Module 14 - Contract Pricing

Question 1

What is the central idea of contracting?

Answer 1

Achieving a fair deal for both parties

The seller makes a decent profit while the buyer receives the goods and services negotiated in the contract.

Question 2

What does the Basis of Estimate (BOE) support in contracting?

Answer 2

Substantiation of estimates

Contractors must use BOE documentation to show that their numbers are justifiable, credible, and defensible.

Question 3

What is the relationship between risk and reward in contracting?

Answer 3

Commensurate risk and reward

Higher risk typically leads to expectations of significant profit, tempered by uncertainty in outcomes.

Question 4

What is the primary analytical construct used in contract pricing?

Answer 4

Piecewise linear function

This function reflects the sharing of risk between the government and the contractor.

Question 5

What does a 70/30 shareline indicate?

Answer 5

Government covers 70 cents on the dollar of any overrun

The contractor accepts the remaining 30 cents on the dollar out of profit.

Question 6

What does the Federal Acquisition Regulation (FAR) govern?

Answer 6

Procurement process using appropriated funds

It outlines how the US government procures goods and services.

Question 7

What is acquisition planning according to FAR section 2.101?

Answer 7

Coordinated efforts for fulfilling agency needs

It includes developing a comprehensive plan for managing the acquisition.

Question 8

What are the roles of government estimators in the acquisition process?

Answer 8

• Developing Independent Cost Estimates (ICEs)
• Participating in Requests For Proposal (RFP)
• Conducting cost and price analysis

They are involved in all stages of acquisition planning.

Question 9

What is the purpose of contract pricing?

Answer 9

Establish a fair and reasonable price

It supports both contractor and government needs in the pricing process.

Question 10

What are the two broad categories of contract types?

Answer 10

• Fixed-price contracts
• Cost-reimbursement contracts

These categories determine how costs and profits are managed.

Question 11

What is a Firm Fixed Price (FFP) contract?

Answer 11

Price is determined first, then cost is subtracted

Profit may be negative if costs exceed the price.

Question 12

What is a Cost Plus Award Fee (CPAF) contract?

Answer 12

Government reimburses total cost plus a fee

Revenue is guaranteed to be positive, though it may be low for poor performance.

Question 13

What does the contract negotiation objective seek to determine?

Answer 13

Contract type and price that result in reasonable contractor risk

It aims to provide the greatest incentive for efficient performance.

Question 14

What is the Coefficient of Variation (CV) in relation to contract types?

Answer 14

Indicates risk in development work

Contractors may resist signing an FFP contract for high CV work.

Question 15

What is the difference between fee, profit, and margin?

Answer 15

• Fee: Amount over cost
• Profit: Commercial ubiquity
• Margin: Percentage of cost and profit

These concepts relate to contractor earnings.

Question 16

What is the equation relating revenue, cost, and profit?

Answer 16

Revenue = Cost + Profit = Price

This equation summarizes the financial relationship in contracting.

Question 17

What is the Target Cost (TC) in contract pricing?

Answer 17

Contractor’s projected incurred expense

It is crucial for determining financial implications in contracts.

Question 18

What does Target Cost (TC) represent in contract terms?

Answer 18

The contractor’s projected incurred expense for the contract

It is a key element in determining the target profit.

Question 19

What is the definition of Target Profit (TP)?

Answer 19

The contractor’s projected award fees and incentives

It is based on the target cost.

Question 20

What does Price refer to in the context of contracts?

Answer 20

The actual cost of the contract paid by the government to the contractor, including award fees and incentives

It reflects the total financial obligation of the government.

Question 21

In a Fixed Price Contract, what is the payment structure based on?

Answer 21

The amount paid is not affected by the resources or labor expended

It can be firm with no incentives or a variation with incentives.

Question 22

What is a Firm Fixed Price (FFP) contract?

Answer 22

Creates a fixed price for a determined set of requirements

The government assumes adequate price competition exists.

Question 23

What happens if a contractor experiences a cost underrun in an FFP contract?

Answer 23

The contractor retains the profit from the savings

Each dollar saved is an extra dollar of profit.

Question 24

What is the formula for calculating Adjusted Profit (AP)?

Answer 24

AP = TP + S(TC - FC)

This formula accounts for the share ratio and the difference between target and final costs.

Question 25

What does a **Share Ratio** of 80/20 indicate?

Answer 25

The government bears 80% of the risk and the contractor 20% ## Footnote It affects how profits and losses are shared between the parties.

Question 26

What is a **Fixed Price Incentive (FPI)** contract?

Answer 26

A contract that distributes risk between the government and contractor based on a share ratio ## Footnote It adjusts profit and establishes the final contract price through a formula.

Question 27

What is the purpose of a **Fixed Price Award Fee (FPAF)** contract?

Answer 27

To incentivize contractors when unable to objectively measure performance ## Footnote Award fees are paid on top of the established fixed price.

Question 28

True or false: In an FFP contract, the price paid by the government changes based on the contractor's costs.

Answer 28

FALSE ## Footnote The price remains fixed regardless of the costs incurred.

Question 29

What happens when the final cost exceeds the **Point of Total Assumption (PTA)**?

Answer 29

The contractor absorbs the difference and may incur a net loss ## Footnote The contract converts to an FFP at this point.

Question 30

What is the **ceiling price** in an FPI contract?

Answer 30

The maximum that the government may pay to the contractor ## Footnote It limits the government's financial obligation.

Question 31

In an FPIF contract, what occurs if the final cost is less than the target cost?

Answer 31

The contractor receives a profit greater than the target profit ## Footnote This incentivizes cost management.

Question 32

What is the impact of a **cost overrun** in an FPIF contract?

Answer 32

The contractor's profit decreases based on the share ratio ## Footnote The government absorbs most of the overrun costs.

Question 33

What is the relationship between **final cost** and **target cost** in an FPIF contract?

Answer 33

Final cost can be less than, equal to, or greater than target cost ## Footnote Each scenario affects profit and pricing differently.

Question 34

What does **AP** stand for in the context of contract pricing?

Answer 34

Award Price ## Footnote AP is calculated as the difference between the final price and the final cost.

Question 35

In a fixed price contract with economic price adjustment, what does it allow for?

Answer 35

* Adjustments based on price increases or decreases * Adjustments based on actual costs of labor or material * Adjustments based on cost indexes ## Footnote This contract type allows for some market fluctuation and shares risk with the government.

Question 36

What are **Fixed Price Level of Effort (FP LOE)** contracts used for?

Answer 36

When work is not suitable for a completion type contract ## Footnote These contracts require fixed labor rates and the government dictates actual hours.

Question 37

What do **cost reimbursement contracts** provide for?

Answer 37

* Payment of allowable incurred costs * Establishment of a ceiling on costs ## Footnote They are suitable when uncertainties inhibit accurate cost estimation.

Question 38

What is the purpose of **Cost Plus Award Fee (CPAF)** contracts?

Answer 38

To incentivize cost, delivery, and performance ## Footnote The award fee is determined by government evaluation based on performance.

Question 39

In a CPAF contract, what happens if the final cost exceeds the cost ceiling?

Answer 39

The final price is the cost ceiling plus the award fee ## Footnote The government only covers costs up to the ceiling.

Question 40

What is the difference between **Cost Plus Incentive Fee (CPIF)** and **Fixed Price Incentive Fee (FPIF)** contracts?

Answer 40

CPIF adjusts fees based on total allowable costs relative to target costs ## Footnote FPIF has a fixed price with incentives for cost control.

Question 41

What is a **Cost Plus Fixed Fee (CPFF)** contract?

Answer 41

A cost reimbursement contract with a fixed fee at inception ## Footnote The fee does not vary with actual costs but may adjust for changes in work.

Question 42

What are the three types of **indefinite delivery contracts**?

Answer 42

* Definite quantity contracts * Requirements contracts * Indefinite quantity contracts ## Footnote These contracts allow flexibility in quantities and delivery scheduling.

Question 43

What do **Time-and-Materials (T&M)** contracts provide for?

Answer 43

* Direct labor hours at fixed rates * Materials at cost ## Footnote T&M contracts are used when accurate cost estimation is not possible.

Question 44

What is the purpose of a **Basis of Estimate (BOE)**?

Answer 44

To describe resources and methodology used for estimating costs ## Footnote It includes details like Work Breakdown Structure (WBS) and estimating methodologies.

Question 45

What is a **letter contract**?

Answer 45

A preliminary contractual instrument authorizing immediate work ## Footnote It is used when a definitive contract cannot be negotiated in time.

Question 46

What is the **maximum fee** limit for R&D under CPFF contracts according to FAR?

Answer 46

15% ## Footnote This is the maximum allowable fee for research and development contracts.

Question 47

In a **Cost Plus Award Fee (CPAF)** contract, what is the award fee based on?

Answer 47

Cost, schedule, technical performance ## Footnote Evaluations are subjective and given on a percent scale.

Question 48

What happens if a contractor's costs exceed the target cost in a **Cost Plus Incentive Fee (CPIF)** contract?

Answer 48

The contractor is paid total allowable costs plus the minimum or maximum fee ## Footnote The fee is adjusted based on the relationship of costs to target costs.

Question 49

What does BOE stand for in the context of cost estimation?

Answer 49

Basis of Estimate ## Footnote The BOE is crucial for providing a structured approach to estimating costs based on historical data and methodologies.

Question 50

The BOE must contain data from _______ tasks or programs in support of the estimate provided.

Answer 50

similar completed ## Footnote This ensures that the estimate is grounded in relevant historical performance.

Question 51

What is the average lines of code from three similar historical interfaces mentioned in the BOE?

Answer 51

1,776 ## Footnote This figure is used to estimate the labor hours required for the software development effort.

Question 52

The average of hours per line of code is _______.

Answer 52

1.19 ## Footnote This average is used to calculate total labor hours for the project.

Question 53

The total labor hours calculated from the BOE example is _______.

Answer 53

2,113.4 ## Footnote This is derived from multiplying lines of code by hours per line.

Question 54

What is the rate for the resource used in the BOE example?

Answer 54

$42 per hour ## Footnote This rate is used to calculate the total direct dollars for the labor effort.

Question 55

The total direct dollars calculated from the BOE example is _______.

Answer 55

$88,763 ## Footnote This total is derived from the labor hours multiplied by the hourly rate.

Question 56

True or false: The quality of the BOE can exceed the quality of the cost estimate itself.

Answer 56

FALSE ## Footnote The BOE quality is inherently tied to the quality of the cost estimate.

Question 57

What are the key aspects that a well-written BOE should address?

Answer 57

* Who performed the work? * What tasks were performed? * Where the work took place? * When the work took place? * Why this data was used? * How the data was normalized or adjusted? ## Footnote Addressing these aspects ensures clarity and traceability in the estimate.

Question 58

What are the three potential sources of risk when using analogies in BOEs?

Answer 58

* Scaled-by-a-driver * M-to-N * Fixed ## Footnote Each source of risk relates to how estimates are derived and justified in the BOE.

Question 59

What are the common acceptable methodology types for BOEs?

Answer 59

* Analogy * Parametric * Engineering * Standard cost models ## Footnote These methodologies provide a framework for developing cost estimates.

Question 60

The Analogy Equation for cost estimation is represented as _______.

Answer 60

E = A * F ## Footnote Where E is the cost estimate, A is the cost of the analogy, and F is a factor or ratio.

Question 61

In the Related Cost Equation, E represents _______.

Answer 61

an indirect or derivative cost ## Footnote This includes costs like program management or design hours.

Question 62

The Build Up Equation for cost estimation is represented as _______.

Answer 62

E = R * P ## Footnote Where E is the cost estimate, R is the historical rate, and P is a parameter.

Question 63

What are the characteristics of high-quality estimates?

Answer 63

* Reflect the right content * Based on accepted methodologies * Use historical data * Perform appropriate statistical analysis ## Footnote High-quality estimates are crucial for competitive proposals.

Question 64

What is the primary purpose of the cost/price comparative analysis?

Answer 64

To evaluate the proposal(s) for reasonableness ## Footnote This analysis provides an objective basis for comparison and validation of a system's cost.

Question 65

The four basic steps of the comparative analysis process are to _______.

Answer 65

* Gain an aggregate technical understanding * Review the BOE * Perform an ICE or Independent Cost Assessment * Conduct a comparative analysis ## Footnote These steps ensure a thorough evaluation of the proposal.

Question 66

What common errors are found in BOEs?

Answer 66

* No basis whatsoever * Adjustments with no basis * Subcontractors with no BOEs * Cherry picking * Missing elements ## Footnote Identifying these errors is crucial for improving estimate accuracy.

Question 67

What does **cherry picking** refer to in the context of BOEs?

Answer 67

Choosing only one program out of a set of analogy programs to get the desired answer ## Footnote Usually aims for the lowest or highest cost, affecting the evaluation process.

Question 68

List common **risk-related errors** in BOEs.

Answer 68

* Missing risks implied by the BOEs * Missing or incorrect roll-up of the risk register * Not understanding the relationship of the risk register to the Management Reserve (MR) * Buried MR * Missing technical risks * Improperly characterized risks * Improper or no analysis of Service Level Agreements (SLAs) * No risk register whatsoever ## Footnote These errors can significantly impact the evaluation and management of risks.

Question 69

What are common **pricing-related errors**?

Answer 69

* Being out of sync with BOEs * Missing BOEs or WBS * Insufficient or no escalation * Lack of inflation clauses * Currency exchange rate hedging misunderstood or mischaracterized in risk or MR ## Footnote These errors can lead to inaccurate pricing assessments.

Question 70

What is the role of the **cost analyst** after reviewing the BOEs?

Answer 70

To provide an ICE or ICA of the various competing proposals ## Footnote The analyst may create an estimate based on historical data or assess differences in proposals.

Question 71

What does ICE stand for in cost analysis?

Answer 71

Independent Cost Estimate ## Footnote ICEs are used to evaluate competing proposals based on cost estimating principles.

Question 72

What is the last step in the **comparative analysis** process?

Answer 72

Prepare a comparative analysis of the contractor's proposal and an independent estimate ## Footnote This includes summarizing assumptions, resources, and results.

Question 73

What questions should be asked regarding **cost differences**?

Answer 73

* What are the big differences in the estimates? * Do both estimates contain the same cost elements? * Are any underlying assumptions different? ## Footnote These questions help identify significant discrepancies between estimates.

Question 74

What happens after the **comparative analysis** is completed?

Answer 74

The government is set for negotiations and a subsequent contract award ## Footnote Substantial deltas may require updating estimates based on negotiation outcomes.

Question 75

What are the primary elements of the **contract pricing process**?

Answer 75

* Determining the best applicable contract vehicle * Creating the cost/pricing proposal * Performing the cost/price comparative analysis ## Footnote This process guides the government from requirements determination to contract award.