Business Question

Learning Goal: I’m working on a business writing question and need an explanation and answer to help me learn.

Integrating Case

You are a contract specialist responsible for the production buy of the Mobile Explosive Detection Device (MEDD,) a new type of hand-held silicone nanowire device to be used for the trace detection of multiple types of explosives; specifically Trinitrotoluene (TNT), Pentaerythritol tetranitrate (PETN) and Research Department Formula X (RDX). Your acquisition team is currently working on the development of an overall acquisition planning strategy in anticipation of preparing the solicitation.

The R&D effort was a complete success and resulted in the development of 8 prototype detectors. In addition, the government secured all the pertinent data rights necessary to move in to production. The design of the detectors themselves is relatively straight forward and the science involved is such that the team feels confident that there are several adequate sources available to produce the detectors.

But despite the team’s confidence that this will be a competitive acquisition, there is concern about how much risk is involved, especially in the area of cost, with this first production buy. The PM is interested in what the team will recommend as an appropriate contract type given the desire to incentivize cost control and perhaps some level of performance. Submit your completed excel workbook and a word document with the answers to the questions posed below.

Watch this video before attempting this assignment if you are unfamiliar with the use of symmetric approximation!

Assignment Part 1: Three Point Roll-Up

  1. You will begin by using the excel spreadsheet that contains estimated Low, Objective, and High position (3-point roll-up) given the information below.
  2. Reference the table below for direct labor hourly rates and the indirect rate estimates:
    • The hourly rates for engineering and manufacturing labor represent a composite rate based on a statistical sampling of the most recent rates paid within the industry. The data was normalized to incorporate those labor categories that the team expects would be most representative of the workforce involved in producing the MEDD.
    • All indirect rate estimates are based on a statistical analysis of multiple companies with experience similar to this type of manufacturing and engineering effort. Knowing that the actual rates proposed by individual contractors will vary, it was decided that the following indirect rates would be used in this analysis in order to ensure consistency in determining the appropriate risk assessment for selecting contract type. The resultant values identified in the table below represent the median rates resulting from the team’s statistical analysis.
Hourly Rate Indirect Rate
Material 5.00%
Engineering $34.00 125.00%
Manufacturing (Fabrication and Assembly/QC) $21.00 185.00%
G&A (TCI) 8.00%
  1. The team’s initial analysis of the individual cost elements resulted in the following ranges of
    • Material – The Industrial Engineer estimated that the cost for the direct materials required for this effort would fall between a low of $1,425,000 and a high of $2,000,000. She estimates that our objective should be right in the middle at about $1,712,500.
    • Material Overhead – See the rates table above.
    • Fabrication (Manufacturing) – The Industrial Engineer believes that the major cost driver in fabrication direct labor cost will be in relation to the number of touch labor hours versus automation processes and updated tooling employed. As such, she believes that the total number of fabrication hours required would be between a low of 30,900 and high of 76,200. She also stated that the most likely number of hours will be about 47,600.
    • Assembly/QC (Manufacturing) – Similar to the fabrication part of the manufacturing process, The government Industrial Engineer believes that the most significant cost driver for Assembly will be associated with the amount of automation employed. As such, her analysis supports that 85,000 hours are most likely and that the hours could be as low as 63,100 or as high as 115,000.
    • Manufacturing Overhead – See the rates table above.
    • Engineering Labor – The Government engineers are uncertain about the extent and magnitude of item testing that will be required. On the one hand, if a majority of test items are subject to actual field testing, then a high estimated number of hours required would approximate 24,100. On the other hand, if a contractor could develop a robust simulation process to test the items, then the number of hours required could fall to a low of 17,650 hrs. The engineers took the mean of the low and high positions to develop an objective.
    • Engineering Overhead – See the rates table
  2. The other direct costs (ODCs) are based on the average price of similar special test equipment that could be expected to be used for this effort. Your team located eleven current prices for this type of equipment:
ITEM PRICE ($)
STA-01 110,120
STA-02 120,950
STA-03 112,250
STA-04 119,980
STA-05 131,870
STA-06 119,360
STA-07 128,000
STA-08 108,100
STA-09 120,890
STA-10 119,990
STA-11 129,870

The team decided to use the mean of the prices as their Objective with a Low and High values that correspond to a 90% Confidence Level around the Mean value.

  1. G&A – The team concluded that the G&A rate used for this comparative analysis is 8% to be used for all three positions. The base for G&A is Total Cost Input (TCI).

ASSIGNMENT PART I: QUESTIONS (30 POINTS)

  1. In Excel, spread the Low, Objective and High positions by cost element and calculate a total cost for each position. (15 pts)
  2. Using the high position as the ceiling price, what is the ceiling price percentage (i.e., how much more than the target price is the ceiling price as a percentage? For example, if the objective price is $100,000 and the high position is $142,000, then the high price as the ceiling is 142% of the objective.) (15 pts)

Assignment Part II: Risk Analysis

Upon seeing the results of your Team’s initial analysis above, you are somewhat dismayed with the overly generous ceiling price percentage, especially in light of the Government’s policy of using a 120% ceiling. You are also aware that you have no way to determine whether you have a “high probability of being able to accomplish the effort within a ceiling percentage of 120 percent”.

With this in mind, you recall that you may perform RISK ANALYSIS to comply with the policy if you can determine the distributions of the cost elements. You ask your technical analysts to dive more deeply into the analysis and see if they can determine the distributions of the elements. The results of that additional analysis yield the following revised technical evaluation. No changes were required for the direct labor rates or the indirect rates. They are copied and included here for ease of analysis. Use the risk analysis tab of the excel spreadsheet to enter the data. You may want to review the explainer video as you work through this.

  1. Reference the table below for direct labor hourly rates and the indirect rate estimates:
    • The hourly rates for engineering and manufacturing labor represent a composite rate based on a statistical sampling of the most recent rates paid within the industry. The data was normalized to incorporate those labor categories that the team expects would be most representative of the workforce involved in producing the MEDD.
    • All indirect rate estimates are based on a statistical analysis of multiple companies with experience similar to this type of manufacturing and engineering effort. Knowing that the actual rates proposed by individual contractors will vary, it was decided that the following indirect rates would be used in this analysis in order to ensure consistency in determining the appropriate risk assessment for selecting contract type. The resultant values identified in the table below represent the median rates resulting from the team’s statistical analysis.
Hourly Rate Indirect Rate
Material n/a 5.00%
Engineering $34.00 125.00%
Manufacturing (Fabrication and Assembly/QC) $21.00 185.00%
G&A (TCI) n/a 8.00%
  1. The revised analysis of the individual cost elements resulted in the following ranges of estimates.
    • Material – The government Industrial Engineer estimated that the cost for the direct materials required for this effort would fall within a range between $1,425,000 and $2,000,000 and any dollar amount within that range is likely to occur. (UNIFORM DISTRIBUTION)
    • Material Overhead – The material overhead rate is 5% and the distribution for overhead would correspond to the distribution of direct material. (UNIFORM DISTRIBUTION)
    • Fabrication (Manufacturing) – The government Industrial Engineer believes that the major cost driver in fabrication direct labor cost will be in relation to the number of touch labor hours versus automation processes and updated tooling employed. As such, she believes that the total number of fabrication hours required would be between a low of 30,900 and high of 76,200. She also stated that she believes that the most likely number of hours will be about 47,600. (TRIANGULAR DISTRIBUTION)
    • Assembly/QC (Manufacturing) – Similar to the fabrication part of the manufacturing process, The government Industrial Engineer believes that the most significant cost driver for Assembly will be associated with the amount of automation employed. As such, her analysis supports that 85,000 hours are most likely and that the hours could be as low as 63,100 or as high as 115,000. (TRIANGULAR DISTRIBUTION)
    • Manufacturing Overhead – The manufacturing overhead rate is 185% and the distribution for the overhead would correspond to the distribution of the total manufacturing effort (Fabrication + Assembly/QC). (TRIANGULAR DISTRIBUTION)
    • Engineering Labor – The Government engineers are uncertain about the extent and magnitude of item testing that will be required. On the one hand, if a majority of test items are subject to actual field testing, the number of hours required would approximate 24,100. On the other hand, if a contractor could develop a robust simulation process to test the items, than the number of hours required could fall to a low of 17,650 hrs. The engineers feel that there is a 50/50 chance of either situation occurring. (DISCRETE DISTRIBUTION)
    • Engineering Overhead – The engineering overhead rate is 125% and the distribution for overhead would correspond to the distribution of direct engineering (DISCRETE DISTRIBUTION)
  2. The other direct costs (ODCs) are based on the average price of similar special test equipment that could be expected to be used for this effort. Your team located eleven current prices for this type of equipment (you will want to enter this data on the ODC tab of the workbook/spreadsheet so you can identify the mean and standard deviation for the data set):
ITEM PRICE ($)
STA-01 110,120
STA-02 120,950
STA-03 112,250
STA-04 119,980
STA-05 131,870
STA-06 119,360
STA-07 128,000
STA-08 108,100
STA-09 120,890
STA-10 119,990
STA-11 129,870

As with the team’s 3-point roll-up analysis, the team decided to use the mean of the prices as their Objective with a Low and High values that correspond to a 90% Confidence Level around the mean value. (NORMAL DISTRIBUTION)

G&A – The team concluded that the G&A rate used for this comparative analysis is 8%. Further, the team concluded that an appropriate distribution for the G&A expense could be calculated by applying the 8% estimated rates to our Low and High total cost.

ASSIGNMENT PART II: QUESTIONS (70 PTS)

  1. Given the data above, and using the Risk Template tool, identify the appropriate distribution for all the cost elements and calculate an estimated Target Cost. (30 pts)
  2. From the output derived, what would appear to be an appropriate contract type category (Fixed Price or Cost) for this requirement? (15 pts)
  3. What is an appropriate profit amount at the target (objective) cost you arrived at from Part 1? Use the Weighted Guidelines tab on the workbook to determine this. Complete the WGL tab within the workbook and use the WGL Guidelines-1.pdfActions considering the following inputs from the PM office (use the WGL guidelines file to get the values needed based on these inputs below): (25 pts)
    • The PM stated that given the outstanding work that was done during the development phase of this program, she does not believe that there are any extraordinary conditions that would require anything other than normal ratings for technical and management in the team’s profit analysis.
    • The amount of contractor risk in the Technical and Management/Cost control areas are about the same (i.e., 50/50).
    • The substantive portion of work is less than 21 months.
    • Progress Payments will be included in the solicitation, with the contractor financing 20% of the cost.
    • OMB’s published interest rate is 1%.
    • FCCOM is excluded from this analysis.
    • Using the “Mean“ values from the Risk Template and the above assumptions, what Profit amount ($ and %) does your analysis support?
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