The total cost method normally consists of subtracting bid price from the actual cost of performance and adding profit to the resulting amount. This approach is heavily disfavored by the boards and courts. Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180, 351 F.2d 956 (1965); Edge Const. Co. v. United States, 95 Fed. Cl. 407, 415 (2010); Appeal of the Clark Constr. Grp., Inc., GAOCAB No. 2003-1 (Nov. 23, 2004). The total cost method is disfavored because, among other things, it assumes the reasonableness of the contractor’s costs, the accuracy of its bid computations, and its lack of responsibility for increases in costs. Edge Const. Co. v. United States, 95 Fed. Cl. 407, 415 (2010); F.H. McGraw and Company v. United States, 131 Ct.Cl. 501 (1955); Boyajian v. United States, 191 Ct.Cl. 233 (1970).
Nonetheless, various decisions have allowed contractors to pursue damage methods in which their total costs in performing a contract are compared to the reasonable cost of providing the same services.
An example of such a method is the modified total cost method. Before a contractor can obtain the benefit of that method, it must prove: “(1) the impracticability of proving its actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs.” Propellex, 342 F.3d at 1338–39 (citing Servidone Constr. Corp. v. United States, 931 F.2d 860, 861 (Fed.Cir.1991)). The modified total cost method is the total cost method adjusted for any deficiencies in the contractor’s proof in satisfying the requirements of the total cost method. Id. In Boyajian v. United States, 191 Ct.Cl. 233, 423 F.2d 1231 (1970), the Court of Claims described the use of this method, thusly:
[T]he total cost computation was used as “only a starting point” with such adjustments thereafter made in such computation as allowances for various factors as to convince the court that the ultimate, reduced, figure fairly represented the increased costs the contractor directly suffered from the particular action of defendant which was the subject of the complaint.
Id. at 1240 (citation omitted); see also Propellex Corp., 342 F.3d at 1339.
N. Star Alaska Hous. Corp. v. United States, 76 Fed. Cl. 158, 213 (Fed. Cir. 2007).
Updated: August 8, 2018
FAQs
The total cost method normally consists of subtracting bid price from the actual cost of performance and adding profit to the resulting amount.
What is the total cost approach? ›
In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation. It yields the most accurate market value for when a property is new than through alternative methods.
What is total cost approach construction? ›
A third approach is commonly called the total cost approach. With this method the contractor claims the difference between its actual and bid labor costs and argues that its counterparty caused the problems that created the overrun.
What is the total cost method? ›
The total cost method is a production income statement. This means that the units of measure produced are used for the accrual of income and expenses. Income and expenses are reported in relation to the units of measure produced in the period under review.
What is cost analysis in government contracting? ›
DAU GLOSSARY DEFINITION
Cost analysis is the review and evaluation of the separate cost elements and profit or fee in an offeror's or contractor's proposal to determine a fair and reasonable price or to determine cost realism.
What is the formula for the cost approach? ›
(3) Cost Approach has a basic formula: Property Value = Land Value plus Cost New minus Depreciation. It relies on the principle of substitution. Simply stated, the price someone is willing to pay for a property is influenced by the cost of acquiring a substitute or comparable.
What is the difference between total system approach and total cost approach? ›
The total cost approach is the total costs involved in the distribution of goods from the time they are manufactured and ultimately delivered to the customers. The supply chain entails the total system approach since all the activities are connected to each other for the distribution of the products to the customers.
What is the total cost formula? ›
Total Cost = Total Fixed Cost + Total Variable Cost. It can also be represented in a more advanced way as, Total Cost = (Average fixed cost + Average variable cost) x Number of units. This was all about the total cost formula, which is a very important concept for determining the total cost of production.
What is the total cost theory? ›
Total cost (TC) in the simplest terms is all the costs incurred in producing something or engaging in an activity. In economics, total cost is made up of variable costs + fixed costs. Variable costs (VC) are costs that change based on how many goods you buy or how much of a service you use.
What are the benefits of total cost method? ›
TCO takes into account costs like maintenance costs, depreciation, and the purchase price when figuring out the overall value of a product. The main benefits to using TCO in business are that it helps with budgeting, better-informed purchases, and smarter expansion decisions.
A fair and reasonable price determination is an assessment by the Government that an offeror's proposed price for a supply or service can be considered “fair and reasonable” on the basis of applying one or more price analysis techniques.
What is unbalanced pricing in government contracts? ›
Unbalanced pricing exists when, despite an acceptable total evaluated price, the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques.
What is contract cost analysis? ›
A cost analysis is conducted to perform an opinion on the degree to which the proposed cost, including profit, represents what the performance of the contract 'should cost', assuming reasonable economy and efficiency.
What is total cost distribution approach? ›
The total cost approach manages the logistic function, focusing on reducing the logistic cost that is storing cost. As a result, it might suggest a high-cost transporting mode to physical distribution management.
What is the full costing approach? ›
Full costing, or absorption costing, accounts for all costs, both fixed and variable along with overhead, that go into a finished product. Advantages of full costing include compliance with reporting rules and greater transparency.
