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

2. 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

3. 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?”

4. 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
Emphasize that the CIG makes only recommendations.

5. Commercial Item Pricing5
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

6. 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 )
Prime contractors in other-than-commercial contracts (FAR )
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 requires the government to conduct market research appropriate to the circumstances.
FAR also requires market research on an ongoing basis, and has some cautions about bundling or consolidating requirements into one contract

7. 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.

8. 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!

9. 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.

10. 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?

11. Group Activity I need to go to Tortuga Music Festival11
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

12. 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

13. Commercial Item Pricing13
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

14. 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

15. 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
$80k is unexplained
DCMA Tools
Price
Qty
Date
Part #123456
$ ,000 6
Apr-08 3
Sep-12
$ ,000
100
Jun-16
KTR history 12
Dec-07
$ ,000
Aug-15

16. 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 $
Stand1 5
100
$ 17,000.00 $
Stand 2 20 8
640
$ 115,200.00 $
Stand 3 12
480
$ 84,000.00 $
Average
Recommendation
$ 70,000.00

17. 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)

18. 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

19. 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
$ ,400
Material
20000 1
$ 20,000
Indirects
Labor OH
$ 32,400
85%
$ 27,540
Material OH
10%
$ ,000
G&A
$ 81,940
12%
$ ,833
Total Cost
$ 91,773
Profit 9%
$ ,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

20. 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

21. 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?”

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. Commercial Part Example Continued

29. Commercial Part Example Continued
Using the model that Temperature is a cost driver
(2000) = $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

30. 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

31. 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

32. Questions

33. 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.

34. BACKUP SLIDES

35. 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.

36. 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

37. Overturning Commerciality
What if a PCO makes a mistake?
NDAA 18 SEC 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.