Parametric Modeling to Support System Acquisition

Source: Shutterstock
Source: Shutterstock

Posted: March 14, 2016 | By: William Roetzheim

Initial System Procurement

The objective of proposal analysis is to ensure that the final agreed-to price is fair and reasonable [FAR 15.404-1].  The FAR uses the phrase “fair and reasonable” throughout, although these are actually two separate but related items when applied to price analysis.

A proposal price analysis looks at the reasonableness of a vendor’s proposed price as a risk reduction measure.  A reasonable price is one where there is a high probability that the vendor can deliver the solution for that price.  An unreasonably low price is a problem for two primary reasons:

  • The vendor may not be willing or able to perform the necessary work at a loss, thereby resulting in a situation involving potential litigation, project cancellation, or major scope changes that are unfavorable to the government.  All of these options are extremely expensive for the government; and
  • The vendor may deliver the product at the price quoted by significantly reducing quality, thereby increasing government work both during the project and during the product lifecycle.  Again, this is an expensive option.

While there are unscrupulous vendors who will buy-in to a contract with a low-ball bid, hoping to use change requests to bring the project back into profitability; the more common reason for unreasonable pricing is that the vendor’s understanding of the project scope does not match the government’s understanding of project scope.  In that situation in particular, a price reasonable test of the vendor’s proposal is of benefit to both the government and the vendor.  Price reasonableness tests are generally pass-fail, and the vendor generally does not have an opportunity to modify their cost proposal if it fails the test.

Price fairness looks at the vendor’s proposed pricing relative to equivalent pricing for the same product offered by others in the industry.  In a situation where there are competing bids that are roughly in-line with each other, price fairness is assured through the competitive process.  In a situation where there is historic precedence for the quoted price (e.g., catalog price, similar procurements for the same goods and services in the past), then this historic information may be used to confirm price fairness.  Where price fairness becomes critical for the cost analyst is the situation where there is only one bid that is under consideration.  This might be because only one bid was submitted, or it might be that only one bid offered a solution that meets the technical or administrative requirements of the procurement.  In that situation, the approach to determining price fairness is to do a cost (vice price) analysis.

One approach to doing the cost analysis is to look at the vendor’s detailed build-up of costs (level-of-effort, direct salary, fringe rates, overhead, G&A, fee, etc.) and to assess each for reasonableness.  The direct salary can be validated using wage and labor charts or through competitive labor market surveys.  The fringe rates can be validated through those same surveys.  The overhead and G&A rates can be validated against competing companies of a similar size and competition6.  Fee can be validated against other similar contracts, based on risk and other factors affecting appropriate profit margins.  However, the validation of the vendor’s proposed level-of-effort is the difficult part.  This is where parametric modeling can offer assistance.  The vendor’s proposed solution is analyzed to identify suitable HLO counts and adjusting factors, and the models are then used to forecast effort based on productivity curves from similar historic projects.  The resultant modeled effort is then compared with the vendor’s proposed effort to determine if the effort is fair.

Unlike reasonableness, problems with price fairness are often handled through vendor negotiation and submission of a best and final offer.  The reason for this difference is as follows.  Cost is always one of the evaluation criteria.  If a vendor wins the competition with a low price, but then fails the price reasonableness test, and we allow the vendor to raise their price to reasonable levels, then we have given that vendor a competitive advantage over other companies who bid the correct price in the first place.  One of those companies should be awarded the contract instead of this vendor.  On the other hand, if a vendor wins the procurement but fails the fairness test, then their bid is the most attractive to the government of the submitted bids at their current, high price.  Lowering their price through negotiation is in the best interest of the government, but would not change the vendor’s relative ranking among the competition.

The third area where IGCE is used is during the life of a project, and that will be the topic of our next discussion.

Want to find out more about this topic?

Request a FREE Technical Inquiry!