TINA and Price and Cost Analysis Flashcards
What is the basic reference guide for Government pricing?
Contract Pricing Reference Guides (CPRG’s)
What are the three elements of the Basic Pricing Policy?
(1) Purchase from responsible sources at fair & reasonable prices
(2) Price each contract separately & independently
(3) Exclude contingencies
What are the two components of pricing each contract separately?
(1) Perspective
(2) Government contracting
What are the conflicting perspectives under pricing each contract separately?
The seller’s position might be that the firm lost money on the last contract so that an effort needs to be made to make up for that loss on the next contract
The buyer’s position might be that the contractor made too much profit on the last contract so the next contract should be structured to restrict profit
What is a contingency?
A contingency is a possible future event or condition arising from presently known or unknown causes and the outcome cannot be determined at the present time
What are the two types of contingencies?
(1) Contingencies can arise from permanently known and existing conditions with the effects of these conditions to be foreseeable within reasonable limits of accuracy
(2) Contingencies can arise from known or unknown conditions, where the effects cannot be measured to provide equitable results to the contractor and the government
Type of Contingency of Foreseeable within reasonable limits of accuracy affect contract price how?
- INCLUDED in contract cost estimates to make those estimates as accurate as possible
Example: Cost of rejects/Cost of defective work
Type of Contingency that Cannot be measured so precisely as to provide equitable results to the contractor and to the government affect contract price how?
- EXCLUDED from the cost estimates under the several items of cost
- DISCLOSED SEPERATELY (Including the basis on which the contingency is computed) to facilitate the negotiation to appropriate contract coverage
Example: Results of pending litigation/costs of volatile material price changes
What is the Truth in Negotiations Act (TINA)?
It is a Public Law that was enacted in 1962 to place the Government on equal footing with the contractor with respect to negotiating contracts and modifications
Requires contractors to give the Government “cost and pricing data” as a “surrogate” In the absence of normal market forces (competition) to determine fair and reasonable prices
What is the dollar threshold for TINA?
$700,000
Define Price Analysis
Analyzes prices in their entirety
The process of examining and evaluating a proposed price to determine if it is fair and reasonable, without evaluating its separate cost elements and proposed profit
Define Cost Analysis
Analyzes prices by reviewing the individual elements of cost (price) & the appropriateness & necessity of each element of cost
Cost analysis is the review and evaluation of the separate cost elements and proposed profit/fee of an offeror’s certified cost and pricing data or data other than certified cost and pricing data
Define Cost Realism Analysis
Independently reviewing cost elements to determine are they realistic for the work to be performed
Cost realism analysis is 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
Reflect a clear understanding of work
Are consistent with the unique methods of performance and materials described in the offeror’s technical performance
Price Analysis is required:
You must use price analysis to determine if a price is fair and reasonable when an offeror is not required to provide certified cost and pricing data
Everytime
Cost Analysis is required:
When TINA applies, you must use cost analysis
Cost Realism Analysis is required:
Cost realism is required for all cost type contracts
Cost realism may be used for fixed price contracts when:
New requirements may not be fully understood by competing offerors
There are quality concerns
Past experience on the contractor yields quality or service shortfalls
When would it be appropriate to use a price analysis?
May include evaluation of data OTHER THAN certified cost or pricing data
If cost or pricing data is not required
When would it be appropriate to use a cost analysis?
May be used to evaluate data OTHER THAN certified cost or pricing data to determine cost reasonableness or in performing cost realism analysis
If certified cost or pricing data is required
The types of price analysis methods that are the most preferred are:
Comparison of prices received in response to the solicitation (COMPETITION)
Comparison of previously proposed prices with current proposed prices for the same or similar items
The types of price analysis methods are:
Price Analysis
Cost Analysis
Cost Realism Analysis
When is TINA required?
Cost analysis shall be used when certified cost or price data are not required (TINA APPLIES)
What types of items does a technical analysis review?
material and labor
Types & quantities of material Types & quantities of labor hours Labor mix Pertinent technical aspects Processes Special tooling Equipment Real property Scrap &/or spoilage
Can cost and price analysis be used together?
Yes, it’s a matter of decision
Cost analysis may also be used to evaluate data to determine cost reasonableness or cost realism when a fair & reasonable price cannot be determined through price analysis alone for commercial or non-commercial items
Which type of cost estimating method should a contractor use?
In general, an offeror may use any generally accepted estimating method that is equitable and consistently applied
What are the three types of cost estimating methods?
(1) Round Table
(2) Comparison
(3) Detailed
Round Table cost estimating method pros and cons are:
Strength: Can be used with limited data
Weaknesses: Lack of data
Increases variability between estimators and true costs
Comparison cost estimating method pros and cons are:
Strength: Rapid development of estimates based on historical costs
Weakness: Estimated based on historical costs can project historical inefficiencies
Detailed cost estimating method pros and cons are:
Strength: Most accurate estimate
Weakness Requires complete information that may be expensive or impossible to obtain
What are the 5 bases for price analysis?
Other proposed prices
Commercial prices
Previously proposed prices & contract prices
Parametric & rough yardsticks
Independent Government Estimates (IGE’s)
The factors that affect comparison are:
Gov’t unique requirements
Geographic location
Extent of competition
Quantity or size
Technology
Purchasing Power
Market Conditions
Which of the 5 bases for price comparison is the most preferred?
Other proposed prices
What type of questions would affect historical price comparison?
Has the product/service been purchase before?
What was the historical price?
Was the historical price fair & reasonable?
Is the comparison valid?
What are the situations for using price index numbers?
Inflate or deflate prices or costs for comparison
Inflate or deflate prices or costs to facilitate trend analysis
Estimate project price or cost over the period of contract performance
Adjust contract price or cost for inflation or deflation
How is an Independent Government Estimate (IGE) prepared?
There are five questions to ask when analyzing the reliability and validity of Government purchase request estimates as well as any Independent Government Estimate before using it as a basis for comparison with offered prices.
How was the estimate made? What assumptions were made? What information and tools were used? Where was the information obtained? How did previous estimates compare with prices paid?
Who prepares an Independent Government Estimate (IGE)?
Normally prepared by the requiring activity
Exceptions to TINA are:
Adequate Price Competition
Price set by law/reg
Commercial Item* (has to fall under formal definition of commercial item)
Waiver by Head of Contracting Activity (HCA)
Three Types of Costs Cost Volume Analysis are:
(1) Fixed
(2) Variable
(3) Semi-variable
Direct Cost is:
any cost that is identified specifically with a particular final cost objective
Direct costs of the contract shall be charged directly to the contract.
No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective
Indirect cost is:
any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective
The four ‘seller strategies’ or approaches that are commonly used in determining price are:
(1) Cost-Plus (Penetration) Pricing
(2) Demand (Skimming) Pricing
(3) Rule-of-Thumb (Myopic) Pricing
(4) Buy-in (Foot-in-the-Door) Pricing
Cost-Plus pricing is defined as:
a method to diffuse the appeal of the product rapidly through low initial pricing; then, once the market is “penetrated” to take ad-vantage of cost reductions and/or price increases to generate profits.
This strategy is also aimed at discouraging would-be competitors from entering the market due to apparently low profit margins. The buyer’s problem becomes one of determining what cost the seller is using to price the product.
This takes on special significance in new product pricing where a variation known as “penetration pricing strategy” is used.
Demand pricing can be viewed as:
“charging as much as the market will bear.”
A variation of this strategy, applicable to the introduction of new technology or innovation in the marketplace, is known as “skimming the cream.” The “skimming” strategy involves high initial pricing in an attempt to achieve an almost instantaneous return on investment.
The obvious risks are that the seller invites competition, that it may not be able to sell as much as it would like at a high price, and that it may alienate potential buyers by the apparent profiteering.
Rule-of-Thumb pricing is a
middle of the road pricing strategy.
Two general approaches to this strategy include:
(1) a leader-follower concept, allowing competitors to set prices and then following suit
(2) a more traditional pricing formula such as direct material and labor costs plus 40 percent.
It is generally considered conservative and safe by those who use it, often because it has worked in the past. The Rule-of-Thumb approach greatly simplifies the pricing problem. It is a way of coping with (by essentially ignoring) uncertainties in the estimation of demand function shapes and elasticities.
For the buyer, it may be much easier to understand and to apply.
The “Buy-In” strategy is a
short-term approach based on other than normal cost recovery or profit motives.
It involves pricing to recover variable costs and perhaps some fixed costs to the extent that a low enough price is offered to beat the competition. In a different form, this strategy meets the conditions of a depressed market.
One analyst states that “companies neither record nor generally talk about all the ‘under the table’ prices and other valuable concessions they make when the market is a seller cuffing a deal with a buyer at a “certain” price because of “certain” conditions. If it became public, other buyers would want deals similar to this most favored customer regardless of the economic or financial health of the seller.
What are the SYSTEMIC AND CULTURAL DIFFERENCES in doing business with the government?
The use of taxpayer money (color of money)
Fairness (small business goals, sole source)
Conflicting Goals
The Defense Department is a final consumer (only customer)
A different culture (Acquisition reform)
Reluctance of commercial firms
What are the PRODUCT DIFFERENCES in doing business with the government?
Higher Performance Requirements
Buying in Small Lot Sizes
Cost and Pricing Issues
Liability
Supportability/Obsolescence
Warranties
TINA must:
Must obtain certified cost or pricing data when:
Award of any negotiated contract >$700,000
Modifications (Even if cost or pricing data not required on initial contract)
Considering positive & negative adjustments exceed $700,000
What does TINA do?
Requires contractors to submit cost or pricing data under certain circumstances
It defines the term “cost or pricing data”
In certain cases, requires certification that data are current, accurate and complete
Delineates exceptions to the requirement
Provides rules governing defective pricing
Cost or Pricing Data means:
the breakdown of what it will cost the contractor, every cost
means all facts that, as of the date of price agreement, or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly.
Certified cost or pricing data means:
it requires the contractor to certify the accuracy of cost or pricing data
“cost or pricing data” that were required to be submitted in accordance with FAR 15.403-4 and 15.403-5 and have been certified, or are required to be certified, in accordance with 15.406-2.
This certification states that, to the best of the person’s knowledge and belief, the cost or pricing data are accurate, complete, and current as of a date certain before contract award. Cost or pricing data are required to be certified in certain procurements (10 U.S.C. 2306a and 41 U.S“Data other than certified cost or pricing data” means pricing data, cost data, and judgmental information necessary for the contracting officer to determine a fair and reasonable price or to determine cost realism. .C. 254b).
“Data other than certified cost or pricing data” means:
pricing data, cost data, and judgmental information necessary for the contracting officer to determine a fair and reasonable price or to determine cost realism.
Such data may include the identical types of data as certified cost or pricing data, consistent with Table 15-2 of 15.408, but without the certification.
Adequate price competition means:
Two or more responsible offers, competing independently, submit priced offers that satisfy the Government’s requirement, or:
There was a reasonable expectation, based on market research that two or more offers, competing independently, would submit priced orders
What FAR Part references pricing estimation?
FAR Part 31
What are some examples of price related factors?
Multiple awards Government Furnished Property Transportation Costs Options and Multiyear contract Life Cycle Costs Energy Conservation & Efficiency Lease vs. Purchase Small Disadvantaged Business HUBZone Price Evaluation Factor Buy American Act Criteria
What is Free on Board (FOB) origin?
Government will pick up the deliverable from the contractor facility
Risk of loss and damage passes to the government immediately upon acceptance, prior to and during transit
What is Free on Board (FOB) destination?
Contractor bears the expense of transporting the item to the government’s desired location
Risk of loss and damage passes to the government on arrival after acceptance
A cost is ALLOCABLE if it is:
assignable or chargeable to one or more cost objectives on the basis of relative benefits received….
Incurred specifically for the contract;
Benefits both the contract and other work, and can be distributed to them in reasonable proportion to benefit received; or
Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown
Costs are ALLOWABLE:
Costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203, and 31.205
Failure to include any item of cost does not imply that it is either allowable or unallowable
The determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of, the cost at issue.
Reasonable is a:
judgment call
Reasonable is generally:
Generally recognized as ordinary and necessary for the conduct of the business or contract performance;
Generally accepted sound business practices, arm’s length bargaining and Federal and State laws and regulations;
Contractor’s responsibilities to the Government, other customers, the owners of the business and the public; and
Contractor’s established practices
Which type of analysis involves looking at labor……
Cost Analysis
What FAR part covers Market Research?
FAR Part 10
What is a price related factor?
Adjustments required by law or regulation in order to complete price evaluation
Government Furnished Property applies to:
Applies to competitive fixed-price contracts, only!
Price analysis is used in conjunction with cost analysis because:
Cost analysis looks at the reasonableness, necessity & appropriateness of each individual cost element, but not the reasonableness nor the cost realism of the entire price as a whole
Cost analysis is used in conjunction with price analysis because
Sometimes we need to analyze other than certified data related to an individual element of cost
