Basic Requirements

Generally, FAR 15.404-3 requires prime contractors or higher-tier subcontractors (for the rest of this article, we will only refer to the Prime for simplicity but keep in mind the discussion also applies to higher-tier subcontractors) to perform cost or price analysis before awarding subcontracts. However, the contracting officer may request additional government audit or field pricing support if it believes it is necessary to ensure reasonableness of the total proposed price. The following four examples, in accordance with DFARS PGI 215-404-3a(i), illustrate circumstances when a government review is required:

1. There is a business relationship between the contractor and subcontractor not conducive to independence;

2. The contractor is a sole source and the subcontract costs represent a substantial part of the contract cost;

3. The contractor has been denied access to the subcontractor’s records. However even if the records are denied, the guidance states the Prime, at a minimum, has the responsibility to perform and document (a) efforts to complete at least a price analysis as specified in FAR 15.404-1(b) and (b) coordinate with the contracting officer to obtain any necessary audit/pricing support from the government.

4. The contracting officer determines that, because of factors such as the size of the proposed subcontract price, audit or field pricing support (i.e. normally conducted by DCAA but sometimes cost or pricing specialists within the agency) for a subcontract is critical to fully detailed analysis of the prime contract.

DFARS 15.806(5) adds that “If the prime contractor’s analysis is not considered adequate, the ACO will return the analysis package to the contractor for re-accomplishment indicating areas of inadequacy. In this case, the prime contractor will accomplish or cause the accomplishment of the additional review and resubmit the package to the ACO.”

• A Word About What Constitutes Adequate Price or Cost Analysis

FAR 15.404-1, Proposal analysis techniques address the two basis types of analysis – price and cost. The section states it is the CO’s responsibility to ensure the final agreed to price is fair and reasonable and that the two techniques, used singly or in combination, should be used to achieve this. Basically, a price analysis, normally conducted by price analysis within the agency, is the process of evaluating a proposed price as a whole, without evaluating its separate cost elements or profit. Examples of pricing techniques are spelled out such as comparison of prices offered by others or prices paid on previous contracts (these are the preferred methods), published lists, independent cost estimates, parametric estimating (e.g. costs per square meter) or market research. Cost analysis, normally conducted by either DCAA or other cost auditors, is the review and evaluation of separate cost elements (direct labor, direct material or subcontracts, ODCs, indirect costs) and profit. Examples of costing techniques are reviews of actual historical cost data, forecasts and estimates. (For more detail, look at prior articles in the GCA DIGEST using our Word Search function, selected texts or the Air Force Institute of Technology’s five volume Contract Pricing Reference Guides.)

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