BUS 315 Cost and Price Analysis Week 10 Discussion 2, business and finance homework help


“NASA” Please respond to the following:Analyze the methods used by NASA in itsstructured profit approach, and speculate on how VectorCal could possibly use the same structured profit approach with their manufacturing operations. Support your analysis with examples of such an approach.Take a position on whether or not companies benefit from using a structured profit approach to calculate their profits. Provide an explanation of your position with at least two examples or scenarios of the use of such an approach.bus315_w10_p2.pptx

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Cost and Price Analysis
BUS 315
Equitable Adjustments and the
Role of Auditors
• To cover this objective, we will discuss the
following topics:
– Preferred measure and processing of equitable
– Approaches to equitable adjustment
– Format for submitting proposals for equitable
– Reviewing and evaluating proposed or incurred costs
– The Defense Contract Audit Agency (DCAA)
Reasonable Cost Approach
• General principles in measuring equitable
– Some cost impact must result from the contract change
– Both parties, the contractor and the government, are to
remain whole
Improper Base for Equitable Adjustment Erodes Contractor’s Profit
Cost of Component Part Kappa as Changed
Cost in Original Price for Component Part Gamma
Actual Cost of Component Part Gamma
Equitable Adjustment
Indirect Costs and Profit in
Equitable Adjustment
• Indirect Costs in Equitable Adjustment
– Overhead and G&A expenses are normally indirect costs
associated with contractor work
– An equitable adjustment is based on the changes in the
contractor’s actual costs created by the contract change
• Profit in Equitable Adjustment
– Profit is specifically excluded from equitable adjustments
resulting from suspension of work. All other equitable
adjustments include profit as a long- standing practice
• FAR 33.207 (c) requires the following certification
accompany any claim in excess of $100,000
– I certify that the claim is made in good faith; that the
supporting data are accurate and complete to the best of
my knowledge and belief; that the amount requested
accurately reflects the contract adjustment for which the
contractor believes the Government is liable; and that I
am duly authorized to certify the claim on behalf of the
Timeliness and
Segregated Costs
• Timeliness of Equitable Adjustments
– it is important to negotiate and settle change orders as
soon as possible
– if several changes affect the same parts of the work, it
may be very difficult to keep the costs for each change
• Equitable Adjustment Based on Segregated Costs
– Experienced contractors will try to segregate the costs
for performing changed work
– FAR 52.243-6, Change Order Accounting, may be used
in research and development and supply contracts if
numerous changes are likely

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
should be used whenever accurate information is available
concerning contractor costs affected by the modification
Total Cost Approach

Equitable Adjustments Using Total Cost Approach
Cost of Work as Charged
Less: Cost of Work Included in Original Bid or Proposal
Plus: Profit
Equals Equitable Adjustment – Total Cost Approach
Approaches, continued
• Jury Verdict Approach
– The government uses the jury verdict method when the
contractor is clearly due an adjustment but there is no
clear way to identify the associated costs for reasonable
cost analysis
• Reasonable Value Approach
– Until 1963, reasonable value was the basis frequently
used to estimate the change in contract value that
resulted from the contract modification
– the reasonable value approach has been replaced by
the reasonable cost approach
Format for Submitting
• Net Cost of a Contract Modification
A(dded) = current estimate of the cost to complete
added work
D(eleted) = Current estimate of the cost to complete
deleted work not yet performed
C(ost) = Actual cost of all deleted work already
N(et) = Net change in cost related to a contract
Government-Caused Delays
• 2 major points must be established when
there are delays
– the government caused delays, entitling the
contractor to an equitable adjustment
– the amount of the claim for the unabsorbed
overhead is justifiable
Eichleay Formula

Eichleay Assumptions
– A = total billings on the delayed contract: $930,000
– B = total billings on all contracts between award and completion of the delayed
contract: $3,100,000
– C = relevant overhead between award and completion of the delayed contract:
– D = Number of days between award and completion of the delayed contract,
including delay: 270 days
– E = Number of days that performance was delayed: 30 days

Eichleay Formula
– Step 1: determine the ratio of billings applicable to the delayed contract to all firm
A/B = $930,000/$3,100,000 = 30%
– Step 2: determine the unabsorbed overhead applicable to the delayed contract
(Results of Step 1) x C = 30% x $391,500 = 117,450
– Step 3: determine the daily unabsorbed overhead applicable to the delayed
(Results of Step 2)/D = $117,450/270 days = $435
– Step 4: determine the unabsorbed overhead applicable to the delayed contract –
the equitable adjustment for the delay
(Results of Step 3 ) x E = $435 x 30 days = $13,050
Eichleay Formula Assumptions
and Adjustments
• Basic Eichleay formula based on the following

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
– the facilities are operating at or near capacity
• 3 possible adjustments to Eichleay to produce more
equitable results
– Eichleay Formula adjusted for a partial replacement of work
– Eichleay Formula adjusted for a partial work stoppage
– Eichleay formula adjusted for less than capacity operation
Reviewing and Evaluating
Proposed or Incurred Costs
• Contract auditors will not:
– Ask to review proposed price submitted in response to
sealed bidding
– Ask to review costs proposed in response to RFP
• Audit procedure and issuing report
• Costs
– Questioned
– Unsupported
– Unresolved
Pre-award Survey to Review and
Approve Accounting Systems
• Is contractor’s accounting system adequate?
• Disapproval
– No cost-reimbursement, fixed-price incentive, or fixedprice redetermination contracts
– Not in contractor’s best interest
Pre-award Survey to
Determine Financial Capability
• Contractor must be:
– Solvent
– Financially strong
• “Responsible financial capability”
Defense Contract Audit
• Definition
– Dominant federal agency that performs contract
audit work
• Website
– http://www.dcaa.mil
Check Your Understanding
• Preferred measure and processing of equitable
• Approaches to equitable adjustment
• Format for submitting proposals for equitable
• Reviewing and evaluating proposed or incurred
• The Defense Contract Audit Agency (DCAA)

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