A basis of estimate is that backbone to every price estimate submitted to the government. In this Cherry Bekaert GovCon podcast, Eric Poppe, Managing Director and Javier Diaz, Manager in Cherry Bekaert’s Government Contractor Services Group discuss the common methodologies and basis of estimates used for various cost elements normally included in proposals.
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HOST: Welcome to Cherry Bekaert's GovCon Podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward. I'm Eric Poppy, Senior Manager within Cherry Bekaert's Government Contract Services team.
With me today is Javier Diaz, a Manager on our team and former DCAA auditor. Today, we are going to talk about common estimating methodologies that are accepted by the government when putting together a cost proposal.
ERIC POPPY: Javi, thank you for joining us today.
JAVIER DIAZ: Thank you for having me.
ERIC POPPY: This topic pops up frequently and can become a pain point, especially if you are going through a cost proposal audit. It is also relevant if you are a subcontractor to a prime contractor performing a cost reasonableness assessment or price analysis.
This can be very important depending on the type of contract, the size, and the agency. When helping a company put together a proposal, let's start with direct labor and follow Table 15-2 as outlined in FAR Part 15 for contract by negotiation.
What do you see as acceptable support when putting together that cost element?
JAVIER DIAZ: Most contractors submitting a proposal are already working in that industry. They have a basis of estimate using historical information from current employees.
They can determine the average pay by labor category and include those averages for estimating. We also encounter situations where companies are moving to a new industry or geographical area where they lack historical information.
In these cases, they should use salary indexes. ERI is one we often use. You can include the position type, labor category, and specific geographical area, and it provides salary information based on years of experience and education.
ERIC POPPY: What about escalation and hours?
JAVIER DIAZ: For escalation, if you have historical information, you know how much you are increasing wages for your employees. You can use that to determine your labor escalation rate.
Regarding hours, you should use previous work completed. If you have worked on a similar project in the past, you can use those hours to estimate how long the current project will take.
ERIC POPPY: To that point, we have seen a trend where the government expects a decrement to labor hours or an efficiency gain if the same people are performing the work.
I have also seen hours increase due to employee turnover. You may no longer have seasoned employees, especially for large manufacturing jobs where the last shipment was years ago and you are training a new group.
JAVIER DIAZ: Regarding learning curves, it is similar to a hockey stick. There is a drastic drop in hours initially, but it levels off after the first period of learning.
You cannot continue to gain efficiencies until you reach zero hours; the work still takes time. If the government pushes you to decrease hours because of learning curves, hold your ground if you believe you are being fair regarding efficiencies gained.
ERIC POPPY: It sounds like you must show the reasonableness of labor costs through historical data, salary bands, labor categories, education, and geographical areas.
If you can link it back to employment records or recent work, that is ideal. If not, show the surveys used and use as much historical data as possible for labor hours while expecting some efficiencies.
JAVIER DIAZ: Correct. If you do not have a similar project, ensure you have subject matter experts who can build the estimate from the ground up and support it.
ERIC POPPY: What about non-labor costs, such as materials and ODCs? What types of support pass muster for a DCAA audit?
JAVIER DIAZ: Historical data is always best. If you have purchased the material in the past, use that as your basis of estimate.
If not, use current quotes from your vendors within the timeframe of the proposal. When looking at these quotes, ensure they seem reasonable, because if they do not seem reasonable to you, they will not seem reasonable to DCAA.
Other sources include estimating databases, such as RSMeans for construction, or catalog prices. For escalation, you can use indices like those from the BLS.
ERIC POPPY: We also use FRED (Federal Reserve Economic Data) and Global Insight. I have also seen internal escalation rates being calculated by the company.
A manufacturer using raw materials might create a rate based on commodity changes. These are harder to defend, but with proper support and documentation, you can get through a DCAA audit.
Let's discuss subcontractor analysis. There is more emphasis being put on subcontractor monitoring by DCAA, DCMA, and contracting officers.
How is the subcontractor's price or cost being analyzed to ensure it is reasonable and verifiable? There is a push for price analysis, cost analysis, or some justification for including those costs in your proposal package.
JAVIER DIAZ: Obtaining multiple quotes helps defend why you chose a specific subcontractor. If you cannot get multiple quotes for a unique item, you should perform a cost or price analysis to defend that inclusion.
You must not only perform the analysis but also document it. If there is nothing documented, in the eyes of DCAA, it did not happen.
ERIC POPPY: We should also discuss indirect rates and burdens.
JAVIER DIAZ: If you have approved forward pricing rates from the government, you should include those in your proposal. Since they have already been reviewed, the process for indirect rates is simplified.
ERIC POPPY: What if a contractor does not have approved forward pricing rates?
JAVIER DIAZ: They would need to provide their indirect rate structure, including pools, the costs included, and the bases.
They should also provide a trend analysis of historical rates to estimate what the rates will be in future years for the period of performance. That is a great starting point for a proposal audit.
ERIC POPPY: Regarding fee, it is also beneficial to use historical data. For a recompete, the government will look at what the fee was last time.
There is significant guidance for defending a proposed fee, such as FAR 15.404-4, which discusses profit analysis. You can use the weighted guidelines from DFARS to help defend reasonableness.
DFARS 215.404-71-3 also covers selecting appropriate profit and fee ranges depending on contract types. Ensure you are checking for statutory limits on fees.
This area will be scrutinized, so provide as much documentation and analysis as possible to prove why the proposed amount works. Any final thoughts on proposal support or estimating practices?
JAVIER DIAZ: The most important part is having supporting documents that reconcile to your proposal available for review. Also, put your best people in front of the auditor.
ERIC POPPY: Thank you, Javi, for joining us.
JAVIER DIAZ: Thanks for having me.
