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…

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