The Basics of Price Analysis

1
The Basics of Price Analysis

• Presented by Edmund Kowalski
• Financial Services Office (FSO)
• Updated as of April 19, 2006

2
Pricing Wisdom

• A cynic is a man who knows the price of
  everything and the value of nothing.
• Oscar Wilde

3
Agenda/Briefing Topics

• Price Analysis
• GAO Report
• Two Types of Cost or Pricing Data
• Price Analysis Techniques
• Commercial Items
• Price Analysis Arithmetic
• Price Analysis Documentation
• Commercial Versus Government Contracting/Pricing
• Price Comparisons Discussion
• Price Analysis Techniques Discussion
• Discounts
• Discussions with Offerors
• Unbalanced Pricing

4
Introduction

• This module presents the FAR, DFARS, and AFARS
  sections related to price analysis
• definitions and concepts discussed in the
  regulations
• direction and support for pricing evaluations.
• This module is set up to be used as a price
  analysis reference guide.
• The contractors know the regulations!
• YOU should know the regulations too!!

5
Disclaimer

• This module and others in the series represent a
  summary covering the pricing basics.
• Not an exhaustive, all inclusive presentation on
  pricing
• They do not replace attending the series of DAU
  price and cost courses.
• This module covers many types of pricing
  situations, not just those pertaining to
  contracting in Europe.

6
Price Analysis
7
Price Analysis Defined

• Per FAR 15.404-1(b)
• Price Analysis is the process of examining and
  evaluating a proposed price, without analyzing
  its separate cost elements and proposed profit.

8
In Plain EnglishWhat is a Price Analysis?

• Its a comparison!
• A comparison of the proposed price to
• All offered prices
• The current contract price
• The previous/historic contract price
• A similar items/services price
• An IGCE
• Others

9
Why Perform a Price Analysis?

• A Price Analysis is performed to ensure that the
  offered/proposed price is fair and reasonable.
• FAR 15.402(a) Contracting officers shall
  purchase supplies and services from responsible
  sources at fair and reasonable prices.
• FAR 15.404-1(a)(1) The contracting officer is
  responsible for evaluating the reasonableness of
  offered prices.

10
What is a Fair and Reasonable Price?

• There is no specific definition for Price
  Reasonableness or Fair and Reasonable Price in
  the FAR.
• Suggestion Substitute price for cost in the FAR
  definition below.
• Cost Reasonableness A cost (price) is
  reasonable if, in its nature and amount, it does
  not exceed what a prudent person would pay in the
  conduct of competitive business FAR
  31.201-3(a).
• Bottom Line Price Reasonableness is determined
  by the results of a price analysis.

11
FSO Working Definition of Price Reasonableness

• A price is determined reasonable if it does not
  exceed what a prudent consumer and/or businessman
  would pay in the conduct of competitive business,
  based on the written results of a price/cost
  analysis for which the contracting officers
  rationale, assumptions, calculations, and final
  conclusion (reasonableness determination) are
  verifiable and convincing to a third party.

12
When Must a Price Analysis Be Performed?

• A Price Analysis is always performed!
• Price analysis shall be used when (certified)
  cost or pricing data are not required FAR
  15.404-1(a)(2).
• If a cost analysis is performed when (certified)
  cost or pricing data are required, a price
  analysis should also be used to verify that the
  overall price is fair reasonable FAR
  15.404.1(a)(3).
• At a minimum, the contracting officer must use
  price analysis to determine whether the price is
  fair and reasonable whenever acquiring a
  commercial item FAR 15.403-3(c)(1).
• Be prepared Management always asks how the
  proposed price compares to the previous contract
  figure or similar items/services on the market.

13
Examples of When a Price Analysis Is Used

• Competitive Procurement Comparing competing
  offers.
• Competitive or Sole Source Procurement
  Comparing the low or proposed price to a
• Historic price (data) for the same or similar
  item
• Current price (data) for the same or similar item
• Sole Source Procurement cost analysis performed
• Unit/total price is compared to historic or
  current contract prices for the same or similar
  item/service as additional support for the cost
  analysis

14
GAO/DoD IG Reports (Or Why Should You Care?)
15
Summary Results of GAO Report, June 1999 DOD
Pricing of Commercial Items Needs Continued
Emphasis (1 of 3)

• 1. Price Analyses are too limited to ensure that
  the proposed prices were fair and reasonable.
• Pertinent historical pricing information was not
  utilized in price analyses, such as prior
  contracts or contracts at other agencies.
• 3. Base comparison prices were not determined to
  be fair and reasonable thus, they are not valid
  for use in price comparisons.

16
Summary Results of GAO Report, June 1999 DOD
Pricing of Commercial Items Needs Continued
Emphasis (2 of 3)

• 4. Buyers are accepting offered prices as fair
  and reasonable, when identical to the catalog or
  list price figures (ignoring discounts, etc.).
• 5. Some prices included the costs for services
  that were not requested (paying price premiums).
• 6. PCOs are not using the discretionary clause
  (FAR 52.215-20), requiring offerors to provide
  information other than cost or pricing data, such
  as sales data, as support for proposed prices.
• 7. Contract files lacked documentation .

17
Summary Results of GAO Report, June 1999 DOD
Pricing of Commercial Items Needs Continued
Emphasis (3 of 3)

• Conclusion?
• Management is looking at the price analyses
  performed by the contracting community
• Price analysis is an important function and part
  of the contract specialists job
• Documentation is essential
• Opinion There doesnt appear to be any negative
  fallout if it is not done properly
• Report Number GAO/NSIAD-99-90, June 1999
• Study references ODUSDA(AR) Information Guide,
  Commercial Pricing

18
IG DoD Audit Report

• Contracting Officer Determinations of Price
  Reasonableness When Cost or Pricing Data Were Not
  Obtained
• Report Number D-2001-129, dated 30 May 2001
• Office of the Inspector General Department of
  Defense
• Basically, it came to the same conclusions

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Two Types of Cost or Pricing Data
20
First Type (Certified) Cost or Pricing Data FAR
2.101

• Definition All facts that, as of the date of
  price agreement or, if applicable, an earlier
  date agreed upon between the parties that is as
  close as practicable to the date of agreement on
  price, prudent buyers, and sellers would
  reasonably expect to affect price negotiations
  significantly.
• Are factual, not judgmental, and are verifiable.
• Includes data forming bases of judgments.
• More than historic accounting data.
• All facts contributing to soundness of estimates.

21
Second Type Information Other than Cost or
Pricing DataFAR 2.101

• Definition Any type of information that is not
  required to be certified IAW FAR 15.406-2 and is
  necessary to determine price reasonableness or
  cost realism.
• Such information may include pricing, sales, or
  cost information, and includes cost or pricing
  data for which certification is determined
  inapplicable after submission.
• Certification is the difference between the two
  categories of cost/price data!

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Certification of Cost or Pricing Data FAR
15.406-2

• When cost or pricing data are required, the
  contracting officer shall require the contractor
  to execute a Certificate of Current Cost or
  Pricing Data.
• To the best of my knowledge and belief, the cost
  or pricing data submitted, either actually or by
  specific identification in writing, to the
  Contracting Officer or the Contracting Officers
  representative in support of (the proposal) are
  accurate, complete, and current as of (date
  negotiations complete or price agreement
  reached).

23
Certification Implications for the Contractor

• Emphasis on non-certified data was an Acquisition
  Streamlining change
• To reduce lead-times and costs to the Government
  Contractors
• Facilitate evaluations and reduce post award
  administration
• Certification is expensive to the contractor in
  terms of time, manpower, and cost.
• Administrative and Legal problems for contractors
  with certification
• Truth in Negotiations Act (TINA) - 10 U.S.C.
  2306a and 41 U.S.C. 254b)
• DCAA post award audits
• Potential defective pricing

24
Exemptions from (Certified) Cost or Pricing Data
Requirements

• FAR 15.403-1(b) provides five exemptions
• Adequate price competition
• Prices set by law or regulation
• Commercial items
• Waivers
• Modifying commercial item/service contract or
  subcontract
• FAR 15.403-2 adds the exercise of options if the
  price was established at contract award or
  initial negotiation.
• Also FAR 15.403-1(a) Cost or pricing data shall
  not be obtained for acquisitions at or below the
  simplified acquisition threshold.

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Adequate Price Competition FAR 15.403-1(c)(1)
1 of 3

• 1. Two or more responsible offerors, competing
  independently, submit offers that satisfy the
  expressed requirement
• Award based on best value where price is a
  substantial factor in the source selection.
• There is no finding that the price of the
  otherwise successful offeror is unreasonable.
• (A finding that the price is unreasonable must
  be supported by statement of the facts, approved
  at the level above the PCO.)

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Adequate Price Competition FAR 15.403-1(c)(1)
2 of 3

• 2. Received only one offer but
• PCO expected competition (two or more responsible
  offerors, etc) based on market research or other
  assessment
• PCO concludes offeror also expected competition
• A written Determination documents that the price
• Is based on adequate competition
• Is reasonable
• Is approved at level above PCO

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Adequate Price Competition FAR 15.403-1(c)(1)
3 of 3

• 3. Price Analysis clearly demonstrates that the
  proposed price is reasonable in comparison with
  current or recent prices for the same or similar
  items, adjusted to reflect changes in market
  conditions, economic conditions, quantities, or
  terms and conditions under contracts that
  resulted from adequate price competition.

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Waivers FAR 15.403-1(c)(4) 1 of 2

• The Head of the Contracting Agency (HCA) may
  waive the requirement for submission of cost or
  pricing data in exceptional cases.
• This authorization must be in writing with
  supporting rationale.
• The waiver is based on a determination of the
  price as fair and reasonable without submission
  of (certified) cost or price data.
• Example data submitted on previous production
  buys sufficient for the current one, when
  combined with updated information,
• Subcontractors are still required to submit
  certified data unless a separate waiver is
  obtained.

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Waivers FAR 15.403-1(c)(4) 2 of 2

• Per DFARS 215.403-1(c)(4), DOD also waived the
  requirement for submission of cost and pricing
  data for
• Canadian Commercial Corporation (CCC) and its
  subcontractors.
• Nonprofit organizations, including educational
  institutions, on cost-reimbursement-no-fee
  contracts.

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Obtaining Information to Establish Price
Reasonableness FAR 15.402(a)

• Do not obtain more info than necessary.
• Data collection/preparation is expensive
• Order of preference for type of data required.
• 1. No additional information, if price based on
  adequate price competition (except as in FAR
  15.403-3(b))
• 2. Information other than cost or pricing data
• 3. (Certified) cost or pricing data

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Order of Preference for Obtaining Information
Other Than Cost or Pricing Data

• FAR 15.402(a)(2) states
• Rely first on information available within the
  Government.
• Second, on information obtained from sources
  other than the offeror.
• If necessary, on information obtained from the
  offeror.

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Information Other than Cost or Pricing Data
General FAR 15.403-3(a)

• If the PCO obtains information other than cost or
  pricing data from the offeror, it must include
  appropriate information on the prices at which
  the item or similar items have been sold,
  adequate for determining price reasonableness.
• Example Prices/sales data from the same/similar
  items at comparable quantities.
• See Chapter 2, Volume 3, Contract Pricing
  Reference Guides

33
Price Analysis Techniques
34
Proposal Price Analysis TechniquesFAR
15.404-1(b)(2)

• Compare offers received
• Compare proposed prices to price history
• or system bill of material or current contract
• Parametric methods
• Comparison to published (catalog) price lists and
  published market prices
• Comparison with independent government estimates
• Compare proposed prices to market research or
  pricing data for same/similar items
• Analysis of pricing information provided by the
  offeror.
• preferred techniques per FAR 15.404-1(b)(3)

35
An Aside FAR 2.101 Definitions

• Catalog price
• means a price included in a catalog, price list,
  schedule, or other form that is regularly
  maintained by the manufacturer or vendor, is
  either published or otherwise available for
  inspection by customers, and states prices at
  which sales are currently, or were last, made to
  a significant number of buyers constituting the
  general public.
• Artifact of the old days
• Use/view with caution since price lists are
  easily produced
• Market prices
• means current prices that are established in the
  course of ordinary trade between buyers and
  sellers free to bargain and that can be
  substantiated through competition or from sources
  independent of the offerors.

36
Proposal Price Analysis Techniques DFARS
215.404-1(a)(i) (iv)

• For spare parts and support equipment, perform an
  analysis
• If proposed price exceeds last price paid (in
  last 12 months) by 25 or more
• Comparison of item description and proposed price
  indicate potential for overpricing
• Significant high-dollar items
• Random sample of low dollar items

37
Auxiliary Price Analysis Techniques

• These include
• Value Analysis List the functions required, and
  compare to those of alternative products with
  know prices
• Visual Analysis Inspect the item or drawings to
  get a general idea of price, and to prevent
  oversights
• These techniques cannot be used alone They
  provide subjective results that can be used to
  support traditional techniques.

38
Comparing Offers Received

• If you have competition on a fixed-price type
  contract, comparing offers received will normally
  satisfy the requirement for price analysis. (FAR
  15.305(a)(1))
• Generally, when the lower/lowest proposed prices
  are in a close range, it is more likely that the
  prices are fair and reasonable.
• If you find that the price is unreasonable FAR
  15.403-1(c)(1)(i)(B), a cost analysis may be
  required.

39
Comparing Offers ReceivedSample Problem

• You receive three offers for a widget
• Offeror A proposed 100 per unit.
• Offeror B proposed 125 per unit.
• Offeror C proposed 130 per unit.
• Trick Question Is the price based on adequate
  price competition?

40
Answer to Sample Problem on Comparing Offers
Received

• There is not enough information.
• The problem didnt state if the offerors are
  competing independently
• Are they dealers or manufacturers?
• Nor did it state that a price analysis clearly
  demonstrates that the proposed price is
  reasonable in comparison with other contracts.

41
Commercial Items
42
What is a Commercial Item?

• Commercial Pricing Information Guide, Volume 1,
  ODUSD(AR), provides a working definition
• A commercial item is any item evolving from, or
  available in the commercial market place that
  will be available in time to satisfy the user
  requirement.

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Commercial Item Defined FAR 2.101

• Any item, other than real property, that is of a
  type customarily used for non-governmental
  purposes and that
• Has been sold, leased, or licensed to the general
  public
• Has been offered for sale, lease, or licensed to
  the general public
• Has evolved from a commercial item that is sold
  or offered for sale as a result of technological
  advancement
• Requires either modifications or a type that is
  customarily available in the commercial market
  place or minor modifications for unique
  government purposes or
• Is any of the above
• Also government unique items that are developed
  exclusively at public expense and sold to
  multiple state and local governments.

44
Commercial Services Defined FAR 2.101

• Installation services, maintenance services,
  repair services, training services, and other
  services if--
• Such services are procured for support of a
  commercial item, regardless of whether such
  services are provided by the same source or at
  the same time as the item and
• The source of such services provides similar
  services contemporaneously to the general public
  under terms and conditions similar to those
  offered to the Federal Government
• Services of a type offered and sold competitively
  in substantial quantities in the commercial
  marketplace based on established catalog or
  market prices for specific tasks performed or
  specific outcomes to be achieved and under
  standard commercial terms and conditions. This
  does not include services that are sold based on
  hourly rates without an established catalog or
  market price for a specific service performed or
  a specific outcome to be achieved.

45
Commercial Items Are Exempt from Certified Cost
or Pricing Data

• Except for certain alterations to the items and
  contract modifications, commercial items are
  exempt from the requirement for certified
  cost/pricing data.
• Requests for offerors sales data should be
  limited to data for the same or similar items
  during a relevant time period FAR
  15.403-3(c)(2)(I).
• To the maximum extent practicable, limit any
  request for info to include only info that is in
  the form regularly maintained by the offeror FAR
  15.403-3(c)(2)(ii).

46
FAR Part 12 Acquisition of Commercial Items (1 of
2)

• Point to be Made cross referencing of FAR cites.
• Per FAR 12.209 Determination of Price
  Reasonableness established IAW
• FAR 13 Part Simplified Acquisition Procedure
• Cites FAR 13.106-3 Award and Documentation
• FAR Part 14 Sealed Bidding
• Cites FAR 14.408-2 Responsible Bidder
  Reasonableness of Price
• References price analysis techniques in FAR
  15.404-1(b)
• FAR Part 15 Contracting by Negotiation
• Cites FAR 15.4 Contract Pricing

47
FAR Part 12 Acquisition of Commercial Items (2 of
2)

• FAR 13.106-3 Award and Documentation
• Before making award, the contracting officer must
  determine that the proposed price is fair and
  reasonable.
• (1) Whenever possible, base price reasonableness
  on competitive quotations or offers.
• (2) If only one response is received, include a
  statement of price reasonableness in the contract
  file. The contracting officer may base the
  statement on --
• (i) Market research
• (ii) Comparison of the proposed price with prices
  found reasonable on previous purchases
• (iii) Current price lists, catalogs, or
  advertisements. However, inclusion of a price in
  a price list, catalog, or advertisement does not,
  in and of itself, establish fairness and
  reasonableness of the price
• (iv) A comparison with similar items in a related
  industry
• (v) The contracting officers personal knowledge
  of the item being purchased
• (vi) Comparison to an independent Government
  estimate or
• (vii) Any other reasonable basis.

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Price Premiums

• Per FAR 12.209 Commercial item prices are
  affected by factors as
• speed of delivery, length and extent of warranty,
  limitations of sellers liability, quantities
  ordered, length of the performance period, and
  specific performance requirements.
• Per FAR 12.209 The contracting officer must
  ensure that contract terms, conditions, and
  prices are commensurate with the Governments
  need.
• Be aware of price premiums, included but not
  specifically indicated/stated, on catalog/price
  lists for quick delivery, small or minimum
  quantity orders, etc.
• Price Premium Example Boeings catalog priced
  items for quick delivery (within 24 hours).
• The buyer was unaware of this price premium. It
  was an unnecessary cost the items were going to
  a depot for storage, not out to the field.
• Result the item was over-priced (high).

49
Minor Item Modification per FAR 2.101(c)

• A modification that does not significantly alter
  the non-governmental function or essential
  physical characteristics of an item or component,
  or change the purpose of a process
• Factors to consider
• Value and size of the mod versus the comparative
  value and size of the final product.
• Dollar values and percentages are guideposts, not
  conclusive evidence.

50
Acquisitions of Modified (altered) Commercial
Items

• If the item modifications are of a type
  customarily available in the commercial
  marketplace, you should be able to evaluate the
  item and the modifications/alternations on a
  commercial basis.
• If you are acquiring an otherwise commercial item
  with noncommercial alternations, you may need to
  get certified cost/pricing data (or information
  other than certified cost/pricing data) to
  evaluate the alternations, and evaluate the base
  commercial item on a commercial pricing basis.

51
Modifications to Contracts for Commercial Items

• If the contract mod changes the item to a
  noncommercial item, and no other exception
  applies, the modification is not exempt from the
  requirement for (certified) cost or pricing data.
• If the mod does not change the item to a
  noncommercial item, consider what information
  other than cost or pricing data you may require.
• This can range from info on prices to cost data
  that is not certified (see restrictions on data
  for commercial items.

52
Price Analysis Arithmetic
53
Price Analysis Arithmetic Examples

• Calculating the price difference and percentage
  change for
• a price increase
• a price decrease
• Calculating the annualized percentage change

54
Calculating Percent ChangeTwo Scenarios

• 1st scenario price increase
• current or proposed price is 150
• previous or comparison price is 110
• 2nd scenario price decrease.
• current or proposed price is 110
• previous or comparison price is 150

55
Calculating Percent Change, Scenario One Price
Increase

• Current or proposed price
  150
• Less previous/comparison price
  (110)
• Equals price change/difference
  40
• Divided by previous/comparison price 110
• Equals
  0.3636
• Result multiplied by 100
• Equals percent change/difference
  36.36
• There is a 40 or 36.4 difference between the
  two prices.
• There is a 40 or 36.4 increase in the price.

56
Calculating Percent Change, Scenario One Price
Decrease

• Current or proposed price
  110
• Less previous/comparison price
  (150)
• Equals price change/difference
  ( 40)
• Divided by previous/comparison price 150
• Equals
  (0.2667)
• Result multiplied by 100
• Equals percent change/difference
  (26.67)
• There is a 40 or 26.7 difference between the
  two prices.
• There is a 40 or 26.7 reduction in the price.

57
Calculating the AnnualizedPercentage Change (1
of 3)

• The Pricing Scenario
• Previous or comparison price.
• Last award date May 9, 1996
• Unit Price 4,976.59
• Current or proposed price.
• Projected award date November 27, 1997
• Unit Price 6,295.00
• Using TACOMs method per the old SOP 715-1
  

58
Calculating the AnnualizedPercentage Change (2
of 3)

• Steps
• 1 Calculate the difference in days between
  the previous and projected award dates.
• 2 Calculate the percentage change in prices.
• 3 Divide 360 (30 days per month x 12 month)
  by resulting figure of step 1.
• 4 Multiply the result figure of step 3 by the
  result of step 2.
• 5 Multiply result of step 4 by 100.

59
Calculating the AnnualizedPercentage Change (3
of 3)

• 1 From 9 May 96 to 27 Nov 97 is 558 days.
• 2 From 4,976.59 to 6,295.00 results in a
• 1,318.41 difference or 26.49 price
  increase.
• 3 Divide 360 by 558 0.6452
• 4 Multiply 0.6452 by 0.2649m 0.1709
• 5 Multiply 0.1709 by 100 17.09
• The 26.5 price change represents an
  annualized
• increase of approximately 17.

60
Price Analysis Documentation
61
Competitive ProcurementPrice analysis (PA)
Example(1 of 4)

• Example Scenario
• Commercial item procurement
• Significant quantity
• Reasonable delivery schedule
• Competition expected
• What type of analysis and documentation are
  necessary?

62
Competitive Procurement PAExample (2 of 4)

• Suggested documentation
• prepare spreadsheet
• arrange offers by ascending dollar value
• detail dollar and percent differences between
  offers
• detail dollar and percent differences between the
  low and competing offers
• prepare narrative
• indicate low offer
• indicate number of offers
• discuss price and percentage differences
• others (procurement history, etc.)

63
Competitive Procurement PAExample (3 of 4)
64
Competitive Procurement PAExample (4 of 4)

• Documentation
• Four offers were received. Red is the low
  offeror at 1000. With the second low offer at
  1050, reflecting an approximate 5 difference,
  there appears to be adequate price competition.
• The low offer compares favorably with the
  previous contract price.

65
Price Analysis The Basics

• Use the previous or similar item price as the
  base for the comparison.
• Calculate dollar amount difference
• Calculate percentage difference
• Price Change?
• Increase or decrease ?
• Materiality Is the difference significant ?
• Explain/discuss the difference.
• Action needed to be taken ?
• Document price analysis (negotiation).

66
Price Analysis More Basics

• Extent/depth of the price analysis is determined
  by
• Type of contractual action
• Type of item purchased
• Dollar value of contractual action
• Agency/department policy and procedures
• Availability of price/cost data and other
  information
• Your team leader/supervisor (Dah Boss)
• Not all price differences can be explained away.

67
Unit Versus Total Prices

• Question For price analyses and comparisons,
  should you use unit or total prices?
• Answer It depends on the procurement type and
  management policy.
• Unit prices are useful and expected for item
  comparisons (trucks, tires, etc.).
• Use totals
• to show total procurement price
• for comparison purposes if procurement involves
  various types of items and services.
• Check for Unbalanced Pricing

68
Price Analysis Documentation

• There is a _______ difference between the
  current proposed and previous (similar item)
  prices this resents a (an) ____ difference over
  a (an) ____ time period.
• The following factor(s) may explain the price
  difference __________ (quantity, economics,
  etc).
• Adjusting the comparison price for the factors
  results in the following amount ______.
• The adjusted figure does/does not compare
  favorably with the proposed price.

69
Commercial Versus Government Contracting/Pricing
70
Commercial VersusGovernment (1 of 3)

• Government and Commercial buyers are from Venus
  and Mars, respectively.
• They have different objectives, procedures, and
  modes of operation.
• This difference is recognized in the business
  world as evidenced by comments in Purchasing
  magazine.

71
Commercial VersusGovernment (2 of 3)

• Commercial
• Bottom line/profit driven
• Price is important
• Price targets determine the buyers bonus and
  impact evaluations
• Partnering leading to more cost analysis
• Less rule driven

72
Commercial Versus Government (3 of 3)

• Government
• NOT bottom line/profit driven, the budget is the
  constraint
• Fair and reasonable price rather than the lowest
  (or best) price obtainable
• Partnering with the contractor less intensive
  than the commercial world
• Buyer rated on making the award and reducing
  lead-time
• Despite Acquisition Reform, government purchasing
  is still rule driven

73
Basis of Contractors PriceCost Plus Profit
Pricing(1 of 2)

• Cost plus profit price (cost based)
• Used by Government in cost analysis
• Also used by the commercial world
• Cost element build-up
• Profit based on structured criteria
• Pro all costs recovered with acceptable profit
• Con resulting price may not be competitive

74
Basis of Contractors PriceCost Plus Profit
Pricing(2 of 2)

• Selling price cost markup
• Percent Markup (markup cost or selling price)
  x 100
• Note the markup can be calculated using either
  cost or selling price. The resulting percentage
  figures will differ between cost and sales price
  as a base in the calculation.

75
Basis of Contractors PriceMarket Based Pricing

• Market based price (price based)
• Demand oriented pricing price set at level
  buyers are willing to pay for an item/service
  and/or level of performance.
• Price set with competition in mind (also called
  parallel pricing) price increases are limited
  cost containment important.
• Differentiate ones product through advertising,
  high quality, delivery, and/or customer service.
• Price Leader Pricing. Seller sets prices price
  changes followed by others.

76
Basis of Contractors PricePrice Strategy (1 of
3)

• Buy-in. Price set with low profit, at cost, or
  below cost to obtain the business profit
  recouped with follow-on business, spares etc.
• Idle Capacity.
• Low price offered (low or no profit, at or below
  cost) to keep shop open, continue to employ key
  personnel avoiding layoffs, covering fixed
  costs, etc.
• Legitimate business strategy

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Basis of Contractors PricePrice Strategy (2 of
3)

• Product Life Cycle. Price set depending on life
  cycle stage (introduction, growth, maturity,
  saturation, and decline)
• new product/price skimming high price to
  attract status conscious customers
• growth market penetration through low prices
  and high sales volume
• Rate of Return Pricing. Price set to obtain
  desired return of investment.

78
Basis of Contractors PricePrice Strategy (3 of
3)

• Price Bundling. Practice of offering two or more
  products or services for sale at one price.
• Perceived Value. Seller sets price at the level
  the intended buyers value the product.
• Loss Leader. Item priced low or at cost to
  attract buyers to sellers place of business.

79
Price Comparisons Discussion
80
Base Price/Comparison Price Reasonableness (1 of
2)

• The comparison price must be reasonable (and
  supported as reasonable) to be used as a base in
  any price analysis.
• Competitive? Number of quotes the price
  range(s).
• Obvious/not so obvious competitive advantage?
  Awarded previous contracts?
• Amortized tooling, special tooling/equipment,
  proprietary item/data, etc.

81
Base Price/Comparison Price Reasonableness (2 of
2)

• Sole source? Basis of award.
• Price analysis performed/Results.
• Cost analysis performed? Results.
• Independent (Government) Cost Estimate?
• Customer
• Industrial Price Analysts
• Cost Analysis Section/Group/Directorate
• PMO/PEO Engineers
• DCMA

82
Price ComparisonsIntroduction

• When performing a price analysis, it is important
  to have an apples to apples comparison.
• This is not always possible there are many
  variables differentiating purchases.
• The analyst will have to adjust the base or
  previous price to allow for a valid comparison.

83
Compare Proposed Prices to Current Prices and/or
Price History

• The previous or comparison price used as the base
  must be reasonable for the same or similar
  contract terms.
• For the comparison to be valid your analysis
  should adjust the price for
• Economics (price escalation/de-escalation)
• Quantity variations (use learning curve)
• Technical/configuration changes
• Startup tooling/pre-production costs
• Packaging differences
• FOB origin or destination

84
Price Analysis Caveat

• Even in price analysis, the individual cost
  elements are important.
• Though not visible as in cost analysis, these
  elements influence the final price a general
  knowledge of them is necessary.
• They are approached and discussed in general
  terms as percentages, round number estimates,
  etc.
• They may be addressed in the price analysis
  document.

85
Price Comparison Example(1 of 2)

• Proposed unit price is 150, FOB origin, and
  commercial pack/packaging.
• Comparison unit price of 136 is approximately
  two years old, quantity is approximately 50 more
  than the current buy, FOB destination, and
  special military pack/packaging.

86
Price Comparison Example(2 of 2)

• Current price 150
• Comparison Price
  136
• Differences/Adjustments
• Quantity
  15
• Transportation/FOB
  - 5
• Packaging
  - 3
• Economics
  4
• Adjusted Comparison Price
  147
• The 147 adjusted comparison price is
  approximately 2 less than that proposed. This
  difference could represent estimating error.

87
Price ComparisonSame Contractor? (1 of 3)

• Different contractor means different cost
  structure.
• Different contractor may mean different
  price/cost objectives (price strategy).
• Basis of the contractors price?
• Cost plus profit price (cost based)
• Market based price (price based)

88
Price ComparisonSame Contractor? (2 of 3)

• Foreign or domestic?
• Foreign currency (FX) impact on price?
• Customs/Duty/Tariff included in the price?
• Manufacturer or Dealer?
• Dealer expected to offer higher price
• New Contractor?
• Production Start-up costs included?
• Other Nonrecurring costs tooling,
  certification, etc.

89
Price ComparisonSame Contractor? (3 of 3)

• Contractors size and expertise are important
  factors.
• Large firms may have higher overhead, enjoy
  economies of scale, and/or have wider expertise.
• Small firms may be more flexible, have more
  expertise in a niche area, and/or lower overhead.
• A contractors past performance is also an
  important price consideration.
• If a contractor is late, cannot deliver, or was
  terminated, how good is his price?

90
Price ComparisonSame Item?

• Purchased complete or partial?
• ECP or VECP incorporated?
• New or old model?
• Special treatment, manufacturing process, or
  material (special bolts)?
• Quality differences?
• Example ruggedized items such as computers,
  other electronics.
• Are these differences material?

91
Price ComparisonPackaging

• Level of packaging similar?
• Packaged in bulk or is each item packed/packaged
  separately?
• Commercial or Military?
• Any special instructions?

92
Price ComparisonTransportation

• Vendors Geographic Location impacts the items
  price and his competitive position.
• F.O.B. (Free on Board) Point?
• Destination. Transportation cost, insurance,
  etc., included in the price.
• Origin. Transportation cost not in the price
  buyer pays/arranges for transportation,
  insurance, etc.

93
Price ComparisonEconomics/Time Period

• When was the previous or similar item contract
  awarded and/or completed?
• Cost change over time
• Material costs increase or decrease
• Wages (usually) increase
• Most contractors propose rising prices.
• Does the comparison price include a contingency
  for economics, price in effect, and/or is it
  ceiling priced?

94
Economics/EscalationPrice Indexes

• Governments measure the change in the prices and
  costs of goods and services
• U.S. Depart of Labor, Bureau of Labor Statistics
  (BLS)
• Federal Statistical Office Germany
• Common indexes
• Consumer Price Index (CPI)
• Measure of what consumers pay
• Producer Price Index (PPI)
• Measure of what businesses pay
• Average Hourly Earnings (AHE)
• Employment Cost Index (ECI)

95
Example Applying Escalation Using Price Indexes
Problem

• Item Ball Bearings
• Nov 1996 price 350
• Aug 200X price ?
• Proposed price is 375
• PPI 1149 05 Ball Bearings
• Nov 1996 158.7
• Aug 200X 171.8
• What is the expected/adjusted price for Aug 200X?

96
Example Applying Escalation Using Price Indexes
Solution

• PPI 1149 05 Ball Bearings
• Nov 1996 158.7
• Aug 200X 171.8
• Calculation
• 171.8 / 158.7 1.0825
• 350 1.0825 378.88
• Solution
• Expected/adjusted price is 378.88 in Aug 200X
• Proposed price of 375 is a bargain.

97
Price ComparisonQuantities/Deliveries

• Same Quantity ?
• Is there a significant difference ?
• Learning curve adjustment needed ?
• Delivery Schedule ?
• Same, shorter, or longer
• Delivery Rate ?
• Monthly/quarterly ?

• Same quantity per delivery ?
• Lot buy ?
• Periodic deliveries ?
• Advanced delivery ?
• Options ?
• Multi-year ?
• Price bundling ?
• Economic order quantities ?

98
Price ComparisonSignificant Material/Component?

• Is Material a major cost driver ?
• Batteries lead is the cost driver.
• Check BLS PPI or American Metals Market for
  historic prices/price trends
• Others aluminum, steel, copper etc.
• Foreign source components ?
• Change in foreign exchange rate may impact the
  price.

99
Price ComparisonOther Considerations

• Surplus or excess item ?
• Contract Terms and Conditions.
• Administrative Costs none versus extensive
  customer relations/contact.
• Warranty included ?
• Prompt Payment (Cash) or other types of Discounts
  taken into account ?
• Buyer (Government) furnished information,
  property, or personnel ?
• State of Market/Economy.

100
Price Analysis TechniquesDiscussion
101
Parametric Methods

• Using rough yardsticks (ratios) such as dollars
  per pound or per horsepower, etc.
• Be very careful when applying this technique.
  You need a large sample size and an appropriate
  one.
• Often this technique can be used to highlight
  significant inconsistencies that warrant
  additional pricing inquiry.

102
Parametric Price Analysis Sample Problem

• Pricing information indicates engines with
• 300 horsepower costs 9,000
• 425 horsepower costs 14,000
• Your requirement 500 horsepower engine with
  technical features similar to the above two
  engines.
• Using parametric analysis, estimate a ball park
  price for your engine?

103
Possible Answer to Sample Problem on Parametric
Price Analysis

• The pricing information indicated similar engines
  cost about 30 to 33 per horsepower (hp)
• 9,000/300hp 30 per hp
• 14,000/425hp 33 per hp
• A ball Park estimate for a technically similar
  500hp engine might be between 15,000 and
  16,500.
• 30hp x 500hp 15,000
• 33/hp x 500hp 16,500

104
Comparison Price Sources (1 of 2)

• Previous contract.
• Current or previous contract for similar item.
• Current or previous proposals.
• Vehicle Bill of Material (BOM).
• Spare Parts/Contractor Support Lists.
• Program Office (PMO or PEO).
• Engineers, logisticians, material managers.

105
Comparison Price Sources (2 of 2)

• Commercial retail outlets, distributors, dealers,
  etc.
• Company web sites (Market Research)
• Independent (Government) Cost Estimates (ICE or
  IGCE)
• PM/PEO Engineers
• DCMA

106
Comparison Price SourcesSuggested Publications
Web Sites

• Purchasing
• American Metal Market
• Modern Materials Handling
• Government Product News
• Thomas Register
• Yellow Pages

• Heavy Duty Trucking
• McMaster-Carr Supply Company
• Rock Dirt, The Equipment Marketplace
• Monthly Labor Review/Employment Earnings BLS

107
Price Analysis Technique Compare to Market
Research Data

• Search the Internet. A popular site is
  www.imart.org
• Contact other commands and/or agencies that may
  have purchased similar items.
• Contact trade groups/professional organizations.
• Become the expert on the marketplace for the type
  of items or services you purchase.

108
Commercial Items Published Market Prices and
Price Lists

• Be sure to understand available quantity and
  other discounts available from the published
  price. Also the terms/conditions the price is
  based on.
• Again The price isnt necessarily reasonable
  just because an item is in a published price list.

109
Price AnalysisCatalog/Market Prices

• Catalog published or on computer? Is it
  available for inspection ?
• What are the quantity/price breaks?
• What are the price discounts?
• Catalog date. Updated when/how often?
• Support documentation available?
• Invoices of actual sales for the same or similar
  items with comparable quantities and/or prices.
  Same terms conditions?

110
Evaluating Prices on Commercial Items

• A price listed in, or discounted from a catalog,
  doesnt make it reasonable.
• Use business/common sense.
• Use market research to really evaluate whether
  the price is good.
• Use techniques similar to those you use when you
  make important purchases for yourself.

111
Potential Questions on a Catalog Price

• What is the discount policy?
• What quantity levels are needed to get price
  breaks?
• What is the included level of packaging?
• Are prices based on faster delivery than needed?
• Is a warranty included?
• What FOB point is the price based on?
• How often is the catalog revised?
• Examples/proof of other customers paying same
  price, with similar terms quantity. (Ask the
  contractor to provide sales invoices.)

112
Percent of Sales Test

• Previously used to define commercial sales, it is
  still a valid technique for reasonableness
  determination
• The items total sales for a specified time
  period (one year) are divided between commercial
  customers and the government
• If there is a reasonable distribution between the
  Government and the general public, usually market
  pricing pressure adequately controls prices.
• If the government become the only or majority
  buyer, the proposed price should be closely
  scrutinized for reasonableness.

113
Independent Government Cost Estimate (IGCE)

• Obtain an IGCE from the requiring
  activity/customer
• FSO can assist them in the preparation
• You can compare offered prices to the estimate
  that came with a PRON.
• Consider investigating how the requiring office
  came up with the estimate.
• An alternative is to obtain an estimate from
  industrial price/cost analyst or DCMA, especially
  if you have a TDP.

114
Seeking Pricing Info Over the Phone/Internet (1
of 2)

• May involve speaking to sales or trade
  organization representatives to obtain data.
• Be prepared ! Have as much information as
  possible. Be polite. Dont waste the reps
  time. Cultivate the rep as a source of info.
• Explain From Government. Doing price study.

115
Seeking Pricing Info Over the Phone/Internet (2
of 2)

• Have basic information ready
• Known source. Manufacturers name, item
  nomenclature/description, and serial/model/part
  number.
• Similar item. Same info as above. If not
  available, product specs, its function, etc.
• Basic/minimum information. Quantity, delivery
  period, packaging.

116
Discounts
117
Types of Discounts

• Trade or functional discount
• Promotional discount
• Cash (prompt payment) discount
• Quantity discount
• Cumulative
• Non-cumulative
• Moms price (most favored customer)

118
Trade/Functional DiscountsDefined

• Trade or functional. Price reduction allowed to a
  class of customers (manufacturing, wholesalers,
  retailers) on a list price before credit terms
  consideration applies to allowance granted w/o
  reference to payment date.
• Promotional. Price reduction given to retailers
  and/or wholesalers in return for product
  promotion.

119
Cash (Prompt Payment)Discounts Defined

• Definition. Price reduction for payment of
  invoice or account made within a specified period
  of time.
• Sellers rationale
• To encourage prompt payment of invoices.
• To reduce his credit risks cost of collecting
  overdue accounts.
• To follow industry or historical practice.

120
Cash DiscountsSellers Considerations

• Amount of cash discount
• Length of credit period
• Customers offered credit terms
• Other (credit line magnitude or amount to spend
  on collecting overdue accounts).

121
Cash DiscountsApplication/AccountingPractice

• (In both price and cost analysis) Credit applied
  directly to the items price
• (In cost analysis) Factor, calculated from actual
  data, directly applied to the total material
  rather than a single item
• (In cost analysis) An indirect expense item in
  the overhead pool applied through the overhead
  rate

122
Cash Discounts Example

• Discount offered 2/10 net 30 (or 2 - 10, Net
  30 days).
• 2 discount of the price if paid within 10 days
  of the invoice date if not taken, full price
  payment due within 30 days.
• Price _at_ 100 total. Pay 98 within 10 days
  (100100 - 2) or 100 within 30 days.

123
Quantity Discount Defined

• Price reduction for volume purchases.
• Two types
• Cumulative. Price reduction for purchases that
  exceed a given volume level over a specified time
  period. Also called deferred or patronage
  discount.
• Non-cumulative. Price reduction for volume
  purchases in a single point of time.
• (Volume level refers to dollar value,
  quantity, or
• both).

124
Quantity DiscountKnow the Specifics

• Sellers consideration/buyers inquiry
• Minimum quantity purchased to qualify for a
  discount
• Number of price breaks or additional discounts
  for larger quantities
• Maximum quantity qualifying for any additional
  discount
• Amount of discount offered at each quantity level

125
Quantity Discount Rationale(1 of 2)

• Larger orders reduce sellers costs savings
  passed on to customer.
• Fewer orders processed/shipped fewer sales
  calls to generate the larger orders
• Longer production runs
• Material quantity discounts for manufacturer
• Fewer production line and/or equipment set-ups
• Other non-recurring costs amortized over the
  larger quantity
• Effect of the learning curve on labor hours

126
Quantity Discount Rationale(2 of 2)

• Rationale (continued)
• Operations costs reduced by shifting finished
  goods carrying costs to buyer
• Extra funds reinvested sooner
• Subtitle form of profit sharing among channel
  members leading to channel cooperation
• Tradition/industry practice.

127
Quantity Discount theLearning Curve

• Quantity discounts may be estimated using the
  learning (experience) curve.
• Simple definition costs (hours) decline by a
  predictable amount (percentage) each time
  accumulated volume doubles.
• In many cases, the quantity discount price
  schedule will reflect a logarithmic function (the
  mathematical term for the learning curve).

128
Price History Quantity Impacts-Use of Learning
Curve

• Although normally used for production labor hour
  analysis, learning curve can sometimes be applied
  in price analysis.
• Consider learning curve when
• Percentage-wise, the quantities you require vary
  significantly from the price history, and
• Contractors produce the previous and current
  quantities on a stand-alone basis, with fairly
  significant production breaks in-between
• This is evident in many vendor quotes, where
  vendors detail different quantity price breaks.
• To calculate learning curve impacts, consult
  someone with experience doing this. We have an
  Excel file that does the calculation.

129
Discussions With Offerors
130
Discussions with Offerors

• Congressional criticism that buyers were not
  getting the best price for the government.
• Damned if you do, damned if you dont situation
• Bargaining allowed?
• Unfair to contractors?
• Time consuming
• When do you have discussions?
• In Negotiated Procurements
• If multiple offerors, competitive range must
  first be established.

131
Reasons to Conduct Price-Related Discussions

• Price has increased significantly from last
  contract, or deviates from government estimate.
• You need the offeror to support their price
  and/or provide additional data.
• Offeror proposes a catalog price.
• Ask what terms the price is based on.
• Changed conditions.

132
Benefits of Conducting Price Discussions

• Minimizes chances of misunderstanding
• Allows us to bargain
• Often you can obtain cost/price savings not
  included in the initial proposal (Is this your
  best price, Mr. Contractor?)
• Secretary of Defense supports award without
  discussions, to reduce lead time, only in
  appropriate circumstances.

133
Example of Changed Conditions

• On a negotiated procurement, if conditions change
  consider obtaining revised quotes.
• For example, on an Indefinite Delivery Indefinite
  Quantity (ID/IQ) solicitation, if the minimum (or
  Initial) order quantity will be 3,000 units
  instead of the original 500 units stated in the
  solicitation, get revised quotes.

134
Unbalanced Pricing
135
Unbalanced Pricing

• Per FAR 15.404-1(g)(1), Unbalanced pricing exists
  when, despite an acceptable total evaluated
  price, the price for one or more contract line
  items is significantly over or understated as
  indicated by the application of cost or price
  analysis techniques.
• Per FAR 15.404-1(g)(2), All offers with
  separately priced line items or subline items
  shall be analyzed to determine if the prices are
  unbalanced.
• No standard but