2 CFR 200: How to Document Cost Reasonableness for Subrecipients

GovKor,

Are you requiring submission of certified cost or pricing data? If not, what cost data are you analyzing?

We require cost data (not certified) to be submitted.

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15.404-1 Proposal analysis techniques.

(a) General. The objective of proposal analysis is to ensure that the final agreed-to price is fair and reasonable.

(1) The contracting officer is responsible for evaluating the reasonableness of the offered prices. The analytical techniques and procedures described in this subsection may be used, singly or in combination with others, to ensure that the final price is fair and reasonable. The complexity and circumstances of each acquisition should determine the level of detail of the analysis required.

(2) Price analysis shall be used when certified cost or pricing data are not required (see paragraph (b) of this subsection and 15.404-3).

(3) Cost analysis shall be used to evaluate the reasonableness of individual cost elements when certified cost or pricing data are required. Price analysis should be used to verify that the overall price offered is fair and reasonable.

(4) Cost analysis may also be used to evaluate data other than certified cost or pricing data to determine cost reasonableness or cost realism when a fair and reasonable price cannot be determined through price analysis alone.

Emphasis added to the above. With respect to price analysis, there are several available techniques that may be used before one needs to use cost analysis. Only one technique requires competition.

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The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price. Examples of such techniques include, but are not limited to, the following:

(i) Comparison of proposed prices received in response to the solicitation. Normally, adequate price competition establishes a fair and reasonable price (see 15.403-1(c)(1)).

(ii) Comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items. This method may be used for commercial products or commercial services including those “of a type” or when requiring minor modifications for commercial products.

(A) The prior price must be a valid basis for comparison. If there has been a significant time lapse between the last acquisition and the present one, if the terms and conditions of the acquisition are significantly different, or if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison.

(B) The prior price must be adjusted to account for materially differing terms and conditions, quantities and market and economic factors. For similar items, the contracting officer must also adjust the prior price to account for material differences between the similar item and the item being procured.

(C) Expert technical advice should be obtained when analyzing similar items, or commercial products or commercial services that are “of a type”, or requiring minor modifications for commercial products, to ascertain the magnitude of changes required and to assist in pricing the required changes

(iii) Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound or per horsepower, or other units) to highlight significant inconsistencies that warrant additional pricing inquiry.

(iv) Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements.

(v) Comparison of proposed prices with independent Government cost estimates.

(vi) Comparison of proposed prices with prices obtained through market research for the same or similar items.

(vii) Analysis of data other than certified cost or pricing data (as defined at 2.101) provided by the offeror.

(3) The first two techniques at 15.404-1(b)(2) are the preferred techniques. However, if the contracting officer determines that information on competitive proposed prices or previous contract prices is not available or is insufficient to determine that the price is fair and reasonable, the contracting officer may use any of the remaining techniques as appropriate to the circumstances applicable to the acquisition.

In summary, if you want to avoid cost analysis but don't have competition, the regulations say you may be able to do so. The onus is on you to choose the right technique to show why the proposed subrecipient price is fair & reasonable. One way may be to have the subrecipient show prices paid by other entities for the same or similar services.

I realize that this is all proposal evaluation 101; but in my experience some people forget that competition and comparison of proposed prices is not the only price analysis technique available.

Hope this helps.

@GovKor You're in business and you cannot figure out how to determine whether a prospective sub's price is reasonable?

Really? You can't think that through?

@here_2_help Thank you for your response! The problem is these efforts are all R&D services being performed for the first time so none of the price analysis methods are applicable (no historical prices paid, no comparable market prices, etc.).

GovKor, the Uniform Guidance is not regulatory in nature.  It is a template for agencies to use is establishing their grant and cooperative agreement regulations.  Have you checked the regulations issued by the agency issuing you your grant/CA to see if those regulations contain any guidance in this area?

@Retreadfed I haven't. This is for DoD. Do you have a suggestion on where to start a search for their regulation on this? Our CO handles FAR based contracts and is stumped by my questions surrounding this.

GovKor said:

@here_2_help Thank you for your response! The problem is these efforts are all R&D services being performed for the first time so none of the price analysis methods are applicable (no historical prices paid, no comparable market prices, etc.).

So ... the subrecipients have never performed R&D services for any other entity before. They have never performed independent R&D for their own benefit. Is that what you are saying? Because if so, I wonder why in the heck you are considering using them.

GovKor, the DODGAR (pronounced dodger) is found at 32 CFR 21-37.

@here_2_help Haha, good question. We are tasked with finding non-traditional partners and small businesses to provide out of the box innovative solutions to government problems. So yes, often these are entities that have never performed R&D services before.

GovKor said:

@here_2_help Haha, good question. We are tasked with finding non-traditional partners and small businesses to provide out of the box innovative solutions to government problems. So yes, often these are entities that have never performed R&D services before.

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212.102 Applicability.

(a)(i) Use of FAR part 12 procedures. Use of FAR part 12 procedures is based on—

(A) A determination that an item is a commercial product or commercial service (see paragraph (a)(iii) of this section); or

(B) Applicability of one of the following statutes that provide for treatment as a commercial product or commercial service and use of FAR part 12 procedures, even though the item may not meet the definition of “commercial product” or “commercial service” at FAR 2.101 and does not require a commercial product or commercial service determination:

(1) 41 U.S.C. 1903 - Supplies or services to be used to facilitate defense against or recovery from cyber, nuclear, biological, chemical, or radiological attack pursuant to FAR 12.102(f).

(2) 10 U.S.C. 3457 - Supplies or services from nontraditional defense contractors pursuant to 212.102 (a)(iv).

(3) 10 U.S.C. 3458 – Supplies or services resulting from a commercial solutions opening pursuant to subpart 212.70.

*****

(iv) Nontraditional defense contractors. In accordance with 10 U.S.C. 3457, contracting officers—

(A) Except as provided in paragraph (a)(iv)(B) of this section, may treat supplies and services provided by nontraditional defense contractors as commercial products or commercial services. This permissive authority is intended to enhance defense innovation and investment, enable DoD to acquire items that otherwise might not have been available, and create incentives for nontraditional defense contractors to do business with DoD. It is not intended to recategorize current noncommercial other than commercial products or commercial services; however, when appropriate, contracting officers may consider applying commercial product or commercial service procedures to the procurement of supplies and services from business segments that meet the definition of “nontraditional defense contractor” even though they have been established under traditional defense contractors. The decision to apply commercial product and commercial service procedures to the procurement of supplies and services from nontraditional defense contractors does not require a commercial product or commercial service determination and does not mean the item is commercial;

(B) Shall treat services provided by a business unit that is a nontraditional defense contractor as commercial services, to the extent that such services use the same pool of employees as used for commercial customers and are priced using methodology similar to methodology used for commercial pricing; and

(C) Shall document the file when treating supplies or services from a nontraditional defense contractor as commercial products or commercial services in accordance with paragraph (a)(iv)(A) or (B) of this section.

(v) Commercial item guidebook. For a link to the commercial item guidebook, see PGI 212.102(a)(v).

Have you considered treating your nontraditional subrecipients as being providers of commercial services pursuant to the above?

H2H, I believe GovKor is talking about a grant.  If that is the case, the FAR does not apply.

@Retreadfed I'm not seeing anything in the DODGAR regarding determination of price reasonableness. Am I missing something?

@here_2_help @Retreadfed While this is a grant and the FAR doesn't apply, we have been leveraging the FAR to outline our internal procedures for determining cost reasonableness as our award is silent on how to do that. Hence my question - is there a different/easier way we can determine cost reasonableness that's applicable to 2 CFR 200? Specific to FAR Part 12, while some of our acquisitions could be applicable, from what I can tell, it doesn't help in alleviating the price/cost analysis burden as the listed price analysis techniques are still not applicable.

On 11/16/2024 at 1:10 PM, Retreadfed said:

H2H, I believe GovKor is talking about a grant.  If that is the case, the FAR does not apply.

Okay. Perhaps you're speaking broadly. But my reading of 2 CFR 200 tells me that the FAR Part 31 cost principles definitely do apply. A price that is not reasonable is not allowable. I see nothing objectionable about searching the FAR and DFARS for available techniques for determining price reasonableness. I would assert that if a technique is acceptable for a DoD contracting officer to use, that same technique ought to be acceptable for a contractor's buyer to use.

In any case, GovKor asked for suggestions and I provided some. If none of my suggestions work then ... shrug. I've done what I can do. Perhaps someone else has better ideas.

On 11/14/2024 at 1:56 PM, GovKor said:

We are a recipient (or pass-through entity) under 2 CFR 200

Why do you think this applies to you?

@Retreadfed 2 CFR 200 is incorporated by reference in two of our awards with two different agencies.

On 11/14/2024 at 10:56 AM, GovKor said:

We are a recipient (or pass-through entity) under 2 CFR 200 and issue many subawards. 2 CFR 200.324 states that the pass-through entity must perform a cost or price analysis for every procurement transaction greater than the SAT. There is no such direction for subaward transactions that I have found (defined separately from procurement transactions in 2 CFR 200.331). However, we are required under 2 CFR 200 Subpart E to determine for all costs that they are reasonable. Currently we are using cost or price analysis (the methods listed in FAR Part 15) to document reasonableness. As the majority of our subrecipients are non-competitive and R&D (meaning there are no comparable market/historical prices), we are having to perform full cost analyses for these subawards, and it is incredibly cumbersome and time consuming. Is there a less burdensome way we can be documenting cost reasonableness?

Have you compared your independent estimates (required before bid or proposal) to the proposed/negotiated amount and quantified any difference in $ ??

@Neil RobertsThe requirement for an advance independent estimate under 2 CFR 200.324 is only required for procurement transactions and therefore doesn't apply to subawards (reference definitions of contract and subaward in 2 CFR 200.1). Regardless of the requirement, preparing an independent estimate pre-solicitation could definitely provide a path for a price analysis; however, considering the level of R&D and innovation involved in these efforts, no one (the program managers or SMEs) knows where they would even start in creating an independent estimate. Do you have any ideas or experience in tackling that hurdle?

@GovKorYes, your company can adopt a policy requiring independent estimates before subaward solicitations. If you do not have the expertise in house to do so, I suggest you spend some money to have an outside consultant provide it. It would tend to made you a whole lot smarter before bidding and negotiations and about a project I assume you are responsible for overseeing from a cost and technical standpoint, even if your estimate was only able to focus on labor rates/categories and expected length of project. The process of estimating might also make you a more attractive source for other customers.

@Neil Roberts I like this idea and appreciate your input! In your experience, has that third-party consultant been an allowable cost? Additionally, do you have any recommendations on where to start a search for an outside consultant?

GovKor said:

no one (the program managers or SMEs) knows where they would even start in creating an independent estimate. Do you have any ideas or experience in tackling that hurdle?

Sorry but I can not help myself - are they not program managers and SMEs?    This posed have you tried something this simple -

Interent Search - "How to create an independent cost estimate for an r&d project + dod"  Try it it might yield some helpful results.  Likewise playing with wording regarding subawards and determination of price reasonableness I got several hits especially University policy and direction on making such determinations.   Maybe weaving everything together you can solve your concerns and questions.

@C Culham Yeah...I know. The SMEs are our government customer and they want an innovative solution, but do not have the time/cost knowledge to provide any sort of justifiable estimate. Then we get complaints that we take too long to get a sub on contract (often due to a lengthy cost analysis), which has led to constant questions for our contracting department whether it is REALLY necessary? What I'm finding (here, in other forums, on the internet, and in the numerous courses I've taken on the subject) is confirmation that price/cost analysis process for a subrecipient is required, there is no way around it, and the Government personnel can either provide additional time/resources for a pre-solicitation estimate or accept the speed to contract.

GovKor said:

Yeah...I know.

So I did not go back and re-read the whole thread but this thought occurred to me.  So price/cost analysis is required.   Your contracting department questions its need.  So  does your organization have internal policy to address the need?   If not maybe it is time to create one.

As to the tools to do the analysis I picked this up in a previous read of the thread and my own research/experience.   There are several measures to do the analysis, some you have said are not existent, so maybe a policy again that says here is how you do analysis that allows for acknowledgement that if some methods are not appropriate the policy simply allows for it.   Bottomline - Reasonableness is a subjective effort that if documented should hold up no matter what method or combination of methods were used.  Or in otherwords are you too wrapped around the axle in trying to create an exact analysis effort?

GovKor said:

Then we get complaints that we take too long to get a sub on contract

I am confused.  You earlier mentioned you are talking about evaluating a subrecipient which indicates you hold a grant/CA,  however, here you are talking about getting a sub on contract, which indicates you have a contract or a grant under which you are issuing a procurement contract.  Can you clarify?

Retreadfed said:

I am confused.  You earlier mentioned you are talking about evaluating a subrecipient which indicates you hold a grant/CA,  however, here you are talking about getting a sub on contract, which indicates you have a contract or a grant under which you are issuing a procurement contract.  Can you clarify?

Yes, my apologies. I mean complaints for taking too long issue a subaward to a subrecipient.

C Culham said:

So I did not go back and re-read the whole thread but this thought occurred to me.  So price/cost analysis is required.   Your contracting department questions its need.  So  does your organization have internal policy to address the need?   If not maybe it is time to create one.

As to the tools to do the analysis I picked this up in a previous read of the thread and my own research/experience.   There are several measures to do the analysis, some you have said are not existent, so maybe a policy again that says here is how you do analysis that allows for acknowledgement that if some methods are not appropriate the policy simply allows for it.   Bottomline - Reasonableness is a subjective effort that if documented should hold up no matter what method or combination of methods were used.  Or in otherwords are you too wrapped around the axle in trying to create an exact analysis effort?

We do have an internal policy (established by the contracting department, which I am a part of) for how to conduct a price/cost analysis. The business units (who are responsible for conducting the analysis) often complain and question whether it's necessary. Meanwhile our Government customer is pushing us to issue subawards faster. Thus my quest began to confirm that the details of our current internal policy IS necessary under 2 CFR 200, and not just "because we've always done it."

Essentially, our internal policy states that when price analysis cannot be used, you must perform a cost analysis. This involves looking at each labor rate, material costs, and travel costs - researching how we determined those to be reasonable and sufficiently documenting the logic and backup documentation for audit purposes. That's what is so time consuming. 

Are you saying an option is to alter our internal process to state that we should conduct a price analysis, and if none of the price analysis techniques are applicable, the price is automatically reasonable (or as you said, simply allow for it)?

GovKor said:

We do have an internal policy (established by the contracting department, which I am a part of) for how to conduct a price/cost analysis. The business units (who are responsible for conducting the analysis) often complain and question whether it's necessary. Meanwhile our Government customer is pushing us to issue subawards faster.

You can consider issuing an undefinitized go ahead transaction.

Neil Roberts said:

You can consider issuing an undefinitized go ahead transaction.

You mean like a letter contract? Wouldn't that remove all negotiation power if we determine that the proposed costs aren't reasonable?

GovKor said:

Are you saying an option is to alter our internal process to state that we should conduct a price analysis, and if none of the price analysis techniques are applicable, the price is automatically reasonable (or as you said, simply allow for it)?

Well I did say that, yet it probably was not stated correctly.   

What I meant is if one or more of the price analysis techniques are not appropriate for the situation yet one element is then it could be the basis for the reasonableness determination.  My view seems consistent with what it appears here-2-help was trying to pass along in responses in this thread.   In a read of FAR part 15 (as the template for your policy) and based on your statement that certified cost or pricing data is not required, cost anaylsis is a "may".

I do not know the specifics and that may be the missing link to my simple view but as I read through the thread this from FAR 15.404-1(b)(3) sticks in my head regarding price analysis -"the contracting officer may use any of the remaining techniques as appropriate to the circumstances applicable to the acquisition."

As I drafted this response another thought came to mind.  You suggest that your subawards are slow per your government customer.   So what does your government customer think of your analysis policy/approach other than it is too slow? Or in other words do they think your policy goes too far to reach a reasonable price determination pursuant to the tenants of 2 CFR 200?

C Culham said:

What I meant is if one or more of the price analysis techniques are not appropriate for the situation yet one element is then it could be the basis for the reasonableness determination.

Can you elaborate here?

C Culham said:

So what does your government customer think of your analysis policy/approach other than it is too slow? Or in other words do they they think your policy goes too far to reach a reasonable price determination pursuant to the tenants of 2 CFR 200?

I discussed with a contracting officer (not our assigned CO, but the CO that was appointed our our main point of contact). She agreed that no price analysis technique is applicable for these projects and a cost analysis would be required. She also acknowledged that the amount of cost analysis we are having to perform is incredibly burdensome and she would like to look into what our options are to minimize that work. I'm trying to set up a meeting with her and our assigned CO to discuss (with our Government partner in the room so they can have a better understanding as well of what we're facing) and brainstorm potential alternate processes. However, our CO deals mostly with FAR based contracts and doesn't know the difference between a procurement contract and a subrecipient (I've had to explain multiple times that they are different). 

By the way, I really appreciate your input!

GovKor said:

ou mean like a letter contract? Wouldn't that remove all negotiation power if we determine that the proposed costs aren't reasonable?

Yes. You appear to already have sub optimal negotiating power because you have no engaged SME to properly estimate hours and so forth  So, keep total partial funding below 40% of the proposed, include the definitization schedule in the go ahead document and make sure you definitize before then.

GovKor said:

Can you elaborate here?

Here is my best shot and I am tying my response, I hope, to your thoughts/comments in your most recent post.

While mentioned with some confusion I am going on the premise that your efforts are subject to 2 CFR 200 and not the FAR.  Yet you are trying to refine your analysis effots using FAR part 15 as your basic template to create an internal policy that meets 2 CFR 200 regarding subrecipient pricing.  As noted as well pricing received does not require a certificate of cost or pricing data.

So from my experience the techniques used in price analysis are - price competition, comparable prices, market prices where the product or service is sold in the commercial market place and even to the Federal government (think GSA Federal Suply Schedules and awards posted in SAM.gov),historical pricing, the cost estimate, comparison to similiar item/effort, parametric estimating, and value analysis.  So if I do not have price competition what then, well sorry for repeating this quote - "the contracting officer may use any of the remaining techniques as appropriate to the circumstances applicable to the acquisition."

Why is the CO pushing cost analysis as "required"?  You have already said that certified cost or pricing data is not required.  In my very simplistic view I am at a loss as to why there is not a price analysis technique(s) that can determine a non-traditional partner and/or small business price is reasonable.   After all the implication is that the entities are doing work for someone!   I lean to another thought here and that is if you can not determine through price analysis that the price is reasonable would you not ask the sub to tell you why it is.  In other words one more technique if you will.

All and all kind of 360 back to here-2-help's comment that I will paraphrase as -proposal (price) evaluation 101 with the reminder thoughts offered as my opinion are based on the limited facts known.

Neil Roberts said:

Yes. You appear to already have sub optimal negotiating power because you have no engaged SME to properly estimate hours and so forth  So, keep total partial funding below 40% of the proposed, include the definitization schedule in the go ahead document and make sure you definitize before then.

This would take redoing our contracting processes, but could solve the problem and allow the agility we're looking for. Thanks for the suggestion!

C Culham said:

Why is the CO pushing cost analysis as "required"?  You have already said that certified cost or pricing data is not required.

Let me rephrase: The CO confirmed that, in my shoes, she would not know another way to confirm and document the price as reasonable without performing a cost analysis.

C Culham said:

In my very simplistic view I am at a loss as to why there is not a price analysis technique(s) that can determine a non-traditional partner and/or small business price is reasonable.   After all the implication is that the entities are doing work for someone!

Here's a high level example: we issue a subaward to a vendor to make a prototype. While the company has made prototypes before, they have never made one with a comparable statement of work. In other words, the price for development of prototype XYZ is not reasonably comparable to the development of prototype ABC.

Am I completely overthinking this? Would you compare the two efforts and call it a day?

GovKor said:

Here's a high level example: we issue a subaward to a vendor to make a prototype. While the company has made prototypes before, they have never made one with a comparable statement of work. In other words, the price for development of prototype XYZ is not reasonably comparable to the development of prototype ABC.

Am I completely overthinking this? Would you compare the two efforts and call it a day?

A parametric estimating expert should be able to factfind the proposed at the supplier facility and come up with a written detailed negotiation objective  (which could conclude accept proposed as reasonable) or let you know whether that price analysis technique is not feasible.

GovKor said:

Let me rephrase: The CO confirmed that, in my shoes, she would not know another way to confirm and document the price as reasonable without performing a cost analysis.

Here's a high level example: we issue a subaward to a vendor to make a prototype. While the company has made prototypes before, they have never made one with a comparable statement of work. In other words, the price for development of prototype XYZ is not reasonably comparable to the development of prototype ABC.

Am I completely overthinking this? Would you compare the two efforts and call it a day?

My simplistic view - Say I made UAS prototypes now I am asked to make a USV prototype.  What inputs for the USV development change?  I as the vendor may have to augment my labor force but doesn't my existing labor force (think rate) stay the same?  Could not I  figure out  what the rate difference is for aeronautical engineer versus a aerospace engineer?  Does my accounting practices for capturing direct and indirect change?   And sourcing of new materials changes but wouldn't it be like going from the airplane parts supplier to the boat parts supplier who have market/catalog prices?   

I agree my simplistic view changes if I as a vendor who makes potsticker protypes was asked to make the USV protoype.  On one hand maybe it is a comparison to a similiar item (price analysis) and on the other it is not (cost analysis).

In the end I don't think I can solve all the "depends" for you but hope my thoughts help you figure out the analysis dilemma.

C Culham said:

My simplistic view - Say I made UAS prototypes now I am asked to make a USV prototype.  What inputs for the USV development change?  I as the vendor may have to augment my labor force but doesn't my existing labor force (think rate) stay the same?  Could not I  figure out  what the rate difference is for aeronautical engineer versus a aerospace engineer?  Does my accounting practices for capturing direct and indirect change?   And sourcing of new materials changes but wouldn't it be like going from the airplane parts supplier to the boat parts supplier who have market/catalog prices?   

I agree my simplistic view changes if I as a vendor who makes potsticker protypes was asked to make the USV protoype.  On one hand maybe it is a comparison to a similiar item (price analysis) and on the other it is not (cost analysis).

In the end I don't think I can solve all the "depends" for you but hope my thoughts help you figure out the analysis dilemma.

I think what you're saying is pretty in line with what we're currently doing - basically a hybrid of price and cost analysis when price analysis in itself isn't applicable.

On 11/14/2024 at 1:56 PM, GovKor said:

we are required under 2 CFR 200 Subpart E to determine for all costs that they are reasonable.

What type of organization are you, e.g., non-profit, state government, institute of higher education?

Retreadfed said:

What type of organization are you, e.g., non-profit, state government, institute of higher education?

Non-profit

Thanks and I assume you are not one of the non-profits listed in 2 CFR 200 Appendix VIII.