Due Diligence and Explanation

Cost Analysis The author of this brief report shall be analyzing the proposed cost structure that is being negotiated and considered between Good Intentions Technology (GIT) and Federal Watchout Agency (FWA). In question is a Firm Fixed Price Solicitation for the B1-RD surveillance product as sold and made by GIT and extended to FWA. The author has been asked to take the perspective of one of the two parties and look at the projected costs.

The costs will be assessed on their face and will also be assessed in terms of what questions and fact-finding could and should be done once negotiations continue at the next meeting. Indeed, the overall structure is fairly straight-forward and figuring out cost structures in advance is advantageous to all parties involved. However, the figures given do lead to some questions and there should indeed be the proper amount of due diligence before agreeing to the cost structure and continuing with the project.

While the overall numbers seem pretty straightforward, there are some figures and questions that should be addressed. For each overall part of the proposal, whether it be labor, materials or something else, there will be a summary of what is being put forth and what questions are or might be relevant to the project and whether the costs might need tweaking, or at least explaining. Analysis Direct Costs • The first item on the list is that of direct material.

In the case of his project, it would seem that the cost of materials would be about 3.3 million even. Provided that this cost can be justified and is in line with that is being delivered in terms of volume, materials and type of all of the above, there should be no issue with those costs. Even so, the costs of the direct materials should be itemized and explained as needed before any final agreement is executed. • A similar statement can be given for the direct labor.

That amount comes in at 2.425 million. It is to be expected that GIT will keep their cards at least somewhat close to the vest in terms of their internal procedures and methods in terms of labor. Even so, the aggregate amount of labor should be justifiable and explainable, lest there be concern about GIT bilking their customers due to inflating the costs of the project. This is not to assume that GIT is doing so.

However, blind faith and acceptance of costs are not the norm, at least they shouldn't be. Indeed, GIT should have at least a high-level itemization of what is costing FWA in what amounts so that they can be compared and contrasted against similar projects to ensure that there are no amounts that are out of phase with what is normal and customary for this sort of work (Brown & Mitchell, 1988).

• The items and agenda just mentioned for the direct labor will also need to be done for the subcontractors, and for the same reason. Again, there should be presumption that GIT is engaging in malfeasance but there will need to be some level of detail given as to what is incurring those costs and whether they are in line with what is expected for a project and purchase of this type • Finally, the direct costs conclude with the "other direct costs".

At the very least, an itemization of those costs should be completed so that a full account of where the money spent is doing is given (Hammad, Abbasi & Ryan, 2016). • The total direct costs are just a sum of the above.

Given that, it's good to use that as a guiding point for the total overall direct costs but the information to know is truly within the different line items of the direct costs, per the above Indirect & Other Costs • There are a few things in this section that should be mentioned. First, there are no indirect costs. so not a huge need to get an explanation there • Labor overhead is a rather significant amount and will need to be explained.

Indeed, the labor overhead is almost as much as the direct labor cost itself. That amount may make sense but detail will be needed • Material overhead is a flat percentage of the overall budget and so is subcontract overhead. The latter is one fourth of the former and they combine to form 12.5% of the overall costs. That could be normal and reasonable, but that should be verified. • G&A comes in at 8%.

Just as it would be with the overhead amounts, this amount would come down if the other costs are inflated. It would go up if they are understated. Of course, if either of those is true it is more likely the former than the latter • A built-in profit of 20% is noted on the total. If that is line with normal profit margins, then that is fine. but that will be assessed and discussed.

If normal industry amounts of profit (in terms of percentage) are less, that item will be discussed and negotiated so to hopefully bring it down and/or in line with the industry norms.

Preliminary Proposal Revisions • Bring down built-in profit to 15%, rather than 20% • Lower G&A to six percent • Lower material overhead to 7.5% unless 10% amount can be justified and proven as being needed and normal • Lower labor overhead, or at least justify how high it is Fact-Finding Agenda • Itemization of direct materials • Itemization of direct labor • Itemization of subcontractors • Listing out of "other direct costs" • Explanation needed of reason for labor overhead being more than $2 million • Explanation of whether 10% materials overhead budget is needed and/or necessary for this project • Explanation of the same for subcontractor overhead (although not as important due to lower rate for this as compared to material overhead) • Verification that an eight percent flat rate.