FAC Financial Analysis & Valuation 2 — Questions and Answers
Question 1: Which cost element is classified as a 'direct cost' under FAR Part 31?
- General and administrative expenses
- Cost of materials specifically purchased for a contract (Correct answer)
- Depreciation of corporate headquarters
- Executive compensation
Correct answer: Cost of materials specifically purchased for a contract
Direct costs are those that can be identified specifically with a contract, such as materials purchased exclusively for that contract.
Question 2: In a should-cost analysis, the primary objective is to:
- Verify contractor accounting records
- Determine what a contract should cost assuming efficient performance (Correct answer)
- Establish a ceiling price for the contract
- Calculate the contractor's profit margin
Correct answer: Determine what a contract should cost assuming efficient performance
Should-cost analysis evaluates contractor efficiency and economy to estimate what a contract should cost under efficient performance conditions.
Question 3: The Economic Price Adjustment (EPA) clause in a contract is primarily designed to:
- Establish the initial contract price
- Protect both parties from economic uncertainties over long performance periods (Correct answer)
- Determine the contractor's profit rate
- Calculate overhead allocation rates
Correct answer: Protect both parties from economic uncertainties over long performance periods
EPA clauses allocate the risk of economic changes (inflation, material cost fluctuations) between the government and contractor over extended contract periods.
Question 4: Under FAR 31.201-4, a cost is allocable to a government contract if it:
- Is incurred only during the contract performance period
- Benefits the contract, helps produce the contract's deliverable, or is necessary for overall operation (Correct answer)
- Has been approved by the contracting officer in advance
- Is less than the approved indirect cost rate
Correct answer: Benefits the contract, helps produce the contract's deliverable, or is necessary for overall operation
Allocability requires that a cost benefits the contract, is necessary to produce the contract deliverable, or is required for overall business operations supporting the contract.
Question 5: A contractor's forward pricing rate agreement (FPRA) is used to:
- Establish the final price for completed contracts
- Pre-negotiate indirect cost rates for use in future contract pricing (Correct answer)
- Determine allowable profit on cost-reimbursement contracts
- Set the maximum fee a contractor may earn
Correct answer: Pre-negotiate indirect cost rates for use in future contract pricing
An FPRA establishes agreed-upon indirect cost rates applicable to future contracts, reducing the need to negotiate rates on each new award.
Question 6: When evaluating a contractor's proposed labor rates, a cost analyst should compare them against:
- Only the Bureau of Labor Statistics national averages
- Bureau of Labor Statistics data, the contractor's historical payroll records, and collective bargaining agreements (Correct answer)
- The government's own pay scales for equivalent positions
- Industry surveys published more than five years ago
Correct answer: Bureau of Labor Statistics data, the contractor's historical payroll records, and collective bargaining agreements
A thorough labor rate analysis cross-references BLS data, the contractor's actual payroll history, and any applicable union agreements to assess reasonableness.
Question 7: The term 'unallowable cost' in government contracting means the cost:
- Exceeds the contractor's budget
- Cannot be included in any contract price or billed to the government (Correct answer)
- Requires additional documentation before payment
- Must be deferred to the next fiscal year
Correct answer: Cannot be included in any contract price or billed to the government
Unallowable costs are specifically excluded by FAR Part 31 from being charged to government contracts or included in contract prices.
FAC Financial Analysis & Valuation 2
Which cost element is classified as a 'direct cost' under FAR Part 31?