The Focus of a Pre-Negotiation Plan - Essay Example

18 August Pricing Problem Introduction: The primary focus of a pre-negotiation plan is to guarantee that the government has developed objectives of the negotiation that will guide to the purchasing of services and supplies at a reasonable and fair price. Negotiating any kind of pricing action needs the development of negotiation objectives. The depth and scope of the analysis supporting the negotiation objectives must be directly connected to the value of money, significance and difficulty of the pricing action. On the other hand, when cost analysis is necessary, the necessity for formal documentation is seen, that is, a plan if pre-negotiation is much more crucial. The progress of a pre-negotiation plan that does not reflect any kind of rigorous analysis, assessment and examination through element of cost will lessen the accomplishment of obtaining a reasonable and fair price. Where there is a departure from the established negotiation objective, the memorandum of the price negotiation should not only recognize the negotiated results but also reproduce the same level of rigor and severity in the examination, assessment and basis for its acceptance. In the absence of sufficient price competition, the contracting officer should apply and document in the pre-negotiation plan the analytical and systematic techniques that will help evaluate whether a proposed price is reasonable and fair. The Pre-negotiation Plan The pre-negotiation plan is an official document and certificate of the negotiation objectives of the contracting officers with regard to pricing, business, technological and contractual issues. It documents the pertinent issues and problems to be negotiated and the objectives of cost and a profit or fee objective. Due to the fact that it serves as a foundation of the negotiation, the pre-negotiation plan must completely explain the positions of the government and the contractor. The template, which is integrated as Attachment-A, is provided to help contracting officers in the examination of their negotiation objectives when cost analysis is necessary to support negotiations. “Contracting activities are encouraged, through implementation level procedures, to establish additional templates that are more aligned with the specific needs of their organization and procurements” (“Negotiation Documentation: Pre-Negotiation Plan & the Price Negotiation Memorandum”). The pre-negotiation plan must: Identify and evaluate the proposed cost of the contractor position against the government position for every individual component of cost. Completely explain the findings and recommendations of the evaluators, auditors and others providing advisory assistance, foundations of their findings and the extent to which they were involved in the establishment of the negotiation objectives. Provide a complete rationale for the fee or profit objectives of the government. Provide complete traceability of the data of the proposal that was relied upon. Guarantee that the format and structure of the memorandum of the price negotiation can be tracked to the pre-negotiation plan, so that commentators can easily cross-reference both the documents. Cost Analysis Cost analysis is the process of observing and assessing a planned cost to decide if it is reasonable, without assessing its proposed profit and cost elements. The pre-negotiation plan needs an analysis of cost or price for every procurement action. It is necessary to carry out a cost or price analysis in relation to every procurement action, which would also include the alteration of contract. The process and level of analysis depends on the facts relating to the particular procurement condition, but as a starting point it must construct independent estimation before getting bids or offers. A cost analysis must be carried out when the offer is required to present elements such as: labor hours, overhead, materials, and etc. of the estimated cost (“Negotiation Documentation”). This type of analysis is necessary whenever price competition is deficient and for sole-source procurements, including contract alterations or change orders, unless price reasonableness can be recognized on the basis of a market price or catalogue of a profitable product marketed in considerable capacity to the general public or on the basis of prices set by law or rule (“Negotiation Documentation”). A cost analysis involves the evaluation and assessment of separate cost elements and the proposed profit of an offerors cost or pricing materials as well as the critical aspects involved in assessing the costs. Cost Elements Contractor Proposed Costs Questioned Cost Unsupported Subcontracted Items $830,000 Purchased parts $500,000 $1,000 Commercial items $825,000 $825,000 Direct Engineering Labor $9,500 Material Overhead $45,255 $17,346 Engineering Overhead $22,901 Manufacturing Overhead $1,000,000 $107,000 Direct Manufacturing Labor $500,000 Total Manufacturing Cost $3,700,255 $139,401 $843,346 G&A $213,726 $7,110 $43,011 Total Contractor Effort $3,913,981 $146,511 $886,357 CAS 414 $168,320 $798 $19,050 Total Cost $4,082,301 $147,309 $905,407 Profit $660,663 Total Proposed Price $4,742,964 $147,309 $905,407 Explanation: 1) The purchased parts indicated in the pre-negotiation plan were analyzed and evaluated by the auditor. 2) The “Material Overhead” in the plan is related to the materials not supported. “Material Overhead” also includes the indirect cost related to procuring, using, storing and managing the materials. 3) The proposed wages are much higher than the ones in the past financial data, and this is due to the requirement of employing extra workers for the construction area. 4) The engineering overhead of the costs questioned is lower as compared to the past figure. 5) The proposed manufacturing overhead of the contractor is very high as it incurs a lot of expenditure for production processes till the final stage. 6) The general and administrative rates are calculated and applied to the total cost. However, where addition of material and subcontract costs would considerably deform the portion of the G&A expense pool in relation to the benefits received, and where costs other than direct labor are important dealings of the total activity, G&A is calculated on a value-added cost input basis, which is equal to the cost less material and subcontract costs, depending on the contractor’s accounting method. 7) The CAS form is prepared on the basis of historical data available. The factors developed are reasonable and have been approved by the office. 8) Direct engineering labor is compared here with the hours and rates. After the cost has been analyzed, the pre-negotiation plan will help in the determination of the decisions by contracting officers regarding a reasonable and fair price. Works Cited “Negotiation Documentation: Pre-Negotiation Plan & the Price Negotiation Memorandum.” Energy.gov. 2009. Web. 18 August 2012. Read More