Case Study Undergraduate 1,785 words

Price Negotiation Memorandum: H-19 Mission Computer Upgrade

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Abstract

This paper presents a Price Negotiation Memorandum (PNM) for the U.S. Department of Defense acquisition of an upgraded H-19 Mission Computer and Operational Flight Programs for the H-19A helicopter. The document outlines the government's prenegotiation objectives against the contractor Malahy Aero Systems' (MAS) proposed costs, identifies questioned and unsupported costs across all major cost elements — including materials, labor, overhead, other direct costs, and G&A expense — and establishes the government's fair and reasonable price objective. The analysis draws on DCAA audit findings, forward pricing rate agreements, stratified sampling, and applicable FAR and DFARS provisions to arrive at a final government price objective of $43,871,896.

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What makes this paper effective

The PNM methodically addresses every major cost element — material, labor, overhead, other direct costs, G&A, cost of money, and profit — ensuring no cost category is overlooked and demonstrating thoroughness expected in government contracting documentation.
Questioned and unsupported costs are clearly distinguished and justified with specific rationale (e.g., expired quotes, eliminated contract requirements, statistical sampling results), giving the document the legal stand-alone quality required of a PNM.
Detailed summary tables accompany each cost element, allowing readers to trace contractor-proposed figures to government objectives without consulting separate audit reports.

Key academic technique demonstrated

The paper demonstrates systematic cost element-by-element analysis grounded in regulatory compliance. By applying FAR, DFARS, and Cost Accounting Standards as evaluative benchmarks, the author shows how government contracting officers build an evidence-based negotiation position. The use of stratified random sampling for the 220-line bill of materials in Engineering Group 69-1100 is a particularly strong technique, illustrating statistical cost verification in a real acquisition scenario.

Structure breakdown

The document follows standard PNM structure: an acquisition background section establishes context; a negotiation summary evaluates data quality and contractor systems; a cost analysis summary table provides a high-level comparison; an element discussion section provides detailed justification for each cost line; the G&A section addresses a contractor merger scenario; and a final section resolves cost of money, profit, and total price. Supporting tables are embedded throughout to substantiate each position.

Introduction and Acquisition Background

This document presents the Price Negotiation Memorandum (PNM) for the acquisition of the H-19 Mission Computer and the Operational Flight Programs for the H-19A helicopter. The Department of Defense intends to upgrade both the H-19 Mission Computer and the Operational Flight Programs of the H-19A. The H-19A helicopter is designed to meet Army troop carrier and ground support requirements. The H-19 currently also supports the U.S. Marine Corps, Navy, Air Force, Department of the Interior, and Coast Guard, and is used in peacekeeping operations.

However, the H-19 requires significant improvements in speed, range, and load capabilities. Malahy Aero Systems (MAS) is the sole prime contractor selected to fulfill this acquisition. The government and MAS have agreed to complete the contract within 19 months.

The negotiation team includes the following government representatives:

Negotiation Summary and Contractor Systems Review

The negotiation is between the government and Malahy Aero Systems, the contractor responsible for upgrading the H-19A helicopter's computer system. The contractor submitted total proposed costs of $43,868,081 to complete the 19-month project. The government's objective was $37,659,750. Despite this variance, the contractor recorded a 12% profit of $4,519,170.

The contractor's accounting systems, material management systems, and related internal controls are considered adequate, with low control risk. The contractor records both direct and indirect employee labor, and the labor accounting system and its internal controls are assessed as adequate and low-risk.

However, the pricing and cost data supporting the proposed materials are inadequate because their preparation does not conform to applicable Federal Acquisition Regulation (FAR) provisions and Cost Accounting Standards. Furthermore, the contractor has not provided adequate documentation to substantiate its position. In this memorandum, "questioned costs" refers to costs that may not be allowable or properly allocated to the contract, while "unsupported costs" refers to costs that appear allowable and allocable but for which the documentation provided is insufficient to substantiate the proposed dollar amounts.

Cost Analysis Summary

The contractor uses the following cost elements in its proposal: Material, Material Overhead, Engineering Labor, Engineering Overhead, Manufacturing Labor, Manufacturing Overhead, Other Direct Costs (ODC), G&A, and Cost of Money. A variance exists between the contractor's cost data and the government's objective. The contractor's total proposed price is $49,110,651, while the government's objective is $43,871,896, representing a variance of $5,238,755.

The following table summarizes the government's objective price for each cost element:

The Defense Contract Audit Agency (DCAA) audited the proposal upon receipt during development of the "H-19 Helicopter Mission Computer Enhancement." In the government's assessment, the pricing and cost data in the proposal are adequate for negotiation purposes. However, the data submitted to support the materials are inadequate because they were not prepared in accordance with applicable Cost Accounting Standards and the appropriate provisions of FAR and DFARS. The audit report is qualified pending the DCAA's receipt of the technical report.

3 Locked Sections · 1,140 words remaining

26% of this paper shown

Element Discussion and Component Breakdown · 780 words

"Detailed justification for each cost element objective"

General and Administrative Expense Analysis · 260 words

"G&A pool and rate analysis for Malahy and Galbraith"

Cost of Money, Profit, and Total Price · 100 words

"Final government price objective and profit determination"

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Key Concepts in This Paper

Price Negotiation Memorandum Prenegotiation Objectives DCAA Audit Questioned Costs Forward Pricing Rate Material Overhead G&A Expense Defense Acquisition FAR Compliance Stratified Sampling