Chapter 9 - Audit of Cost Estimates and Price Proposals

DCAAM 7640.1; DCAA Contract Audit Manual

CHAPTER 9

Audit of Cost Estimates and Price Proposals

Table of Contents

9-000 Audit of Cost Estimates and Price Proposals

9-001 Scope of Chapter 9-002 Related Audit Guidance 9-003 The Total Audit Environment

9-100 Section 1 - Administrative Procedures for Field Pricing Support

9-101 Introduction 9-102 The Field Pricing Support Concept

9-102.1 The Approach 9-102.2 Applicability of Procurement Procedures 9-102.3 Applicability of Dollar Thresholds 9-103 DCAA Field Pricing Support at the Prime Contract Level 9-103.1 Coordination of the Request-Field Pricing Support 9-103.2 Acknowledging the Request 9-103.3 Audit Scope ? Field Pricing Support 9-103.4 Sampling Procedures to be Used 9-103.5 Request to Report by Line Item 9-103.6 Requests to Report on Comparative Historical Cost Information 9-103.7 Scheduling Audit Report Issuance 9-103.8 Technical Evaluation Impact on Audit Report Schedule

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9-104 Field Pricing of Subcontract Proposals Included in Prime Contract Price Proposals

9-104.1 Basic Responsibilities for Subcontract Proposals 9-104.2 Deciding Whether a Government Field Audit of a Subcontractor's

Proposal Should be Obtained 9-104.3 Coordination of Major Program Subcontract Assistance 9-104.4 Processing Requests for Audit of Subcontractor Price Proposals 9-104.5 Special Requirements for Timeliness and Coordination of

Subcontractor Audits 9-104.6 Subcontractor Proposed Profit 9-104.7 Differences of Opinion Between DCAA Offices

9-105 Intracompany Proposals Included in Prime Contract Price Proposals

9-106 Special Considerations - Release of Data to Higher-Tier Contractors

9-107 Written and Telephone Requests for Specific Cost Information on Price Proposals

9-107.1 Processing Requests for Specific Cost Information 9-107.2 Written Confirmation of Specific Cost Information 9-107.3 Special Considerations - Subcontractor Cost Information

9-108 Audit of Part(s) of a Proposal and Applications of Agreed-Upon Procedures ? Price Proposals

9-109 Evaluation of Data Rights Price Proposals

9-110 Release of Contractor Proprietary Data to FMS/DCC Customers

Figure 9-1-1 Sample Format for Confirmation of Specific Cost Information on Price Proposals

9-200 Section 2 - Evaluating the Adequacy of Certified Cost or Pricing Data or Data Other Than Certified Cost or Pricing Data in Price Proposals

9-201 Introduction

9-202 Definitions

9-203 Certified Cost or Pricing Data Requirements

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9-204 Determining Adequacy of Certified Cost or Pricing Data 9-205 Deficient or Denial of Access to Certified Cost or Pricing Data 9-206 Data Other Than Certified Cost or Pricing Data Requirements 9-207 Audits of Proposals Based on Data Other Than Certified Cost or Pricing

Data 9-208 Determining Adequacy of Data Other Than Certified Cost or Pricing Data 9-209 Audit of Parts of a Proposal 9-210 Reporting Results of Evaluations of Pricing Proposals with Certified

Cost or Pricing Data or Data Other Than Certified or Pricing Data

9-300 Section 3 - General Evaluation Procedures for Cost Estimates

9-301 Introduction 9-302 Adequacy of Cost Accounting System for Preparation of Price Proposals 9-303 Contractor Estimating Methods and Procedures-Cost Estimates 9-304 Price Proposals Format and Support 9-305 Coordination with Contracting Officers 9-306 Use of Specialist Assistance in Price Proposal Technical Evaluations 9-307 Incorporating Technical Evaluations into the Audit Report 9-308 Incorporating Cost Avoidance Recommendations into Audits of Price

Proposals 9-309 Evaluation of Methods and Procedures-Cost Estimates 9-310 Deficiencies in Specific Cost Estimates 9-311 Evaluation of Individual Cost Estimates and Cost Realism

9-311.1 Evaluation of Indirect Versus Direct Cost Classification 9-311.2 Evaluation of Consistency in Estimating and Accounting 9-311.3 Comparison of Estimated and Actual Costs 9-311.4 Cost Realism Analyses 9-312 Pre-Established Forward Pricing Rates and Factors

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9-313 Evaluation of Cost Estimates After Costs Have Been Incurred 9-314 Cost Estimates Based on Standard Costs

9-314.1 Estimates Based on Revised Standards 9-314.2 Variance Analysis 9-314.3 Variances by Product Line 9-314.4 Consistency in Using Standards 9-315 Evaluation of Statement of Income and Expense 9-316 Evaluation of Contractor Cost Controls 9-317 Evaluation of Cost Reduction Programs

9-318 Evaluation of Plans for Plant and Facility Improvements

9-400 Section 4 - Evaluating Direct Material Cost Estimates

9-401 Introduction 9-402 Direct Materials Estimating Methods

9-402.1 Source of Material Cost Estimates 9-402.2 Extent of Auditor's Evaluation

9-403 Price Proposals Bill of Material Evaluations 9-403.1 Evaluating Quantity Estimates 9-403.2 Using Operations Time Sheets 9-403.3 Using Engineering Drawings

9-404 Evaluating Contractor's Direct Materials Pricing Procedures 9-404.1 Sources for Pricing 9-404.2 Effect of Purchasing Procedures on Prices Paid 9-404.3 Using Previous Purchase Order Prices 9-404.4 Pricing of Company-Produced Components 9-404.5 Pyramiding of Costs and Profit on Material Purchases 9-404.6 Subcontract Decrements 9-404.7 Using Trade Information 9-404.8 Use of Consolidated Material Requirements

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9-405 Make or Buy Decisions ? Direct Material Cost Estimates 9-405.1 General Considerations 9-405.2 Special Considerations in Make or Buy

9-406 Evaluating Major Subcontract Proposal Cost Estimates 9-406.1 Contractor's Procurement Procedures 9-406.2 Significance of Type of Subcontractor or Purchase Order 9-406.3 Long Term Agreements

9-407 Direct Materials Requiring Special Considerations 9-407.1 Government-Furnished Material and Reusable Containers 9-407.2 Residual Inventories 9-407.3 Scrap, Spoilage, and Rework 9-407.4 Process Loss 9-407.5 Obsolescence and Inventory Adjustments

9-408 Using Direct Materials Cost Trend Data 9-408.1 Material Cost Scatter Chart 9-408.2 Material Cost Improvement Curve

9-500 Section 5 - Evaluating Direct Labor Cost Estimates

9-501 Introduction 9-502 Methods of Estimating-Direct Labor Costs

9-502.1 Basis for the Estimate 9-502.2 Classification of Labor

9-503 Direct Labor-Cost Estimates Based on Historical Cost 9-503.1 Current Nature of the Labor Cost Data 9-503.2 Guidance for Evaluating Estimates Based on Historical Data 9-503.3 Labor Cost Trends 9-503.4 Proposed Nonrecurring Cost of Labor 9-503.5 Proposed Engineering Changes Costs 9-503.6 Setup Time Cost

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9-503.7 Applicability of the Labor Cost Data 9-503.8 Variances-Direct Labor Cost Estimates

9-504 Direct Labor Hours Based on Technical Data

9-504.1 Coordination with Technical Representatives 9-504.2 Guidance for Evaluating Estimates Based on Technical Data 9-504.3 Direct Labor Hour Estimates 9-504.4 Evaluation of Operation Time Sheets and Shop Methods 9-504.5 Operation Time Standards 9-504.6 Labor Productivity

9-505 Evaluation of Estimated Direct Labor Rates 9-505.1 Individual Employee Labor Rates 9-505.2 Average Labor Rates 9-505.3 Pre-established Labor Rates 9-505.4 Rate Impact of Contractor's Labor Usage 9-505.5 Use of Permanent Audit Files 9-505.6 Trends of Labor Rate Experience 9-505.7 Factors Influencing Validity of Average Labor Rates

9-600 Section 6 - Evaluating Estimated Other Direct Costs (ODC)

9-601 Introduction

9-602 Definition of Other Direct Costs

9-603 Objectives and Scope

9-604 Other Direct Cost Evaluation Considerations and Techniques

9-604.1 Application of Percentage and Conversion Factors 9-604.2 Government-Furnished Material 9-604.3 Use of Accounting Data 9-604.4 Analytical Techniques

9-605 Specific ODC Evaluation Considerations

9-605.1 Engineering 9-605.2 Special Tooling and Special Test Equipment

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9-605.3 Packaging 9-605.4 Travel and Subsistence 9-605.5 Field Service 9-605.6 Royalties 9-605.7 Preproduction and Start-up Costs

9-700 Section 7 - Evaluating Estimated Indirect Costs

9-701 Introduction

9-702 Estimated Indirect Costs ? General

9-702.1 Evaluation Consideration and Techniques 9-702.2 Anticipated Future Operations 9-702.3 Classification of Cost as Direct or Indirect

9-703 Evaluation of Indirect Costs

9-703.1 General 9-703.2 Classification of Indirect Costs 9-703.3 Advance Agreements (Indirect Cost) 9-703.4 Allocation Bases 9-703.5 Individual Indirect Costs 9-703.6 Indirect Labor 9-703.7 Indirect Material 9-703.8 Payroll Costs ? Estimated Taxes and Fringe Benefits 9-703.9 Plant Rearrangement 9-703.10 Depreciation 9-703.11 Rent 9-703.12 Occupancy Cost 9-703.13 Excess Facilities 9-703.14 Corporate or Home Office Assessments 9-703.15 Miscellaneous Income and Credit Adjustments 9-703.16 Independent Research and Development and Bid and Proposal

Costs

9-704 Evaluation of Prospective Rates ? Indirect Costs

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9-704.1 Evaluation of Rate 9-704.2 Rate Period 9-704.3 Propriety of Rate 9-704.4 Ceiling Rates

9-800 Section 8 - Economic Price Adjustments

9-801 Introduction 9-802 General 9-803 Types of Economic Price Adjustments 9-804 Proposed Economic Adjustments ? Evaluation Techniques and

Considerations 9-805 Unsatisfactory Conditions

9-900 Section 9 - Profit in Price Proposals

9-901 Introduction 9-902 Weighted Guidelines for DoD Profit Policy 9-903 Other Methods for Establishing DoD Profit Objectives 9-904 Civilian Agency Profit Policies and Procedures 9-905 Responsibility for Evaluation of Proposed Profit 9-906 Audit Policies ? Profit Evaluations

9-906.1 Contractor Performance Risk 9-906.2 Contract-Type Risk and Working Capital Adjustment 9-906.3 Facilities Capital Employed 9-906.4 Cost Efficiency Factor 9-906.5 Offsets ? Profit Evaluations 9-906.6 Limitations

9-1000 Section 10 - Audit of Parametric Cost Estimates

9-1001 Introduction 9-1002 Parametric Estimating Terminology

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