June 30, 2014

What's in a prototype?

Many of my clients have issues with approaching prototypes from a price analysis perspective. Routinely this is because they are viewing what their company is procuring incorrectly.

While a prototype effort ends in a deliverable, you're not actually buying an item - you're buying a suite of services applied to a static BOM (e.g. requirements won't change depending on who is performing the engineering) that results in that deliverable. Because every prototype is, on some level, a developmental item the core object of a prototype procurement is those specialized developmental services required to produce in accordance with the approved configuration.

So what does that mean when it comes time to perform a price analysis? Here's my suggestion:

First, try to compete. Not usually an option, so next ask for evidence of prices previously paid for a same or substantially similar prototype. This is not often available on a 1:1 or even 1:1a basis.

Next, try looking for a same or substantially similar item that can be used as the basis of comparison. This may be an option when the provider has proprietary type rights in the base component and is being contracted to modify the component for use within the government configuration. 

Finally, an independent estimate can be developed to analyze the prototype. There are fine points to this process that are for another post, but here are some general thoughts:

Prototype efforts generally have four phases - design (during which the configuration is developed/finalized, tooling is acquired and the line set); fabrication (first article build against config); testing (against general and specific performance standards); and production (output of eventual deliverable). Each of these functions require skilled people at a manufacturing wrap rate to perform.

A program manager (who could be a general task manager or an SME in the field depending on the complexity of the configuration) working several hours a week to oversee the effort will also be needed by the offeror to perform. Also potentially needed by the offeror - support from a buyer to manage the BOM. These should be burdened with an "off the floor" service wrap rate (Science and Technical, etc.). 

Now build your IE using your comparative rates - what's the outcome?

If your labor estimate exceeds the total price proposed, stop. You've established price reasonableness as the addition of anticipated item pricing will only increase the comparable delta.

If you labor estimate does not exceed the total price, analyze the BOM. Usually the BOM details are not provided by the offeror but no matter - detail is unnecessary. Take the bottom line BOM pricing and decrement it by 20-25% - this represents "best option" pricing (the best possible price reduction available if you sourced the items on your own, assuming offeror is buying against blanket agreements and/or using trusted suppliers offering discounts on recurring purchases). Now add this decremented item line to estimated labor to determine the delta. 

Hope this helps!