BUS 315 Cost and Price Analysis Week 10 Discussion 1, business and finance homework help

  

“Profit” Please respond to the following:Determine two to three (2-3) reasons why VectorCal may not always receive the exact amount of profit that it negotiated into its contract with the federal government. Predict two to three (2-3) outcomes VectorCal may experience as a result of not meeting the profit requirements specified in their government contract. Justify your response.Hypothesize two examples of circumstances where a company has not met the profit requirements of a government contract. Next, speculate on why these circumstances resulted in a failure to meet the profit requirements of its contract with the federal government. Next, from the e-Activity, provide one example of a company that has not met the profit requirements of a government contract, and specify the company’s end result.Week 10 eActivityUse the Internet or the Strayer Library to research articles discussing companies that failed to fulfill the profit provisions of their government contract, focusing on the end result of the company in question. Be prepared to discuss.bus315_w10_p1.pptxbus315_week_10_scenario_script_10_31_13_fs.docx
bus315_w10_p1.pptx

bus315_week_10_scenario_script_10_31_13_fs.docx

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Cost and Price Analysis
BUS 315
Profit or Fee Determination
Topics
• To cover this objective, we will discuss the
following topics:
– Government policies regarding profit
– Misconceptions about profit and fee
– Structured profit approach
How Are Profits Set By A
Company?
• A company will set profits based on whatever it
believes it can get after considering the cost of
doing the work
• If the market is highly competitive, the company
will set an initial price based largely on what it
believes its competitors would charge
• If the market is not highly competitive and the
demand is high, the seller is motivated to get high
profits
Misconceptions about Profit
and Fee
• Misconception is that the negotiated profit or fee is
what the contractor will actually get
• If the contractor incurs some costs that are
disallowed, it takes a loss on those costs. In effect,
those losses reduce their profit for that work
• The exact amount of the total fee that we will pay is
not necessarily the total fee that we negotiated
Broad Government Policies
• Contractors who have an opportunity to earn
reasonable profits on a government contract are
motivated to turn in a good job because they can
afford to do so
• Agencies with a reputation for paying reasonable
prices attract the better offerors from among both
small and large businesses
• The wise use of government contracting, including
reasonable profits, expands the general industrial
base of the nation
Detailed Government Policies
• Contracting Officer Responsibilities
– Profit (Fee) Pre-negotiation Objective
– Facilities Capital Cost of Money
– Statutory Limitations on Prices or Fees
• Factors Bearing on Profit Levels for Government Contracts






Contractor Effort
Contract Cost of Risk
Federal Socioeconomic Programs
Capital Investments
Cost Control and Other Past Accomplishments
Independent Development
The Structured Profit Approach
• GSA Structured Profit Guidelines
Profit Factors
Weight Range
(%)
1. Contractor Effort
Material Acquisition
1 to 4
Direct Labor
4 to 12
Overhead
3 to 8
Other Costs
1 to 3
General Management
4 to 8
2. Other Factors
Cost Risk
0 to 7
Investment
-2 to +2
Cost Control, Other Past Accomplishments
-2 to +2
Federal Socioeconomic Programs
-.5 to +.5
Special Situations
-2 to +2
Check Your Understanding
Summary




Government policies regarding profit
Misconceptions about profit and fee
Reasonable rewards
Structured profit approach
BUS315 Week 10 Scenario Script: Government Policies Regarding Profit and Preferred
Measure and Processing of Equitable Adjustments
Slide #
Topics
Narration
Slide 1
Scene 1
Semi-large building
(VectorCal) and have avatar
inserted to represent her
entering the building
Slide 2
Scene 2
Introduction to the week and
beginning of going over final
key concepts
Takes place in Dominic’s
office
Dominic: Welcome back Sally! I hope you
enjoyed working with me last week and gained
some valuable knowledge about the Facilities
Capital Cost of Money we went over last week.
This will also be your last week at VectorCal, we
are really going to miss having you around.
Sally: Thanks Dominic, I’ve learned so much
while I’ve been here and I’m excited for my final
lesson! Who will I be working with this week?
Dominic: Since this is you last week here, I
would like to work with you on some of the final
key concepts related to the field of government
contracting. I hope you are ready to conclude
your internship and training!
Sally: I am ready to go and am looking forward to
add these last key tools to my cost and pricing
analysis belt!
Dominic: That is fantastic! I thought we would
start off with analyzing how profits are set by a
company.
Sally: I believe I know a little bit about this topic.
I recall that a company will set its profits based on
whatever it believes it can get after considering
the cost of doing the work. I know that when the
market is highly competitive, the company will
set an initial price based largely on what it
believes its competitors would charge. The
company will then examine its own costs to do
the job and decide whether the profit that would
result is worth the effort. I do wonder though
what would happen if the market wasn’t highly
competitive and the demand was low?
Dominic: That as great question! To answer your
question, if the market is not highly competitive
and the demand is high, the seller is motivated to
get high profits. The only significant deterrent is
that the buyers may choose to do without, seek
substitutes, or aggressively develop competition.
Sally: That makes a lot of sense now! Thanks for
clarifying that for me.
Dominic: Not a problem at all. Let’s now move
onto misconceptions about profit and fees.
Federal acquisition regulations point out a
consideration sometimes misunderstood by
government people who are negotiating cost,
profit, and price. This misconception is that the
negotiated profit or fee is what the contractor will
actually get. When we negotiate a cost-plus-fixed
fee contract, we typically think of that fee as a
firm figure. Sally, who do you think pays the
fixed-fee?
Sally: I believe it would be the government that
will pay the fixed-fee in addition to the allowable
costs. However, I recall that if the contractor
incurs some costs that are disallowed, it takes a
loss on those costs.
Dominic: Very good! One of the major areas of
government contracting is detailed government
policies. Keep in mind that federal acquisition
regulations state that negotiation of extremely low
profits, use of historical averages, or automatic
application of predetermined percentages of total
estimated costs do not provide proper motivation
for optimum contract performance. Based on your
schooling, what can you tell me about
government contracting officers and their
policies?
Sally: I know that government contracting
officers must adhere to certain requirements. I
also remember that contacting officers are
required to use government pre-negotiation cost
objective amounts as the basis for calculating the
pre-negotiation profit objective.
Dominic: Excellent response! To elaborate on
what you said, when calculating the profit or fee
objective, the contracting officer is required to
exclude any facilities capital cost of money that
was included in the pre-negotiation cost objective.
Sally: Aren’t there also three statutory limitations
used for prices or fees?
Dominic: Why yes and thanks for bringing that
up. The first limitation is used with experimental,
developmental, or research work under a costplus-fixed-fee contract, where the fee must not
exceed fifteen percent of the estimated cost,
excluding the fee. Secondly, for other work under
a cost-plus-fixed-fee contract, the fee must not
exceed ten percent of the estimated costs,
excluding the fee. Lastly, for architect-engineer
contracts, the contract price or the estimated cost
plus fee must not exceed six percent of the
expected cost of the public work, exclusive of the
architect-engineer fee.
Slide 3
Scene 3
Dominic’s office to go over
key concepts related to
Government Policies
Regarding Profit
Sally: That is quite interesting! Could you tell me
a little more about the six major factors used by
agencies when they develop their structured profit
approaches?
Dominic: I will gladly answer this question. You
are correct, federal acquisition regulations list six
major factors to be used by agencies in
developing their structured profit approaches and
they include the following:
Contractor Effort;
Contract Cost of Risk;
Federal Socioeconomic Programs;
Capital Investments;
Cost Control and Other Past Accomplishments;
and
Independent Development.
Sally: That makes a lot more sense now. Aren’t
there also certain approaches that can be used as
well?
Dominic: Right you are! The first approach I
want to share with you is the structured profit
approach. Keep in mind that all of the structured
profit guidelines take the same general approach.
They establish a total profit objective by adding
profit increments for various major cost inputs
and for other contract factors.
Sally: Thanks for sharing that approach with me, I
never heard of that approach being used. I
however remember from school another
approach; I recall it was the reasonable cost
approach. I recall that there were two general
principles used when measuring equitable
adjustments. First, some cost impacts must result
from the contract change. The second principle
says that both parties, the contractor and the
government, are to remain whole.
Dominic: Great job Sally! You seem to have a
great understanding of that approach. Let me now
tell you about indirect costs and profit in
equitable adjustments. Overhead and general
and administrative expenses are normally indirect
costs associated with contractor work. However
normal allocation rules cover the application of
indirect costs to the equitable adjustment for a
contract change. Keep in mind as well that an
equitable adjustment is based on the changes in
the contractor’s actual costs created by the
contract change; although some indirect costs can
also be relatively fixed.
Sally: Dominic isn’t profit specifically excluded
from equitable adjustments resulting from
suspension of work?
Dominic: You are quite right but also take notice
that all other equitable adjustments include profit
as a long- standing practice.
Slide 4
Scene 4
Dominic’s office to go over
key concepts related to
Preferred Measure and
Processing of Equitable
Adjustments
Sally: What can you tell me about the processing
aspect of equitable adjustment? I know that
ideally, the contracting officer and the contractor
will work together to negotiate the price for the
equitable adjustment – without resorting to the
courts and the boards of contract appeals but I’m
not too sure of much else.
Dominic: I think you have a great foundation for
this topic but let me explain this topic to you a
little more. It is good that you understand that the
contracting officer and the contractor will work
together to negotiate the price for the equitable
adjustment, as this approach is quite effective for
most claims for equitable adjustment. Keep in
mind that the changes clause requires that the
contractor submit its claim for equitable
adjustment within thirty days after receipt of the
change. The contracting officer can also extend
this period if the circumstances justify doing so.
Sally: I think I have a better grasp of this concept
now. I will definitely keep this in mind moving
forward.
Dominic: Let me now tell you about timeliness
and segregated costs. Make note that it is
important to negotiate and settle change orders as
soon as possible. These change orders can also be
settled more quickly when their frequency is kept
to a minimum. However, when there is a failure to
negotiate and settle equitable adjustments soon
after the directed changes there can be several
negative effects.
Sally: I think I’m good on this first part of the
importance of timelines. What about the
segregated costs contractors use?
Dominic: I’m getting to that part now.
Experienced contractors will try to segregate the
costs for performing changed work. They usually
accomplish this by assigning special accounting
codes to those transactions attributed to the
changed work. The contractor has a very strong
case when their actual cost records clearly
identify the direct costs related to the changed
work. Also, actual costs are far easier to validate
than estimates.
Sally: Thank you for going over that with me. I
also recall that there are four approaches for
establishing equitable adjustments in specific
cases. I know the first approach is referred to as
the reasonable cost approach. This approach
attempts to keep the contractor in the same profit
position on the unchanged work after the change
than it was before the change. I also know that
this approach should be used whenever accurate
information is available concerning contractor
costs affected by the modification.
Dominic: Very good! I will now talk about the
second approach. The second approach is the
total cost approach. This approach infers that all
costs incurred in excess of the original estimate
were attributed to the contract change.
Sally: The third method would then be the jury
verdict method which is used when the
contractor is clearly due an adjustment but there is
no clear way to identify the associated costs for
reasonable cost analysis. While using this method
both sides attempt to isolate the costs identifiable
with the change in such a way that a third party is
able to pass judgment on their reasonableness and
the general allow-ability of the adjustment.
Dominic: I will now explain the last approach
that can be utilized. To begin, until nineteen sixty
three, reasonable value approach was the basis
frequently used to estimate the change in contract
value that resulted from the contract modification.
This approach was tested and to a large extent
rendered obsolete by the court of claims decision
in Bruce Construction versus United States. As a
result of the court of claims decision, the
reasonable value approach has been replaced by
the reasonable cost approach. Do you recall
anything about the format for submitting
proposals?
Sally: I actually know quite a bit about this topic.
I recall that when submitting certified cost and
pricing data, the contractor must follow the
procedures delineated in Federal Acquisition
Regulation fifteen point four-oh –eight, table
fifteen dash two, Instructions for Submitting
Cost/Price Proposals. I also remember that this
formal procedure is a methodical way to
document the calculation of the equitable
adjustment.
Dominic: To add on to your response, part three-b
in this regulation provides instructions for
calculating equitable adjustments specifically for
change orders, modifications, and claims. In
accordance with these instructions, the net cost of
a contract modification is shown on this slide.
Slide 5
Scene 5
Dominic’s office to go over
key concepts related to
Preferred Measure and
Processing of Equitable
Adjustments
Dominic: Now I want to talk about an issue that
we sometimes run into our program and we see
prevalent in our field. Sometimes government
action or inaction delays contract completion,
extending the contract performance beyond the
anticipated completion date. In many of these
delays the contractor will incur additional costs
during the delay period; as a result certain fixed
overhead costs will continue even during the
delay period.
Sally: Won’t the incremental overhead costs be
unabsorbed in the absence of replacement work or
an equitable adjustment?
Dominic: Fantastic question! The problem of
unabsorbed overhead is a major source of court
and board of contract appeals cases. There is no
question that contractors incur extra costs during
these government delays. When they do occur,
the contractor must establish two major points.
First, the government caused delays, entitling the
contractor to an equitable adjustment. Secondly,
the amount of the claim for the unabsorbed
overhead is justifiable.
Sally: That makes a lot of sense now; your
explanation definitely made things a lot clearer.
Dominic: I’m glad I could help clarify that for
you. The last concept I want to go over with you
is the Eichleay Formula. What do you know
about this formula?
Sally: I recall that the Eichleay Formula is the
most widely used method to find the normal fixed
overhead allocable to a contract that is identified
and expressed in terms of a daily rate. I also
remember that the daily rate is then multiplied by
the days of delay to arrive at the total amount of
unabsorbed overhead.
Dominic: Excellent work Sally! To add to this,
although, the basic Eichleay formula is widely
used, unless it is appropriately adjusted, it may
yield inequitable results. It is important for you to
note that the basic Eichleay calculations are based
on several assumptions which include:
Overhead costs include only fixed costs;
The contractor cannot replace the suspended work
with other work;
There is a total work stoppage;
The cost of the delay is the same regardless of the
percentage of contract completion; and
The facilities are operating at or near capacity.
This is everything I wanted to cover for our final
week; I feel you are now prepared to go through
your final weekly review of the main topics we
covered this week.
Slide 6
Scene 6
Tab interaction that will have
audio for each tab.
Users will click each item and
be greeted with images and
narration.
Dominic: Eichleay Formula is the most widely
used method to find the normal fixed overhead
allocable to a contract that is identified and
expressed in terms of a daily rate. The basic
Eichleay Formula is widely used, unless it is
appropriately adjusted, it may yield inequitable
results. It is important to note that the basic
Eichleay calculations are based on several
assumptions which include:
Overhead costs include only fixed costs;
The contractor cannot replace the suspended work
with other work;
There is a total work stoppage;
The cost of the delay is the same regardless of the
percentage of contract completion; and
The facilities are operating at or near capacity.
Dominic: The Reasonable Cost Approach
attempts to keep the contractor in the same profit
position on the unchanged work after the change
than it was before the change. This approach
should be used whenever accurate information is
available concerning contractor costs affected by
the modification.
Dominic: The Importance of Overhead
Analysis involves the government awarding a
firm-fixed-price contract and then being
committed to pay that price. Because overhead
cost is part of the price, the government analysis
of the overhead rate must be as precise as is
possible under the circumstances. The purpose of
the analysis is to come up with a bottom line price
that is reasonable, remembering that we can never
predict future costs with total accuracy.
Dominic: The Jury Verdict Method is used
when the contractor is clearly due an adjustment
but there is no clear way to identify the associated
costs for reasonable cost analysis. While using
this method both sides attempt to isolate the costs
identifiable with the change in such a way that a
third party is able to pass judgment on their
reasonableness and the general allow-ability of
the adjustment.
Slide 7
Scene 7
Check Your Understanding
Drag and Drop with key
concepts from this week’s
lesson.
Drop and drag match correct
summary:




Eichleay Formula
The Reasonable Cost
Approach
The Importance of
Overhead Analysis
The Jury Verdict
Method
Goes with #1- The most
widely used method to find
the normal fixed overhead
allocable to a contract that is
identified and expressed in
terms of a daily rate.
Goes with #2- Attempts to
keep the contractor in the
same profit position on the
unchanged work after the
change than it was before the
change.
Goes with #3- Involves the
government awarding a firmfixed-price contract and then
being committed to pay that
price.
Goes with #4- Used when the
contractor is clearly due an
adjustment but there is no
clear way to identify the
associated costs for
reasonable cost analysis.
Slide 8
Scene 8
Conference room with
Dominic to go over the
week’s key points
Dominic: Great work on the review materials.
You did excellent and I think you really have a
solid foundation for the concepts we discussed
this week.
I would now like to summarize what we went
over this week to fill in any gaps you may have
had. Please feel free to add on to anything I say as
we go through. I will start off our final weekly
review.
Dominic: First, we learned about how companies
set profits. You learned that a company sets
profits based on whatever it believes it can get
after considering the cost of doing the work.
These profits a …
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