Cost/Pricing Breakdown Requirements in Firm-Fixed-Price Proposals
Understanding When & Why the Government Still Requires Cost Detail for (some) FFP Awards
It happens almost every time I meet with a new company about pricing a big proposal. I’ll start to answer a question about labor categories or overhead rates, and a well-meaning advisor or consultant will interrupt me and say, “But Megan, this is FFP. We don’t need to provide any of this information.” As a highly competitive pricing nerd, I find this situation both frustrating and exciting—so I’ve decided to put this out in what I hope will be a helpful and only mildly inflammatory post.
There are a few different scenarios when the USG will ask for a bottoms-up proposal (or one that complies with the DoD Proposal Adequacy Checklist)—in other words, a proposal that breaks out your price into discrete cost elements like Direct Labor, Direct Materials, Other Direct Costs (software licenses, consumables, travel, etc.), Subcontractors, Indirect Rates, and Profit/Fee. Contract type is only one driver of that decision, and bottoms-up proposals in an FFP environment are not only something the USG can require, they are mandatory more often than many vendors realize.
Why? Let’s start with FARLand.
Under FAR, Certified Cost or Pricing Data or CCPD11 is mandatory unless an exception applies. The two most common exceptions for dual-use, small or non-traditional businesses are competition and commerciality.
So if you are competing with other vendors under the same solicitation, CCPD is not required. If you are in a sole-source environment or selling directly to the USG2, and they have determined that what you are selling meets the definition of a commercial item under FAR 2.101—and you can substantiate your pricing with commercial pricing documentation3—then CCPD is not required.
So where does contract type come in? For every award the USG makes, the Contracting Officer (KO) must determine that the award price is fair and reasonable. Under FAR, the KO typically makes that determination using either price analysis or cost analysis4 . For FFP contracts, the KO can use price analysis, which does not require a bottoms-up proposal. For cost-type contracts, the KO must use cost analysis, which does require a bottoms-up proposal. However, contract type is only one factor in considering the required proposal content.
Because, when CCPD is required, there is an additional requirement that the proposal itself must contain certain information—enter the DoD Proposal Adequacy Checklist—which means that the vendor is providing a bottoms-up proposal, even if the KO ultimately plans to use price analysis to determine that the price is fair and reasonable.
If this is starting to feel complicated, that’s normal—welcome to Government contracting. Now, let’s talk about a second category of information called Other Than Certified Cost or Pricing Data. What this essentially means is that if the KO does not believe they have the necessary information to determine that a price is fair and reasonable, but an exception to CCPD applies, they can request the vendor provide additional information similar to CCPD, but without the certification. In other words, even if FAR/DFARS does not require you to provide a bottoms-up proposal, the KO can ask for it. You can also say no. However, the KO still has to make that fair and reasonable determination, and they are given broad discretion as to how they do so. So what can you do?
Be prepared for situations where you may have to provide a bottoms-up proposal or more in-depth cost/price information. Unless you intend to operate in a purely competitive environment, it is difficult to avoid providing cost information to the USG forever. If you’re a dual-use company, having a pricing strategy that leverages commerciality as an exception is a great plan, but it can take time to execute. Additionally, commerciality determinations are subjective and not always consistently applied throughout the USG—particularly when it comes to things like software pricing. Knowing what your offering costs in terms of labor, materials, hours, quantities, and indirect rates is critical, even if you never intend or need to provide that information to the USG5.
Tell a story and use formulas or relational explanations. If you are a small business and don’t have perfect data—that’s OK. The most important thing is that you used some rationale to arrive at your pricing and that it appears fair and reasonable. Did you use numbers from a simpler project and add 10% because this effort is more complex? That’s fine—explain it. Did you take last year’s numbers and add 4% for inflation? Perfect. Write it down. Even if you have to rely on Engineering Estimates (the industry term for a WAG), as long as you can clearly articulate how you got from 1 + 1 = 2, the more you can explain, the better position you’ll be in.
Use historical pricing or commerciality at the cost element or sub-cost element level. In some cases, you may have historical or commercial pricing, but not captured on a one-to-one basis for the entire effort. In that case, use what you have. Maybe you only have one of three tasks clearly documented in a prior contract—use that to avoid re-pricing that task, and then use an engineering or parametric estimate for the remaining two. Maybe you have labor rates codified in commercial contracts; you can use those fully burdened commercial labor rates to avoid breaking them out further. Over time, as your federal practice matures, it becomes easier to limit how granular your cost volumes need to be.
Shape the inquiry when the USG requests Other Than CCPD. Assuming you want the award, the best thing you can do is try to narrow the scope of the USG’s request for data. Rather than providing an entire proposal or mound of information they have to sort through, ask questions to understand which areas raised concern or felt insufficient in your original submission. You can also offer example scenarios to see whether they would satisfy the KO’s needs. For example: “If I can provide two historical contracts and an explanation of how they relate to this pricing, would that satisfy your requirement?” Or, “If I can provide multiple invoices showing each labor category across commercial contracts along with a cross-reference matrix, would that allow you to determine commerciality?” Often, the KO has their own documentation burden to meet, and helping them meet it can reduce rework and limit how much information you need to provide.
A short note on OTAs.
CCPD is not a requirement for OTs. However, it is not uncommon for the USG to use similar processes and methodologies when evaluating price. If you are doing something that is not commercial or participating in a type of competition where the USG cannot reasonably compare your pricing to others (such as a BAA, CSO, or multi-step process), be prepared to provide more than a bottom-line number—even in an FFP environment.
While this can feel frustrating for new vendors, it’s worth pausing to think about this from a taxpayer’s perspective. Do we really want the USG handing new companies money for new products without any understanding of how those prices were developed or any basis for comparison? I don’t. Knowing what it costs your company to perform work is simply good business. And while it’s rarely a choice between a single bottom-line number slid across the table with a shrug or a full-blown audit of your accounting system, vendors who are thoughtful about what they share, when they share it, and how they tell their pricing story often find success somewhere in the middle.
For a full definition of Certified Cost or Pricing Data, you can go here(**add link). I intend to, at some point, write something on what this means in practice for small/non-traditional/dual-use companies, but for now, let’s simplify by saying this refers to the cost or price data within a proposal that requires a vendor to certify that the data is current, accurate, and complete, and where that certification has ramifications because a knowing violation carries potential administrative, civil, or criminal penalties for both the individual who signed the certification and the company itself.
For a full definition of Certified Cost or Pricing Data, you can go here (you may need to CTRL+F). I intend to, at some point, write something on what this means in practice for small/non-traditional/dual-use companies, but for now, let’s simplify by saying this refers to the cost or price data within a proposal that requires a vendor to certify that the data is current, accurate, and complete, and where that certification has ramifications because a knowing violation carries potential administrative, civil, or criminal penalties for both the individual who signed the certification and the company itself.
How this works when dealing with Primes and other vendors is similar in process, but can be very different in practice. For this article, I’m not going to get into these concepts at the subcontract level in detail. Shoot me a note if you have questions, and I’ll be happy to chat.
This is a really big “and.”
Nice try—we aren’t getting into cost realism today.
Very important note: the requirements to provide detailed cost/price information to other vendors—even when mandated at the prime to USG level—are different than when dealing directly with the USG. Be very cautious and/or seek advice before turning over any internal cost information to another vendor.