DEFENSE DEPOT MAINTENANCE COUNCIL COST COMPARABILITY COMMITTEE COST COMPARABILITY HANDBOOK JANUARY 1998 20000112 027 DTIC QUALITY DSBEECTBD 1 CONTENTS SECTION PAGE I Certification 1 II. Purpose 2 III. Background 3 IV. Scope 4 Assumptions 5 V. Financial Procedures to Ensure Cost Comparability 6 General ° Cost Proposal Development 1 Gains and Losses 8 Overhead 8 Over and Above (Within Scope Changes) 9 Changes to Statement of Work (SOW) 9 Reporting and Audit ^ VI. Comparability/Bid Proposal Worksheet Overview H General H Comparability Adjustments H Engineering H State Unemployment Payments 11 Base Facilities Maintenance 12 Unfunded Civilian Retirement 12 Depreciation for MCP Facilities ■ 12 Casualty Insurance 12 Military Non-Depot Costs 12 Other Recurring Costs 12 Nonrecurring Project Costs 13 Capital Expenditures 13 Other Nonrecurring Costs 13 Indirect Costs/Savings Impact 13 General Summary 13 Comparability/Bid Proposal Worksheet (Form 1) 14 Comparability/Bid Proposal Worksheet Line Item Instructions 15 Proposal Information • 15 Depot 15 Date 15 Solicitation Number 15 Customer 15 Project Brief 15 Customer Quantity 15 Estimated Hours per Unit 15 Basis of Estimated Hours 15 Cost Information 15 Cost per Hour 15 Cost per Unit 15 Total Project Cost 16 Recurring Customer Costs 16 Direct Labor 16 Direct Material 16 Other Direct 16 Production Overhead (Indirect) 16 General and Administrative Expense (G&A) 16 Total Customer Cost 16 Recurring Comparability Adjustments 16 Engineering 16 State Unemployment 17 Base Facilities Maintenance 17 Unfunded Civilian Retirement 17 Depreciation for MCP Facilities 17 Casualty Insurance 17 Military Non-Depot Cost 17 Other Recurring Cost 17 Total Recurring Comparability Adjustments 18 Nonrecurring Project Costs 18 Capital Expenditures 18 Other Nonrecurring Costs 18 Total Nonrecurring Costs 18 Project Bid / Proposal 18 Total Depot Maintenance Comparability Cost 18 Indirect Cost Impact 18 VÜ. Cost Evaluation Overview 20 Cost Evaluation Format (Form 2) 21 Cost Evaluation Format Instructions 22 Proposal Information 22 Solicitation Number 22 Customer 22 Project Brief 22 Comparability Summary 22 Customer Costs 22 Depot Maintenance Comparability Costs 22 Indirect Cost/Savings 22 Total 22 DOD Evaluation Factors 23 Transfer/Relocation Expenditures 23 Second Destination Transportation 23 Changes in Spares 23 Contract Administration 23 Cost of Capital 23 Federal Income Tax 23 Award Fee or Incentives 24 Other Public or Private Costs 24 Total DOD Evaluation Factors 24 Cost Summary 24 Total Alternative Costs 24 Vm. Financial Performance 25 IX. Verification and Validation 25 APPENDICES Appendix A. Definitions A-l General ,\ A-l Summary of Major Adjustments Matrix , A-3 Index of Definitions A-4 Indirect Cost Element Definitions A-8 thru A-40 Appendix B. References B-l AppendixC. Data Systems ..C-l Appendix D. Committee Membership D-l Appendix E. Acronyms E-l FORMS Form 1. Comparability/Bid Proposal Worksheet 14 Form 2. Cost Evaluation Format 21 in I. CERTIFICATION This version of the Cost Comparability Handbook is authorized for release to the Services for use in preparing competitive proposals. This is a living document and will require updating over time due to the dynamics of the business environment. We wish to express our sincere appreciation to all individuals that assisted in updating the handbook. John C. Lawkowski /John W. Martin m HQAMCADCSRM NASC AIR-6.0D2B Army Representative Navy Representative Peter G. Stauder Sandra F. Lemke HQ AFMC/FMR MARCORLOGBASES Code G320 Air Force Representative Marine Corps Representative II. PURPOSE The purpose of this handbook is to provide standardized procedures and techniques to insure cost comparability during consolidation studies and when competing depot maintenance workloads between DOD components (public/public) and between organic (DOD) sources and the private sector (public/private). There are some differences in accounting for costs between the DoD Services (hereafter called Service(s)) and even between different locations within the same Service. These variances are a result of the managerial and organizational philosophy of the respective Service. These differences as covered in Appendix A must be addressed in order to "level the playing field" before workloads can be compared or competed between Services and private industry. Overall cost analysis is in two segments. The first segment is the end item cost to the customer. It is anticipated that competition will decrease cost to the government by forcing economy and efficiency at the source of repair. Cost efficient, well managed operations will prosper and grow while the inefficient operations will be reduced. This process of natural selection based on a "free market economy" will result in reduced duplication of capability, increased capacity utilization and reduced costs to the customer. The second segment of cost comparison is the overall cost to DOD. There are certain costs that are funded by other appropriations (other than the customer) which include military construction, equipment and transportation costs. These costs must be accounted for before a comprehensive source selection decision can be made. The total cost to DOD is one of the decision criteria. The cost comparability process involves including in a competitive bid proposal the costs for various organic (public) depot cost elements as appropriate and as defined in this handbook. These costs are determined and applied by the public bidder during cost proposal development. For the purposes of this handbook, cost comparability is not to be confused with the source selection process. However, the cost comparability committee has determined that a listing (not all inclusive) of potential source selection evaluation factors is appropriate for inclusion in this handbook. The source selection authority, representing the buyer, will tailor cost analysis to include those evaluation factors determined to be appropriate to the specific competition. Once determined, the evaluation factors must be identified in the request for proposal. The buyer or the buyer's agents are responsible for the accumulation of cost data when the use of an evaluation factor requires data that is not accumulated in the sellers' (public or private) data systems or when the data is not routinely available to the seller. III. BACKGROUND In June 1990, the Under Secretary of Defense established the Defense Depot Maintenance Council (DDMC) in a memorandum titled "Strengthening Depot Maintenance Activities". The Council tasked the cost comparability committee (reference Appendix D) to establish a technique to compare depot maintenance costs from all providers (public or private) using standard accounting techniques. The specific tasking (reference Appendix B) of the cost comparability committee was to "develop a handbook that would facilitate cost comparability between and among the depot maintenance activities". The objectives of the committee were to: 1. "Level the playing field" for cost comparison in preparation for workload consolidation studies and competitive bidding for workloads. Identify differences and establish a technique for leveling. 2. Establish a uniform methodology for unit costing, recognizing that there are four distinct functions: cost estimating, cost tracking, cost comparison procedures, and the bid processes. 3. Lay the ground work for uniform DOD depot maintenance cost accounting procedures by providing feedback and recommended changes to DOD 7220.9-M (superseded by DOD 7000.14-R). 4. Develop a handbook that can be used to perform cost comparisons. After an in-depth review of the Service's cost accounting procedures and cost accounts, the committee found that there were more similarities than differences between each Service's cost accounting practices. The committee observed indirect cost accounts that warranted definition which are provided in Appendix A. Those major indirect cost accounts that had Service variances are listed in the Summary of Adjustments Matrix on page A-3. Adjustments will be made in either direction when they are significant. This handbook, which was first published in January 1992, is the result of the committee's efforts. Subsequent to initial publication of this handbook, the cost comparability committee was chartered by the Joint Policy Coordinating Group on Depot Maintenance (JPCG-DM) to maintain currency based on changes in cost accounting policies, standards, and practices. The committee may periodically change or update this handbook and will provide changes to the DDMC via the JPCG-DM. Periodic changes will be promulgated by interim change memorandum approved by the JPCG-DM. IV. SCOPE The application of this handbook is limited to costing procedures for workload decisions under the auspices of the Defense Depot Maintenance Council. The rules and procedures identified by this handbook will be applicable to all working capital funded DOD depot maintenance functions and any other government activity that is proposing to compete for depot maintenance work. Private industry offerors do not complete a Comparability / Bid Proposal Worksheet (Form 1). These rules and procedures will be valid as long as there are no significant changes in accounting classifications, systems and categories of costs. This document incorporates governmental cost accounting conventions with standard accounting practices in industry and with generally accepted accounting principles. Because of Service differences, manual cost adjustments are necessary to facilitate comparability. It is imperative that all activities (regardless of whether appropriation funded or working capital funded) develop cost data that is consistent with this handbook and that will withstand the test of audit. — Working capital funded activities must account for all direct and indirect costs as defined herein and in DoD 7000.14-R. This level of cost detail supports completion of the cost comparability worksheet (Form 1). ... Appropriation funded activities that want to propose on depot maintenance workload must determine all direct and indirect costs as defined herein and portray those costs on the cost comparability worksheet (Form 1). This requirement applies regardless of the type (or lack thereof) of cost accounting system used by the activity. In those cases where an appropriation funded activity will be involved in a competition, assistance from the parent Service's Cost Comparability Committee representative (Appendix D) should be requested. The following is a partial quote from the Congressional Record of the House, dated October 23, 1990: "The conferees agree to suspend section 2466 of tide 10, United States Code, in order to allow an evaluation of a pilot program for competition of depot maintenance workload in the Army and Air Force. In carrying out this program, the Secretary shall insure that all DOD activities competing for depot maintenance workload are required to submit bids based on comparable estimates for direct and indirect cost factors. In addition, the Secretary shall insure that any successful bid includes estimates for all direct and indirect cost factors, including all direct and indirect cost factors included in bids submitted by private firms." ASSUMPTIONS: 1. Interservice competition between DOD depot maintenance facilities (public) as well as competition between DOD maintenance facilities (public) and commercial sources (private) is feasible, prudent and legal. 2. In order to effect free and open competition this handbook assumes that there will be no constraints on depot maintenance manpower. Manpower will be allowed to fluctuate up or down in order to accommodate competitive workloads that are won or lost. It must be realized that there are inherent risks in the competitive process. 3. The DoD rate stabilization (selling price) requirements will be waived in order to prepare bids that reflect the actual and estimated costs at time of the bid. Once the "contract / work agreement" is awarded, the rates and prices will be "locked in" for the period specified in the contract(s) and thus become stabilized. 4. Acquisition of capital equipment to perform a competed workload by DOD agencies will be allowed when their proposal (including the cost of acquisition) provides the best overall value to DOD, so long as compliance with established procedures for financing the acquisition of capital equipment are followed. 5. All proposals will be based on the same terms and conditions, including quantities, delivery schedules and work specifications. 6. Existing public depot cost accounting systems will be used and will be in compliance with the Cost Accounting Standards as contained in DOD 7000.14-R. Adjustments are contained in Appendix A and other DOD directives. 7. Competition will be conducted in accordance with the Federal Acquisition Regulation (FAR) for private offerors and using similar rules as amended by the Request For Proposal for public offerers. V. FINANCIAL PROCEDURES TO ENSURE COST COMPARABILITY This handbook establishes the financial procedures regarding bid preparation for workload subject to public / private and public / public competitions or consolidation at working capital funded depot activities. Consistent with this, the following procedures are provided for proposal preparation by DOD agencies and Military Services. Guidance for competition is established by the Joint Service Procedures describing Public / Private or Public / Public Competition of Depot Maintenance. General a. In developing competitive cost proposals for public to public or consolidation studies, a workload allocation base upon which the bids will be developed will include approved core, current funded non-core, and the specific workload covered under the bid. Other potential workloads will not be considered for costing purposes when competing for a workload public to public. For public / private bids; however, a best estimate of the workload that could be won as a result of competition based on a command headquarters approved win factor may be included for indirect (i.e. production overhead or general and administrative) expense absorption. This win factor, which is the percentage of other competitions that the bidder might expect to win, must be approved by the management command of the activity and must be supported by previous competition results. The use of a win factor to determine potential changes in indirect expenses may result in indirect savings which are discussed elsewhere in this handbook. b. Generally accepted accounting principles will be followed. These principles will be in compliance with Cost Accounting Standards (CAS) as incorporated in DOD 7000.14-R. Compliance will be evaluated by the Defense Contract Audit Agency (DCAA) during audits of the depot accounting systems and competition proposals. c. Consolidation or competitive proposals will only include cost estimates for the work specified in the Statement of Work (SOW). In cases where industry or practice would indicate work inclusion, any specific work intended to be omitted or accomplished only on an "as required by inspection" basis will be clearly identified in the Request for Proposal (RFP) response. d. Cost elements and allocation procedures for indirect expenses will be the same for all work at the depot which is competing or being considered for consolidation. e. Noncompetitive workload will not be used to finance costs that according to generally accepted accounting principles should be a proper cost to the competitive workload.