Price (Not Cost) Analysis NCMA March Workshop Katherine Rachubinski Ryan Connell Commercial Item Group 7 March, 2018

DCMA’s Commercial Item Group (CIG) MISSION Provide acquisition insight for the integration of commercial products and services within DoD to streamline procurements and ensure warfighters receive cutting-edge technology at fair and reasonable prices. Photo: CIG experts arriving at the scene! (Actually, they’re students at the DeGlooper Air Assault School at Fort Bragg, NC rappelling from a UH-60 Black Hawk helicopter) DCMA strategic goals - 1.1.3 Create and increase awareness of the new commercial item database IAW 2016 NDAA 1.2.4: Provide commercial item training/assistance to CMOs and Buying Commands 1.2.5: Establish advance agreements for Commercial Item Determination Process and Price Reasonableness Analysis commercial@dcma.mil www.dcma.mil/commercial-item-group

Commercial Acquisition Challenges What’s “commercial”? What’s a “fair and reasonable” price? CIG’s work in a nutshell is to answer these two questions. However, the words are subject to interpretation! Photo: United Launch Alliance’s Delta Heavy launch vehicle, which was recently determined commercial under the provisions of the Space Act (51 U.SC §50131), although it had previously been procured as noncommercial. Congress can (and does) change the answer to “what’s commercial?”

Commercial Item Database Currently maintained in Excel format More than 15,000 parts – and growing Not all-inclusive (but we’re working on that) Sources of data: Commercial Item Determinations by Procuring Contracting Officers Commercial Item Recommendations by CIG personnel Others Need information? Contact commercial@dcma.mil Emphasize that the CIG makes only recommendations.

Commercial Item Pricing 5 Evaluate price, not cost Cost plus a certain profit is not the F&R way to look at commercial pricing Peanut butter and jelly sandwich Be a prudent business person Understand the competitive market conditions Direct competition, if commercial, why isn't it being competed Who makes products/services similar? Who buys besides USG? Reasonable knowledge of the market What has the Government paid, what do others pay? What is the value of the item/service; complexity, risk, difficulty Negotiate a fair and reasonable price Ryan

Market Research What is Market Research? “Market research” means collecting and analyzing information about capabilities within the market to satisfy agency needs (FAR 2.101) Do I have to do market research on pricing? Yes, NDAA 2017 requires market research for price reasonableness Who is responsible? The Government (FAR 10.002) Prime contractors in other-than-commercial contracts (FAR 10.003) Exception: market research not required for procurements under the Simplified Acquisition Threshold unless “adequate information is not available and the circumstances justify its cost.” FAR 10.002 requires the government to conduct market research appropriate to the circumstances. FAR 10.002 also requires market research on an ongoing basis, and has some cautions about bundling or consolidating requirements into one contract

Market Research First, understand the requirements Know the specifications for form, fit, and function Know any special military requirements such as paint, labeling, qualification, testing Is the exact same item (part number) advertised for sale? Google it Check specialized websites such as military surplus & aviation parts resellers BUT, are sufficient quantities available? What are the terms & conditions? Do similar items exist? Check the commercial item database Look at CIG helpful links for resources Note to industry audiences: PLEASE TELL US THE PRODUCT SPECIFICATIONS. This is the single biggest cause of delay in government commerciality determinations/recommendations.

Market Research …document it! There is no single website, person, or tool that has all the answers There is no checklist or template, since each part or service has its own unique circumstances Be creative, use your own best judgment Combine all sources of information to paint a complete picture, and… …document it!

Let me call a buddy of mine… Market Research Let me call a buddy of mine… 9 Talk to suppliers and other subject matter experts TALKING TO PEOPLE IS THE BEST MARKET RESEARCH TECHNIQUE You know Rick on Pawn Stars? Rick is a smart guy, but Rick’s network makes him smarter. Someone could come in with a nuclear propulsion system, and Rick would say I don’t know a lot about that, but let me call my friend Dave, who is an expert at nuclear propulsion. Network, find people who are willing to help. You will be amazed the doors that open by just reaching out to a stranger. Find a guy that owns an aircraft, make contact with POCs at various companies, fields, industries.

Understanding Price Tastes great Convenient location Fair trade sourcing Costs $5 to make 12 oz. cup Customer price is $6 20% markup on the sale Tastes great Convenient location Fair trade sourcing Costs $2.50 to make 12 oz. cup Customer price is $5 100% markup on the sale How would customers know that Excellent Coffee has a 100% markup? Should they care?

Group Activity I need to go to Tortuga Music Festival 11 I need to go to Tortuga Music Festival 3 day country music festival on Ft Lauderdale beach (in on April 12, home April 14) I want a flight from Boston to Ft Lauderdale 2 minutes and perform research to get me the best price you can find. Whole lot of Market research in 2 minutes. Everyone thinks differently Google vs Kayak ? Setting my requirements Needs vs wants No right vs wrong Research, document, justify

Misconceptions about Price Analysis If it’s commercial, the price must be fair and reasonable Catalog prices are automatically fair and reasonable GSA schedule makes the price fair and reasonable 50% profit is excessive 1 source of information is adequate

Commercial Item Pricing 13 FAR 15 Price Analysis Techniques Comparison to other prices received from other companies Comparison to historic prices paid Parametric estimating methods Government cost estimates Market research on same or similar items (NDAA 2017 – required) Data other than certified cost or pricing data Other price-estimating approaches: Bottoms-up, based on the labor and materials Value based pricing Ryan

Commercial Item Pricing Comparison to other prices received from other companies Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: During pre-solicitation, discovered that only this company makes this particular part. Analysis: If other companies offered, expectation this would be a competitive procurement Sometimes distributors create competition

Commercial Item Pricing Comparison to historic prices paid Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: During review, researched historic prices paid using DCMA systems, and Contractor sales history Analysis: Inflation/Deflation 2007 to 2012 no price adjustments Quantity discounts Only large quantity (100) This explains the $90k 3 @ $80k is unexplained DCMA Tools Price Qty Date Part #123456 $ 100,000 6 Apr-08 3 Sep-12 $ 90,000 100 Jun-16   KTR history 12 Dec-07 $ 80,000 Aug-15

Commercial Item Pricing Parametric estimating methods Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: During market research, found several stands offered for sale. Stand 1, 5x4x5, $17,000 Stand 2, 20x4x8, $115,000 Stand 3, 12x4x10, $84,000 Parametric Relationship: Size is a good indicator of price Stands 1,2,3 all around $175 per ft3 Using that metric, estimate $70,000 Length Width Height Ft3 Price P per ft3 Proposal 10 4 400 $ 100,000.00 $ 250.00 Stand1 5 100 $ 17,000.00 $ 170.00 Stand 2 20 8 640 $ 115,200.00 $ 180.00 Stand 3 12 480 $ 84,000.00 $ 175.00 Average Recommendation $ 70,000.00

Commercial Item Pricing Government cost estimate Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: Consulted Government cost estimators at the buying command. They used a 0.2% of total aircraft maintenance cost, to factor in the cost of setting up the depot, to include the stands. Analysis: Aircraft maintenance was estimated at $120M. Thus the depot cost estimate is $2.4M. $300k proposal for the 3 stands, appears high (12.5% of total depot price)

Commercial Item Pricing Market research on same or similar items (NDAA 2017 – required) Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: During market research, obtained market research-based quotes from 2 other companies Analysis: No other companies offer exact item Company 1’s stands are 15x4x10 for $90k Don’t have wheels for moving Company 2’s stands are 10x4x10 for $65k But they do not come painted Understanding the market, ball park

Commercial Item Pricing Data other than certified cost or pricing data Hours Rate Cost Labor mechanic 300 45 $ 13,500 laborer 500 25 $ 12,500 engineer 80 $ 6,400 Material 20000 1 $ 20,000 Indirects Labor OH $ 32,400 85% $ 27,540 Material OH 10% $ 2,000 G&A $ 81,940 12% $ 9,833 Total Cost $ 91,773 Profit 9% $ 8,227 Price $ 100,000 Example case: Item: Aircraft maintenance stand 3 pieces, 10x4x10. Proposed Price $100,000 each Artifacts: Other than CCOPD is a last resort. Analysis: This should be used when other price analysis techniques still don’t demonstrate information to determine a fair and reasonable price Shown (right) example of what other than CCOPD looks like

Commercial Item Pricing Combining Price Analysis techniques: No one offering exact item for sale In 2015, sold 3 for $80k each, escalate upward Not ignoring the fact that there were regular $100k sales Parametric analysis recommended $70k Government Cost estimate, less reliable data point $65k same size, unpainted Estimate paint costs $90k bigger, no wheels Art not a science TAKEAWAY: Somewhere around $85k is the answer Being “okay” with this level of fidelity Relying heavily on market research

Commercial Item Pricing Overarching Price-Analysis concepts Collecting all of the information available Putting those data points together to form a overall recommendation Ranges are acceptable “What makes sense?” Accepting imperfection “What if it was your money?”

Commercial Service Pricing Pricing Services Finding similar services (market research) Price to maintain/repair vs price to buy Bottoms up estimate (labor) Using publicly available information Bureau of Labor statistics Census Consultant prices Salary.com List available on CIG website www.dcma.mil/commercial-item-group

Commercial Service Pricing CIG has developed an internal tool for pricing services Uses Bureau of Labor statistics to pull “salary” information Companies are required to provide % expenses in Material, Labor and Indirect costs every 5 years on census data Uses a combination of occupation, geographic location, escalation and indirect load factor based on 2017 Census Categorized by NAICS code

Commercial Pricing Adjustments in pricing Changes in market conditions (supply, demand) Cost of starting or re-starting production Quantity Escalation Delivery schedule Warranty Other contract terms & conditions

Price Reasonableness NDAA 2017 allows value-based pricing What is Value-Based Pricing? Is it new? NDAA 2017 allows value-based pricing What is the item worth to the end user? Pros: An additional data point which can be used to help with price analysis Considers demand, which affects pricing in the commercial market Cons: May lead to additional negotiation issues over “value” DCMA, DCAA, buying commands can’t really determine “value” – really the user

Commercial Part Example Contractor provided sales history of commercial sales CIG performed mkt research and found other similar for sale Government-requirements 2.25” diameter 2000 PSI 10” long Max Temp 2,000 degrees F Is the value commercial? Let’s discuss or mention our focal point of using this expertise to promote to DoD and the prime contractor community maximum integration of Commercial items in the DoD programs. Should we mention our DCMA strategic goals - 1.1.3 Create and increase awareness of the new commercial item database IAW 2016 NDAA 1.2.4: Provide commercial item training/assistance to CMOs and Buying Commands 1.2.5: Establish advance agreements for Commercial Item Determination Process and Price Reasonableness Analysis CIG opinion is yes This fits into the “of a type” scope Inbounds

Commercial Part Example Continued What about pricing? KTR proposed $50k Some are higher some are lower Is $50k reasonable? Let’s compare various technical specs to the average price offered/sold

Commercial Part Example Continued

Commercial Part Example Continued Using the model that Temperature is a cost driver 12.284 (2000) + 8975.3 = $33,543 Is $50k reasonable? RFI to contractor. You haven’t given us supporting data for a $50k price Government Requires additional testing, that we don’t do commercially Wait, is this still a commercial valve? RFI to contractor. Need more information regarding the testing Tests are all offered/performed commercially, frequency was different CIG bottoms up estimated the value of the tests, $2,500; total $36,043 No, not based off the information provided, plus market research. CIG recommends $36k

Key Takeaways Emphasis on market research Requirement to perform price analysis for commercial items Thinking creatively, being ‘okay’ with less than 100% solution Gathering & understanding pricing data Value-based pricing

Commercial@dcma.mil www.dcma.mil/commercial-item-group CIG Contact The DCMA Commercial Item Group is available to: Provide expert assistance to DoD buying commands Support DCMA offices in performance of CPSRs Provide training Work with contractors to streamline the buying process Commercial@dcma.mil www.dcma.mil/commercial-item-group

Questions

What is Noncommercial? The V-22 Osprey is a tilt-rotor aircraft that can hover like a helicopter and fly like an airplane. It has no known commercial application and no commercial sales have ever occurred. However, this could change.

BACKUP SLIDES

Commercial Item Database Note: it takes 3 clicks to get through this slide! The data shown is taken from the PCO determinations worksheet. The other two worksheets contain only *recommendations* and therefore do not have a “Commercial Decision” column.

Evolution of Commercial Acquisition Law NDAA 2016: - Restricted the PCO’s ability to change a commercial decision; HCA to overturn - Reliance on prior Government prices paid - Added scrutiny to convert from a FAR 15 to FAR 12 - Required a database for recommendations and determinations of commerciality NDAA 2017 - Emphasized market research for price analysis - Enforced the build of a central database - Added many commercial related pilot programs NDAA 2018 - Directed establishment of a program for buying COTS items on the internet - Established the existence of prior FAR 12 buys as a basis for commerciality

Overturning Commerciality What if a PCO makes a mistake? NDAA 18 SEC. 848. COMMERCIAL ITEM DETERMINATIONS states that a prior PCO use of FAR 12 procedures to acquire an item can be changed to different acquisition procedures under two conditions: The head of contracting activity determines in writing that the use of such procedures was improper; or The senior procurement executive of the military department or the Department of Defense as designated for purposes of section 1702(c) of title 41 determines in writing that it is no longer appropriate to acquire the item using FAR 12 procedures. Note: DoD has not yet finalized guidance to Department staff on implementation of the above.