Why Estimating Systems are Critical Tools for Winning Government Contracts

At a glance:

• The main takeaway: Estimating systems are potent, often optional and little understood tools in the arsenal of businesses pursuing government contracts.
• The impact on your business: Understanding what estimating systems are, what they entail and when they’re required is important knowledge for any businesses seeking success in government contracting.
• Next steps: Absorb the insights in this piece, then reach out to Aprio’s talented government contracting team for answers to your questions and assistance with creating, evaluating and implementing your own estimating system.

Schedule a consultation with our dedicated Government Contracting team today.

The full story:

What is an Estimating System?

“Estimating System” means the contractor’s policies, procedures and practices for budgeting and planning controls, and generating estimates of costs and other data included in proposals submitted to customers in the expectation of receiving contract awards.

FAR 15.407-5 states that using an acceptable estimating system for proposal preparation benefits both the government and the contractor by increasing the accuracy and reliability of individual proposals, reducing the scope of review for individual proposals and expediting the negotiation process.

An estimating system includes the contractor’s:

1. Organizational structure
2. Established lines of authority, duties and responsibilities
3. Internal controls and managerial reviews
4. Flow of work, coordination and communication
5. Budgeting, planning, estimating methods, techniques, accumulation of historical costs and other analyses used to generate cost estimates

When are you required to have an estimating system?

The Department of Defense (DoD) is the only agency that has established a formal estimating system program for their contractors. Per DFARS 215.407-5, all contractors should have an acceptable estimating system.

However, for most contractors this is an aspirational goal, not an enforceable obligation, as the clause that requires contractors to maintain an adequate estimating system (DFARS 252.215-7002) is only applicable to contracts that were awarded based on the submission of certified cost or pricing data. 

Per that clause, an acceptable estimating system:

• Is maintained, reliable and consistently applied
• Produces verifiable, supportable, documented and timely cost estimates
• Is consistent with and integrated with the contractor’s related management systems
• Is subject to applicable financial control systems

Why government contractors should implement an estimating system

While this is a contract requirement, it is very general, and the clause does not include an effective enforcement mechanism applicable to all contractors. Much more specific requirements, applicable to certain large businesses apply:

1. In its fiscal year preceding award of a DoD prime contract or subcontract, totaling $50 million or more for which certified cost or pricing data were required, or
2. In its fiscal year preceding award of a contract, received DoD prime contracts or subcontracts totaling between $10 million to $50 million for which certified cost or pricing data were required; and was notified, in writing, by the Contracting Officer that an estimating system is required and to maintain an estimating system that meets the 27 system criteria listed in Part D of the clause.

To summarize,

• All contractors should have an estimating system
• DoD contractors with contracts based on the submission of cost or pricing data are contractually required to maintain estimating systems
• DoD contractors with $50 million of contracts based on the submission of certified cost or pricing data in their previous fiscal year, must comply with the 27 system criteria set forth in the clause and could have payments withheld if they fail to comply

The risks of having a subpar estimating system

Preparing FAR Part 15 cost proposals is a highly regulated activity that is on every contractor’s critical path to success. Even contractors that are not required to maintain an acceptable estimating system should implement one that is scaled to their size and the types of proposals they submit. Failure to do so significantly increases both regulatory and business development risk.

If a contractor’s estimating system is deemed to be “significantly deficient,” it means the system has a shortcoming that materially affects the ability of officials of the Department of Defense to rely upon data and information produced by the system that is needed for management purposes.

If such a contractor fails to maintain an acceptable estimating system, the government can retain up to 10% of each public voucher until the deficiency is corrected.

Connect with our dedicated Government Contract Compliance team today for help with your CAS compliance needs.

Related Resources:

Earned Value Management System (EVMS)

The Four Horsemen of the Incurred Cost Audit

Cost Accounting Standards Decoded: CAS 401 Consistency in Estimating, Accumulating and Reporting Costs