DCAA offices have been reporting that prime contractors have not been conducting required cost analysis of proposed subcontract costs when cost or pricing data is submitted.  As a result, DCAA has been increasingly citing such contractors with estimating system deficiencies.  Many contractors have been responding to such claims stating the FAR does not require it to conduct cost analysis of subcontractor proposals prior to negotiations of the contract but rather prior to negotiation of the subcontract.  DCAA issued its guidance as a response to this assertion.

The guidance cites the DCAA Contract Manual (DCAM) Chapter 15.403-14 that states a contractor is directed to obtain cost or pricing data from “prospective sources” (e.g. subcontractors, purchase orders, material orders, etc.) for procurements exceeding $500,000 (unless the procurement is otherwise exempted such as for a commercial item). According to FAR Part 15.408, Table 15-2 ILA, the contractor is also required to conduct a cost analysis of the submitted cost or pricing data.  The time frame for obtaining and conducting cost analysis is prior to negotiation of the prime contract since the provision requires the contractor to include cost analysis along with its own cost or pricing data.

The guidance also reminds auditors about rules covering subcontracts that either exceed $10 million or represent at least 10% of the prime contract cost, whichever is less.  While subcontractor proposals and any cost analysis usually remains in the contractor’s file, if a subcontract meets either of the above thresholds and still exceeds $500,000, the regulation requires the prime contractor to provide both a summary of its cost analysis and a copy of the submitted cost or pricing data along with its own submission.  When this condition is not met, an estimating deficiency is also called for.

Responding to why such failures represent estimating deficiencies, DCAA cites DFARS 215.407-5-70 where an estimating system deficiency is considered to be a shortcoming in estimating total cost or major cost elements that results in not providing a basis for negotiating a fair and reasonable price.  Since subcontract costs are usually significant and are explicitly listed as one of the deficiencies, failure to conduct cost reviews constitutes an estimating deficiency.

To avoid the burden of conducting cost reviews, prime contractors often apply a decrement factor to proposed subcontract costs usually based on some historical experience of analyzing cost proposals.  The guidance addresses this common practice stating such a decrement factor does not eliminate the requirement to conduct cost analysis of subcontractor cost data (00-PPD-048R).

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