APMP Pricing Strategy and Cost Volume Development 2 — Questions and Answers
Question 1: What is 'should-cost' analysis in proposal pricing strategy?
- An independent estimate of what a contract should cost based on realistic performance standards, used to challenge inflated estimates (Correct answer)
- The minimum acceptable profit margin for contract award
- A DCAA-required format for presenting indirect cost rates
- The government's published price list for common services
Correct 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.
Question 2: In a fixed-price contract proposal, who bears the primary risk of cost overruns?
- The contractor, because the price is set at award and cost overruns reduce profit (Correct answer)
- The government, because it funds the contract
- The subcontractors, because they are held to fixed rates
- DCAA, because it audited and approved the proposed costs
Correct 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.
Question 3: What is the purpose of a 'fee narrative' in a cost proposal?
- To justify the proposed profit percentage by explaining the risk, complexity, and investment involved (Correct answer)
- To disclose executive salaries to the contracting officer
- To document the company's fee history on prior government contracts
- To explain how indirect rates were calculated and applied
Correct 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.
Question 4: What is 'unbalanced pricing' and why is it a concern in proposals?
- Artificially inflating prices on early or certain line items while reducing others, which can result in overpayment to the contractor (Correct answer)
- Pricing labor at different rates for different skill levels
- Allocating costs unevenly across contract years due to known schedule differences
- Using different burden rates for different cost categories
Correct 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.
Question 5: What is the difference between 'allowable' and 'allocable' costs in government contracting?
- Allowable costs are permitted by FAR; allocable costs are reasonably assignable to the specific contract being priced (Correct answer)
- Allowable costs are fixed; allocable costs are variable
- Allowable costs apply only to subcontractors; allocable costs apply to the prime
- Allowable means pre-approved; allocable means audited
Correct 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.
Question 6: What is the purpose of 'escalation' factors in a multi-year cost proposal?
- To account for expected increases in labor rates and material costs in future contract years due to inflation (Correct answer)
- To add contingency for unexpected technical risks
- To increase profit margins in later contract years
- To offset anticipated reductions in government funding
Correct 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.
APMP Pricing Strategy and Cost Volume Development 2
What is 'should-cost' analysis in proposal pricing strategy?