Should-cost review
Should-cost reviews enable the government to identify and address inefficiencies in contractor operations, leading to more cost-effective contract negotiations and improved long-term performance.
Overview
FAR 15.407-4 outlines the requirements and procedures for conducting should-cost reviews, a specialized form of cost analysis used in government contracting. Unlike traditional cost analysis, should-cost reviews do not assume that a contractor’s historical costs are efficient or economical. Instead, they evaluate the contractor’s operations, workforce, materials, and management to identify potential cost savings and promote efficiency. There are two types of should-cost reviews: program should-cost reviews (focused on direct and associated indirect costs, typically for major systems) and overhead should-cost reviews (focused on indirect costs such as fringe benefits, plant maintenance, and general administration). These reviews are conducted by multi-functional government teams and are intended to inform negotiation objectives and drive both immediate and long-term improvements in contractor performance.
Key Rules
- General Requirements
- Should-cost reviews assess the efficiency and economy of contractor operations, not just historical costs, and are conducted by a team of government specialists.
- Types of Reviews
- Program should-cost reviews focus on direct and associated indirect costs, especially for major system acquisitions, and require a separate audit and team report.
- Overhead should-cost reviews focus on indirect costs and are often used to negotiate Forward Pricing Rate Agreements (FPRAs), also requiring a separate audit report unless conducted with a program review.
- Selection Criteria
- Reviews are prioritized based on factors such as contract value, government business volume, noncompetitive contracts, and organizational changes.
- Reporting and Follow-up
- Contracting officers must consider review findings in negotiations, report uneconomical practices, and establish follow-up plans to ensure corrective actions are implemented.
Responsibilities
- Contracting Officers: Initiate and plan should-cost reviews, ensure findings are considered in negotiations, report inefficiencies, and monitor corrective actions.
- Contractors: Cooperate with review teams, provide access to relevant data and personnel, and implement agreed-upon corrective actions.
- Agencies: Assign qualified personnel, conduct reviews per agency procedures, and oversee follow-up on identified issues.
Practical Implications
- Should-cost reviews help the government negotiate more realistic and cost-effective contract prices by identifying inefficiencies in contractor operations.
- These reviews can lead to significant cost savings and process improvements but require substantial planning and coordination.
- Contractors should be prepared for in-depth scrutiny of their operations and may need to address identified inefficiencies to remain competitive in future government contracts.