Better Acquisition Decisions through Financial Analysis

stock investmentGovernment spending has become a political football, and with budget cuts and sequestration, there is greater pressure to spend taxpayer dollars in the most cost effective way and to be able to prove that we are doing so. It seems like a daunting challenge, as more scrutiny has been placed on Federal programs that are competing for the limited funds in decreasing Department budgets.

Is it really that difficult to justify and obtain the funding that has become harder to acquire? With rigorous financial analysis and accurate reporting, this challenge becomes less of an obstacle.

Financial analysis throughout the entire acquisition lifecycle is one of the best practices for ensuring and providing proof of cost efficiency. Federal Government acquisitions use frameworks and processes that leverage several financial tools put in place to maximize the value procured from the solution while decreasing the risk of wasted resources, and ensuring that the best alternative is selected.

In part 1 of a two-part series, I’ll describe the financial analysis tools at the disposal of Federal programs for in-depth analysis, planning, reporting and tracking, to reduce risks and promote success in the conduct of acquisitions. In part 2, I’ll discuss three specific frameworks.

Why You Should Follow the Money

In June 2014, the Federal Emergency Management Agency (FEMA) prevailed after Livingston Parish, LA sued for $59 million in post-disaster cleanup funds after the 2008 Hurricane Gustav devastation. FEMA argued that the Parish had already received more funds than could be justified. FEMA’s sound financial analysis helped it to win the case before the U.S. Civilian Board of Contract Appeals, while Livingston’s incomplete financial analysis contributed to its loss. The Board noted the parish’s “utter failure” to document its claims. Financial analysis is effective at all stages of any financial activity. Applying the Federal Acquisition Life Cycle to a disaster response, for example, would involve the following financial best practices:

In PLANNING, conduct critical analysis quickly to document damages, generate rough estimates of their cost to include the high and low repair & replacement costs during recovery. This allows you to challenge or avoid contractors with excessive estimates.

In ACQUIRING, select a dependable contractor with the best rate affordable. Agree on a contract with a near accurate estimate of the operation, to be used as a baseline in measuring performance and keep alert for cost growth and scope creep.

In UTILIZING, monitor the recovery’s planned versus actual performance to ensure that the actual costs associated with the work completed do not exceed the planned milestone costs. Update the total estimate with actual data for improved accuracy and to facilitate planning and risk mitigation for outstanding work.

In PERFORMANCE MEASURING, assess the quality and validity of the work completed, the costs expended and invoices for services unpaid to ensure they don’t exceed the life cycle costs of the project.

Using financial analysis throughout the acquisition of cleanup and recovery services follows best practices. It could have saved Livingston Parish millions and prevented a lengthy and expensive lawsuit.

Tools of the Trade                                                                                                     

Financial analysis tools provide better constructed acquisition and more informed acquisition decisions for Program Managers. Furthermore, the current economic climate calls for due diligence in executing acquisitions. Using the below tools where appropriate or required can increase the amount of information available to managers and reduce acquisition risks:

  • Alternatives Analysis (AA): An AA may be used for simpler, Component-unique materiel solutions. An AA can be used when the preferred solution is already narrowed down to a specific materiel solution. An AA does examine more detailed performance characteristics of various alternative ways to implement the materiel solution, and may be affected by cost and schedule constraints and trade-offs.
  • Analysis of Alternatives (AoA): The AoA is an analytical comparison (from a high-level cost and performance perspective) of selected solution alternatives for fulfilling the specific capability gaps/needs. The AoA explores these alternatives with the goal of identifying the most promising approach to achieve user-required capabilities within practical performance, cost, schedule, and risk boundaries without biases. Within this decision space, it trades-off these variables to achieve a balanced solution.
  • Acquisition Program Baseline (APB): The APB formally documents the program/project critical cost, schedule, and performance parameters, expressed in measurable, quantitative terms, which must be met in order to accomplish the program’s goals.
  • Cost Benefit Analysis (CBA): An analytic technique that compares the costs and benefits of investments, programs, or policy actions in order to determine which alternative or alternatives maximize net profits. Net benefits of an alternative are determined by subtracting the present value of costs from the present value of benefits.
  • Component Cost Estimate (CCE): The generic term “DoD Component Cost Estimate” is used to provide considerable latitude to each military service or defense agency as to the actual responsible party for this cost estimate. In some cases, a military service assigns the responsibility to the Program Office (PO), which then provides a PO Life-Cycle Cost Estimate (PLCCE). In other cases, the DoD Component may adopt a more corporate approach in which an initial PO cost estimate is subject to considerable review and possible adjustment as determined by the Service Cost Center or defense agency equivalent.
  • Earned Value Management (EVM): A project performance-measurement technique that effectively integrates the contract’s scope of work with schedule and cost elements at the appropriate level for optimum project and program planning and control.
  • Exhibit 300 (E-300): A Capital Asset Plan and Business Case Summary that supports budget justification and reporting requirements for major information technology (IT) and non-IT investments as required by OMB Circular No. A.11’s Supplement: Capital Programming Guide- Planning, Budgeting, and Acquisition of Capital Assets.
  • Future Years Defense Program (FYDP): The Future Years Defense Program is a database and accounting system that summarizes the program and financial plan for the Department of Defense (DoD) as approved by the Secretary of Defense (SECDEF). The FYDP arrays cost data, manpower and force structure over a 6-year period (force structure for an additional 3 years), portraying this data by major force program for DoD internal review for the program and budget review submission. It is also provided to the Congress in conjunction with the President’s budget.
  • Future Years Homeland Security Program (FYHSP): A proprietary Department of Homeland Security (DHS) IT system that provides program funding allocations, performance, and milestones for the budget year + 4 years in support of DHS goals and priorities- requiring planning for all requirements over the next 5 years of a program. It is also provided to the Congress in conjunction with the President’s budget.
  • Independent Government Cost Estimate (IGCE): An Independent Government Cost Estimate- commonly referred to as an IGCE – is the Government’s best estimate of the cost of a proposed acquisition. It is the Government’s estimate of the resources, and projected cost of those resources, a contractor will need to complete a contract as the Government understands the requirements. The IGCE’s function is to provide the contracting officer with unbiased realistic cost estimation for what is being purchased.
  • Life Cycle Cost Estimate (LCCE): The LCCE estimates the total cost of a project from initiation through disposal, to include support and sustainment after fielding of the capability for the selected alternative.
  • Operational Analysis (OA): The Operational analysis is a method of examining the ongoing performance of an operating asset investment and measuring that performance against an established set of cost, schedule, and performance goals. OAs are conducted by investments in ‘steady state,’ or only in the operations and maintenance phase with no acquisition activities and are required annually in the Federal space by the Office of Management and Budget (OMB) to determine if investments meet their intended objectives.
  • Resource Allocation Plan (RAP): The Resource Allocation Plan is a Component organization request for funding necessary to achieve the objectives, commitments, and priorities of the Department, within fiscal guidance constraints. The RAP illustrates proposed allocation of resources to programs, subprograms and activities across the five-year Future Years Homeland Security Program (FYHSP) or the six-year Future Year Defense Program (FYDP).
  • Rough Order of Magnitude (ROM) Cost Estimate: An estimate of costs and time provided in the early stages of a project when its scope and requirements have not been fully defined.

In part 2 of this blog post, we will explore the use of financial analysis in acquisitions across the Federal government and three frameworks which rely heavily on financial analysis to ensure successful acquisitions—Acquisition Review Process (ARP); Planning, Programming, Budgeting, Execution (PPBE); and Capital Planning Investment Control (CPIC). We will see how the tools discussed in part 1 are used in these frameworks to maximize the value of and reduce the risks inherent in Federal acquisitions.

Sources:

  1. DHS Acquisition Instruction 102-01-001
  2. Defense Acquisition Guide Book
  3. Glossary of Defense Acquisition Acronyms & Terms, 15th Ed.

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