Most prime contractors include one or more subcontractors in their proposals to the Government. For solicitations issued pursuant to FAR Part 15, 15.404-3(b) requires the prime contractor to conduct appropriate cost and price analysis to establish the reasonableness of the price and to include the results of these analyses in the cost proposal. Cost analysis involves reviewing each cost element, (i.e. for labor the direct labor rate, escalation, indirect rates and profit) to determine if each element is reasonable and ties to the contractor’s accounting records. As this information is highly proprietary, most subcontractors provide the prime contractor with a sanitized proposal consisting of only the fully burdened labor rates and include their cost or pricing data in a sealed package for audit by the government.
What Does Price Analysis Involve?
Price analysis involves examining and evaluating the proposed fully burdened labor rate without evaluating its separate cost elements and proposed profit. Price analysis is a function of comparing the proposed labor rate to previous rates for that labor category known to be reasonable. Examples of comparators include what other subcontractors have proposed, prices previously paid by the prime or commercially available catalogue prices. Even if the subcontractor has included their cost or pricing data in a “sealed package” for audit by the government, the prime contractor is still required to conduct price analysis.
Why Do a Price Analysis on Proposed Subcontractor Prices?
Failure to include price analysis in a proposal will result in Defense Contract Audit Agency (DCAA) characterizing the subcontractor costs as unsupported. This finding will jeopardize the prime contractor’s chances for award. DCAA may consider price analysis in the audit as long as the analysis is submitted prior to conclusion of the audit. However, post-proposal submission price analysis frequently shows the subcontractor’s proposed labor rate are not reasonable which is at best an embarrassing result. Therefore, prime contractors should always perform price analysis on their proposed subcontractor prices to document the reasonableness of those prices and include that analysis in the proposal submitted to the Government.
Guest writer Tom Marcinko is a Principal Consultant at Aronson, LLC. For over 50 years, Aronson has provided a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals.