CHAPTER 2 Independent Government Cost Estimates
(FAR 4.803, 13.106-3, 15.404-1 and 406-1, 36.203, 36.605)
A cost estimate is the estimated cost or price of supplies or services to be purchased for the federal government. Commonly referred to as independent government cost estimates (IGCE) within the federal government, cost estimates are important in the acquisition process, but they are often prepared incorrectly. Acquisition audit reviews have shown that too many contracts have incomplete or inadequate estimates.
Sadly, some believe that government estimates are not important. Not long ago, an acquisition instructor noted that government estimates were not worth the paper they were written on, implying that they were not necessary. On the contrary: Cost estimates are essential. When a cost estimate is prepared properly and includes supporting information, it will help determine whether prices offered by vendors are fair and reasonable. Incomplete estimates or those that lack cost details make cost or price analysis much more difficult. All acquisition professionals should understand why cost estimates are important and how to develop and use them.
Cost estimates have three primary purposes. They are used:
To reserve funds for the contract during the acquisition planning phase
As a basis of comparison for costs or prices proposed by prospective vendors
To determine price reasonableness if only one vendor responds to a solicitation.
COST ESTIMATES FOR CONTRACTS
The Federal Acquisition Regulation (FAR) does not require the government to prepare a cost estimate for each acquisition. When a cost estimate is prepared, it must be included in the contract file as documentation. (Documentation of all actions undertaken during the preaward phase should be placed in the contract file.)
Estimates for Contracts and Option Periods
Cost estimates should be prepared for all new contracts, delivery and task orders, and any modification that results in a monetary change to the contract. The estimate should represent the maximum probable cost for the supplies or services being procured.
Many agencies have acquisition policies that require the preparation of an estimate for acquisitions over the simplified acquisition threshold of $150,000. Some agencies also require cost estimates for complex acquisitions under the simplified acquisition method of contracting. Because the cost estimate is used to evaluate vendors’ pricing during the evaluation phase of an acquisition, it is very important that it be kept in the contract file for reference.
A new cost estimate is not necessary if the government issues a contract modification to exercise a priced option period containing negotiated costs that have already been determined to be fair and reasonable. An option period gives the government a unilateral right to purchase additional supplies or services beyond the initial contract performance period or to extend the contract. A priced option period is an option period that has been evaluated; the specific amount of the option is specified in the contract. Option periods may include priced or unpriced supplies or services. An unpriced option lists the supplies or services to be provided in the contract but does not identify the price of the option. The option price is negotiated at the time the option is exercised.
Estimates for Commercial Items
It is not necessary to develop cost estimates for commercial items that are considered standard material, such as office supplies or printing services. Catalog or market survey prices may be used as an estimate for materials that are readily available and can be immediately purchased off-the-shelf in the commercial marketplace.
The Party Responsible for Estimates
The requesting office (often called the program office) is responsible for preparing the cost estimate for a proposed acquisition. Sometimes the contracting officer is called upon to help the program office prepare the estimate. The program office develops an estimate it considers reasonable and in line with current prices in the commercial marketplace. Cost is considered reasonable if a prudent businessperson would spend as much for the item or service, which is determined by reviewing historical data from private businesses/industry.
A cost estimate developed by the program office is usually based on current, reliable information, but sometimes estimates are “guesstimates” or are based on outdated information. A rough estimate might not be a very reliable price evaluation tool. Therefore, it is very important for the contracting officer to know where the information was obtained and to understand the pricing tools used to develop the cost estimate. Whoever prepares government cost estimates must have some experience or training in cost estimating.
Estimate Confidentiality
An IGCE is confidential. Under no circumstances should it be given to proposing vendors prior to receipt of proposals. It is also not wise to make it available to anyone outside the acquisition team that is preparing the preaward documentation for the proposed acquisition. This will prevent sensitive or proprietary information from being leaked to other agency employees and to people in the commercial marketplace. If sensitive or proprietary information is leaked to the commercial marketplace, the contracting officer may cancel the proposed acquisition if he or she determines that all vendors cannot compete equally.
TYPES OF COST ESTIMATES
The government normally uses two basic estimating methods when developing the IGCE: the lump sum estimate and the detailed estimate. When developing an IGCE, the program office reviews and considers many types of data. These include published prices from the commercial marketplace and price information from previous acquisitions. When using price information from previous acquisition actions, the information should be no more than two years old, because prices change rapidly in the commercial marketplace.
Lump Sum Estimates
A lump sum estimate projects the cost of an acquisition on a gross or bottom-line basis. This type of estimate is useful when the final award price can be determined without examining individual cost elements and fee or profit. Lump sum estimating can be used when the proposed acquisition is carried out under the full and open competition method of contracting, when purchasing commercial items, and for small-dollar and noncomplex projects. This is because a small, simple project usually has a well-defined scope of work with a low risk of unforeseen conditions and will not require any changes to the work for the total duration of the contract period. The type of work activity, not the cost, determines whether a project is simple. Acquisition of lawn maintenance is one example of a simple project.
Exhibit 2-1 shows a sample format for a lump sum estimate. This is only one of many formats used by various organizations. When used, it should be modified to fit the appropriate acquisition action.
Detailed Estimates
A detailed estimate involves an analysis of the individual cost elements that are directly related to the requirements specified in the solicitation. The person responsible for preparing the estimate must have a good understanding of the government’s requirements. The estimate should cover the entire performance period, including option periods, but can be done for only a portion of the proposed contract period if warranted. For example, if a contract has one base year and four option periods, the estimator may analyze only the base year. When performing a detailed estimate, the following elements, at a minimum, must be analyzed:
Direct labor
Materials, if included
Overhead amount or rates identified in percentages
Other direct costs
Amount of profit, in dollar amount or percentage.
A detailed estimate will help an agency:
Determine the type of contract to be used
Evaluate proposals received from competing vendors
Develop negotiation positions that result in fair and reasonable prices that are acceptable to the federal agency and to the vendors who are awarded the contract.
The government and the contractor do not usually negotiate each cost element. These negotiations of cost elements are not necessary as long as the cost agreed upon is considered fair and reasonable.
Because an estimate is prepared in the early stages of the acquisition process, it is at times necessary to update the government’s estimate before receiving proposals from competing vendors. Updating the detailed cost estimate is necessary if the consumer price index changes or changes are made to the requirements between the time the solicitation was issued and when proposals are received. If the requirements are changed during this time period, the solicitation must be amended and issued again to all interested parties.
See Exhibit 2-2 for a sample detailed cost estimate. The sample should be modified to fit the appropriate type of acquisition action. This is only one of many versions used within the federal government.
