Contract and Pricing Integration

Production Case Study PRICE NEGOTIATION MEMORANDUM (The prenegotiation objectives establish the Government's initial negotiation position. They provide parameters that will be used in the contracting officer's final determination of a fair and reasonable price. They should be based on the results of the acquisition team'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 and document prenegotiation objectives before the negotiation of any pricing action.

A PNM must be a stand alone document that will pass scrutiny in court.

The reader should not have to refer to audits or technical reports to make sense of the PNM.) TEAM: TEAM MEMBERS: (List the first and last names and positions of each person representing the Government here.) First and Last names Position Peter John Senior Contracting Specialist Allen Austin Contracting Specialist Jane Dickens Assistant Contracting Specialist Helen Anderson Assistant Contracting Specialist Johnson Holland Assistant Contracting Specialist Joe Rogers Assistant Contracting Specialist Acquisition Background: (Include the purpose of the negotiation and a description of the acquisition.) The purpose of the document is to present the Price Negotiation Memorandum for the acquisition of the H-19 Mission Computer as well as the Operational Flight Programs for the H-19A helicopter.

Department of Defense intends to upgrade the H-19 Mission Computer as well as the Operational Flight Programs of the H-19A. The H-19A helicopter is designed to meet the Army troop carrier and ground support. Presently, the H-19 also supports the U.S. Marine, Navy, Air Force, the Department of Interior and Coast Guard. The U.S. government also uses the H-19 to support the peacekeeping.

However, the H-19 requires a significant improvement in speed, range and load capabilities, and the MAS (Malahy Aero Systems) are the sole prime contractor to satisfy the G-19 acquisition. In essence, the MAS and the government have agreed to complete the contract within 19 months. Negotiation Summary: (Describe the quality of cost or pricing data and the extent it was used.

Include a discussion of contract type and elements of price that should be considered, together with issues of risk and uncertainty to the contractor and the Government.) The negotiation is between the government and the Malahy Aero Systems, which is the Contractor to upgrade the computer system of the government H-19A helicopter. The contactor has submitted the costs of materials to complete the 19-month project. The contractor submitted the total costs of $43,868,081; however, the government objective was $37,659,750.

Despite the variance recorded, the company was still able to record the 12% profits of $4,519,170 Summary: (Provide the status of any contractor systems considered in this negotiation.) The contractor's accounting systems and material management as well as internal controls for the material management are adequate; however, the control risk is still low. The contractor records employee labor both the direct and indirect labor. Additionally, we consider that both the labor accounting system as well as related internal controls as adequate and carrying low risks based on our assessment.

The pricing and cost data submitted by the company to support the materials are inadequate because their preparation is not in accordance with appropriate FAR provision, and applicable cost accounting standard. Moreover, the contractor has not delivered an adequate documentation to back up its position. The concept "question costs" are the costs that may not be allowable or allocated to the contract.

On the other hand, the term "unsupported costs" in our opinion refer to the allocated and allowable, however, the documentation provided is insufficient to back up the dollar amount in the proposal. Cost Analysis Summary: The contractor uses the element such as the material, Material Overhead, Engineering Labor, Engineering Overhead, Manufacturing Labor, Manufacturing Overhead, Other Direct Costs, G&A and Cost of Money for the proposal pricing. However, there is still a variance between the contractor cost data and government objective.

The total price proposed by the contractor is $49,110,651 ; however, the government objective is $43,871,896 revealing the variance of $5,238,755 (Then, fill in the following table with the government objective price for each cost element.) Element Contractor Proposed Government Objective Reference Material $20,976,910 $19,565,594 Engineering Group 66-9210 = $158,990 67-1100 = $481,175 67-5200 = $593,409 68-2400 = $98,342 68-3800 = $47,883 68-4800 = $324,587 68-5300 = $193,758 69-1100 =$19,078,766 Total = $20,976,910 Material Overhead $897,812 763,058 Material Overhead rate =4.28% Based on the current company forecast Engineering Labor $7,018,980 $7,018,980 Yr 1: 35,900 hrs x $35.72 = $1,282,348 Yr2: 140,250 hrs x $35.72 = $5,009,730 Yr3: 20,350 hrs x $35.72 = $726,902 Total = $7,018,980 Engineering Overhead $3,287,690 $2,912,877 Engineering Labor Overhead rate = 46.84%, Based on the current company forecast Manufacturing Labor $230,676 $230,676 Yr 1: 400 hrs x $25.15 = $10,060 Yr 2: 1,787 hrs x $25.15 = $44,943 Yr 3: 6,985 hrs x $25.15 = $175,673 Total = $230,676 Manufacturing Overhead $253,444 $251,898 Manufacturing Overhead rate = 109.87% Based on the forward pricing rate agreement Other Direct Costs $5,822,798 $3,418,235 Engineering Reproduction = $89,483 Engineering Travel = $297,720 Overtime Premium (1,940 x $52.15) = $101,171 Computer Services = $3,031,032 Marketing = $2,046,258 Subtotal ODC's = $5,565,664 Misc ODC's (4.62% x Subtotal ODC's)= $257,134 Total ODC's = $5,822,798 Sub-Total $38,488,798 $34,161,318 G&A $5,199,771 $4,830,018 The paper figures the G&A rate = 13.51%.

The calculation is derived using the current accounting information available from the latest fiscal year and adjusted based on the estimated of current sale year forecast.

Cost of Money 180,000 180,000 Amount agreed upon in conjunction with government auditor Total Cost $43,868,081 5,264 Profit 5,242,570 $4,700,560 Based on the 12% of the forecasted Total cost Total Price $49,110,651 $43,871,896 Significant Considerations: The DCAA (Defense Contract Audit Agency) has audited the proposal upon receipt of the proposal development of the "H-19 Helicopter mission computer enhancement." Based on our opinion, the pricing or cost data in the proposal are adequate for the negotiation purpose.

However, we remark that the pricing and cost data that the offeror has submitted to support the materials are inadequate because the data are not prepared in accordance with the applicable "Cost Accounting Standards and appropriate provisions of FAR (Federal Acquisition Regulation) and DFARS (Defense Federal Acquisition Regulation)." CON 217 (nd). The report of this audit is qualified pending the time the DCAA receives the technical report. (Discuss the most significant facts or considerations controlling the establishment of the prenegotiation objectives.

To the extent, such direction has a significant effect on the action, a discussion and quantification of the impact of direction given by Congress, other agencies, and higher-level authorities.) Element Discussion/Component Breakdown: (Discuss each major element of cost and if necessary, sub-elements, as well as profit and price for the acquisition. Always begin with the amount the contractor has proposed and then the amount of the government objective.

It may seem redundant to keep providing the amounts when the Summary shows them, but large acquisitions may require lengthy PNMs and readers should not have to flip back and forth to compare the amounts.) 1. Material: The contractor proposed total direct material costs of $20,976,910. This major element of cost has been divided into separate engineering groups; therefore, the cost analysis was done on each engineering group to determine the Government's total material cost objective.

The last four digits refer to the work-numbering package for the project and they are in accordance with the normal acceptable practice. The auditors and the company agree substantially in the area. Engineering Group Contractor's Proposal Questioned Costs Unsupported Costs 66-9210 $158,990 $34,294 $23,980 67-1100 481,175 140,000 341,175 67-5300 593,409 0 0 68-2400 98,342 0 0 68-4800 566,228 47,883 0 69-1100 $19,078,766 823,984 0 Total $20,976,910 $1,046,161 $365,155 (Discuss in DETAIL how you developed your objective. Who provided the information? What info was provided? What analysis techniques were used? Do this for each engineering group.) Engineering Group 66-9210: The contractor proposed $158,990 for this engineering group. The Government objective is $100,716.

The Government objective position is based on the questioned costs of $34,294. Thus, we questioned the proposed costs of $34,294 because the company used the $158,990, which is the same amount for the 22-month schedule since the new project is 19-month schedule. Moreover, there are unsupported costs of $23,980 that the contractor proposed for the security equipment. In essence, the Malahy has agreed to remove this unsupported amount. Engineering Group 67-1100: The contractor proposed $481,175 for this engineering group. The government objective is $0.

In essence, we question the $140,000, which is the proposed costs of the CLS (cartridge load software) since the cost is no longer needed based on the initiation on the proposal development meeting. Moreover, the remaining $341,175 is unsupported because the cost is the quote for the Orbit Science for the Fairchild defense, which has already expired. Malay's negotiator proposed 7% reduction, however, the negotiation has not taken place, thus, we cannot consider this amount as supported. Meanwhile, we have deleted the entire $481,175 proposed for the Engineering Group.

Engineering Group 67-5300: Under this engineering group, we take no exception with regard to the material costs. The contractor proposed $543,409 for this engineering group. The Government objective is also $543,409. Engineering Group 68-2400: The contractor proposed $98,342 for this engineering group. The Government objective is $98,342. Under this engineering group, we take no exception concerning the material costs. Engineering Group 68-4800: The contractor proposed $566,228 for this engineering group. The Government objective is $518,345. We question $47,883 as the vendor support cost because this task is no longer needed based on the contract requirements.

The cost of the earlier upgrade 2 in the table below reveals that there was a temporary shortage of the IT (Information Technology) personnel and materials leading to the higher costs of $706,993 during that period. Thus, we do not feel that that the proposed costs support this contract. Upgrade Cost Upgrade 1 $521,289 Upgrade 2 $706,993 Upgrade 3 $528,390 Upgrade 4 $508,300 Average $566,228 In opinion, we should use the average costs of the last two upgrades which is ($528,390 + $508,300) =$518,345 leading to the questioning of the $47,883 ($566,228 -$518,345) =$47,883. Engineering Group 69-1100: The contractor proposed $19,078,766 for this engineering group. The Government objective is $18,254,782.

We question $823,984 of the material costs under this group. In this group, the contractor provides the bill of materials that contain 220 line materials. The stratified sample analysis conducted reveals that 30% of the item account for the 72% of the costs of $13,736,790 and the remaining 190 items account for the 28% totaling $5,341,976. Based on the 100% sample, we conclude that the materials ought to be reduced by $1,347,218 from our analysis. Based on the random sampling of 35 items, we notice that there is a need for the adjustment of $523,234, which is $1,347,218 - $523,234=$823,984.

(Fill in the following table to summarize the government positions for the Engineering Groups described above.) Material Summary Engineering Group Contractor Proposed Government Objective Deleted $ Added $ Total $ 66-9210 $158,990 $58,274 0 $100,716 67-1100 481,175 481,175 0 0 67-5300 593,409 0 0 593,409 68-2400 98,342 0 0 98,342 68-4800 566,228 47,883 0 518,345 69-1100 $19,078,766 823,984 0 $18,254,782 Total $20,976,910 $1,411,316 0 $19,565,594 2. Material Overhead: The contractor proposed $897,812 for material overhead cost. The contractor arrived at this amount by applying a material overhead rate of 4.28% to the base of proposed direct material dollars. The government objective is $763,058 because we recommend the overhead rate of 3.9%, which is 3.9% x 897,812=$763,058, to the contracting officer.

Our rate is based on the latest information FPRA (forward pricing rate agreement). (Discuss the rate and what base you applied it against for all overheads you need to analyze.) 3. Engineering Labor: The contractor proposed engineering labor dollars of $7,018,980. The contractor arrived at this amount by proposing a total of 196,500 hours over the 19-month period at a stable, composite rate of $35.72 per hour. The Government objective is $7,018,980. Under this engineering, we take no exception concerning the Engineering Labor.

We multiply the number of hours with wages to arrive at the labor dollars. (Labor dollars are made up of two components: hours to be worked and wages to be paid. Discuss how you developed your position on hours and the wages then multiply the two together to get the objective for labor dollars.) 4. Engineering Overhead: The contractor proposed $3,287,690 for the engineering overhead cost. The contractor arrived at this amount by applying an engineering overhead rate of 46.84% to the base of proposed engineering labor dollars.

We recommend the Engineering overhead rate of be 41.50% of the engineering labor cost. We recommend $2,912,887 as the Engineering overhead and the rate is calculated as.