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The Mysterious World of the Cost Worksheet and Cost Statement, National Star Route Mail Contractors Association Newsletter



July 01, 2010

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Government Contracts

No single document in HCR contracting is more pervasive, and yet more mysterious, than the Cost Worksheet (PS Form 7468A) and its progeny, the Cost Statement (PS Form 7463A). While every HCR contractor fills out these forms, they do not become part of an HCR contract. Nonetheless, misunderstandings about these forms within the industry, and within the USPS Office of Inspector General, can lead to disastrous results.

As every HCR contractor knows, the Cost Worksheet contains 19 numbered "cost segments" with blank lines for commonly incurred categories of cost. The last blank line, item no. 20, is the total of these 19 segments and becomes the offeror's "TOTAL OFFER." Some of the cost segments cover relatively minor areas (e.g., oil, tolls), while one major category -- profit -- is left unmentioned entirely.

Actual Costs or Pricing Estimates?

Notwithstanding its title, the Cost Worksheet is not a statement of your actual costs, or even your estimated costs for each cost segment. It can't be a statement of your actual costs because it is prepared before the contract has been awarded and before performance costs are incurred. And it can't even be an estimate of your costs for each cost segment because the form contains no cost segment for profit, nor any guidance on where to put profit. Unless you run a non-profit organization (as many of you apparently do), you have no choice but to put estimated profit in one or more of the cost segments. If profit is included in a cost segment, it can't be an estimate of the "actual cost" for that segment.

In light of these factors, the Cost Worksheet is best understood as a Price Worksheet. HCR solicitations confirm this view, stating in the Evaluation section at 3.1.2.A(2)(c) that the purpose of the Cost Worksheet is to "assist you in determining your price for the service being solicited."

Another common misunderstanding about the Cost Worksheet is its use in the evaluation of your offer price. Standard HCR solicitation provision section 3.1.2 states that the information on your Cost Worksheet will not be considered in evaluating your offer. Instead, HCR offer prices are supposed to be evaluated based on the price shown on PS Form 7405, entitled "Transportation Services Proposal and Contract for Regular Service." This form contains none of the detailed pricing build-up set out in the Cost Worksheet.

The Cost Worksheet does not become part of your contract. However, the information contained on the form does establish the base from which your rate of compensation may be adjusted during the term of your contract. Such adjustments are governed by the USPS Management Instruction on Economic Pay Adjustments that was effective on the day your contract was awarded or renewed.

The Cost Statement

A close relative of the Cost Worksheet is the Cost Statement. This form is used when, after award, the contract price is subject to adjustment. The Cost Statement contains the same 19 cost segments as the Cost Worksheet, and repeats these categories in three separate columns. The first column shows the exact same information as the Cost Worksheet (or the most recent Cost Statement). The second column shows the amount of any increase (or decrease) in price for each cost segment. And the third column shows the impact of these changes on the total amount for each cost segment and the new contract price.

The Cost Statement differs in one major respect from the Cost Worksheet. The Cost Worksheet does not ask you to certify to the truthfulness of your pricing estimates. But the Cost Statement contains the following language:

"U.S. Code Title 18 (Crimes and Criminal Procedures), Section 1001, makes it a criminal offense to make a willfully false statement or representation herein."

This warning of potential criminal prosecution for willful false statements is gratuitous because it is not a legally necessary notice. If you run afoul of this statute, it is no defense to say that you were unaware of it. But the addition of this warning and certification requirement ratchets up the importance of the statements you are making.

As with the Cost Worksheet, the Cost Statement uses the term "cost" when it really means price, or perhaps estimated cost. The addition of the false statement warning and certification requirement, however, makes it appear as if you are certifying to actual costs. After all, what is the point of certifying to the truthfulness of a pricing estimate? But the first column of the Cost Statement requires contractors to use the identical numbers used in the Cost Worksheet (or most recent Cost Statement). And the numbers in the Cost Worksheet are prepared before performance begins and thus cannot be actual costs (except for those prepared by the Amazing Kreskin). So starting with the first column, the numbers used in the Cost Statement are not actual costs.

If the first column of the Cost Statement must contain the same figures as in the Cost Worksheet, what is a contractor supposed to show in the second column? This column shows the "negotiated effect" of the changes that allow the contractor to obtain a price adjustment. HCR Solicitations advise, at section 3.12.A(2)(b), that the figures on the Cost Worksheet establish "the base from which the rate of compensation may be adjusted during the term of any contract." Consistent with that premise, should the contractor use the same method it used in establishing the Cost Worksheet baseline for the amount of the price adjustment? Using such a method to calculate the adjustment would produce a number that represents an estimate, not an actual cost. Or, should the contractor show its historical actual costs for each cost segment in this column? If the contractor wanted to do so, where would the contractor place profit if profit was part of one of those cost segments?

And therein lies another problem. I have heard from Star Route members that some USPS OIG officials, and even postal procurement officials, take the position that the figures shown on the Cost Statement must show the contractor's actual cost. I am aware of one instance in which an HCR contractor was asked to produce cost records to substantiate its workers compensation costs over the course of the contract. The implication of the request was that if the actual costs incurred did not substantiate the amount shown in the Cost Worksheet and subsequent Cost Statements, then any cost savings incurred would have to be turned over to the Postal Service.

The Achilles' heel of this position is to simply put the shoe on the other foot and see how it fits. In the example above, if the contractor had incurred greater workers compensation costs than shown in the Cost Worksheet, would the Postal Service increase the contract price by this amount?

What You Can Do

What's a contractor to do to prevent misunderstandings from arising? Aside from hoping that you will not be thrust into this hornet's nest, one preventative measure might be adding an asterisk next to the certification with a notation stating: "Figures represent pricing estimates, not actual costs." This would make it clear that the figures shown are not actual or historical costs and should be not regarded as such.

David P. Hendel
Husch Blackwell Sanders LLP
750 17th Street, N.W., Suite 1000
Washington, D.C. 20006

fax: 202.378.2319


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