Reference no: EM132197545

CHANGE ORDER PRICING

Review this case carefully and answer the questions that are listed throughout the case in detail.

In January 20X1, the ABC Company received a contract from the Air Force for 175 electronic devices. The contract was a firm fixed price contract at a unit price of $115,000, and a total price of $20,125,000. The price included a 12% profit. The delivery schedule called for 25 a month commencing in May 20X1, with delivery to be completed by December 20X1.

In July, a change was made by the Air Force in several of the components, At the time of the change the contractor had completed 75 but had not shipped any of the items. Another 50 units were partially completed. The components affected by the change were completed on 40 of the 50 items, Ten of the work-in-process items were not affected by the change. The contractor submitted the following cost proposal.

QUESTIONS:

1. Is the contractor's argument a reasonable one?

2. what should the buyer do?
Mr. Foster also suggested that since the contractor had estimated labor at $27.50 per hour in the original contract, the same figure should be applied to the labor for removing the changed work.

3. Do you agree with Mr. Foster is approach, viz.; using the labor rate used in the original proposal to price out the work associated with the change ($27.50 versus $30.00)?

4. Would you advocate using the same approach if the work required by the change was to be performed by a lower paid class of workers than originally estimated ($27.50 versus $22.50)?

5. If a composite labor rat, developed on the basis of the overall mix of work on the
entire contract, was reed in the original estimate, should the same composite rate be Med in pricing the work associated with the change?

6. Is the contractor entitled to charge the 3 days unused downtime to the cost of the change?

7. Assume that he paid the workers affected $30.00 per hour and used them on work for which he normally paid only $20.00 per hour. Could he charge the difference to the cost of the change?

8. Should a learning curve be applied to work affected by the change?

9. Is the contractor entitled to claim the costs associated with the affect of the change on she rate of improvement for the changed work for the units on which none of the changed work has been performed?

10. Is the contractor entitled to recover costs associated with the affect of the change on
the rate of improvement tithe work not directly affected by the change?

11. Is the contractor's approach a reasonable one?

12. Assuming the buyer accepts the contractor's contention, should he require that the contractor furnish an improvement curve to substantiate his claim?

13. Do you agree with this approach of the cost analyst?

14 Assume that the situation was reversed, viz.; Mar the contractor had used a rate of 180% in. his original proposal and his rate for the period of performance of the change was 110%4 would you approach the matter any differently?

15. Do you agree with this approach?

16. If the situation was reserved viz; the contractor had used a G&A rate of 15in his original proposal, and his anticipated G&A rate during the period of performance of the changed work was 6%, would you approach the matter any differently?

17, Do you think a contractor should receive. the same rate of profit on costs- associated with a change as on the original proposal'

18. Under what circumstances might he get less?

19. Under what circumstances might he get more?

Attachment:- Pricing case.rar