oversight

Audit Guidelines for the Review of the Pricing of Noncompetitive Prime and Subcontracts Over $100,000

Published by the Government Accountability Office on 1977-01-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                          The objecthe of thLs review Fs to determine Ihether the subcontractorls

                                       cost -estimates far eqch major element of c o s t proposed xere reasonable

                                       based on t h e latest available c o s t i n f o n a t i o n at the t i n e of prime

                                       contract n e g o t h t i o i l s with the                                                            below are matters




                      -       ..
                                                              .-          .1.. Whether t h e contractor's accounting system 2nd record-
                                                    .             .            keepixg procedmes pro*ride the latest -available cost                            .
                . .                                       .
                                                                   _ -
                                                                          .   : . informtion            t o its negotiators.
                                                    . *                                                                         . .

                              .        _-
                                                                          .-
                                                                          2.. .Whether there are'any apparent weaknesses in the con-
                                                                              ,
                                                                               tractor's e s t i m t i n g system which could affect the
                                       .                                      - r e l i a b i l i t y of socle- of the cost estimates.
                                                                                  ..
                                  -.

                                                          .           .
                                                                                      -.
                                                                          '3, Whether in est-ting              costs for t h i s contract recognition     .
                          .            .                                      '   .. has  been given to production changes, q c a n t i t y -c'naczes and
                                                                                      other factors.which could result in costs cn t'nis contract
                                                                                      varying f r o 2 historicai costs experienced on prior contracts.
                . .               .         -             .               '4. Factors -otherthan- the type nentioned i n ( 3 ) above which
          .       .                                           -.                      have -influenced the contractor's est-tes.
       . .                                                                                                                                          .

                                                    __ ...        . ..    5.. The extent          to'which the esthste.is based on 1) historical
                                       ..                                             ~ 0 q n a t ~ o n2). ee n g b e e r h g judgment, . .

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            Public Law 87-653, the Truth-ipNegotiations Act, enacted by Congress
       i n SepteFber 1962, requires prime contractors and subcontractors t o sub-
       m i t , subject t o certain exemptions, ,cost o r pricing data (as.defined i n
       Arwd Services Procurement Regulation ASPR 3-807.3(h) i n support o f pro-

        posed prices for noncompetiti ve contracts expected t o exceed $100,000
       and a t the completion of negotiations, requires the contractors and sub-
       contractors to c e r t i f y t h a t the cost or pricing data provided i s accurate,
       current, and complete.        Refer t o the Armed Services Procurewnt Regulation
       (ASPR) 3-807.3 f o r specific requiremnts f o r cost o r pricing d a t a .             The

       Law also provides f o r contract price reduction when the negotiated contract

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       price t o the Government was increased by any significant               SUN   because the
       contractor furnished cost or pricing data which was n o t complete, accurate,
       and current as c e r t i f i e d in the contractor's c e r t i f i c a t e o f current cost
       o r Pricing Data (ASPR 7-104.29 Price Reduction f o r De-fective Cost o r
       Pricing Data).      We want t o emphasize, however, t h a t the .identification

       o f potential defective pricing i s only one part of this survey.                We a l s o
       want t o pursue instances where we believe the price may have been over%tated
       because of actions taken or not taken by the contracting o f f i c e r or members
       o f his team, such as DCAA o r the technical' evaluators.
                                                                                          -    .

             ASPR 3-807.2 ( c ) provides t h a t . s o m e form of cost analysis (financial
       a u d i t and technical evaluation) of the contractor's proposal be performed

       whenever cost or pricing data a r e required (per ASPR 3-807.3) t o be sub-
                                                                               -

       rnitted.   Financial audits and technical evaluations a r e reviews of a
%q
       contractor's submitted cost or pricing data and o f the judgmental factors
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.-   - -        . .. ..      ..                   ..    ~___
                                                       .~      . ~.           ~   .   ~   --   ~-          --   - - .~~

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            *
                      applied i n projecting from the d a t a t o the estirrated costs.              They provide
                      advice' t o the cgntracting o f f i c e r a b o u t the degree t o which proposed costs
                      a r e representative of future performance, assuming reasonable economy
                      and efficiency.
                           The contracting o f f i c e r i s responsible for negotiating a f a i r and
                      reasonable price (ASPR 3-801.2).       The degree t o which adequate c o s t
                      analyses and technical evaluations a r e performed a n d the extent t o which
                      such assessments are relied upon i n negotiations by the contracting o f f i -
                      cer, significantly influence t h e contract price.
                            In the review of 28 prime a n d subcontracts, wkich resulted from
                      previous recent, surveys , we found t h a t the negotiated prices of prime
                      and subcontracts were $22 miilion higher t h a n indicated by available

                      cost or pricing d a t a .   The prime contract overpricing occurred primayily
                      because ( l } contracting officers d i d n o t obtain adequate cost or pricing
                      data along w i t h prime contractors' proposal subnissi ons, ( 2 ) adequate
                      cost and technical evaluations of the proposal were n o t performed and/or
                      ( 3 ) negotiations w i t h the contractor were ineffective.              Subcontracts
                      appeared t o have a propensity for over.and/or defective pricing p r i m r i l y
                      because ( 1 ) subcontractors were not aware o f the a a t e that the prime
                   ..
                      contractor signed the "Certificate" and d i d not update the subcontract
                      proposal through t h a t date (ASPR 3-807.3(b) ( 2 ) , { 2 ) of claimed ignorance
                 .    by the subcontractor of the requiremnts o f ASPR 8-307.3 and (3) the
                      prime contractor failed i n his responsibility t o update the prospective
                  .   subcontractor's data t o the "Certificate" date f r o m the time o f t h e

                      -original submission by the subcontractor.       '




                                                                                                    .. .
b.   IABOR COST ESTIXqTES

                                   -
      Labor cost estimates are generally prepared e i t h e r on t h e b a s i s                         '




of historical data, o r on the basis o f engineering judm.ents where

prior r e l i a b l e producticn e-erience        i s * n o t availzble as i n research
                                                                        i
and development contracts or i n i n i t i a l pmductiod contracts.                      Howelrer,

even i n the latter s i t u a t i o n s i t should not be necessary to base t h e entire
                                  -
                                  I    .                 #   *


labor estimate on enginething judgnent s i n & some a s p e c t s of t h e work u n d e r

t h e contract ray be s i m i l a r t o work- _ produced &(!er_&ther
                                                              .- .     . .   ..
                                                                     contracts.                                     .   .-   .


(1). Labor hours based on -h_ i s t o r i c z l costs
      h r the bulk o f       t 3 e contracts.:included
                                          .   .                  i n our.revfew ;e' would e q e c t

k h a t laker fidurs estimates w i l l be'be-sed on h i s t o r i c a l c o s t s , .Where t h i s

situasion pre-jails we should consider:                  :
                                                                                                                                     I
            Currency of h i s t o r i c a l labor experience being used.
                                                     . .
           Whether &rent yariances cave.. seen used t o a d j u s t
           any standard iabor h o u i s .                                                                      .        ..
                                      .   .
           Whether ie'oor cost trends have keen used   to develop
                                                                                           _-   _-
           projections e.g., learning csrves.    .. _ . .
                                                 . .
           How :fluctuations i n h i s t o r i c a l ' t r e n d s were considered .
           or whether                                                                                    , .
                         .    . i t was appropriate to consider them a t a l l .
                                       . -
           Whether unusual labor costs have been i d e n t i f i e d ia . ..
           h i s t o r i c a l labor c o s t s and considered as t o the r e l a t i v e .           . _                .-       .
           probability o f t h e i r recurrqnce prior t o their use as a
           basis for estimating f u t u r e costs.                          . .        .-
                                                                                .._. .    .-    -   _.
           Whether engineering change .costs included i n recorded ccsts                                           ..
           have been properly considered i n estimating c o s t s of follow- _ _
           on procurement..


                            .
           %ether set-ug time recorded far prior produ.ction is appropriate
           for the contract under review to avoid possible..-duplication OF
           overlapping    .
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                                                                8.      Whether the recorded c o s t d a t a is e p p l i c a b l e ' t o t h e proposed
                                                                        contract e.g., chsnged production methcds o r a s i g n i f i c a n t
                                                                        change ir, the end product.                                    .    .
                                                                             .   i
                                                                                                                                                                                                                                                            c
                                                                        Vhether labor has been c l a s s i f i e d c o n s i s t e n t with i t s
                                                                        c l a s s i f i c a t i o n on p r i o r c o n t r a c t s , e.g., a s h i f t of a class
                                                                        of employees froin i n d i r e c t labor t o q r e c t l a 5 o r shoald be
                                                                                                                      - . .
                                                                        questioned.                                                    4   .
                                                                                                                                                          . .
                                                                                                                                    -_                                          . .                         .    .
                                               '12) Lstior Ecurs &sed on Ecgincering Jadgnent I
                                                                                                                                    i'
                             - .                                Even though lab&                        hours m y .have .been estimated based. e n t i r e l y or
                                 . _                                                                                    . .    . -                         . . .
                                                                  .-
                                   .
                                 .-            largely on' engineering jud&ents,                                          r e l e m n t recorded d a t a my e x i s t which
                                                                         .       .        -                                                 -              .
                                                                                                                                                                                . .
                                                                                                                                                                                                           .-.
                                                                                                            .   .

                                 .             could b e used i n t h e pr&ard                                      a u d i t to ;lidate                     Generally      the estiktes
                                                                                                                                                      .      -
                                      . -. -we should e v a l u a t e both the                                           auditor's anziysis and t h e n e g o t i a. t.i n g
                                                                                         . . .                      . .         .   .           . . .
                                   . team's tec?mical review in.or2ier t o form a.conclusion on t'ne' reasonableness.
                                                                                         . . .                  . .        . . .
                                                                . .                                             ..
i
                             - . .. of the estimates.                              -.             -
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!           .k       .                        areas t o be considered'include:      . .
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                                                                                          :.'          .    .
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                                ..                       .  .                           .....       . . . . .. . .             .   .
                                         _ .                                                                                   . . _. ... . . . . . . ._. . -.
                                                                                                                                            :


    .            .                                                       Conditions a f f e c t i n g lzbor dour estimatis- such .as (e)- .:- .                                                                                      . -
                                                                                                                                                                                                                                    . .
                                                                        elimination:of nonstandard nethods o r .oroduci;.ion lines .' ::.
                                                                        e s t a b l i s h e d . i n past 'to.meet kaergzncy. d e l i v e r y (.k) 'nex
                                                                        procedures f o r r a t e r i a l h a n d l i n g t ~avoid.  .        stoppages ; .' .
-            .
            ..                                                          ( c ) ievly eqlcyed train&                     methods { ci I. & r e e f f s c t i v e                                                                                    .-
                                                                        methods to shift e q l o y e e s . as.needed &nd (e) a d d i t i o n
                                                                                                                        ...                                             _ .
                                                                        af 'special tooling..                        . . . . .:. ,.-             .- -.
                                                                                                                                                    .           ..     ..
                                                                                                                                                                                                                                                             - _
                                                                                                          . .. . .                                          .  .                                                                .         .                 .-.
                                                                                                          ..        -   ..                .    .                 ..                                                                               ._
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                                                                                                                                                                                                                                                            .
                                                                       ,X$erat'ion time skeets and .sh$ 'methods 'which- r e f l e c - t . .-- .                                                                                    .
                                                                        the & s t b a t & t i n e r e q u i r e d t o p e r.f o. m each: -. . h r c d u 5 t i o n -
                                                                                                                                                                       . .
                                                                                                                                                                                                                                          _.
                                                                                                     . . . _                                                     . .- . _
                 .           .                  . .                     aperation. . .                                        . . . . .: . . . .. ... ... .
                                                 ..
                                                 -.                     . . .. .                             _ ._ .      ..
                                                                                                                            .
                                                                                                                            >  ..
                                                                                                                                      .. . . .
                                                                                                                                      .
                                                                                                                                                          #.


                                                                                                                                                                   ..
                 f           .                                                                                               .          .
                                               I   .            .3. Operation t i n e 'standards or:predetemined e s l k t e s of t h e                                                                                     ...
                                                                   t h e : reqtiired to perform each operation. 'A2p'roprlate re-                                                                                      -'


                                                                   view-should Include t h e c o n t r a c t o r s ' . t i n e s t u d y .methcds  or
    .   _.                                                       '-'other    b a s i s u s e d to  develop  the st+ndards.              . .. .  ..
                                                                        . ..    .                             - - ..                 . .            .. ..
                                                                                           .   -~                                         - .
                                 - ..                          4. Labor p r o d u c t i v i t y ' or the' increase generally i n Froduct
        .            .                                             produced p e r labor unit. Often t h i s can be, used' to develog
                                 . .                   .. . ..     bpmvement o r l e a r n i n g curves;'          _.         -.
                                                                                                                                                   . .                                                                                        .         .
                                                       .    .                                                                                                  . . . .. . .. . .             ..
                                                                                                                                                                                                                                              .         .

                                     -.   .    (3)              Besis of birect Labor Rates                                         ..
                                                                                                                                                                     . . .
                                                                                                                                                                        a   .




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                                                                Direct labor rates m y be estimted separatezx far each proposal or
                     -           .
                                           prk-estabfished. ('bid rates) f o r p r i c i n g m n y pFgosals' over'8 given period                                                                                                                    ..
                                                                           .. . -..               . .
                                                                ..                                                         .- _-
                 - -.                .
                                          . .. .                                . - 4:
                                                                                 .   .
                                                                                                         : : .
                                                                                                                    -:         . ..-__.
                                                                                                                                     .           .             -    z                             ..
. . . .                                                                      .   ----------.-----_-
                                                                                            .--                        ---.-__.--.._    --.._                                                     .- - .        ..   _--    - ..
                                                                                                                                                                                                                            .              -        ..
    ....
         : .
         ;
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                                                                                                                               . . . .                        . . .                      ................                   --I--___            ....           ..                        ...............

                                             ..
                                                                                                                                                                                                                                                                             .           -
                                                                                                                                                                                                                                                                                                              .     *
                                                                                                                                                                                                                                                                                                                    4.


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                                                                                                                                                                                                                                                                                                              *.
                                                                                                                                                                                                                                                                                                                  *. '+*

                                                                                                                                                                                                                                     . .

                                            0f:time. Where bid rates are being used this a s s i g m e n t does n o t c o n t e q l a t e
                                                                                          -
                                            a review of the negotiation and support submitted in connection Kith such                                                                                                                                                                            ,
                                                                                  .   -

                                            rates unless there appears t o be a very great v a r i a t i o n between mch r a t e s
                                                                                                                                                                                                  .           .
                                            and a c t u a l current cost experience.                                                                                                          .                   4.         .
                                                     .Direct labor rate estimates mzy e i t h e r be expected i ~ d i v i d u a lo r
                                                                                                                                                                                              _ .
     ii                                     expected averege ::rates. I
                                       . . . .-                                                                                                                            3:
                                    1
     I                              .. _                                                                                                                                   . . ...       '                                                    .     .
                                                                                                                                                                            . :-                                                 .             :* .                     *        .

                      :                                                                                                                                                                                                                    .. . . . .
                                                                                                                                                                                                                                           .

     !                                                                 I n d i v i d ~ i z ll a b o r rates
    .               .                                            .                                                                                ..'     .   A             .


                                                                                                                                                                                                              .._                .         .
    ! :-.                           .-                                                                                                                                                                                                                                           .                   .
     . . .                                                                                                                                                                                                                                                                                           --
                                                         ' I n d i A d u z l -labor rates are used when the . persons
                                                                                                               . -----
                                                                                                                       who ui.Q              a
                                                                                                                                   perform. ._
     I              '                                                                                                  -    . . . . . .
     i -.
                                            proposed 'contract are known.           This generrjlly occurs' beczuse of some i n d i v i d u a l s '
    ii                                                                                --                   .   .
                                                                                     . .        . .                                        :   . .
    1.       ......                         special knculedie or . i h i l i t i e s o r bkcau.se t h e : . ~ n t r s c t ' r e q u i ~ 8
                                                                                                                                        e ssignificant ..
    i               .-
                    .-         -.
                                                                                                   . .
                p r o p o r t i o n of emloyees whose pay 'is n o t r e p r e s e n t a t i v e of the average in'-.
                                                                                                                           .     ..                                                                                                                                 .. . .


                   I -       .          ~
                                                                                   ._
               i
       _.    -.'their       Classifications.      k'hile     t h i s  method   is- &e        likely t o produ:ce p r e c i s e                                                                                                                                                                           .*

                                                                                   ......                     .- .-
             .. . .
                r e s u l t s , the:'mre m m n u s e i e is average r a t e s .-wi&in                   each     4abor.classifick-

    1.                                                                                    . . . . ..- .-                          .-
                                                                                      __ .
                                                                                         .                    .--               . ._ -. . . . . .
        .                                                                                                             _-.. . .- _.  _ _ I

                                                                                                                                     .-..          .- _ ..
                tion.                                              .,           .-                    .....                                             _.
 I
                                                                         z
                                                                            .                               . . . . . . _..-             _-
                                                                                                                                          I

                                                                                                                                                      _.
                                                                                                                                                                        c
                                                                                                             - r
                                                                                                                            .- .                                                    J    r


                                  'Average labor' r a t e s *                        ..                                                              .. ..
                                                                                                ..   ..
      .. .          -1                           .. * .                                    ._ ..
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                        -Ayerage.      labor rates inay include a. si&le            plknt*-wide average, or.. __
                                    -.                                       . . .. ..
                                                                                  3

                                                                                                         . . .                                        -.
- ..
                                                                        - -                                                          ..
     . . . . sepqake averages .for d i f f e r . m t classes of lebor," c o s t centers; depgrtments                                                   ... . .
.    -.                                                                                                                                                    ..                                                                    ..                        .....                          ..                        ..
                                                                                                                                                                                                                       I                                                    -.

       . .-. . &-production
                   ...          p&cesses.
                            - - _      . . . Single .averages- should     . - ... .-.. . been
                                                                      - . have           . ........cleveloped b$' . .'
                                                                                                                             ._
                                                                                                                                 .
                         .                                                ~
                                                                                                                 _-      _ _ ..                                                               -4


       ..      pop&      wcighttd -cGnponh,s e . g . the num3er
                         -.e
                                                            . . . . ..of . . e&loye& _ in              eech .                      . .-
                                                                                                 .
               kassgfication. . Factors. to be'. conside&d kn evaluating ~ G e r e g el e b Q r .
* ..                                                       . .                    .. . .
                                                              . . . - . -.. . ... .. . . . .
    ..
                                                                                                                           e    &     .

. . .
    I.
                                                               .    .,..
                                                                      ....                       . ..... -  .-..   -   1
                                                                                                                               . . .                  a           -         .
                                                                                                                                                                                        5 5

               rates. incGiie: ,:                               . .- .- _                   .     .                 . .
                                                                                                                        ..                                                                            t


                                           . .                              .         .
                                                                                                    . .. _.      . .                                                            i                                                     C.




                                    ....
                                                                                                                                i :
                                                                                                                                                                                    .         .

                                 ....
                                                     -8 .
                                                     -.b:i.
                                                                              z

                                                                     reasonableness and acceptability of "labor cia ssificitions
                                                                                                                                                                                                                       - . . .- . _
                                                                                                                                                                                                                                                                    .       ._ .
                                                                     proprietyof the method used i n c c q u t i n g -averages:                                                                                                                                                                                     ..



: ,(.-
.            ._ -                             .      I   el
                                                         d.
                                                                     impact of projected increases- or decrea.ses i n Yne general
                                                                     level -09labor cost on t h e everage rates.
                                                                     sign5ficance of any d c v i s t l o n f r o m past practices in
                                                                     developing rates and i n t h e i r application.
. . . _
                                                                                                                                                          .. .                      .                                                  _.
                                                                                                                                           .      .                                                                                                        .   .
                                                                                                       - _                     ..         -*:
                                                                                                                                            ..
                                                                                                                                                  -5    .                                                           -- _.                                                        .. .-
               .... - -                     ......   I   - --.----.-------c-.~.---------.-----I-              . . . .
                                                                                                                                                 . . . .
                                                                                                                                                                      -;---
                                                                                                                                                                                       -
                                                                                                                                                                                    ______
                                                                                                                                                                                        . -.-
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                                                                                                                                                                                                                                               __-_____II____^_._._______
                  .-                                                                                                                                        __                   ..   .                 ._.


!

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                                                                                                                                                                     ..

                                           Other factors that m y have a bearing on average l a b r rates include :

                                                      a.          -sed     personnel policles ecd a c t i o n s .
                                                      b.          Wage agreements and prospective changes.
                                                      c.          Multi-shift or overtime operations.
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                                                                                                                                                                 -
                            .                    Audit considerations

                                                 A review of i z t e r i a l c o s t est-tes                     s h o u l d b e concerned with the v a l i d i t y

                           of e s t i m a t e d p r i c e s as well a s                         t i e qu.antitative and,qualitative material                                                                                    re-
                                                                                                                                                     t               -                                                                                         *
                                                                                                                                                                                                                                                       .   Y
                           quirements.

                                                 F ~ c t o r sthat may i n f l p e n c e the scope 0 f . r e v i e w i@Ude:
                                                                                                                      \--*
                                                                                                                          ..    . .         ..     .                                                       .                                       -       -
                           - _
                                        : ti,                 s i g n i f i c a n c e of m a t e r i a l c o s t to. total dost : .
         -- -          .            .        . b.            'adequacy of ccntractor's m e t e r i a l e s t i m t i n g                    .                                                                                          .       .       .
                                                 .         ' p r o c e d u r e s 2nd e x t e n t to which these p r o c e d u f e s
                                                              arc folldwed
                                                 c.           t e c h n i c a l enalyst's input re quan+Yi'ti and. e.u a l i t y ..
    . -                                           .          of m t e r i a l                                                            - .
                                        :-   . d.         . c o n s i s t e n c y of r a t e r i a l e.stirates w i t h accoclnting
                                                            . s y s t e n c l a s s i f i c s t i o q s for d i r e c t vs. i n d i r e c t    . .                                                     -
                                                                                                                                                                                                       -       .
                                                                                                                                                                                                                   .    .

                                                     . MterLal                                                                                           .       .
                                                                                                                                                                         .        .
         c- B i l l ' a f tsaterial
             '.  ,
                                                                                                                                     . _.
                                                                                                                                         ._
             -         -
    ~




                                                                                                                                                                                  ,    .           .                                       .
                             .. .                A bill o f m a t e r..i a l should c o n t a i n            a   detailed . l i s t i n g of t h e ' t y p e s and .
                                .            .                                                                                                       .           - .          . -
                                                                                                                                                                                                                                .     .

    .               q u a n t i t i e s of raw -materials, co.qonents.and         parts.. .Allcyence.s ray also be - . .'
                                                            . - . .. .       . .                          .. . .
                                                   ,?J.
                   i n c l u d e d fir.spoilage         scrap, . 2nd
                                                                   .
                                                                      cormon su&ly. .. items
                                                                                           . . ,such        as n u t.s "end
                                                                                                                          .    bolts.                                                                                                              .
                                                                                                   .
                                                                              . .      . . -
                 :- These 81.lo~mn~ces        ray be pmvided .in  . - t h e forg. of l o a d i n g f s c t o r s i f ' t h e bill
                                        . .                                      . .   .. .
                                                                         .   I
                                                                                                                                                                                                                                                       - _
    -_ ..                  .of m a t e r i a l . c .n.l y i d e n t i f i e s. basic material i t e m s ,
                                                                                                  If this-l a t t e r iethod is
                                                                                                                             . .
                                   . . .                                         -                                                            . -
        I.              used,' c d n s i d e r a t i o n ' should be given t o whether ' t h.e..s e - c -o s t. s 'are h p l i c a t e d f i n ' .
                                                             - .
                                                                                                                   . .. . .   .        . _
                       .                                                                                                                        ,  -
             .-
                        d i r e c t and i n d i r e c t wterfal .estimates. . . . -' .
                                                                                             . .
                                                                                                             . . -   .
                                                                                                                      ..
                                                                                                                         . ..

                                                                                                                                            -
                                                                                                                                                .1

                                                                                                                                                     .
                                                                                                                                                             '   '     .*-

                                                                                                                                                                             .        -.
                                                                                                      ._                                                     _ .                  . ...-. . ..                     .        .
                           mierial q u a n t i t y ' e v a l u z t i o n                        .- . . .                                                  . -            . .-
                                                                             .   -                                .          -
                                                                                                                                                         . ..                              .                       ..                 .-
    . .                                          In ..f d u o w - o n proc-u2emen%.the foilo&ng. considerations are appllcable :
                                                                                                                                 .   -                                                         .           .
                                .        . .8.'-            Whether t h e b i l l of A t e r i a l is c u r r e n t and besed on t S e l a t e s t * .
                                                            s p e c i f i c s t i o n s snd r e f l e c t s a n t i c i s a t e d changes i n u n i t q u a n t i t i e s .
                                                      .     .                                                                                                    .- _        .-                                                           -
                                                 b.. Whether the s i g n i f i c a n t d i f f e r e n c e s between the c u r r e n t b i l l of
             c.\ ..-                    ..
                                                    . . material andrprior b i l l s of nraterial m e a d e q u a t e l y e x p l a i n e d .
                                                                                     .
         i

                              . . .    P a t e r i a l costs i n c l u d e r z w h t e r i a l , p a c h a s e d p r t s , s x b c o n t r a c t e d

                          perts and components and o t h e r n a t e r i a l , t h a t can be i d e n t i f i e d with t h e

      !
                          end product or e n g i n e e r i n s effort. r e l a t e d t h e r e t o                                                .I       Spoilage, o b s o l e s c e n c e
    - :! .
.    I              __ and other losses of                             m t e r i a l connected with production a r e nomially con-
      /             -..
                    --
                                 l o a d i n g f a c t o r s ' g n d may f r e q u e n t l y. .be
                                                                                                . . l i s t e d as an l n d i r e c t c o s t .
      !
      :                 - sidered
                          .                                                                 ...                       ..         .                                            '       -       -
      !
                                                                                     .      .         .
      ! . .(I) E s t i r z s t i n g Xethods                                                             ....
      i-.. -
                          Estimating k t h o d s for direct"materia1 are g e n e r a l l y - ' d e p ~ . n d e n ton- Che .

                          t y p e of .accounting and s t a t i s t i c a l data maintained by t h e contractor.                                                                                                 Recent
                                                                                       . .       ...            . .                                        -        .
                                                                                                                                                                                                                                 .
                          experience. data m y be- availabie
                                                        . .
                                                             for t h e e n t i r e . prodsct or f c r p w t s .or 'con- .
                                                 . . .                                                                . .
                                                                                                                                                                                                           ..      .    .
                          ponents t h a t may have been produced for a similar itern.                                                                               -       .         .
                                                                                                                  ._
                              .        The con%ractor's estimate. f o r                                mterial rnii be                                 sijp~ortedi y one .or more.                                               .
                                                                                        .        .          -   .. .                    . .
                                                                      .    .                         --.-.     ... . .
                                                                                                                           -.
                          of.the following:                   .                          .  -   .          . .
                                                                  ,,
                                                                                                     . *.        .- .-           . . . . . . .
                                                                        .-                        ..                           -   --..
                                                                                                                                              . .
                              . a. - p s t records. for t h e iast ccnpieted .contract K i t h. . . . - .                   .

                                     . ' a p p r o p r i a t e adj stm ment s
                                                                           .. - .
                                                                                                 .                      I  ...
                                                                                                                         . .
                                                                                                                            .


                                                                                                        - .               ._
                                 b. Cost records' f o r t h e .list iot .orAsele&ed..Ldts of                              _ .
                                                                                           .    - . .
                                                                                                                                                                                              L .

                                       .the..last completed contract. .-                                      - .
                                                                                                                *-.                          . -
                                                                                       . .
                                  .:                                                                     . .          . -
                                  :
                           - ..ci Ejcperienced direct k t e r i a l costs , ? l o t t e d on a n .
                                             ,
                                                                                                                        . .
                            . . .       impmiem+Dt curve r e l a t i n g t o -the. sqme.         or
                                                                                            . . . . . similar         .- . .                                                      .       ~




                                                          or c o q o n e n t s . . - .         . .. .- - . .- . . .                . -- .                                                                               a


                                . . proaucts  --.                                                                 . .            . _.
                                                                                                                                    Y                                                               '

                                                                                                                      _..                                                                                              _.    .
                                       ti.
                                      Priced 'bills of inaterial fo; tfii saae .product cr - .
                                                                                                                                                                                                                        f




                                             -                                                                                           -                                                                                  .
                          . . . . . . simila'r .products k&tf! .appmpriate a d j u s t n e n t s ,. . ..            .
                         . .
                                 . .           .-       ..    . .          . . . .                  - . . ....- .          . -. .                                           :

                                e. . Direct mat&lal c o s t s .incurred on a .pi.lot run of . . . .                          -. . .
                             . -                                                          ..                                           ..
                                     & p&tot$p model.        .                               . .       . . .. . .                 .  -
                        . . .                              . . .                                                 .-. .
                                                                                    . .
                                f. A prior. cost e s t f m t e a d j u s t e d t o r e f l e c t . current .: .
                          .   e




                                                                                                                          . .
                                . . needs'.      .
                                                   -                    .     .    .-.. .           . ...                       0
                                                                                                                                   -
                                                                                                                                        *,.


                            .  g. Experience factors and ratios established,. -.                          ..
    .i       '..                                                   b
                                                                   ..
                                                                                                                                    .         .        .
                                                                                             .   .
                                                                                                                       ..                                               I .




                   ..~.. ..           : -. .
                                      . .
                                                 .                                ..                    .              ..                                  .......                                                          :..
                                                                                                                                                                                                        . . .. . . .., . .. .
    ......          .         .........              .   .   .   - . . .   - ..         ......
                                                                                                                            .
                                                                                                                       . . . . .
                                                                                                                                         .             .        *       .
                                                                                                                                                                                      .-                        .........
  I
  ?          _ *
                                                  . .-                                                                                                                                                                                                                                      *.
                                                               I
                                                                                                                                                                                                                                                                                   .,           .7
                                                                                                                                                                                                                                                                                   T'




                                                                   .            In conpietely ilew product procurezentlavailable d a t a m y be limited t o
                                              ?
                                     ;f -rough sketckes, and p r o t 3 t D e d e s i g n s .                                                                                             Hateriel q u a n t i t y and quality nay
                                 ._. .
                                                                 ._-    $                                                                                                                                     The opportunity f o r duplicetion
                                  _ ...                    frequehtly be- based on ergineering judgment.
                     ..  7
                                                                  -_
 .               -           I
                                 .                a
                                                      '
                                                                   .


                                                  ..;and e r r o r i s s u d s t m t i a l .                                                                   f i a l u a t i o n i n t h e s e circurcstences w i l l r e q u i r e
                                                  -.
                                                  1 .



                                              -';close cooperation and essistance                                                                                       3f   Goverpxent t y ' m i c a l personnel.
                                                      t



                                                                               Material Pricing P r o c e h r e s
                                     -                -
        . .
  1
  t
                     :                                                              Pricing sources foy p a r t s and corrponents include s t m d a r d costs, previous       . .
  1..    .               *                .               .purchase p r i c e s with adjustments f o r quantit.y changes, current- vendor quotes
                                              . .
 .       .. .
                                     - _. 'and prices of orders ' c u r r e n t l y placed.                                                                                          .   'The c o n t r a c t o r ' s proposai a n d ' s u g p o r t i r a
. I          ._.
                                                           data sbould.d&lose
                                                                . .                                                                               which of these scarce3
                                                                                                                                                                   .  .  o r combinations were u s e d t o e s t i -
 J .                 .
                                                                                                                                                       . .
                                     --   ..               Ate-L t u r e                                               costs.                                           .- . .                    -           .
                                                                                                                                                                                                                  . .
  !                  .                                                                                                                                                                        _ . .                                              . . .
  i
  5          .
                                                                                                                                                                                                                                    ..       .
                                                      .                .        Audit con-siderations
        ..                                                                                                                                                                                                        ..
                 _-.. ._ .

 Ii.     :.-:                                         .                    ---I:,When s-ndFlrd                                      c o s t s a r e used f o r r i t e r i a l , have variance
                                                                                                      'factors been applied and ere they r e a l i s t i c i n r e l a t i o n
                                                                                                                                                                                              ..
  5-                                      - .                  .-.             ..                     .t o p s .t Z. . . c i r r r e n t and p o b a b l e f u t u r e experiences.                                                                                                         .        .
 I.                                                                                 2.                .When p r i c e s
                                                                                                                    a r i based i n previous Furchases, reference


  I:-
  1-


                                                                   -                :                  sh&d be nsde t o stock purchase records or t o purchsse
                                              . -                          .            .       *      or$ers t o determine currency and q u a. n. t i.t i e s p u c k a s e d - .                                                                         .
                                                                                                       previously. .                                   '

                         .- ..                    *        *           :                                                         . .-                                         . -

  I;     - - .
                     .
                                                               .       -_           3..
                                                                                    when current vendor q i o t e s are used t h e e x t e n t t o vhich
                                                                                    -the  contractor solici3ed com;Detition s h s q d b e e s c e r t e i n e d .- .

  I. :--     .
                 .
                             -
                             .
                                     -
                                              -.:
                                                      .
                                                                         .-.
                                                                            -.

                                                                       .. . :
                                                                                *
                                                                                     and where no c o i p t i t l o n vas a a - i l s b l e , t'ce reasoneblzness
                                                                                 . . of- any noncjap&itive p r i c e should' Gve. been evalueted.
                                                                                        .




                                                                              - -.. the l a t t e r case we' should expect to f i n d adequate supportha
                                                                              . . data for subcontrsctor' proposals.
                                                                               . -
                                                                                                                                                         . ..
                                                                                                                                                                In .

                                                                                                               .        .
                                                                                                      .. .         .                                                                     .    .. -    .                                                                   . .
                                                                                                                                                                                                          *        .
                                                                                .               ...                                                                                                                             .   -   ..           . .
                                                                   .           . .                                                                                                                                                                             .   .
                                                                                                                                 .       .        _.                             .           ..                                                                                         .   ,

                                                                           -                          .        .
                                                                                                                                . -
                                                                                                                                                   .       -                                                                                                                  -.
                                                                               --

  1
                                                                                -       *
                                                                       .            .

         -.                                           -.       ..              ._                      .
                                                                                                               - .
                                                                                                                   .....    .

                                                                                                                                                                       . -
                                                                           -                               .                                                                                                           -   .-


 I
-i
         L--'                                                                  ..
                                                                               1'
                                                                                            .              -
                                                                                                                                     .       ..
                                                                                                                                                                                                                                                           . -.-   .--   ..   .
                                                                                                     0


                 It is not unusual f o r c e r t a i n parts to be &awn A.om t h e con-
                ' t r a c t o r ' s e x i s t i n g inventory. In s w h instances, e s t b a t e s
                 sho-rlld reflect a c t u a l c o s t s and t h e c o n t r z c t o r ' s m t h o d of
                 valuing the u n i t s of inventory s h o u l d be verified.

          The contractor's purchasing procedures W i l l h&ve a l a r g e
          i n f l u e n c e on whether he is obtaining loxes& p r i c e s for
          naxhum q u a n t i t i e s c o c s i s t e n t with quality 'and delivery                                                                                                               ,
          requirencnts. These procedures should have been reviewed
          since they could e f f e c t prozosed prices regardless of f i e
          source of t h e p r i F i n g data.
                                                               5..              . . .
                                                             . .   . .      . .
bske o r buy decislons                                   . ..        . .
                                                                                                                                                              ._
 .   .   Contractors decfde on vhether - t o mke or buy.parts or cozcpanents.                                                                                    Factors

that msy be control the decision includet prior experience, f u t u r e requirements,
                                                         .     -                                             .        .
relative. c.o s t s , , &ket        condition, delivery sc>edule, in-house c q e c i t y , finances,'
                           -        .                                     . .                                                                     ..
hanpowe.r, end subcontractors ' capability and availebillty of zhterials.                                                                                          Etcsuse
                                                                                    ..
m k e or buy decisions m y have been made where 'the contractor's interests vere sdvcrs
                                                                                                                                      .       .                        .           .
.to -the,Government's interest.a n evaluation.should b e. - &de
                                                             .  o f ' the 'basis f o r any.
  - .                 ..                             . -           .                                                                  :


s i g n i f i c a n t mike o r buy decisi'ons:and
                                               .  .
                                                    t h e. e x
                                                             . t e n t. to k-hich &&e. .oi-buy pl&.                                                                                    '.   .
                     ..                                                 .   i       -


fndicated in prior estfnmntes.were.       .  . followed
                                               .            -in a c t u a l performrice. .-                                                                - *


                                                                    . .                 ..           :       :                                           ..
                                             .   .   .                                                   . .                                           ~.

         Audit ~ o a s i d s r a t i o n s               . .             . .             .   I       .                        .           .
                                                                   . .         -_ .                                                                                                             . .
         .Special .pkblerns. with r e s p e c t t o m&e or .5uy include, intracoxqany pro-                                                                                     .
            .   .                                                               -                .               :.       '


                                                                                                                                              .-       .
cureEen%, changes in d                  e or .buy, sbdtaneous rmklng and-buying t h e same :parts                                                                                           .
                                                                                                                                      . -
                        .   .                                                   .        7       .                                                                 .       .
.&. corqcnents , and vhether rake or buy'. decisions i z d i c a t e d ,in' the.proposal Cave
                                                 .   .                                       . .
                                                                                                                  ..              .
                                                                                                                                                                                            '
been k l e x e n t e d in'situations where a long period elapsed.between prqposal and
  . -                             ..                 _ . . .. .             ..
                                                   .  .
negotiation         .
                    a




                            can be viewed as e i t h e r mke or b i y items depending
     . . -Intracompany purchases
                        .  .                                                                                                                                                                . .
             . .. .
upoh.whether they are priced at cost to tfie diyision, affiliate.or subsidiary,
                                                                                                         .        .                                                . .

                                 . i-                                                                . .
....                       .--      .-_ .
                                    .                           .   .           .           I__                        .        . .___._..    ~           -
                                                                                                                                                                                                            .               ~                     ______
                                                                                                                                                                                                                                              ... .                            ..             .-
       't
        I
                                    *
                                                                                                                                                                                                                                                                                          ..
        1              .                                                                                                                                                                                                                                               .       .          ,'.,. -
                                                .   I   .




                                                                                                                                                                                                                                                                               . .
        1'
        i                  -

                               ~
                                                                                                                                                                                                                                                                           -
                                                                                                                                                                                                                                                                                         9'        -#


       ..
                                                o r a r e priced on a "competitive" b a s i s respectively.                                                                                                     Fqr items based on c o s t ,

                                                8           review should have been made by t h e contracting agency t o 2etermine t h a t
        !
        I                                       duplication of such costs a s engineering, f i e l d service and product w a r r s n t y

                                                a r e not included i n both t h e manufacturing d i v i s i o n P s p r i c e a n 3 i n t h e p r i n e

                                                contracting d i v i s i o n ' s p r i c e .                                      E v a h a t i o n of "competitive" w a r d s t o r e l a t e d
        i                                                                                                                                                                                      4
                                                                                                                                                                                               4
                                                                                                                                                                                                                .

                                                concerns i s s i m i l a r t o tincse used f o r competitive unrelated vendors.                                                                                                                                    I n addi-
                 . -
                                    .
        i
            I
                                           tion, i f a f f i l i a t e s are g e r n i t t e d t o obtain- awarcis by c e r e l y meeting the lowest
                                                                                                       ;*, ..
        !I                               - .
                                                                                                             I
                                                                                                                                   . .                                                                                  b           .




                                           outside bid t h i s may not represent f a i r p r i c i n g and may tend to.discourege
            i                                                                                                                                                                              .        .
            I --.~.
            .
            !        ;
                     .                      - f u t u r e 'competition.
                                                                                            . .
                                                                                                        --                                                     -                   . ._.                *       . .
                                                                                                                                             . .
            i      _ . .                    -
                                                                                                                                                                                                                    .           .
                                                                    A different-make or buy hrogram from;t h a t used under p r i c r c c n t r a c t s , while
            i                                                                            ..             ..        . .
            I                                               -           .                                                                                                                               -           *

            ! .-               ..               not u n c s u a l , should be.examined to.'dcterrSne t h a t a l l c o s t s r e i a t e d to any e a r l i e r
            !.                 .    .               ,.                      .   .                                                                                                                                                                             .        -
   .        i
                               ..       .       decisions have. been e i l h i n a t e d 'from the c o n t r a c t o r ' s cost data ' p r i o r to t h e 'addi-
                                                                                                                                                                                                                                                                                                   .
            i.         !'-..        - t i o n 'of the- cost.
                                                        .    of                                        the new mike o r p u decisicn.
                                                                                                                            ~                                                                       If.i rhznge i n cake. o r b';y                                                        '
            .              I




                 .             .        . substantially it?creases costs: t o the Goverrient, a c a l y s i s o$ 'the. ccn   .
                                                                                                                        .- tractcr I                                                                                                                                                 s

                                                                                                  ..                                                                     .                                      . .
                                                                                                                                                                      .-
                                                                                                                                                                                                        * .                                                        .       .. . -
                                                b a s i s for decision a2pears-warranted.                                                     .           '.                                                                                   ..              - .- -.                         - .
                                                                                          . .                                                . .                   . . -                                            - . :
                                                                                                                                                                                                                                - -
                                                        . ~j o                   d-m a t e s
                                                             a r SuScontrector .ES+
                                                                                                                                                               I           .                                                                              ..;. .
                                                                                                                           .-     .                                                                                                                   -. _.
                                                            .       Factors to.be consid'erec? include: .
                                                                                                                 - .                          - .
                                                                                                                                                       . -
                                                                                                                                                                           . ..                .   -. . -
                                                                                                                                                                                                        :
                                                                                                                                                                                                                    .

                                                                        . . . -
                                                                                                ..                    . .               . .               . .             . .
                                                  . I..:    s i g n i f i c e m e of subccntra.c.t -estimates.i n r e l a t i o n t o t o t a l . . .                      . .
                                                   .- .. .direct material .               .
                                                                                                                      -.     . _                      .    -
                                               - .. _                                                                        ..          . .
                                                                                                            . . - ...
                                                                                                                                                                       a               .

                                                                                ..                                                                             . -- . ,                                                                   C           '




                                                    .2 .. - c o n h c t o r s ' procurement. procedures to'ensure. niaximm corn- . . _ .                               .. .
                                                      : p e t i t i c n o r o t h e p i s e sssure.reascnableness of -prices-.w;?en                            -
                                                                                                                                                                     .    .
                                                                                                                                                         - .
                                               .   - . . c o q e t i t i. o n . does n o t exist    .     . _-                             f     ..
                                                                                                                                 . . . . .-
                                                                                                                                                                                   e       .
                                                                                '                                      . .
                                                                                                                              . .. .. . . .-- .     .                                                                                   . -

                                            - . - 3.' 'type of su'bcontracts    - _         a%=rded-    :  . - . . ..      .   .   .  .                   ..
                                                                                       , _                            ._-
                                                                                                              - * . .._                       . .         '        .
                                                                                                                                                                    ..
                                                                                                                                                                               *
                                                                                                                                                                                                        -.
                                                                                                                                          . ..               .. .-
                                            Cther 'matters f o r 'special consideraticn.                     .. - . .              .     .-        ..
                                                                                                                                                - .            .               .                                                                _ .

                                                                    Government-furnished material a n d t h e use of reusable containers shotild
                                                                                    -   7                                                             .        .                               .        . _
                                            have 6een reviewed by the. contracting agency t o be ' S u f i ' they are n o t d u p l i c a t e d or-
                                                                               _ -           .    ._         . .
                                                               ' C
                                            overestimated respectively i n t h e c o n t r r c t o r 's, material estimates. Possible use of

                                            Government-owned reuseable containers should have- Seen considered i n lieu of new
                                            Residual invsntories i n t h e hands of t h e c o n t r a c t o r from p r i o r contracts

I           - ,_.
         .- -  ..-<
.-. - -.. - - ; .
               2
                       -;should                     be consXered es t o ownership and d u e .                                                          For e x q l e , if the preceding

.     -. . - c o n t r a c t                          was a c o s t type, residual m a t e r i a l would be Gc-rerment-um?ed and should
t     :. :-
    .     .
                            be i n c l u d e d i n t h e proposal a t no cost.                                                         For some fixed-price-type contracts
-.. .
.j .-.-._.._. ..-  I


                        .

         - .       ;.
                            . - m y also hold t r u e .
                            z.iiis                                                                   k l e r e t h e c d n t r a c t o r hag t i t l e t o t h e residual frcm
               .   i
                   1-       .
                            prioz fixed-price-type c o n t r a c t s , c o s t should be kesed on t h e lower of cost o r
                                                                                                                                                       4
                                                                                                                                                                                                                       -
                            :z..r%et o r t h e value a s s i g n e d
                                              --- .        .   I
                                                                    in negotiating the p r i c e of the prior c o n t r a c t .
                                                                                i'
                                                                                                                                       .
                                .                                                                                                                                                                                  .-
                                        .   Scrap spoilage and rework should.be analyzed t o a s s u r e ' t h a t t h e contractors
                                . .
                            zccounti_ng prdcedures. give tip$r&riate                                                           recognitLon t o salv.5g e a b l e natekial 'and

                            vhe.ther-t h e ' e s t k z t e s are c o n s i s t e n t w i t h the accounting t r e z t n e n t . . E q e r i e c c e d
                                     .. .       .
                                                                               . . .
                            data pn scrag and' spoilage i f aveilatle, s h o u l d have been used. i n . e s t 5 m t i n g
                                                                                                                                                   . ..._                        .     . _    .        .
                            these f a c t o r s i n .the current proposal raking-use of trend analysis.                                                                                            .
                               . -
                                                     _.
                                        ... -
                                                          .-       -                            ..
                                                                         _.
                   --       . _...          .
                                                .         ..            -    .-             .
                                                                       . . .                               .       .
    -.
                                    -           .                                                                  .     .



                                                                                                                                       . ..         .. .             .       -                             .       .
                                                                                                                                                        ..   .   .                          - .                ._.
        ...-    _.
                                    .. -                                  -   ..   .   .             . .       .       . .                           -.                                .    .
        . .     .                               - :            .
                                                                        .          _   ..        .    . .                                      ~




                                                                                                                                                                                      - . .                    . .
                                                                                                                             . .   . . . . -.        ..      .   .
                                . . . .
                                                      .        -
                                                                              .__
                                                                                                                                   -    .     ..-   . . .        ':      .           c -. .    .
                          d.       I R D I R E C T COST ESTTYAES

                                    I n d i r e c t c o s t s include such expenses    3s          manufacturisg, engineering,
                          tooling, zosterial hadling, selling and general and adnlnistrative. Evaluation
                                                                                       -
                          should consider whether annual o r billing rates h&ve been appro%-edfor overhead

                          or whether rates have becn es+&blished solely for t h e contract w d e r review.
                         Unless specifically directed by the Procurtment S d f f , review of overhead Should                                                                                                      i
                                                                                                                                                                                                              v

                         generally be limited t o a deternioation that t h e Ioost current negotiated bil2ir.g
    . .

                       ltqtes        were used.          Generaily we would revie&' .overhead
                                                                                     .        costs m6re intensively where
                      - .
                      . -.                                                             .       .                                             . .. .
                       rates veie specificaJly i e g b t i a t e a for 'the c c. a t-r-z c -t-
                                                                                             .
                                                                                         - .__ _                                    -
                                                                                                                            - . . . .. ..-.                           .               . . .. -
                                                                                                                           .-.            ..
                     -.   .                                                  .                         -..~
                                                                                                                         -.
                                                                                                                        .-
                                                                                                                                                                          .
                                                                                                                                                                              .
                                                                                                                                                                                  .              -   ..
                 ~


                                                                                                                                                  .       .
                     .- .   k u d i t consideration should be giken to:
                                                                                                                                                          .       I




                                                   . .                           . .                       .        .
                          - . .. a)..' the propriety of classificetion and zllocztion of costs,
                                                                                                                                                                              -   '




                     -.-.
                                                                                 . .
.    :      - .           -    .   .c.)'. -reasombleness
                                          . . .
                                                         of estiimtes a s reflected  by costs,                                                        .           ..      :
         .- . -
                                                                                                                                                  .           .
                     . . _ .... d ) acceitability of .estimating
                                                        . .      procedures,
                                                                                                          .._.
                                                                                                                   . ..;-..              .   .--.             :_
     -       _                        .   _    .     -                 . :                                          . .* .               i

                                                                                                                       . .                                                               .
  -..     .             e) the indlhdion' of all fae-tors having a bearing 011 the ._.                         . .
                                                                                    .    -
                -. .        . - validity of estimated costs, %ad.. .                       . . .
                               ..    . .            . ...
                                                                                               i   .

               - -                              . -
                        :f) &y advance .Sgreeaenix-b e t i e e n .the con<rac& and the . .
-       ...           . . . m v e r m e n t .-- such acivznce agreerents rcay-.l&it recovery-
                           - . of certain indirect c o s t s such as indegendeni; resezrch' -                                                                             ,


                          ._: - q d development.               . .       . -.
                                                                              . -                                  . .   .
                                                                                                                           .
                                                                                                                             .                                                                            . .
                                                                                                                                                                                                          . -
.     .. .                .  -
                                                                   I .




           . -                     .   .          - .                    *   .
                                                                                      ... . - . .
        -    ._
                     . . 1 . Indir&.l&or                   .
                                                          ._
                                                             .       .. . .
                                                                                 -  ..      . : -.. .
       . .. .             .    .         - .                                             .   ..            1   .




       .. -- . _        ~ b o kgenerally
                                   .          represents 8 na jor 2orti6nZ of indirect       ' c d s t i i Current .
                                                                                          -.
     . . ... .           . .
                estinztes. should bear a relationship to re&entI$ expericnceh .r.a t i o s of variable,                                                                                                   I




           * .
                                                                   . -         ._ . .       ..

..  . -.;
   _.           semi-variable and nonvariable-i n z i r e c t iabor.. .'.md€r&ctlabor hour projections                                                                                                        -
     0   .           I




.        .
                         and indirect labdr rate projections can'be compared Witin mp&er budgets end
             -            .                                                                                             -   .       .
                                                                                 . .                                                                  ._
                                                                                                                                        ..    -

1    *       .           . p a p =. .records. respectively.
                                                                                           .           -

                                                                                                                            .   .
-       . . .    .- .............




                                                         &precistion

                                       .The contractor's forecasts                                          fclr         d e p r e c i a t i o n rcay have been evalup-ted
                               .       .
                                   .           \   using I n t e r n a l Revenue guidelines a s recognized by current M D

        .             instructions. The contractor's c a p i t a l rel;laceEent or s c q u i s i t i o n policy

                      should be reviewed for 2ny variations effecting contract costs.

                                                         -
                                                         Rent                                                                                          4
                                                                                                                                                      4.
                                                                                                                                                                                                                                                   Y
                                                                                                                                                                                                                                                   Y
                       .               Estimated rentals of mjor machinery and equipment should be comparable
- _                                                                                        I
                  .to prior costs incurred for rentals.                                                                       !I%e pgreements should be exedned, if
                                                   . .
                       0   .                                                                                                                                                       ..       .        .       .       .
        -.         necesssry', to ascertain veristions from prior costs.
             ...                                                                                                                                               -           .        .
                                                     -0dcupancy cost .

                                       C o s t s such a s insurence, taxes,. heat, l i g b t , guerd services, and
                      . . .
                                                                                                                     -    .      .
                  %iini;en&nee sh6;ld be reviewed for r2asocablene$s ana a p p r o p r i a t e allocation..
                                                                                                  . .
                                                                                                   .    .

                   bases.                                     . .-
                                                              .. .
                  .   .                                                                                                                                                                             .~
                        ..-                         -                                                                                         . ..-
                                                                                                                               . . . . . .
                                           .         .*ExcessFacilities
                                                                                                                                                                                    -       ._
                           .-.
                                       Consideration.. shculd hzve been g i &
                                                                     . .                                                                          . . trends- which might
                                                                                                                                     ta arg -viST:ble
                                                                                                                                                      .        .                            ...
                                                                                                                                                                                                                             .
                                                                                                                                                                                                         .       .       .   .
                   indicate the probability-'
                                        .  . k h a t excess
                                                       .  .
                                                            f a .c i l. i t i e s + o d d dsvelop 6uring the                                                                                                                 .                     ..
                                                                                               . . .
                                                                                                                                ..        r   .

                  .:period of the contract; . . -. .. . .. .                                                              _.                      -        .
                                                                                                                                                                                                                                         ..
                               .-_                                                                                                                    ,        -   .


                                                          .    .                                                                                                       . -
    .        .     T n a r e c .t -cost
                       . -          .
                                 . . .
                                       .' f o r e c a s t s . m a d e -by an op4rating'hivisibn w i u ' usually ir,chde
                                                                       - . .. .                       . . .
                                                                                                                                                                                                                                         '     *


                 . .
           . the-anticipated hone office .a'ssessment to that .division, The bases of assesizent                                                                       '
    .. ... . .    I. .. .. . . .                           . ._                  . . . .. .   - ..       -.
      --_ ..- should be reviex-ed t o determine t h a t . the.division is. n o t besring sn i n e q u i t a b l e                                                                                                                             -.
                                                                                                   ~.




                                                                                                                                                                   .           .        .       .
                           :           It may be'found
                                                  - _ . that i n d l r e c t expense pools have not been
                                                              ....                                        reduced by the
                  .
            . .                                    . -                                                 ..




.
            . -..
            -.
               - -
                       . .                 .
                                                   . .

                                                    .. .
                                                                           . . . .

                                                                                 ...   I
                                                                                               -             ..
                                                                                                            ..   .       34-
                                                                                                                                .    .-                                    __ -                 .
                                                                                                                                                                                                         - -


                                                                                                                                                                                                                     .-.
                                                                                                                                                                                                                         .
                                                                                                                                                                                                                             -
                                                                                                                                                                                                                                 .
                                                                                                                                                                                                                                     ,
!                          and licensing fees.                                                      Similarly, cash discounts -ken                                      end t r a d e discounts

                           m y have been c r e d i t e d t o income accounts.

                           e.            PROLPECTIVE INIERECT COST U T E S                                                              -

                                             Proper ev&at!.on                                        of the contractor's i n d i r e c t c o s t r a t e s t o determine

                           a c c e p t a b i l i t j , reasonableness, and propriety w i l l be 'served . by:
                                                                                                                                                            4

I                                                              determilling appropriateness of period b e d t o develop r a t e vs                                                                           .                          *
                                                               period contsnplated by c m t r a c t ;

                                                               ascertaining ,>le reasonableness' of data a m i l a b l e t o support
                                                               long-range projections vhere estimates. a r e s u b j e c t t o c-nge;

                                                               reviewing c m u t a t i o n s of r a t e s t o detemZne i f the coziiputing
                                                               nethbd i s consistent v:th h i s t d r i c l a l deta end, if a differen+,
                                                               methoa I s eiqd.oyed, whether the r e s u l t provides an equitable .                                                                              ,

                                                               allocation;

                                                               dete&ning the possibility o f - ; s i g k f i c a n t f l u c t u a t i o n s i n
                                                               the rates and the existence of eppropriate c e i l i n g s ' t o ??e-
1I       .                                                     vent.the acceptance of an unreasoneble anoug% of i n d i r e c t
                                                               c o s t s . i n the negotiation of t h e contract p r i c e . .

                                                               DIRECT COSTS ESTlX4TES                                                                                                                        ..
                                                                               .     . _-                                      - . -
I'                    .
                     ~.     ..
                                             Certain costs , normlly considzred .Indirect c o s t s , are s m e t h e s t r e E t e d
1                                                          ..
i ..                      .as direct -costs where they can be i d e n t i f i e d with a particular cost oSj.ect'ive.
i        .                                         .       .                        .. -                        -.
i                     -.   These may. Include engineering, . s p e c i a l t o o l h i , .packaging, travel. and
i                                                 _-                                                                                                                                                                      . .
i.   ..
.. -.        .             subsistence, and' field service.                                                             me propriety of o t h e r d i r e c t c o s t s . should
                     .                     .. . .                             _ . . .
.       -.. -              be reflec&d i n the -sapporting d a t a and dny. inconsistencies . i n methods 'of
    *
    :
         -       .                   ._  -
                                                                                                     - . _    .                                                                                                                 .
                                                                                            . . .._
                           trestme.nt should b e noted.. .- .
                                   .   .
                                                                                              .. -
                                                                                                          - . .
                                         .    .  Percentege and Conversion Factors
                                                   .
                                                  ..                                             -. .            . .
                                             . .
                                -        . hckagin& f i e l d service, and various types of e.h.gineering and toolizg
                                                                                                    . .                                                                                  .-          .

                           c o s t s . may be estimated by e?pl.ying percentege or conversion 'factors (nurcber.
                                     -.                                                                                                                                                                                    .        .
                                    . . per month) to some other .basic 'cost.o r. t o. basic e s t i m t e s of
                           of man-hours
                                                           .. -              . "-       ..       -
                           required man-mmths
                                            *: of effort.                   . .
                                    ..
                                                                                        *
                                             A review of the c o n t r a c t o r ' s r e s e n e accounts for "other d i r e c t costs"

                           may help to deternine the relzability of prior e s t h a t e s .                                                                                            If significant
                                                                                                                                                                               . -
                     .    : differences                                ark disclosed by analysis
                            .       -         ..                                                                                 Gthey should be                            adequately j u s t i f i e d .
                                                                                                                                                                                                                      -
                            . .
                                                   .
                                             .~... . .
                                                       .       .... --i*----l---.C--.
                                                                  . :-                ...,-: -. -
                                                                                             -.           __ - ._       .  .
                                                                                                                    .- .---:.~   -.---.
                                                                                                                                      - --   .-   ,.   ..   ~.._
                                                                                                                                                                . . ;-..?        ...
                                                                                                                                                                                        -----.
                                                                                                                                                                                       :_ . _ _  ~       -            :--- r   ._
                                                                                                                                                                                                                                - .
                                                                                                                                                                                                                                            ,
                                                        .....                                                        __.
                                                                                                                       .
                                                                                                                       .
                                                                                                                       .                    .                             .........                                               .............




                                                            .           Evaluation Considerations

                                                                                   Engineering

                                                                .           .-     Statistical ??cords,contained i n the contractor's accountil?g

                                                                        system shculd be revieved t o detem.li:e t h yeliability of t h e

                                                                        nethods and s u p p r t i n g data used to err've ' a t e s t h a t e s , giving                                                                                                                                                       #


                                                                    -       consideration t o the nunber or' sbiiTi?r t y p e e n g i n e e r i n g hours
I
I
         - -
                                      . _                   .               expended on sir&                                             previously ccr_T;i'eted projects.                                                   ..
                                                                                                                                                                                                                                  Imprwe&ent
                                      . .                                                                                                                                                                                                ..
                                                        .           '.trends should not be overlooked.
                              _ .                                                                                                                                                                                                                             ?       *
                     .            .
                                                         ..                 Special b o l i n q                                 .




......
-
. ,
             I                   .expended
                                   ._
                                           for similar.t o o l s i n prev2ous production,. mzking apgro2riate a d j u s t z e z t s
                                                                                      _ ,
                                                                                                                                                                                                                                                                                                    .
                                                            . . . ...                                                                                                                                           . . .
                 ': . Tools t h a t - a r e p f a g e b e F
                                                          . .l nature, capital equiprrient, e t c . , shculd'be excluded
                                            _.                                                  -        .                                                        .....  ... . .
                                                                                                                                                                                                                                                         ..
                 '           _.  fro&.the:estimte.                                                           -me                         audifqrs
                                                                                                                                            . . .-
                                                                                                                                                   are required t o consider:
                                                                                                                                                               ..
    -_                                                                                                                                                                        ._                                                                                  .   .
                             .            -. .a) .c?arges f o r use                                                       o f , tools purchased-cr, f a b r i c a t e 6 'on'prior contracts,
                                                                                                                                                                                                                                                                                        ~




                                                I           .
                                                                     . .           . .
         -.                                                                                                .- - :
                                      :
                                      '         . b) j u s t i f i c a t i o n of eqknsive. tools,: and,       . -
                                                                      . .- ..-
. . ..                                                                                                                                                                                                                                                                                              . .
                                                  c> &ether. the-tbols 'were aiready paid. f o r under prior ccntiacts
                                                                                                              . -
                                                                                                                                                                                                                                                              .       .   '

                                                                                                                                                                                                                                                                                                .       .. .
                                                                                                         . -.
                                                                                                                                                                                                                                                     .        ..      -
                                                                                                                                                                                                                                         ...
                                                                                                                                                                            . . . .
                                                        'me.reasonableness'of      for packaging cost m y be                        the.  contractor's e s t * t e .
           .. . -. . -        .     -                                  .._ . . .
                                                                             . I

                                                                                           . .
                                                                                                 ..                                   . .
                                                                                                                                                .                                                                                                                                           '




         .. - ..a s c e r t a i n e d by comparing it w i t h costs incurred
                     -'                                                       fcs s k a r :types and kicds of
                                                                              ._ . . .
                                                                            .
                                                                                                    ..                . . . . -. . . .          :   ..        .      ..
                                                                                                                                                                                                        .
                                                                                                                                                                                                                . . .         ..                             ._               . .
                                                                                                                                                                          .
. . . .'.gadsgiig.                                                                                       . . . . . .. -. .                            .       -.   ..
                                                                                                                                                                    . .. . .^
                                                                                                                                                                                            .. .    .       .   ._      .      _                 .           ..   _-
_.- .
 -                                                                                          .                               -. ... . .
                                                                                                                                       .        .
                                                                                                                                                            - .-
                                                                                                                                                         - . . . . . .. . .
                                                                                                                                                                            . .                         f
                                                                                                                                                                                                        .....
                                                                                                                                                                                                                .                 .-     .
                                                                                                                                                                                                                                                                                   - .
                                                                                                                                                                                                                   .     .
.                -                                                                                                                 -_                    .     .                      . -           . .
         . _             -       -.                                                                                         ....
                                                                                                                                    .
                                                                                                                                                ....              _ . _ - ..           _.       .                  . .
                                                                                                                                                                                                                  . .. _
                                                                                                                                                                                                                             -.     a    .


                                            . -.
                                                                                                                                                                                                            .    . .                ..-. .
                                                                                                e   .



                                      . .                       -           Travel arid Subsistence                                                                                                                                          \           .
                                                                                                                                                                                                                                                                                                    .          .
-                .                    -.            .           . .                                                                                                                   ....                      ....                ..
' -          -                                                                          .       ._
;        .
                 .               *.
                                                        As t h e estimate for travel snd. subsistence 2s mually-based oil the con-                                                                                                                                                  .
;                                          I.           .. .    .                                        -       4-   .
                                                                                                                 c
                 ..              terupleted number of trips, length of stay, transportation c o s t s , and estinsted

.
.        .--                     per diem -ellowance,contractors shculd have control procedures. over:

. . . .                                                                                                                      . .                              16. ._                                                                                                          :.
                 -. . .. .                      . -             .       .          '.   ._          .        .                                  .    .    .                                 -           .        . .
                  ~       .       .
                                  .                . .   _-.            _ _ .-                . ..     .-_---_I__.                       ..                                                  ~   .       .. .                             __.
                                                                                          -

                                                                                                                                                                                                                .   .
                                                                                                                                                                                                                    - .
                                                                                                                                                                                                                              - ,-* -
                                                                                                                                                                                                                                  c   .


                                                                                                                                                                                                                                      .
                  1) t h e reasona”,eness                                                      of p e r d i m rat.es,                                                                                                         5‘



                  2) t h e use of econoaical trnnsportation where available,

                  3 ) proper p o i n t s of depzrture and a r r i v a l ,
                  4) a c t u a l need f o r milage alloT*Bnce, end                                                                                                                                                      \



                  5)                  the m x b e r of t r i p s o r l e n g t h of stay.

                          .       Preproduction and Start-up Co’sts
                                                                                                                                                           4             .
                                                                                                                                                           4
                  A rcview by v e r i o i n g detailed documentation and proposed method of                                                                                                                                                 Y
                                                                                                                                                                                                                                                m



       b n d l i n g such estimated c o s t s , should be Fide.                                                                                          If t h e t o t a l c o s t s are n o t
                                                                             .   ’, --.                                              5 ,’
       t o be charged t o t h e c o c t r a c t under, rev&,                                                                                  .-itshculd be determined vhetber
                                                                                                                                                         .. .
       the contractor. intends - t o B b s o r b . thc r e s i d u-a l - c. o s t s o r recq-Jer them i n sub-:                                                                                                               ._
                                                                                                                                                                         . .             .   .
                                                                                              .        .                                                            ..
       sequent orders..                                                                                    . .                                                                               .       .
                      -_                                                                                                 .           .               .          .
                      .           .          .
                                                                                      - .          .       .         .           - .                                -            .                       .      :
         .    .
                  . . ..                     . -                                                                                                                                                             . -            . .
                                        .a                                                    : .          .                                         . ..       .
                                                                                                                                                                . .
                                                                                                                                               _ ..
                                                                                                                                               I.                   .    --


                                                                                                                     -           .
                                                                                                                             .            *     -
                                                                                                                                                           ~.
                                                                                                                                                     ..
              . . _ .                      ..                       .        _. .- -
                                      . .. . _                                                                                                                                           .       . .-
                                                                                     .                                                                              -        .
      .. -.                                                                                   a.

                                                                                                                             . .
                                                 . .. .
                                                                                 .        .                                                               . .- :
                                                                                                                                                               -                                   . .
. -           .       *
                                        . . . ..               ..                    ..            ..
                              .                                                                                                      - -        .-        ..                         .   .
                                                                                                                         . .




                                                          .             .                                                        _.
                                                                                                           .     .