a way of determining whether offerors under the requirements contained in the solicitation. Unlike in cost-type contracts, however, the Government will not make a MPC adjustment.

Cost and Price Analysis: Realism (cont.)

▼In competitive procurements, after the competitive range is established, the Government may engage offerors in discussions.

▼If the Government decides to hold discussions, it must discuss all deficiencies and significant weaknesses to which the offeror has not yet had an opportunity to respond.

▼ If an offeror’s proposed price or cost was determined to be unrealistically low, this is something the Government is required to discuss.

Truth in Negotiations Act (TINA)

▼TINA is codified at 10 U.S.C. 2306a, and its implementing regulations are at FAR Subpart 15.4.

▼It is designed to combat “defective” pricing by putting the Government in the same position as a contractor with respect to the contractor’s cost and pricing data.

▼When certified cost or pricing data is required, the contractor must certify that, to the best of the contractor’s knowledge and belief, the data is accurate, complete, and current as of that date.

▼From a practical perspective, it is fairly difficult to enforce, because much of a proposal is “judgment” instead of “fact.”

Progress Payments

▼In fixed price contracts, FAR Subpart 32.5 authorizes contract financing by use of progress payments based on the contractor’s costs.

▼Progress payments are generally limited to 80% of the contractor’s total costs (or 85% for small businesses) and, of course, are further limited to the fixed price of the contract.

▼The Government may authorize progress payments before or after contract award. Thus, a contractor may wait to request after award.

▼If progress payments are authorized, the contractor’s costs are subject to audit.

Advanced Payments

▼In certain instances, FAR Subpart 32.4 authorizes the Government to finance performance of contracts by making advance payments.

▼ Advance payment is the least preferred method of contract financing. Thus, if there are reasonably available alternatives, the Government should not use.

▼ In addition, the contractor must provide adequate security, the advance payments must not exceed the unpaid contract price, and the Government must determine that the advance payment is in the public interest or facilitates the national defense.

▼Small businesses with limited access to alternative financing and strong technical expertise are strong candidates for this for advance payments.

▼The Government will generally charge interest on all outstanding advance payments.

Forward Pricing Rate Agreements (FPRA)

▼FAR Section 42.1701 sets out the procedures for establishing FPRAs.

▼A FPRA is requested by Contracting Officer or Administrative Contracting Officer.

▼The Government shall establish a FPRA with contractors whose sales to the Government are expected to exceed $200 million in the contractor’s next fiscal year.

▼Auditors and contracting offices with significant interest assist in review and negotiations.

▼Price Negotiation Memorandum (PNM) is issued which specifies expiration, application and monitoring requirements.

▼A FPRA is a bilateral agreement.

Forward Pricing Rate Recommendations (FPRR)

▼A FPRR is unilaterally set by the Administrative Contracting Officer when:

▼ A FPRA has not been established with the contractor (e.g., when the contractor will not agree to terms of FRPA) or

▼ The contractor’s FPRA has been invalidated (e.g., because the ACO determines invalidation should occur because of changed conditions).

Limitation of Cost / Funds

▼Government agencies are granted funds by Congress. For this reason, the Government’s authority to obligate funding and make payments is limited. One of these limitations is reflected in the FAR’s limitation of costs / funds clauses, which are required in all cost-type contracts.

▼FAR 52.232-20, Limitation of Cost – required in all cost-type contracts that are fully funded.

▼FAR 52.232-22, Limitation of Funds – required in all cost-type contracts that are incrementally funded.

▼Under no circumstances is a contractor entitled to reimbursement of its costs in excess of the limitation of cost /funds indicated in the contract. For example, a cost overrun caused by an overrun in a contractor’s indirect rates will not be reimbursable.

GSA Price Reductions Clause

▼552.238-75, Price Reductions – Provides that the Government and the contractor will agree on (a) a commercial customer (or category of customers) that will be the basis of award and (2) the Government’s discount relationship to the identified customer(s).

▼The Government will receive a price reduction if the contractor: ▼ Reduces its pricing in its commercial catalog, ▼ Grants more favorable discounts or terms than those contained in its

commercial catalog, or ▼ Grants special discounts to the customer (or category of customers) that

formed the basis of award, and the change disturbs the previously agreed discount relationship.

▼The Government is not entitled to a price reduction for sales to Government agencies.

False Claims Act (FCA)

▼Pricing Considerations ▼ Review G&A rates and other indirect pricing to ensure no unallowable costs

are included ▼ Ensure that pricing reflects the most accurate, complete and current data ▼ Develop pricing based upon approved labor categories

False Claims Act (FCA) (cont.)

▼Billing Considerations ▼ Charge only costs incurred in connection with that specific contract ▼ Base charges only upon costs actually incurred ▼ Ensure that timesheets for direct charge employees accurately reflect time

spent on that contract