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SECTION PRE NEGOTIATION OBJECTIVES

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					June 2012                           Contract Administration Manual                                           SADDM 1110-1-1


                        CHAPTER 2 - CONTRACT MODIFICATIONS

   SECTION 9 – PRE-NEGOTIATION OBJECTIVE MEMORANDUM (POM)

                                                             INDEX

    Paragraph No.                             Description                                                    Page No.

     2.9.1                          Scope. . . . . . . . . . . . . . . . . . . . . .                         2-9-2

     2.9.2                          General. . . . . . . . . . . . . . . . . . . . . .                       2-9-2

     2.9.3                         Cost Analyses Inclusion in the
                                   Pre-negotiation Objective
                                   Memorandum. . . . . . . . . . . . . . . . .                               2-9-6

     2.9.4                         Audit Exceptions. . . . . . . . . . . . . . .                            2-9-7

     2.9.5                          Profit. . . . . . . . . . . . . . . . . . . . . . . . .                 2-9-7

     2.9.6                          Instructions . . . . . . . . . . . . . . . . . . .                      2-9-7

     2.9.7                          Format . . . . . . . . . . . . . . . . . . . . . . .                     2-9-7

Exhibit 2.9A                        Sample POM. . . . . . . . . . . . . . .                                  2-9A




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        This printed copy is for “Information Only.” The controlled version resides on the SAD Contract Administration Website.
June 2012                           Contract Administration Manual                                           SADDM 1110-1-1


CHAPTER 2 - CONTRACT MODIFICATIONS

SECTION 9 – PRE-NEGOTIATION OBJECTIVE MEMORANDUM


2.9.1 Scope: This chapter covers the requirements for pre-negotiation objectives,
content of and format for the memorandum. See FAR 15.406-1, DFARS 215.406-1, PGI
215.406-1, AFARS 5115.406-1, and EFARS 15.406-1

2.9.2 General:

       a. The pre-negotiation objective memorandum (POM) is an official
documentation of the negotiation objectives. The POM is the negotiator's general plan
for negotiations, although it need not contain details of planned strategy, e.g., minimum
or maximum negotiating position. It contains the negotiator's "fair and reasonable" price
and time objectives, cost element objectives, a cost analysis, if required, and the rationale
and justification underlying the objectives. The POM justifies the negotiator's proposed
settlement to reviewers, and the negotiator signs as well as the approving official. The
POM, with the Price Negotiation Memorandum (PNM), documents who, what, where,
why and how the action was anticipated and settled.

        b. Pre-negotiation objectives are required for all negotiated pricing actions.
Objectives represent the negotiator's pre-negotiation assessment of a fair and reasonable
price and time settlement. Analysis of the contractor's proposal shall be performed as
follows FAR 15.404-1:

              (1) Price: always required.

             (2) Technical: A technical analysis is always performed. However, a
separate technical analysis is required where cost or pricing data is required and/or an
audit is being requested. In these cases, a separate technical analysis will be furnished to
the auditor as discussed in Chapter 2, Section 8, paragraph 2.8.4.

              (3) Results of audit and any exceptions taken by the negotiator.




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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

             (4) Cost analysis: incorporates the results of technical analysis, audit,
market surveys, experience, etc; and is required for all modifications when cost or
pricing data are required.

        (5) Elimination of proposed costs, which are inconsistent with normal
accounting practices, unallowable or non-allocable under FAR Part 31.

        (6) The situational facts: cost impacts on the unchanged work; concurrency
with other delays; acceleration; efficiencies; the effect on the schedule; knowledge of the
Contractor’s operation; whether the work is to be forward priced or "after-the-fact," etc.

         (7) Results of scope or fact finding sessions with the contractor, as appropriate.

              (a) Comparison with the Government's estimate.

              (b) Price histories.

              (c) Previous modifications for the same or similar work.

            (d) Profit objective when cost analysis is required, FAR 15.404-4. Compare
proposed profit with an objective developed using the Corps of Engineers' Weighted
Guidelines Method (EFARS 15.404-73-100).

             (e) When a substantial portion of the work ordered under an un-definitized
contract modification (change order) is completed before final price is negotiated, the
contractor assumes less risk. Consider this when developing a profit objective.

       c. State the pre-negotiation objectives in terms of dollars and days time
extension, showing the basis of each objective to be considered during negotiations.
When a cost analysis is required, separate cost element objectives and profit objectives
are required, as explained herein. In addition, for all pricing actions, a bottom line price
objective is required.

       d. Definite objectives should lead to a successful settlement, which may
otherwise be impossible to achieve. Without objectives, a settlement may be impossible
to explain or defend. Objectives such as "a fair and reasonable price", "the lowest price
we can get", or "a price about ten percent below the proposal", do not qualify as good


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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

objectives because they are not definitive. State the cost and price objectives in terms of
definite dollar amounts, which reflect the team's evaluation of the terms and conditions
of the intended contract action. If the team is considering alternative sets of conditions,
each alternative set should have its own objective.

        e. The POMs are pre-decisional material and protected from release to the
contractor prior to negotiations. See paragraph h. below. In addition, the following
statement shall be placed on all POMs: “This document may contain information that is
exempt from disclosure or release whether as deliberative process, pre-decisional in
nature, or prepared for use of legal counsel in anticipation of claims or litigation.
Contact the Office of Counsel before any release.”

        f. The POMs are usually developed from a combination of factual and
judgmental factors. The more judgment involved, the more flexible your negotiating
position becomes. POMs are only a guide for the negotiation team. If used as a
measurement of success by those who evaluate performances, the objectives lose their
significance, and a team is likely to hedge/hesitate to develop honest estimates and
definite objectives. When an objective is based on a particular set of conditions, it is a
reflection of the best judgment at the time the objectives are prepared and does not mean
the circumstances will remain the same. If there is good reason to change judgment,
based on the factors involved, the objective can be revised accordingly. All changes
should be documented in the price negotiation memorandum and the revised
Government estimate, if applicable, to clearly track the basis for the changes. Since the
objective is a position hidden from the contractor's negotiators, a change in objectives
does not indicate vacillation.

        g. It is permissible, but not mandatory, to state a range for the cost, price and
time objectives between alternate positions. Some negotiators prefer to cite a range for
the objectives from minimum to maximum, explaining the basis for the range.
Sometimes this technique can be dangerous. In the event of failure to reach a bilateral
agreement, the contractor might obtain the POM in the "discovery" process of claims
resolution or through the Freedom of Information Act. A unilateral modification,
containing the Contracting Officer's final assessment of the equitable cost or time
adjustment for less than the highest objective(s), becomes more complicated to defend
against a subsequent claim. At least at the pre-negotiation time frame, the highest end of
the range was considered to be a "fair and reasonable" position. This is not to say that a
unilateral modification containing less than the most liberal position won't be


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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

sustainable; it may well be. The problem becomes one of fully justifying why the
previous position was later found to be incorrect or unreasonable. As a result, some
experienced negotiators document only their most defendable or lowest, conservative
position in the pre-negotiation objective, preferring to justify subsequent flexibility and
more liberal settlement in the price negotiation memorandum (or unilateral
modification). This is another reason why negotiators and reviewers should not measure
success by how closely the final settlement parallels the pre-negotiation objectives. The
keys to justifying and selling a successful settlement are a clear presentation of how you
applied good judgment, considering what you learned during negotiations, combined
with the facts to form a sound rationale for the settlement.

        h. Negotiations are, by definition, a give-and-take process, leading to a mutually
satisfactory conclusion. It is acceptable to settle outside the negotiation objectives
provided you document a supportable rationale in the PNM. Integrity and honesty in
practice and on record are fundamental principals of contract administration.

        i. When negotiating a price based on a straight fixed-price type of contract, it is
best to plan more than one position, especially if the Government is dealing with a
contractor for the first time. Other positions may be necessary so that the Government
negotiators may have some "bargaining room" or have an opportunity to "feel out" the
contractor through the interchange of information in the negotiations process. When
negotiating with a contractor the Government has dealt with for some time and found
reasonable, planning other positions may not be as significant.

       j. There should be a logical flow from the pre-negotiation objective
memorandum through the price negotiation memorandum to allow the reviewer to fully
reconstruct the pre-negotiation plan and settlement.

         k. The POM must be signed and dated by the negotiator and the approving
official. Keep in mind that price analysis is required for all changes and must be
performed prior to the negotiator signing the above statement.

2.9.3 Cost Analyses Inclusion in the Pre-negotiation Objective Memorandum:

Cost analysis and a columnar summary are required for changes where cost and pricing
data is required.



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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

       a. A summary comparison in columnar format of (i) the proposal, (ii) audit
recommendations, (iii) the price/technical recommendations, and (iv) the pre-negotiation
position by using the various cost elements should be prepared for inclusion in the POM
This could include but not be limited to the following elements:

       (1) Labor.

       (2) Equipment.

       (3) Materials.

       (4) Subcontractor(s).

       (5) Bond.

       (6) Overhead (OH).

       (7) Extended OH.

       (8) Profit.

       (9) Acceleration.

       (10) Home office overhead.

       (11) Coefficient.




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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

2.9.4 Audit Exceptions: In addition to the summary listing of any applicable audit
cost elements, the negotiator explains in the detailed remarks any exceptions taken to the
audit in developing the objectives.

2.9.5 G&A: G&A must be consistently applied throughout the contract. The G&A
overhead is normally charged to each contract as a percentage of job costs in the
contractor's accounting system. If G&A percentage is consistently charged for each
increase, a like credit must be provided for deductive changes, which reduce the job cost
base. The G&A overhead rate is normally expressed as a percentage of job costs (direct
and indirect).

2.9.6 Profit: When a cost analysis is required, related supplements to FAR 15.404-4
require basing the profit objective on the Corps of Engineers’ Weighted Guidelines, and
the pre-negotiation objectives shall include the profit analysis with a comparison of the
proposed rate and amount to the objective rate and amount. Note it is not mandatory to
reach agreement on the profit element of the overall settlement. FAR 15.404-4 advises
not to attempt to obtain specific agreement during negotiations on exact values or
weights assigned to the individual profit-analysis factors.

2.9.7 Content For Prenegotiation Objective Memorandum

1. DESCRIPTION OF CHANGE. Provide the scope of work of the proposed
modification. If a claim, also summarize who determined merit, when, etc.; reference the
decision memorandum, MFR, analysis, etc. Identify all previous unpriced change orders
related to this change.

2. REASON CODE AND NECESSITY FOR CHANGE. Enter the Mod reason code
and the necessity for the change. Verify that scope determination has been made and
include the authorizing clause(s).

3. CONTRACTOR PROPOSAL. Provide information, including dates, concerning the
request for proposal, any supplements, and notice to proceed. Include information on
proposed price and time adjustments, date of the proposal and revisions. State whether
the proposal contains the required detail for analysis.

4. GOVERNMENT ESTIMATE. This paragraph includes the estimated total price (not
necessarily the total price objective) and time adjustments, including dates and amounts



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June 2012                            Contract Administration Manual                                           SADDM 1110-1-1

of original and revised estimates. See Chapter 2, Section 4, Modification Process, and
Section 6, Government Estimates, for procedures.

5. AUDIT (WHEN REQUIRED). This paragraph refers to the audit report, preparing
office, dates, etc. See Chapter 2, Section 4, Modification Process, and Section 8,
Contractor Cost or Pricing Data. If audit not performed, document basis.

6. TECHNICAL ANALYSIS. If separate reports were not prepared, provide the
analysis in the columnar summary and remarks. Identify separate analyses prepared for
the negotiator. See Chapter 2, Sections 4 and 8.

7. COST ANALYSIS (WHEN REQUIRED). If separate reports were not prepared,
mark as N/A and provide your analysis in the columnar summary and in remarks. One or
more separate analyses prepared for the negotiator are identified here and summarized in
the columnar summary and in the remarks. See Chapter 2, Section 4 and Section 8.

8. Time.

    a. If there is a separate time analysis report, reference it and summarize the
differences between the proposed and Government time objective.

   b. If there is not a separate analysis report, document the rationale for the
Government objective in detail in this paragraph.

       (1) If the objective is based on a review of the NAS or Bar Chart, identify the
activities affected.

      (2) If the objective is a no-cost time extension for change order work ordered after
the required completion period, concurrent with the contractor's own delays develop and
explain the objective. Such time extensions are based on the principal of "equity"
whereby Government personnel would have been assigned to the job to monitor the
changed work, thus benefiting the Government, while the contractor's own supervisory
personnel would have been assigned anyway to complete the project during the period
the work was performed. Thus, there was no extra cost to him.

       (3) If the contractor's time bargaining position is not strong or the time
justification is "gray", but the negotiator's objective is to be liberal with time, to use time
as leverage for other concessions or issues, explain it here. The negotiation team must


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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

weigh the relative advantage and disadvantage of trade-offs, settlement opportunity, loss
of liquidated damages relative bargaining strength, etc., in determining reasonableness of
the objective.

   c. Unsupported statements like the following (from actual documents) are
meaningless, as they don't explain the basis underlying the objective:

      (1) "The Contractor didn't request any time extension and
 the Government agrees."

      (2) "Proposed time was 20 days, but 14 days is more reasonable."

      (3) "The Contractor proposed 45 days. A review of the NAS
 confirms that this is reasonable."

      (4) "The Contractor should reduce his request of 30 days to 10 days ."

   d. The above statements don't provide documentation for subsequent analysis in the
event of a future claim requiring reconstruction of the project history.

 9. SUMMARY OF COST DIFFERENCES.

     a. Columnar Summary. When a cost analysis is required, list the cost elements and
profit in a columnar summary similar to that listed below. Multiple CLINs are analyzed
in like detail. Note that the columnar summary can be an attachment to the POM. It will
be acceptable to use columnar pad paper in either pencil, ink or typed, as long as it is
neat and legible. It is recognized that the negotiator's primary effort should be devoted
to the analysis.
                                     Contractor                  Government                     Cost                       Target
     Cost Element
                                      Proposal                    Estimate                   Difference                   Objective
1. Labor
2. Equipment
3. Materials
4. Subcontractor(s)
5. Bond
6. Overhead
7. Extended
   Overhead
8. Profit


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June 2012                           Contract Administration Manual                                           SADDM 1110-1-1

                                     Contractor                  Government                     Cost                       Target
    Cost Element
                                      Proposal                    Estimate                   Difference                   Objective

Narratives: (provide an explanation for each Cost Objective
identified above)
1. Labor
2. Equipment
3. Materials
4. Subcontractor(s)
5. Bond:
6. Overhead:
7. Extended OH:
8. Profit:

         b. The narrative should include discussion of the various significant differences
for each element, between the proposal and the audit, cost and technical analysis, and
Government estimate. Explain the basis for each objective. Discuss exceptions taken or
clarifications to the audit report.

 10. PRENEGOTIATION OBJECTIVES.

        a. If cost analyses are not required, summarize the price analysis to the extent
prices were analyzed, e.g., overall price, CLIN prices, labor, equipment, materials, etc.
Price analysis is required for all negotiated price actions regardless of amount. See
Chapter 2, Section 4, Modification Process, and Section 8, Truth in Negotiations, for
price analysis procedures. Identify each price objective as a dollar amount or range. Do
not use statements similar to, "The objectives are to assure mutual understanding of the
scope of work and settle at a fair and reasonable price." These are the purposes of
negotiations; objectives are target dollar values or ranges. If the negotiator performed
cost analyses, summarize the separate price analysis here to the prices that were
analyzed.

        b. Identify the overall price objectives price analysis, etc. The objective must be
consistent with the principle that the price adjustment is based on the reasonable,
allowable cost impact on the contractor's operations.

 11. ATTACHMENTS. Include other supporting documentation and comments as
necessary such as: Technical Analysis, Cost Analysis, Contractor proposal(s), audit, IGE,
capacity reservation, Liquidated Damages, Statutory Limits, Funding, etc.




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June 2012                          Contract Administration Manual                                           SADDM 1110-1-1

 12. SIGNATURES. The lead negotiator signs the objectives. ACO/KO approves and
signs as appropriate.

2.9.8 Format: See Exhibit 2.9A for a sample of the POM.




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