Price Analysis

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Price Analysis

• Price analysis is the process of examining and
  evaluating a proposed price to determine if it is
  fair and reasonable , without evaluating its
  separate cost elements and proposed profit.

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Worried about pricing?
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Know the Difference

• PRICE VERSUS COST
• PRICE ANALYSIS VERSUS COST ANALYSIS

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Price Analysis

• MAKE COMPARISONS (Order of Preference)
• Prices received on same solicitation
• Past history for same or similar items
• Use of parametric estimating methods
• Published price lists
• Independent Government Estimates
• Market Research
• Information provided by the offeror
• Its a subjective evaluation!

FAR 15.404-1(b)
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Price Analysis

• Have you ever done any Price Analysis?

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Price Analysis

• How would you conduct a Price Analysis if you
  were buying a house?
• What if you were buying a car?

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Cost Analysis

• Cost Analysis is the review and evaluation of the
  separate elements of cost (both direct and
  indirect costs) as well as proposed profit/fee
  of
• An offerors cost or pricing data or information
  other that cost or pricing data.
• The judgmental factors applied in projecting from
  the data to the estimated costs.

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Various Thresholds

• Micro-purchase
• Contingencies
• Construction
• Simplified Acquisition Threshold
• Contingency (CONUS)
• Contingency (OCONUS)
• Commercial Item
• Large-purchase
• Cost or Pricing Data
• New Award (Negotiated)
• Subcontracts
• Modifications (Sealed bid or negotiated)

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Cost or Pricing Data

• All facts that, as of the date of price agreement
  prudent buyers and sellers would reasonably
  expect to affect price negotiations
  significantly.
• Data requiring certification must be
• Current, Accurate, and Complete
• Factual (objective) not judgmental (subjective)

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Cost or Pricing Data Exceptions

• Adequate Price Competition
• Prices set by Law or Regulation
• Commercial Item
• Waiver by HCA
• Modifying a contract or subcontract for
  commercial items

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Competition Requirements

• Two or more responsible offerors compete
  independently
• Reasonable expectation of two or more responsible
  offerors

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Other Than Cost or Pricing Data

• Not Certified
• Should be tailored
• Request only needed items
• No cost to government
• Use the Contractors Format

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Price Analysis Calculations

• There are a couple of useful concepts and methods
  we can employ to conduct Price Analysis

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Quantitative Analysis Techniques
Price Index Numbers Cost-Volume-Profit
Analysis Statistical Analysis Regression
Analysis Improvement Curve Analysis Cost
Estimating Relationships
Information on these techniques can be found in
the Contract Pricing Reference Guides -- Vol. 2
available at the website below
http//www.acq.osd.mil/dpap/contractpricing/chap-i
ndex.htm
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TYPES OF INDIRECT COST

• TRUE INDIRECT COST
• Those that cannot be directly identifiable with a
  specific cost objective
• DIRECT COST OF MINOR AMOUNT
• Rivets, washers, screws
• Accounting treatment must be consistently applied

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CATEGORIES OF INDIRECTS

• OVERHEADS
• Indirect cost related to the support of a
  particular operation.
• Material, Manufacturing, Engineering
• GENERAL AND ADMINISTRATIVE
• Management, financial, and other expenses related
  to the general operation of the
  business unit

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IMPORTANCE OF INDIRECTS

• A LARGE PORTION OF CONTRACT COSTS ARE ATTRIBUTED
  TO INDIRECT COSTS
• YEAR of BUSINESS
• 1974 43
• 1987 50
• 2000 62

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ALLOWABILITY TEST

• Cost Reasonableness
• Allocable to the Contract
• Requirements of cost accounting principles,
  practices, and standards
• Terms of the Contract

CONTRACT
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REASONABLE TEST

• Is the cost necessary in conducting business?
• Is the cost consistent with sound business
  practice, law, and regulation?
• Does the contractors action reflect a
  responsible attitude?
• Are the actions consistent with established
  practices?

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ALLOCABLE TEST

• Was the cost specifically incurred for that cost
  objective?
• Was the cost allocated in reasonable proportions
  to the benefits received?
• Is the cost necessary?

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COST PRINCIPLES

• ALLOWABLE COST
• They meet the requirements of the allowability
  test.
• UNALLOWABLE COST
• They do not meet the requirements of the
  allowability test.
• ALLOWABLE WITH RESTRICTIONS
• They have special restrictions that must be met
  before they are allowed.

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TERMS OF THE CONTRACT TEST

• Contract terms can only be more restrictive than
  the other four tests.
• Contract terms cannot make an otherwise
  unallowable cost allowable.
• Can you answer yes to the following question ?
• Is the contractor complying with any specific
  contract language that dictates the treatment of
  certain cost?

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INDIRECT COST RATES

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INDIRECT COST POOL

• Logical grouping of indirect cost with a similar
  relationship to the cost objectives.
• Material Overhead
• Manufacturing Overhead
• Engineering Overhead
• General and Administrative

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INDIRECT COSTALLOCATION BASE

• Some measure of direct contractor effort that can
  be used to allocate pool cost.
• Direct Labor Hours
• Direct Labor Dollars
• Number of Units Produced
• Number of Machine Hours

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KYLLAND SYSTEMS You recently received the
following firm fixed-price cost proposal from
Kylland Systems for X-119 System replacement
units. Kylland's cost proposal is summarized
below.
What would the Government objective be using
audit recommended indirect rates instead of
proposed rates?
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Conclusion
Questions?