like complexity.
c. Analytical Techniques. The plotting of engineering hours of contracts of similar complexity, by month, will generally indicate the extent of design and production engi
neering effort related to significant points of contract performance. Graphic analysis may also indicate definite patterns of engineering contract costs compared to deliveries. When the estimate involves a follow-on procurement, or the run-out portion of an existing con
tract, using graphic analysis of prior experience is of particular importance in evaluating proposed engineering costs. The analysis should provide:
(1) An appraisal of the reasonableness of the monthly production engineering hours estimated by the contractor.
(2) A determination whether there is a marked reduction in engineering hours after the initial delivery.
(3) An appraisal, at an interim point, of the reasonableness of the contractor's esti
mated production engineering hours for the run-out portion of contracts subject to price redetermination or for setting successive targets under incentive type contracts.
9-605.2 Special Tooling and Special Test Equipment a. Special tooling is designed:
(1) to reduce the requirements for production/manufacturing labor hours and costs, (2) to speed production, and
(3) to improve techniques, tolerances, and finished parts.
The term includes jigs, dies, fixtures, molds, patterns, special taps, special gauges, and special test equipment used in the production of end items. The term does not include gen
eral-purpose tools, capital equipment, expendable tools, small hand tools, tools acquired prior to the contract, replacement tools, and items of tooling which are usable for the pro
duction of items not required under the contract.
b. Special test equipment means either single or multipurpose integrated test units engineered, designed, fabricated, or modified to accomplish special-purpose testing in the performance of the contract. Testing units comprise electrical, electronic, hydraulic, pneumatic, mechanical, or other items or assemblies of equipment that are mechanical
ly, electrically, or electronically interconnected to become a new functional entity. This causes the individual item or items to become interdependent and essential in the per
formance of special-purpose testing in the development or production of particular sup
plies or services. The term special testing equipment does not include:
(1) material;
(2) special tooling;
(3) buildings and nonseverable structures (except foundations and similar im
provements necessary for the installation of special test equipment); and (4) equipment items used for general plant testing purposes.
c. Audit Considerations
(1) The contractor may support the total tooling cost estimate (including estimated tooling hour requirements) by a detailed listing of the type and quantity of each special tool required, with the related estimated purchase or fabrication cost. To evaluate their reasonableness, compare the estimates for a selected group of these tools with actual costs or actual hours expended for similar tools in previous production, appropriately adjusted.
Adjustments may be necessary to reflect differences in the number of tooling hours be
cause of increased or decreased complexity of the product or improvements in methods and techniques. Replacement and maintenance type tools recorded as indirect costs, and items of a capital nature which should be obtained under a facility contract, should be excluded from the list of special tools.
(2) For follow-on production orders, determine whether any of the production tools purchased or fabricated on prior contracts will be available for use on the proposed con
tract and whether the cost estimate has taken this into account.
(3) The use of graphic analysis to reflect the relationship between tooling costs of projects of like complexity with related delivery schedules will assist in evaluating the reasonableness of tooling costs in the current estimate. This type of analysis should pro
vide information similar to that discussed in 9-605.1c.
(4) Determine whether expensive tools are justified and whether a sufficient num
ber of employees with required skills are available to use the tools properly.
(5) Establish whether proposed special test equipment is justified. It must meet the definition for such equipment, and current inventories of Government- or contractor-owned special test equipment should be evaluated to determine whether the equipment is available (see 7-200).
d. Liaison with Government Engineering Personnel. Maintain liaison with available Government engineering personnel familiar with the requirements of the proposed pro
curement and obtain information on:
(1) the availability of Government-owned tooling and special test equipment, (2) the propriety of the numbers and types of tooling and special test equipment provided for in the estimates in relation to the production requirements,
(3) possible savings which may be accomplished through improved tooling, and (4) the overall reasonableness of the estimated costs for tooling and special test equipment proposed by the contractor (see Appendix D).
9-605.3 Packaging
a. Packaging specifications are usually included in the request for proposals. These mainly depend on whether the item packaged will be shipped to a point within the United States (domestic) or overseas. Domestic packaging usually does not require special treat
ment provided it meets generally accepted end item packaging methods. The related cost may be classified as either an indirect cost or an ODC as long as it complies with the pro
posed accounting system to be used in costing the contract and all applicable Cost Ac
counting Standards. Packaging for overseas shipment requires special treatment, and the applicable costs are generally classified as ODCs. The special treatment accorded overseas packaging, as prescribed by Government specifications, requires that crating materials be of a better grade than those used for domestic crating; and the packages must pass a water and moisture proofing test. When packaging cost estimates are based on complex tech
nical determinations and the dollar amount is significant, it usually is appropriate to re
quest the assistance of a Government packaging specialist (see Appendix D).
b. The reasonableness of the contractor's packaging cost estimate may be evaluated by comparing it with costs incurred for similar types and kinds of packaging. Graphic analysis (e.g., time series or scatter charts) showing the unit packaging material and labor costs for related items or the relationship of packaging cost to shop cost over an
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9-605 extended period, may be used to plot the experienced costs for further analysis. Statisti
cal data usually available in the packaging department can be used for this comparison.
In addition, review information regarding instructions for packaging under various spec
ifications, packaging standard hours arrived at by scientific means, and packaging bills of material if available. When experienced cost trends are plotted on charts for further study and analysis, ascertain whether:
(1) all nonrecurring costs have been eliminated,
(2) the packaging specifications of the current proposal are comparable to those which generated the experienced costs, and
(3) the contractor has considered the possible impact to packaging material and labor cost trends resulting from expected changed market conditions.
9-605.4 Travel and Subsistence
Travel and subsistence costs usually include the costs of transportation and per diem, (lodging, meals, and incidental expenses) incurred by personnel while in travel status.
When included as ODCs, the estimate usually is based on the contemplated number of trips, places to be visited, length of stay, transportation costs, and estimated per diem allowance. Questionable estimates for this cost may arise from such errors as the fol
lowing:
a. Per diem rates projected that exceed allowable per diem costs after they have been escalated for expected inflation. Per diem rates are set forth in the (1) Federal Travel Regulations (FTR) established by GSA for the 48 Continental United States, (2) Joint Travel Regulations (JTR), Volume 2 established by DoD for Alaska, Hawaii, Puerto Rico, Northern Marianna Islands and territories and possessions of the U.S.,and (3) De
partment of State Standardized Regulations for locations not covered by GSA or DoD (FAR 31.205-46(a) and P.L. 99-234). For example, to estimate 20X9 per diem rates, the latest established rates for meals and lodging should be increased/decreased by a factor that reflects the forecasted economic change from the current established rate expiration date to 20X9. Refer to DCAAP 7641.74, Use of Economic Indexes in Contract Audits.
b. Transportation rates projected in excess of lowest customary standard, coach, or equivalent air fare offered during normal business hours.
c. Projected transportation costs for personnel to be transferred computed by using other than proper departure points.
d. Mileage allowances projected in excess of actual needs.
e. Excessive projected trip costs to a Government activity or subcontractor location for engineering coordination because the required number of trips and/or length of stay has been overstated.
f. A comparison of the current estimate with experienced costs of prior procurements of a similar nature indicates that the current estimate is unreasonable.
9-605.5 Field Service
Contracts may contain provisions requiring contractor engineering personnel to ser
vice delivered equipment. The cost, usually referred to as field service expense, may be included in the contractor's estimate as a separately identifiable ODC, or as a part of indirect cost. Whichever method is used, it must comply with the accounting system to
be used in costing the contract and all applicable cost accounting standards. The cost of installation, maintenance and repair, and the development of operating instructions may be identified in the contractor's records as Field Service Expense, Guarantee Expense, Warranty Expense, or Reserve for Guarantee. Establish whether the procurement being audited provides for field service. An evaluation of the field service estimate should include:
(1) evaluation of the data in support of the estimate,
(2) comparative cost analysis, including the use of graphic analysis where appro
priate,
(3) discussions with other Government representatives regarding complex engi
neering determinations, and
(4) evaluation of the degree of conformity to the policy stated in FAR 22.1006.
9-605.6 Royalties
The contractor's cost estimate may include provision for royalties as a separately identifiable ODC or as part of indirect cost. Determine whether royalties are proper for inclusion in the price and whether the contract will include royalty reporting require
ments and royalty escrow or recapture provisions (FAR 27.202-1). The nature of the contractor's cost support for this element should be evaluated and addressed in the re
port.
9-605.7 Preproduction and Start-up Costs
Contractor's proposals should identify preproduction, start-up, and other nonrecur
ring costs, including such elements as preproduction engineering, special tooling, spe
cial plant rearrangement, training programs, initial rework or spoilage, and pilot runs.
These costs may be susceptible to verification by a review of detailed documentation. In some instances, an analysis of experience on prior contracts by means described in the Graphic & Regression Analysis Guidebook will help to establish the reasonableness of costs proposed. Ascertain the proposed handling of such estimated costs. If the total costs are not to be charged to the contract being audited, determine whether the contrac
tor intends to absorb the residual costs or recover them on subsequent orders.
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