Production Case Study
PRICE NEGOTIATION MEMORANDUM
(The prenegotiation objectives establish the Government’s initial negotiation position. They provide parameters that will be used in the contracting officer’s final determination of a fair and reasonable price. They should be based on the results of the acquisition team’s analysis of the offeror’s proposal, taking into consideration all pertinent information including field pricing assistance, audit reports and technical analysis, fact-finding results, independent Government cost estimates, and price histories. The contracting officer must establish and document prenegotiation objectives before the negotiation of any pricing action.
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A PNM must be a stand alone document that will pass scrutiny in court. The reader should not have to refer to audits or technical reports to make sense of the PNM.)
TEAM:
TEAM MEMBERS: (List the first and last names and positions of each person representing the Government here.)
First and Last names
Position
Peter John
Senior Contracting Specialist
Allen Austin
Contracting Specialist
Jane Dickens
Assistant Contracting Specialist
Helen Anderson
Assistant Contracting Specialist
Johnson Holland
Assistant Contracting Specialist
Joe Rogers
Assistant Contracting Specialist
Acquisition Background:
(Include the purpose of the negotiation and a description of the acquisition.)
The purpose of the document is to present the Price Negotiation Memorandum for the acquisition of the H-19 Mission Computer as well as the Operational Flight Programs for the H-19A helicopter. Department of Defense intends to upgrade the H-19 Mission Computer as well as the Operational Flight Programs of the H-19A. The H-19A helicopter is designed to meet the Army troop carrier and ground support. Presently, the H-19 also supports the U.S. Marine, Navy, Air Force, the Department of Interior and Coast Guard. The U.S. government also uses the H-19 to support the peacekeeping. However, the H-19 requires a significant improvement in speed, range and load capabilities, and the MAS (Malahy Aero Systems) are the sole prime contractor to satisfy the G-19 acquisition. In essence, the MAS and the government have agreed to complete the contract within 19 months.
Negotiation Summary:
(Describe the quality of cost or pricing data and the extent it was used. Include a discussion of contract type and elements of price that should be considered, together with issues of risk and uncertainty to the contractor and the Government.)
The negotiation is between the government and the Malahy Aero Systems, which is the Contractor to upgrade the computer system of the government H-19A helicopter.
The contactor has submitted the costs of materials to complete the 19-month project. The contractor submitted the total costs of $43,868,081; however, the government objective was $37,659,750. Despite the variance recorded, the company was still able to record the 12% profits of $4,519,170
Summary:
(Provide the status of any contractor systems considered in this negotiation.)
The contractor’s accounting systems and material management as well as internal controls for the material management are adequate; however, the control risk is still low. The contractor records employee labor both the direct and indirect labor. Additionally, we consider that both the labor accounting system as well as related internal controls as adequate and carrying low risks based on our assessment.
The pricing and cost data submitted by the company to support the materials are inadequate because their preparation is not in accordance with appropriate FAR provision, and applicable cost accounting standard. Moreover, the contractor has not delivered an adequate documentation to back up its position. The concept “question costs” are the costs that may not be allowable or allocated to the contract. On the other hand, the term “unsupported costs” in our opinion refer to the allocated and allowable, however, the documentation provided is insufficient to back up the dollar amount in the proposal.
Cost Analysis Summary:
The contractor uses the element such as the material, Material Overhead, Engineering Labor, Engineering Overhead, Manufacturing Labor, Manufacturing Overhead, Other Direct Costs, G and Cost of Money for the proposal pricing. However, there is still a variance between the contractor cost data and government objective. The total price proposed by the contractor is $49,110,651
; however, the government objective is $43,871,896 revealing the variance of $5,238,755
(Then, fill in the following table with the government objective price for each cost element.)
Element
Contractor
Proposed
Government
Objective
Reference
Material
$20,976,910
$19,565,594
Engineering Group 66-9210 = $158,990
67-1100 = $481,175
67-5200 = $593,409
68-2400 = $98,342
68-3800 = $47,883
68-4800 = $324,587
68-5300 = $193,758
69-1100 =$19,078,766
Total = $20,976,910
Material Overhead
$897,812
763,058
Material Overhead rate =4.28%
Based on the current company forecast
Engineering Labor
$7,018,980
$7,018,980
Yr 1: 35,900 hrs x $35.72 = $1,282,348
Yr2: 140,250 hrs x $35.72 = $5,009,730
Yr3: 20,350 hrs x $35.72 = $726,902
Total = $7,018,980
Engineering Overhead
$3,287,690
$2,912,877
Engineering Labor Overhead rate = 46.84%,
Based on the current company forecast
Manufacturing Labor
$230,676
$230,676
Yr 1: 400 hrs x $25.15 = $10,060
Yr 2: 1,787 hrs x $25.15 = $44,943
Yr 3: 6,985 hrs x $25.15 = $175,673
Total = $230,676
Manufacturing Overhead
$253,444
$251,898
Manufacturing Overhead rate = 109.87%
Based on the forward pricing rate agreement
Other Direct Costs
$5,822,798
$3,418,235
Engineering Reproduction = $89,483
Engineering Travel = $297,720
Overtime Premium (1,940 x $52.15) = $101,171
Computer Services = $3,031,032
Marketing = $2,046,258
Subtotal ODC’s = $5,565,664
Misc ODC’s (4.62% x Subtotal ODC’s)= $257,134
Total ODC’s = $5,822,798
Sub-Total
$38,488,798
$34,161,318
G
$5,199,771
$4,830,018
The paper figures the G rate = 13.51%. The calculation is derived using the current accounting information available from the latest fiscal year and adjusted based on the estimated of current sale year forecast.
Cost of Money
180,000
180,000
Amount agreed upon in conjunction with government auditor
Total Cost
$43,868,081
5,264
Profit
5,242,570
$4,700,560
Based on the 12% of the forecasted Total cost
Total Price
$49,110,651
$43,871,896
Significant Considerations:
The DCAA (Defense Contract Audit Agency) has audited the proposal upon receipt of the proposal development of the “H-19 Helicopter mission computer enhancement.” Based on our opinion, the pricing or cost data in the proposal are adequate for the negotiation purpose. However, we remark that the pricing and cost data that the offeror has submitted to support the materials are inadequate because the data are not prepared in accordance with the applicable “Cost Accounting Standards and appropriate provisions of FAR (Federal Acquisition Regulation) and DFARS (Defense Federal Acquisition Regulation).” CON 217 (nd). The report of this audit is qualified pending the time the DCAA receives the technical report.
(Discuss the most significant facts or considerations controlling the establishment of the prenegotiation objectives. To the extent, such direction has a significant effect on the action, a discussion and quantification of the impact of direction given by Congress, other agencies, and higher-level authorities.)
Element Discussion/Component Breakdown:
(Discuss each major element of cost and if necessary, sub-elements, as well as profit and price for the acquisition. Always begin with the amount the contractor has proposed and then the amount of the government objective. It may seem redundant to keep providing the amounts when the Summary shows them, but large acquisitions may require lengthy PNMs and readers should not have to flip back and forth to compare the amounts.)
1. Material: The contractor proposed total direct material costs of $20,976,910. This major element of cost has been divided into separate engineering groups; therefore, the cost analysis was done on each engineering group to determine the Government’s total material cost objective. The last four digits refer to the work-numbering package for the project and they are in accordance with the normal acceptable practice. The auditors and the company agree substantially in the area.
Engineering Group
Contractor’s Proposal
Questioned Costs
Unsupported Costs
66-9210
$158,990
$34,294
$23,980
67-1100
481,175
140,000
341,175
67-5300
593,409
0
0
68-2400
98,342
0
0
68-4800
566,228
47,883
0
69-1100
$19,078,766
823,984
0
Total
$20,976,910
$1,046,161
$365,155
(Discuss in DETAIL how you developed your objective. Who provided the information? What info was provided? What analysis techniques were used? Do this for each engineering group.)
Engineering Group 66-9210:
The contractor proposed $158,990 for this engineering group. The Government objective is $100,716. The Government objective position is based on the questioned costs of $34,294. Thus, we questioned the proposed costs of $34,294 because the company used the $158,990, which is the same amount for the 22-month schedule since the new project is 19-month schedule. Moreover, there are unsupported costs of $23,980 that the contractor proposed for the security equipment. In essence, the Malahy has agreed to remove this unsupported amount.
Engineering Group 67-1100:
The contractor proposed $481,175 for this engineering group. The government objective is $0. In essence, we question the $140,000, which is the proposed costs of the CLS (cartridge load software) since the cost is no longer needed based on the initiation on the proposal development meeting. Moreover, the remaining $341,175 is unsupported because the cost is the quote for the Orbit Science for the Fairchild defense, which has already expired. Malay’s negotiator proposed 7% reduction, however, the negotiation has not taken place, thus, we cannot consider this amount as supported. Meanwhile, we have deleted the entire $481,175 proposed for the Engineering Group.
Engineering…
