Price Not Cost Analysis NCMA March Workshop Katherine

Price (Not Cost) Analysis NCMA March Workshop Katherine Rachubinski Ryan Connell Commercial Item Group 7 March, 2018

DCMA’s Commercial Item Group (CIG) MISSION Provide acquisition insight for the integration of commercial products and services within Do. D to streamline procurements and ensure warfighters receive cutting-edge technology at fair and reasonable prices. www. dcma. mil/commercial-item-group commercial@dcma. mil One team, one voice delivering global acquisition insight that matters. 2

Commercial Acquisition Challenges What’s “commercial”? What’s a “fair and reasonable” price? One team, one voice delivering global acquisition insight that matters. 3

Commercial Item Database • • Currently maintained in Excel format More than 15, 000 parts – and growing Not all-inclusive (but we’re working on that) Sources of data: – Commercial Item Determinations by Procuring Contracting Officers – Commercial Item Recommendations by CIG personnel – Others • Need information? Contact commercial@dcma. mil One team, one voice delivering global acquisition insight that matters. 4

5 Commercial Item Pricing 5 • Evaluate price, not cost – Cost plus a certain profit is not the F&R way to look at commercial pricing – Peanut butter and jelly sandwich • Be a prudent business person • Understand the competitive market conditions – Direct competition, if commercial, why isn't it being competed – Who makes products/services similar? Who buys besides USG? • Reasonable knowledge of the market – What has the Government paid, what do others pay? – What is the value of the item/service; complexity, risk, difficulty • Negotiate a fair and reasonable price One team, one voice delivering global acquisition insight that matters.

Market Research • What is Market Research? – “Market research” means collecting and analyzing information about capabilities within the market to satisfy agency needs (FAR 2. 101) • Do I have to do market research on pricing? – Yes, NDAA 2017 requires market research for price reasonableness • Who is responsible? – The Government (FAR 10. 002) – Prime contractors in other-than-commercial contracts (FAR 10. 003) • Exception: market research not required for procurements under the Simplified Acquisition Threshold unless “adequate information is not available and the circumstances justify its cost. ” One team, one voice delivering global acquisition insight that matters. 6

Market Research • First, understand the requirements – Know the specifications form, fit, and function – Know any special military requirements such as paint, labeling, qualification, testing • Is the exact same item (part number) advertised for sale? – Google it – Check specialized websites such as military surplus & aviation parts resellers – BUT, are sufficient quantities available? What are the terms & conditions? • Do similar items exist? – Check the commercial item database – Look at CIG helpful links for resources One team, one voice delivering global acquisition insight that matters. 7

Market Research • There is no single website, person, or tool that has all the answers • There is no checklist or template, since each part or service has its own unique circumstances • Be creative, use your own best judgment • Combine all sources of information to paint a complete picture, and… …document it! One team, one voice delivering global acquisition insight that matters. 8

Market Research Let me call a buddy of mine… Talk to suppliers and other subject matter experts 9 One team, one voice delivering global acquisition insight that matters. 9

Understanding Price • • • Tastes great Convenient location Fair trade sourcing Costs $5 to make 12 oz. cup Customer price is $6 20% markup on the sale • • • One team, one voice delivering global acquisition insight that matters. Tastes great Convenient location Fair trade sourcing Costs $2. 50 to make 12 oz. cup Customer price is $5 100% markup on the sale 10

Group Activity 11 I need to go to Tortuga Music Festival 3 day country music festival on Ft Lauderdale beach (in on April 12, home April 14) I want a flight from Boston to Ft Lauderdale 2 minutes and perform research to get me the best price you can find. • Whole lot of Market research in 2 minutes. • Everyone thinks differently • Google vs Kayak ? • Setting my requirements • Needs vs wants • No right vs wrong • Research, document, justify One team, one voice delivering global acquisition insight that matters.

Misconceptions about Price Analysis • • • If it’s commercial, the price must be fair and reasonable Catalog prices are automatically fair and reasonable GSA schedule makes the price fair and reasonable 50% profit is excessive 1 source of information is adequate One team, one voice delivering global acquisition insight that matters. 12

13 Commercial Item Pricing 13 • FAR 15 Price Analysis Techniques – Comparison to other prices received from other companies – Comparison to historic prices paid – Parametric estimating methods – Government cost estimates – Market research on same or similar items (NDAA 2017 – required) – Data other than certified cost or pricing data • Other price-estimating approaches: – Bottoms-up, based on the labor and materials – Value based pricing One team, one voice delivering global acquisition insight that matters.

Commercial Item Pricing Comparison to other prices received from other companies Example case: • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each • Artifacts: During pre-solicitation, discovered that only this company makes this particular part. • Analysis: • If other companies offered, expectation this would be a competitive procurement • Sometimes distributors create competition One team, one voice delivering global acquisition insight that matters. 14

Commercial Item Pricing Comparison to historic prices paid Example case: DCMA Tools Part #123456 Price $ 100, 000 $ 90, 000 Qty 6 3 100 Date Apr-08 Sep-12 Jun-16 KTR history Part #123456 Part #123456 Price $ $ $ Qty 12 6 3 3 100 Date Dec-07 Apr-08 Sep-12 Aug-15 Jun-16 100, 000 80, 000 90, 000 • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each • Artifacts: During review, researched historic prices paid using DCMA systems, and Contractor sales history • Analysis: • Inflation/Deflation • 2007 to 2012 no price adjustments • Quantity discounts • Only large quantity (100) • This explains the $90 k • 3 @ $80 k is unexplained One team, one voice delivering global acquisition insight that matters. 15

Commercial Item Pricing Parametric estimating methods Example case: • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each • Artifacts: During market research, found several stands offered for sale. • Stand 1, 5 x 4 x 5, $17, 000 • Stand 2, 20 x 4 x 8, $115, 000 • Stand 3, 12 x 4 x 10, $84, 000 • Parametric Relationship: • Size is a good indicator of price • Stands 1, 2, 3 all around $175 per ft 3 • Using that metric, estimate $70, 000 Length 10 Width 4 Height 10 Ft 3 400 Price P per ft 3 $ 100, 000. 00 $ 250. 00 Stand 1 5 4 5 100 $ 17, 000. 00 $ 170. 00 Stand 2 20 4 8 640 $ 115, 200. 00 $ 180. 00 Stand 3 12 4 10 480 $ 84, 000. 00 $ 175. 00 Proposal Average Recommendation One team, one voice delivering global acquisition insight that matters. 400 $ 175. 00 $ 70, 000. 00 16

Commercial Item Pricing Government cost estimate Example case: • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each • Artifacts: Consulted Government cost estimators at the buying command. They used a 0. 2% of total aircraft maintenance cost, to factor in the cost of setting up the depot, to include the stands. • Analysis: • Aircraft maintenance was estimated at $120 M. Thus the depot cost estimate is $2. 4 M. $300 k proposal for the 3 stands, appears high (12. 5% of total depot price) One team, one voice delivering global acquisition insight that matters. 17

Commercial Item Pricing Market research on same or similar items (NDAA 2017 – required) Example case: • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each • Artifacts: During market research, obtained market research-based quotes from 2 other companies • Analysis: • No other companies offer exact item • Company 1’s stands are 15 x 4 x 10 for $90 k • Don’t have wheels for moving • Company 2’s stands are 10 x 4 x 10 for $65 k • But they do not come painted • Understanding the market, ball park One team, one voice delivering global acquisition insight that matters. 18

Commercial Item Pricing Data other than certified cost or pricing data Example case: • Item: Aircraft maintenance stand 3 pieces, 10 x 4 x 10. Proposed Price $100, 000 each Labor mechanic laborer engineer Material • Artifacts: Other than CCOPD is a last resort. • Analysis: • This should be used when other price analysis techniques still don’t demonstrate information to determine a fair and reasonable price • Shown (right) example of what other than CCOPD looks like Hours Rate Cost 300 500 80 45 25 80 $ 13, 500 $ 12, 500 $ 6, 400 20000 1 $ 20, 000 Indirects Labor OH Material OH $ 32, 400 $ 20, 000 85% 10% $ 27, 540 $ 2, 000 G&A $ 81, 940 12% $ 9, 833 Total Cost $ 91, 773 Profit $ 91, 773 9% $ 8, 227 Price $ 100, 000 One team, one voice delivering global acquisition insight that matters. 19

Commercial Item Pricing Combining Price Analysis techniques: • No one offering exact item for sale • In 2015, sold 3 for $80 k each, escalate upward • Not ignoring the fact that there were regular $100 k sales • Parametric analysis recommended $70 k • Government Cost estimate, less reliable data point • $65 k same size, unpainted • Estimate paint costs • $90 k bigger, no wheels TAKEAWAY: • Somewhere around $85 k is the answer • Being “okay” with this level of fidelity • Relying heavily on market research One team, one voice delivering global acquisition insight that matters. 20

Commercial Item Pricing • Overarching Price-Analysis concepts • Collecting all of the information available • Putting those data points together to form a overall recommendation • Ranges are acceptable • “What makes sense? ” • Accepting imperfection • “What if it was your money? ” One team, one voice delivering global acquisition insight that matters. 21

Commercial Service Pricing • Pricing Services • Finding similar services (market research) • Price to maintain/repair vs price to buy • Bottoms up estimate (labor) • Using publicly available information • Bureau of Labor statistics • Census • Consultant prices • Salary. com • List available on CIG website • www. dcma. mil/commercial-item-group One team, one voice delivering global acquisition insight that matters. 22

Commercial Service Pricing • CIG has developed an internal tool for pricing services • Uses Bureau of Labor statistics to pull “salary” information • Companies are required to provide % expenses in Material, Labor and Indirect costs every 5 years on census data • Uses a combination of occupation, geographic location, escalation and indirect load factor based on 2017 Census • Categorized by NAICS code One team, one voice delivering global acquisition insight that matters. 23

Commercial Pricing Adjustments in pricing • • Changes in market conditions (supply, demand) Cost of starting or re-starting production Quantity Escalation Delivery schedule Warranty Other contract terms & conditions One team, one voice delivering global acquisition insight that matters. 24

Price Reasonableness What is Value-Based Pricing? Is it new? NDAA 2017 allows value-based pricing What is the item worth to the end user? Pros: • An additional data point which can be used to help with price analysis • Considers demand, which affects pricing in the commercial market Cons: • May lead to additional negotiation issues over “value” • DCMA, DCAA, buying commands can’t really determine “value” – really the user One team, one voice delivering global acquisition insight that matters. 25

Commercial Part Example • Contractor provided sales history of commercial sales • CIG performed mkt research and found other similar for sale • Government-requirements ─ ─ 2. 25” diameter 2000 PSI 10” long Max Temp 2, 000 degrees F • Is the value commercial? • CIG opinion is yes • This fits into the “of a type” scope • Inbounds One team, one voice delivering global acquisition insight that matters. 26

Commercial Part Example Continued • What about pricing? • KTR proposed $50 k • Some are higher some are lower • Is $50 k reasonable? • Let’s compare various technical specs to the average price offered/sold One team, one voice delivering global acquisition insight that matters. 27

Commercial Part Example Continued Length Diameter $ 70, 000 R 2 = 0. 0627 $ 60, 000 $ 50, 000 $ 60, 000 R 2 = 0. 0627 $ 50, 000 $ 40, 000 Average Price $ 30, 000 Linear(Avera ge Price) $ 20, 000 $ 10, 000 $ 40, 000 Average Price $ 30, 000 Linear(Averag e Price) $ 20, 000 $ 10, 000 $0 10 20 $- 30 0 20 30 Temperature PSI R 2 = 0. 0561 $ 70, 000 10 $ 70, 000 R 2 = 0. 827 $ 60, 000 Average Price $ 50, 000 $ 40, 000 Linear(Avera ge Price) $ 30, 000 $ 20, 000 Linear(Avera ge Price) $ 10, 000 $0 2000 4000 $ 50, 000 $ 40, 000 Average Price $ 30, 000 Linear(Averag e Price) $ 20, 000 $ 10, 000 $0 2000 4000 6000 One team, one voice delivering global acquisition insight that matters. 28

Commercial Part Example Continued • Using the model that Temperature is a cost driver ─ 12. 284 (2000) + 8975. 3 = $33, 543 ─ Is $50 k reasonable? • RFI to contractor. You haven’t given us supporting data for a $50 k price • Government Requires additional testing, that we don’t do commercially ─ Wait, is this still a commercial valve? • RFI to contractor. Need more information regarding the testing • Tests are all offered/performed commercially, frequency was different • CIG bottoms up estimated the value of the tests, $2, 500; total $36, 043 ─ Is $50 k reasonable? ─ No, not based off the information provided, plus market research. CIG recommends $36 k One team, one voice delivering global acquisition insight that matters. 29

Key Takeaways Emphasis on market research Requirement to perform price analysis for commercial items Thinking creatively, being ‘okay’ with less than 100% solution Gathering & understanding pricing data Value-based pricing One team, one voice delivering global acquisition insight that matters. 30

CIG Contact The DCMA Commercial Item Group is available to: • Provide expert assistance to Do. D buying commands • Support DCMA offices in performance of CPSRs • Provide training • Work with contractors to streamline the buying process Commercial@dcma. mil www. dcma. mil/commercial-item-group One team, one voice delivering global acquisition insight that matters. 31

Questions One team, one voice delivering global acquisition insight that matters. 32

What is Noncommercial? One team, one voice delivering global acquisition insight that matters. 33

BACKUP SLIDES One team, one voice delivering global acquisition insight that matters. 34

Commercial Item Database One team, one voice delivering global acquisition insight that matters. 35

Evolution of Commercial Acquisition Law • NDAA 2016: - Restricted the PCO’s ability to change a commercial decision; HCA to overturn - Reliance on prior Government prices paid - Added scrutiny to convert from a FAR 15 to FAR 12 - Required a database for recommendations and determinations of commerciality • NDAA 2017 - Emphasized market research for price analysis - Enforced the build of a central database - Added many commercial related pilot programs • NDAA 2018 - Directed establishment of a program for buying COTS items on the internet - Established the existence of prior FAR 12 buys as a basis for commerciality One team, one voice delivering global acquisition insight that matters. 36

Overturning Commerciality What if a PCO makes a mistake? NDAA 18 SEC. 848. COMMERCIAL ITEM DETERMINATIONS states that a prior PCO use of FAR 12 procedures to acquire an item can be changed to different acquisition procedures under two conditions: • The head of contracting activity determines in writing that the use of such procedures was improper; or • The senior procurement executive of the military department or the Department of Defense as designated for purposes of section 1702(c) of title 41 determines in writing that it is no longer appropriate to acquire the item using FAR 12 procedures. Note: Do. D has not yet finalized guidance to Department staff on implementation of the above. One team, one voice delivering global acquisition insight that matters. 37