Pricing Strategy and Cost Volume Development Flashcards

What is 'should-cost' analysis in proposal pricing strategy?

Answer: An independent estimate of what a contract should cost based on realistic performance standards, used to challenge inflated estimates

Should-cost analysis challenges cost assumptions to drive efficiency and is used by both the government and contractors to identify cost reduction opportunities.

In a fixed-price contract proposal, who bears the primary risk of cost overruns?

Answer: The contractor, because the price is set at award and cost overruns reduce profit

Under a firm-fixed-price contract, the contractor absorbs any costs above the agreed price, making accurate estimation critical.

What is the purpose of a 'fee narrative' in a cost proposal?

Answer: To justify the proposed profit percentage by explaining the risk, complexity, and investment involved

The fee narrative provides a rationale for the proposed profit margin based on contract risk, difficulty, and contractor investment.

What is 'unbalanced pricing' and why is it a concern in proposals?

Answer: Artificially inflating prices on early or certain line items while reducing others, which can result in overpayment to the contractor

Unbalanced pricing is a red flag because it can lead the government to overpay early in the contract before realizing costs were front-loaded artificially.

What is the difference between 'allowable' and 'allocable' costs in government contracting?

Answer: Allowable costs are permitted by FAR; allocable costs are reasonably assignable to the specific contract being priced

Both tests must be met: a cost must be allowable under FAR and must logically relate to the contract to be charged against it.

What is the purpose of 'escalation' factors in a multi-year cost proposal?

Answer: To account for expected increases in labor rates and material costs in future contract years due to inflation

Escalation factors adjust future-year costs for inflation, ensuring the contractor is not underfunded in later performance periods.