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Supplying Principles and Practices > USPS Supplying Practices Process Step 2: Evaluate Sources > Conduct Price/Cost Analysis
Conduct Price/Cost Analysis
Price analysis is the process of examining and evaluating a proposed price
against reasonable price benchmarks, without evaluating its separate cost
elements and profit that make up the price. Some form of price analysis is
required for every purchase; the dollar amount and characteristics of the
purchase determine the method and scope of analysis. Cost analysis is the
process of examining the separate elements of cost and profit in a potential
supplier's cost or pricing data. Additional information on the should-cost
analysis can be found in the Conduct Should-Cost Analysis topic performed
during the Collect Ideas and Build Fact Base task of Process Step 2:
Evaluate Sources Process. The Pricing Analyst is responsible for determining
the most appropriate technique for a given purchase.
One or more of the following techniques may be used when conducting a
price analysis:
• Comparison of competitive offers
• Comparison with regulated, catalog, or market prices
• Comparison with historical prices
• Use of independent cost estimates (ICEs)
Comparing competitive offers involves comparing proposed prices received in
response to the request for proposals (RFP). The Pricing Analyst may
compare the current price with those proposed in competing offers or offers
for the purchase if adequate price competition exists. To determine whether
adequate price competition exists, the Pricing Analyst may examine the
following:
• Proposed prices
• Range of prices offered by competing suppliers
• Production or performance experience of the suppliers
• Exceptions taken by any supplier to the specifications or delivery
schedule
Generally, price competition exists if two or more independent and capable
suppliers submit priced proposals meeting the RFP requirements. If price
competition exists, it is presumed adequate, unless:
• The potential supplier offering the lowest price has such a
decided market advantage that it is practically immune from
competition
• The Purchase/SCM Team determines that the lowest price is not
reasonable
Once adequate price competition is determined to exist, price comparison
between proposals should be relatively easy.
When evaluating potential suppliers' proposals, the Pricing Analyst should
compare not only the price, but also the terms and conditions of the proposal.
Often, these terms and conditions will differ with regard to delivery schedule
and upgraded technology to the point that a direct comparison between
proposals cannot be made. Therefore, the Pricing Analyst must "level" the
proposals to meet the basic requirements of the RFP to ensure that the price
evaluation is performed on proposals with comparable terms and conditions.
This may be accomplished by removing additional or upgraded services or
components from the overall proposal and proposed price so that the price
evaluation can be made only with regard to the terms and conditions explicitly
stated in the RFP.
This technique allows the Postal Service to comply with the price as set by
law or regulation and compares proposed prices with prices available in
supplier's catalogs, market prices, indexes, and discount or rebate
arrangements.
Regulated or legal prices are set when applicable laws or regulations specify
the price and no potential supplier may charge anything other than this price.
Catalog prices are prices included in a catalog, price list, schedule, or other
document that is regularly maintained by the manufacturer or supplier and is
either published or otherwise available for inspection by customers. Before
using catalog prices as a basis for comparison, the Pricing Analyst should
ensure that:
• Significant quantities are sold to a significant number of
customers at the indicated prices
• The complexity of the product is relatively low
Market prices are established by the interaction of market supply and
demand and are usually published in trade publications or other news media.
This price analysis technique involves comparing previously proposed and
contract prices with current proposed prices for the same/similar items in
comparable quantities. The Pricing Analyst should ensure that historical
prices are still reasonable in the marketplace and serve as a valid basis for
comparison. Just because a historical price exists does not mean that it is
valid for comparison purposes. The following considerations apply to
comparison with historical prices:
• How has the state of the market and competition changed?
• What are the fixed costs of the original prices that may no longer
apply to the current purchase?
• How has inflation and/or deflation affected the price?
• Have the supplier's sources, quantities, production, start-up
costs, or terms of purchase changed?
• What was the market demand/supply for the item/service at the
time of previous purchase?
• Is the commercial item used for comparison similar?
• Was the historic purchase conducted as noncompetitive or
competitive?
• Did the price include additional services?
The Pricing Analyst must adjust the historical price accordingly so that a
direct comparison can be made with the proposed price.
Because of the lack of competition, any of the pricing techniques
above-except the comparison of competitive offers-may be used when
pricing noncompetitive proposals. If price analysis does not ensure that
prices are fair and reasonable, then:
• A cost analysis is performed on the noncompetitive purchase
• Cost or pricing data must be obtained before awarding a
noncompetitive contract or modification
(Cost analysis and cost and pricing data are discussed later in this topic in
further detail.)
Performing an independent cost estimate (ICE) allows the Purchase/SCM
Team to compare proposed prices with independent Postal Service cost
estimates to establish a reasonable price. An ICE should assess the total
cost of ownership (TCO) to be incurred by the supplier if the contract is to be
awarded. TCO refers to the total cost incurred over the life cycle of an item,
encompassing purchase, use, maintenance, support, and disposal.
Whenever adequate price competition has been obtained, comparing
proposed prices with Postal Service ICEs may suffice to meet price-analysis
requirements. These estimates can be a valid standard for comparison if they
are based on a realistic analysis that accounts for past purchase prices,
quantities, physical inspection of the product, and analysis of similar work. To
determine whether the basis of the ICE is reliable and can be used as a
standard for comparison, the Pricing Analyst must account for the following
factors:
• What was the source of the information?
• What information and techniques were used?
• How reliable were earlier estimates?
• Is the ICE based upon the same technical approach as the
current product or service?
The Pricing Analyst must consider whether the requirements or the
assumptions of the RFP have changed since the ICE was performed. Often,
an ICE is prepared early in the purchase process; by the time the RFP is
issued and offers are received, specifications and requirements have
changed. This may cause the price or the nature of the product or service to
change significantly, rendering a direct comparison with the ICE invalid. A
new ICE will have to be developed based on the new information.
Cost analysis is appropriate when factors affecting the purchase will not
ensure a reasonable price based on price analysis alone and/or the Postal
Service needs an understanding of the cost buildup of the proposal to verify
cost realism and reasonableness. Cost or pricing data must be obtained
whenever price analysis is insufficient to determine reasonableness of price.
Cost analysis should be limited to cost elements that need detailed analysis
to protect the Postal Service's interest. When a limited number of cost
elements will provide a reasonable analysis, the Contracting Officer should
obtain only the data needed to support such an analysis. Cost analysis is
generally most useful when purchasing nonstandard items and services.
Cost analysis involves, as appropriate:
• Verifying cost or pricing data and evaluating cost elements,
including:
• The necessity for, and reasonableness of, proposed costs,
including allowances for contingencies
• Projecting the potential supplier's cost trends on the basis of
current and historical cost or pricing data
• Performing a technical analysis of the estimated labor, material,
tooling, and facilities required and the reasonableness of scrap
and spoilage factors
• Applying audited or negotiated indirect-cost rates and labor rates
• Evaluating the effect of the supplier's current practices on future
costs - the Purchase/SCM Team must ensure that the effects of
inefficient or uneconomical past practices are not projected into
the future. In pricing production of recently developed, complex
equipment, the Purchase/SCM Team should make a trend
analysis of basic labor and materials, even in periods of relative
price stability.
• Comparing costs proposed by the supplier for individual cost
elements with:
- Actual costs previously incurred by the same supplier
- Previous cost estimates from the supplier or from other
suppliers for the same or similar items
- Independent Postal Service cost estimates
• Analyzing supplier's make-or-buy decisions in evaluating
subcontract costs.
• Verifying that the supplier's cost submissions are in accordance
with the cost principles below.
• Reviewing submissions to ensure that data needed to make the
supplier's proposal accurate, complete, and current have been
submitted or identified in writing. The Contracting Officer must
attempt to obtain such data if they are available. If data cannot be
obtained satisfactorily, allowance for the incomplete data must be
negotiated.
• Utilizing audit services through the Office of the Inspector General
(OIG) to validated cost or pricing data. More information on
obtaining audit services through the OIG can be found at:
www.oig.hhs.gov.
Cost or pricing data include all the facts affecting cost estimates and costs
incurred that can be expected to significantly affect price negotiations. Cost or
pricing data may also include:
• Supplier quotations
• Nonrecurring costs
• Information on changes in production methods and in production
or purchasing volume
• Data supporting business projections, objectives, and related
operating costs
• Unit-cost trends, such as those associated with labor efficiency
• Make vs. buy decisions
• Resource estimates to meet business goals
• Information on management decisions that could have a
significant bearing on costs
• Historical costs for the same or similar items
Whenever price analysis is insufficient to determine reasonableness of price,
cost or pricing data must be obtained before awarding a noncompetitive
contract or modification. Only the data needed to make the determination
should be obtained. Before agreeing on price, the Contracting Officer must
have the supplier update the data to the latest dates for which data are
reasonably available.
The Contracting Officer must have suppliers obtain cost or pricing data for
proposed subcontracts or subcontract modifications when needed to
determine the reasonableness of a proposed contract or subcontract price
(including negotiated final pricing actions such as termination settlements and
total final price agreements for fixed-price-incentive contracts). The supplier
is responsible for conducting the price or cost analysis for subcontracts and
including the results as part of its cost or pricing data. In unusual
circumstances, to ensure that analysis is adequate, the Contracting Officer
may require the supplier to submit the subcontract data along with its own
data. This does not reduce the supplier's responsibility to do the subcontract
cost or price analysis and negotiate fair and reasonable subcontract prices.
If cost or pricing data are needed and the supplier refuses to provide the
necessary data despite repeated requests, the Contracting Officer must
withhold award or modification and refer the matter to the next higher level of
contracting authority. The ultimate disposition must be documented.
Under Clause 2-30: Allowable Cost and Payment, suppliers must submit a
final indirect-cost rate proposal to the Contracting Officer or Contracting
Officer's Representative (COR) reflecting actual costs during the period,
together with cost or pricing data.
Whenever cost or pricing data may be required when negotiating a contract
or the subsequent modification of a contract, the contract must include:
• Clause 5-1: Price Reduction for Defective Cost or Pricing Data -
lists the conditions under which the negotiated price that was
increased significantly can be reduced
• Clause 5-2: Subcontractor Cost or Pricing Data - requires that
before awarding any subcontract or pricing any subcontract
modification, the supplier must require the subcontractor to
submit cost or pricing data whenever cost or pricing data are
required
To be allowed, costs must be:
• Reasonable
• Allocable to the contract
• Consistent with generally accepted accounting principles
• Appropriate to the specific purchase
• Consistent with the requirements and terms and conditions of the
contract
• Not unallowable
A cost is reasonable if it is a type of cost and amount that does not exceed
what a prudent person would incur conducting competitive business. In
determining the reasonableness of a specific cost, consider:
• Whether it is a type of cost generally recognized as ordinary and
necessary for conducting business or performing the contract
• Restraints imposed by generally accepted business practices,
arm's-length bargaining, and Federal and state laws and
regulations
• What a prudent business person, considering his or her
responsibilities to owners, employees, customers, the Postal
Service, and the public at large, would do under the
circumstances
• Any deviations from the supplier's established business practices
that may unjustifiably increase costs
A cost is allocable to a contract if it:
• Is incurred specifically for the contract
• Benefits both the contract and other work and can be distributed
among them in reasonable proportion to the benefits received
• Is necessary to the overall operation of the business, although a
direct relationship to the contract cannot be shown
Costs that are expressly or mutually agreed to be unallowable, including
directly associated costs, must be excluded from any contract billing, claim,
or proposal. A directly associated cost is a cost generated solely as a result
of another cost, which would not have been incurred if the other cost had not
been incurred. When an unallowable cost is incurred, its directly associated
costs are also unallowable. The following categories of costs are
unallowable:
1. Public relations and advertising costs, except for costs of:
a. Responding to inquiries concerning company policies and
activities;
b. Essential communication with the public, press, stockholders,
creditors, and customers, including communications on matters of
public concern;
c. Participating in community-service activities, such as blood-bank
drives, charity drives, and disaster assistance (but not
contributions to civil defense funds and projects);
d. Recruiting personnel needed to work under the contract;
e. Acquiring scarce items for contract performance; and
f. Disposing of scrap or surplus materials acquired for contract
performance.
2. Bad debts, including actual or estimated losses arising from
uncollectible accounts receivable from customers and other claims, and
any costs directly associated with bad debts such as collection and
legal costs.
3. Contributions or donations, including cash, property, and services,
except as provided in 1(c).
4. Dividends or payments and distribution of profits.
5. Entertainment costs, including amusement, diversion, social activities,
and costs directly associated with entertainment, such as tickets to
shows or sporting events, meals, lodging, rentals, transportation, and
gratuities. Entertainment costs include membership in social, dining, or
country clubs or other organizations having the same purpose,
regardless of whether the cost is reported as taxable income to the
employees.
6. Fines and penalties resulting from violations of Federal, state, local, or
foreign laws and regulations, except when incurred as a result of
complying with specific terms and conditions of the contract or written
instructions from the Contracting Officer.
7. Life insurance on the lives of officers, partners, or proprietors, unless
the insurance represents additional compensation.
8. Interest on loans (however represented), bond discounts, costs of
financing and refinancing capital, and the costs of preparing and issuing
prospectuses and stock rights.
9. Lobbying cost:
a. including
(1) Attempts to influence the outcome of any Federal, state, or
local election, referendum, initiative, or similar procedure
through contributions, endorsements, publicity, or similar
activities.
(2) Establishing, administering, contributing to, or paying the
expenses of a political party, campaign, political action
committee, or other organization established for the
purpose of influencing the outcomes of elections.
(3) Any attempt to influence the introduction of Federal or state
legislation, or the enactment or modification of any pending
Federal or state legislation through communication with any
member or employee of Congress or a state legislature
(including efforts to influence state or local officials to
engage in similar lobbying activity), or with any government
official or employee in connection with a decision to sign or
veto legislation.
(4) Any attempt to influence the introduction of Federal or state
legislation, or the enactment or modification of pending
Federal or state legislation by preparing, distributing, or
using publicity or propaganda, or by urging members of the
general public to contribute to, or participate in, any mass
demonstration, march, rally, fund-raising drive, lobbying
campaign, or letter-writing or telephone campaign.
(5) Legislation-liaison activities, including attendance at
legislative sessions or committee hearings, gathering
information regarding legislation, and analyzing the effect of
legislation, when the activities are in support of, or in
knowing preparation for, an effort to engage in unallowable
activities.
b. But not including:
(1) Providing a technical and factual presentation of information
on a topic directly related to performing the contract in a
hearing testimony, statement, or letter to Congress or a
state legislature, or subdivision, member, or staff member of
either, in response to a documented request (including a
Congressional Record notice requesting testimony or
statements for the record at a regularly scheduled hearing)
made by the recipient member, legislative body or
subdivision, or a cognizant staff member. Costs for
transportation, lodging, or meals associated with this
exception are not allowed unless incurred for the purpose of
offering testimony at a regularly scheduled Congressional
hearing in response to a written request made by the chair
or ranking minority member of the committee or
subcommittee conducting the hearing.
(2) Any lobbying to influence state or Federal legislation to
directly reduce contract cost, or to impair the supplier's
obligation to perform the contract.
(3) Any activity specifically authorized by statute to be
undertaken with funds from the contract.
10. Losses on other contracts (including the supplier's contribution under
cost-sharing contracts).
11. Taxes:
a. Federal income and excess-profits taxes.
b. Taxes in connection with financing, refinancing, refunding
operations, or reorganizations.
c. Taxes from which exemptions are available to the supplier
directly, or available to the supplier based on a Postal Service
exemption, except when the Purchase/SCM team determines that
the administrative burden of obtaining the exemption outweighs
the benefits to the Postal Service. The term "exemption" means
freedom from taxation in whole or in part, and includes a tax
abatement or reduction resulting from the method of assessment,
calculation, or other reason.
d. Special assessments on land that represent capital
improvements.
e. Taxes (including excise taxes) on real or personal property, or on
the value, use, possession, or sale of property, used solely in
connection with work on contracts that are not with the Postal
Service or the government.
f. Taxes on accumulated funding deficiencies of, or prohibited
transactions involving, employee deferred compensation plans
under section 4971 or 4975 of the Internal Revenue Code of
1954, as amended.
g. Income tax accruals designed to account for the tax effect of
differences between taxable income and pretax income as
reflected by the supplier's accounting and financial statements.
12. Costs incurred in defending against any combination of the actions
below when brought by the government against a supplier, its agents,
or employees, when the charges involve fraud or similar criminal
offenses (including filing of a false certification) on the part of the
supplier, its agents, or employees, and result in conviction (including
conviction entered on a plea of nolo contendere), judgment against the
supplier, its agents, or employees, or a decision to debar or suspend, or
are resolved by consent or compromise (when charges of fraud are
resolved by consent or compromise, the parties may agree on the
extent of allowability of defense costs as a part of the resolution). The
actions include:
a. Criminal or civil investigation, grand jury proceedings, or
prosecution;
b. Civil litigation; or
c. Administrative proceedings such as suspension or debarment.
13. Costs incurred against Postal Service claims or appeals or the
prosecution of claims or appeals against the Postal Service.
Cost realism means that the costs in a supplier's proposal:
• Are realistic for the work to be performed
• Reflect a clear understanding of the requirements
• Are consistent with the various elements of the supplier's
technical proposal
The emphasis of a cost-realism analysis is to determine whether costs may
be overstated or understated. Cost realism helps to ascertain the potential
risk to the Postal Service as a result of the supplier being unable to meet
contract requirements.
Cost-realism analysis is an objective process of identifying the specific
elements of a cost estimate or a proposed price and comparing those
elements against reliable and independent means of cost measurement, and
is particularly useful in the evaluation of cost reimbursement contracts. This
analysis determines whether the estimates under analysis are verifiable,
complete, and accurate. It also shows whether the supplier's estimating
methodology is logical, appropriate, and adequately explained. As a result,
the analysis helps ensure that the cost or prices proposed fairly represent the
costs likely to be incurred for the proposed services, given the supplier's
technical and management approach.
Conduct Market Research and Benchmarking Analysis topic, Decide on
Make vs. Buy task, Process Step 1: Identify Needs
Start Request for Proposals (RFP) Development topic, Prepare Project task,
Process Step 2: Evaluate Sources
Conduct Should-Cost Analysis topic, Collect Ideas and Build Fact Base task,
Process Step 2: Evaluate Sources
Negotiate With Suppliers topic, Perform Preaward Activities task, Process
Step 2: Evaluate Sources
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