NCMA Insights: Cost estimating for the Air Combat Command
August 22, 20238:03 am
6 min read
Tom Temin: Give us a little bit of a scope of what it is you cover as a contracting specialist.
Eric Christianson: I work through the Air Combat Command at the Joint Warfare Analysis Center in a SCIF. We buy analytic tools and simulations to help with our warfighter.
Tom Temin: So, software?
Eric Christianson: Software and tools.
Tom Temin: I wanted to ask you about what you spoke about here at NCMA. And that’s cost estimating. I mean, the average person thinks of a cost estimate as ‘that should cost about ten bucks.’ It’s a little bit more complicated for the Air Combat Command and federal procurement in general, isn’t it?
Eric Christianson: It is. It’s a fairly loosely regulated FAR requirement. It doesn’t actually show up in anything other than construction contracts, which is hilarious because I work mainly in services and acquisitions. But government cost estimates really are required there for planning; it helps us determine fair and reasonable. Now, when you have quotes come in for largely firm fixed price procurement, which is what most of us think of when we think of contracting, you’re not looking at indirect labor rates, you’re not looking at fringe benefits, you’re not looking at those types of estimates.
Tom Temin: Like you would be in construction.
Eric Christianson: Or large services acquisitions. You don’t know what your costs are going to be, you get an estimate of your cost. Your contractor doesn’t know what the cost is going to be, and all the risk is different. On an FFP contract, the risk is with the contractor. If they can’t perform to the price, the government doesn’t care, because the contractor gets to take the risk. In a cost environment, the government takes all the risk on. This is where you kind of get into like the F-35 programs that I’m sure you’ve heard about in the news. That’s where the costs are so different because you don’t know what they’re going to be until you’re into the acquisition. We manage costs through reporting and whatnot. But the indirect costs are subjected to individual contractors. We can’t estimate other than for historical analysis and whatnot. But everybody’s different. And it’s really difficult because each agency gets to check or determine their own policy on how they do their government cost estimates.
Tom Temin: But even in a fixed price situation, you still want accuracy, because you really don’t want your contractor taking a bath. Because ultimately, it’s going to come back and affect the government even in that situation.
Eric Christianson: Correct. In FFP, the contractor gives their best risk-included price, and the government accepts it. Unless there’s some very different situation that arises, like with inflation, as long as the right clauses are in there, they can ask for an increase if it’s justified. The government has to accept it, of course. But you know, if you have a seven percent inflation rate, nobody’s going to predict that in anybody’s cost test.
Tom Temin: Understood. We’ve set the scene here. We’re speaking with Eric Christiansen, he’s a contract specialist with Air Combat Command. And you have developed something called the Independent Government Cost Estimate tool. What is that and how does it help?
Eric Christianson: It’s a simple excel spreadsheet and it’s meant to standardize but be as flexible as it can be in multiple different environments. It’s not a catch-all tool, but you can change all of the different parameters and have it all rolled up, ready to go and being signed off by whoever your people are. It really is geared more towards the cost, which has indirects, the fringe, the overhead rates. In our particular environment, we are in between two very significant labor-pooled areas: DC and Richmond. But we’re in the middle; nobody wants to come to the middle. And we have to pay for people to come to the middle. Our cost estimates were twenty, thirty percent low, which created all sorts of havoc, as you can imagine, in planning, in finances, in everything. Instead, we built in our own rate to this tool. And it’s like, well, historically, we’ve been short. Let’s use our historical shorts to make up the difference so that we can actually accurately plan what our costs are going to be.
Tom Temin: It is corrected for sort of an ongoing bias and try to get that out of the system.
Eric Christianson: Correct. So based on historical analysis, and that was across small business and large business, it was not dependent on one of the two. Whereas the indirect rates, small businesses don’t have to choose, because they’re really not in the cost. But the large businesses have their independent FPRR rates that DCMA approves; those are great. It helps us standardize. But when you go to a small business, there’s no standardization. It’s kind of the wild west.
Tom Temin: All right, so using this tool, you’ve seen some tangible results. Tell us about some of them.
Eric Christianson: We have definitely come back from the twenties to thirties, to up to fifty percent off, and we’re averaging right around five. Again, that’s within our normal margin of fair and reasonable. Most agencies will set their standards, and most people – even ten percent – can be a reasonable margin of error. You just don’t know what they’re going to go after. They could go out and get you interns and you’re expecting for PhDs or vice versa. As long as they can justify the cost, it’s fine.
Tom Temin: Right, so this is a tool in which the vendor data is entered as part of it. And it sounds like it goes a layer deeper than maybe the older way.
Eric Christianson: Vendor data is used as a historical, which DCAA will actually tell you to beware of historical. Ironically enough.
Tom Temin: No guarantee of future performance.
Eric Christianson: Exactly. It’s like, well, that’s where inflation, right, you capture the historical inflation costs in your inflation rates year over year. And then what we also did was make sure that the market research report flowed into the IGCE, which never was a guarantee to happen. So now that the market research report is looking at the same labor categories, it’s including all the assumptions and justifications. They’re so much more defensible when we have to go to contract clearance at our higher levels, especially for higher dollar programs, that we can say, well, we got these at the rates were from here, they were justified through here, historically, this is what we’ve paid. This is how we determine fair or reasonable.
Tom Temin: And this tool is available to anyone in government that would like to download it?
Eric Christianson: It’s available on the NCMA website in the sponsorship program, and it’s free to use that’s unclassified and we just developed it ourselves. You can take the tool and manipulate it however you want. The cells are all open and get back to me if you can improve it because this is education.