Federal contracts: Cost proposals: Why, how, whenby
By Marcelle Green, marketing director, VBP OutSourcing, Inc.
When bidding on or fulfilling a federal contract, chances are you'll be required to submit a cost proposal. What is it, how do you do it, and when is it required? The answers will vary depending upon your contract and situation.
There are two basic types of cost proposals: upfront cost proposals, which are done prior to winning a contract, and incurred cost proposals, which are an annual report of your company's actual costs to fulfill a contract. Both cover the direct and indirect costs of fulfilling a contract.
The rules for the first type are explained below. The second type, Incurred Cost Proposals, is much simpler: all contractors must submit one. An electronic form called ICE (Incurred Cost Electronically) is used, and is due within six months of the end of the contractor's (not the federal government's) fiscal year. Extensions may be granted under certain circumstances. ICE is available as a free download; you'll find it in the list of DCAA publications.
When is a cost proposal required?
An upfront cost proposal may be required as part of the bidding process for one of two reasons:
· If required in the RFP (Request For Proposal)
· If the contract is subject to TINA (the Truth In Negotiations Act)
The first requirement is self-explanatory. Sometimes the RFP will even state the format the contracting officer wants to see, since the Federal Acquisition Regulations (FAR) simply state in FAR 15.403-4 and 15.403-5 that cost proposals "shall be submitted in a form acceptable to the contracting officer." Sometimes the RFP will require the contractor to submit DD Form 1921 or 1921-1.
TINA (10 U.S.C. 2306a and 41 U.S.C. 254b) requires offerors to submit cost or pricing data if a procurement exceeds the TINA threshold and none of the exceptions to cost or pricing data requirements applies. The TINA threshold is currently $550,000; waivers to TINA may be granted if:
· Adequate price competition exists for the product or service
· Price of the product or service set by law or regulation
· The product is a commercial item
· The contract is a modification to a contract or subcontract for a commercial item
Essentially, the government wants to ensure that it is paying a fair price for the goods or services described in the contract. The government wants the contractor to make a fair profit (which may be spelled out in the contract), but not an outrageous one. When there is little or no price competition for a contract – particularly when the company is the sole source for a product or service – the government is particularly vigilant. TINA mandates that the contractor give the government all of the cost data it has, so that the government and the contractor can negotiate using the same information
What are the elements of a cost proposal?
A cost proposal includes two elements: projections or estimates of costs, and the data used to support those estimates. That data should include:
- Labor Hours – time phased breakdown of hours, rates by category AND basis of estimate
- Bill of Materials identifying item, source, quantity, and price
- Price Analyses of all subcontracts
- Cost Analyses of subcontracts exceeding TINA threshold
- Interdivisional Work Authorizations by cost element
- Cost or Pricing Data for subcontracts greater than $10M or 10% of prime's price & over TINA threshold (subcontractor's actual proposal & associated data)
- Adequate Price Competition - data showing degree of competition and basis for establishing source and reasonableness of price
- Indirect Costs – rates, cost breakdowns, and how costs are computed
- Other Costs, such as travel and packaging, along with bases for pricing
- Cost of Money - Form CASB-CMF and calculation of proposed amount (usually provided to the Administrative Contracting Officer (ACO) in support of rate negotiations)
Many of these items may require additional explanation: FAR states that royalties over $1,500, for example, must include licensing and patent information. Indirect costs should take their cue from the categories listed in the ICE, even though the ICE is not used for cost proposals submitted as part of a bid or contract negotiation.
In addition, a cost proposal should include any factors which may cause the contractor's costs to change. The contracting officer may specify the use of FAR Table 15-2, which requires that the data must be certified. Certification requires that this statement be included in the cost proposal:
This is to certify that, to the best of my knowledge and believe, the cost or pricing data (as defined in section 2.101 of the Federal Acquisition Regulation (FAR) and required under FAR subsection 15.403-4) submitted, either actually or by specific identification in writing, to the Contracting Officer or to the Contracting Officer's representative in support of ____* are accurate, complete, and current as of ____**. This certification includes the cost or pricing data supporting any advance agreements and forward pricing rate agreement between the offer and the Government that are part of the proposal.
Date of execution***______________
*Identify the proposal, request for price adjustment.
**Insert the day, month, and year when price negotiations were concluded and price agreement was reached or, if applicable, an earlier date agreed upon between the parties that is close as practicable to the date of agreement on price.
***Insert the day, month, and year of signing, which should be as close as practicable to the date when the price negotiations were concluded and the contract price was agreed to.
The contracting officer has the legal right to request and examine all of a contractor's data used to prepare a cost proposal. Note that it is only the cost data, and not the projections/conclusions drawn from it, that require certification. There is a mechanism for correcting data that the contractor later finds to be incorrect, as well as penalties for supplying inaccurate information.
For a more in-depth look on cost proposals, an excellent starting point is the information in Chapter 3 of Information for Contractors, a free guide available at DCAA (look in the Publications section).