# Quick Guide to Cost and Price Analysis 

# for HUD Grantees and Funding Recipients

**Who is this guide for?**

This guide is for all HUD grantees and funding recipients that contract
for services and/or supplies using funds provided in whole or in part by
HUD.

**What is price analysis?**

Price analysis is essentially price comparison. It is the evaluation of
a proposed price (i.e., lump sum) without analyzing any of the separate
cost elements that it is composed of.

**What is cost analysis?**

Cost analysis is the evaluation of the separate elements (e.g., labor,
materials, etc.) that make up a contractor\'s total cost proposal or
price (for both new contracts and modifications) to determine if they
are allowable, directed related to the requirement and ultimately,
reasonable.

**Is cost or price analysis always required?**

Yes. HUD's regulations at 24 Code of Federal Regulations (CFR) Part 84,
"Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations," and 24 CFR Part 85, "Administrative Requirements for
Grants and Cooperative Agreements to State, Local and Federally
Recognized Indian Tribal Governments," require grantees to perform a
cost or price analysis for *every* procurement action, including
contract modifications (e.g., \"change orders\"), using HUD grant funds.

**When do I perform a price analysis?**

You use price analysis whenever you are comparing lump sum prices -- not
cost estimates - received from contractors in a competitive pricing
situation (e.g., when sealed bids are obtained).

**What qualifies as competition?**

Generally, competition means two or more responsible (e.g., not debarred
or suspended, etc.) offerors ("bidders"), competing independently,
submit priced offers that satisfy the grantee's contract requirement.
Obviously, the greater the number of offers received, the greater the
competition and ideally, the better the pricing.

**When do I perform a cost analysis?**

Cost analysis is used whenever you do not have price competition. A cost
analysis is required when:

-   Using the ***competitive proposal*** (or "negotiated") method of
    contracting (see 24 CFR 85.36(d)(3) for a definition), e.g., for
    acquiring professional, consulting or architect/engineering (A/E)
    services. Under the competitive proposal method, offerors are
    required to submit cost proposals that show the elements (e.g.,
    labor, materials, overhead, profit) of their proposed costs or
    price.

-   Negotiating a contract with a ***sole source***, i.e., not
    soliciting competitive bids or offers. When a sole source is
    appropriate and justified (see 24 CFR 85.36(d)(4)), you must obtain
    a complete cost breakdown from the sole source contractor and
    perform an analysis using the cost principles to establish a fair
    and reasonable price or estimated cost.

-   After soliciting competitive sealed bids, you receive ***only one
    bid***, and it differs substantially from your independent estimate
    of the contract price. If you determine that the bid is unreasonable
    and decide to not recompete (e.g., market survey tells you that you
    wouldn't get competition), then you may formally cancel the
    solicitation and negotiate a contract price with the single bidder.
    In that case, you must obtain a cost breakdown of the single bid
    price and use cost principles to determine if that price is
    reasonable.

-   Negotiating a ***modification*** (including change orders) to *any*
    type of contract, if the modification changes the work authorized
    under the contract, and changes the price or total estimated cost,
    either upwards *or* downwards. You must obtain a detailed breakdown
    of the contractor\'s proposed cost - not a lump sum proposal -
    before negotiating the change in contract price.

> ***CAUTION**: Modifications that change the work beyond the scope of
> the contract must be justified in accordance with the conditions set
> forth in 24 CFR 85.36(d)(4) or 24 CFR 84.43. If the out-of-scope
> change cannot be justified, you must procure the work competitively.*

Could there ever be a situation where I don't have price competition,
and I don't have to perform a cost analysis?

Yes. There are two situations:

-   The price can be established on the basis of catalog or market
    prices of commercial products or services sold in substantial
    quantities to the general public. A product is considered to be
    \"sold in substantial quantity\" when the regular sales volume is
    large enough to constitute a real commercial market. Services are
    considered to be \"sold in substantial quantity\" when the
    contractor/vendor customarily provides them, using his/her regularly
    employed personnel and using equipment (if any is needed) regularly
    maintained solely to provide the services.

or

-   The price is set by law or regulation.

***Do I need to analyze and negotiate profit separately?***

Whenever you are required to perform a cost analysis, and you are
negotiating a contract action that provides for a profit or fee, you
must negotiate profit separately. When negotiating profit, you should
consider ***all*** of the following:

-   The complexity of the work to be performed. The more difficult the
    work, the more profit a contractor may be entitled to.

-   Contractor's risk. How much risk -- either performance or cost to
    the contractor - will the contract create? The higher the risk, the
    higher the reward, i.e., profit.

-   Contractor\'s investment (labor, oversight, etc.). How much and what
    type of resources will the contractor have to dedicate to performing
    the contract? The greater the investment of resources the more
    profit.

-   Subcontracting. The amount of profit depends upon the size, nature
    and oversight needs of the subcontracts the contractor will use.
    Will the contractor perform most of the work, or will he/she sub out
    some of it, and if so, how much? Will subcontracted work be routine
    or complex? What amount and level of oversight and management will
    subcontracted work require of the contractor? Simple subcontracts
    for routine supplies of services should not be worth as much profit
    as complex subcontracts that require a lot oversight by your own
    highly skilled staff or management.

-   Quality of the contractor\'s past performance. Profit should reward
    the contractor for a proven record of high quality performance. A
    consistent record of delivering quality goods or services on time
    within cost, indicates that the contractor will likely "deliver the
    goods" to you, too. (Note: You probably won't be considering a poor
    performer for a new contract award.) Performance under the current
    contract must be considered when negotiating a modification.

-   Industry profit rates in the surrounding geographical areas for
    similar work. What's the "going rate," especially for standard, more
    commercial types of work? ***CAUTION:*** Be careful to not pay going
    rates when the work required is not really covered by those rates,
    e.g., paying specialty rates for routine work.

***CAUTION!*** *The **"cost-plus-a-percentage-of-cost"** and
**"percentage-of-construction-cost"** contract types are prohibited.
(See also 24 CFR 85.36(f)(4), and 24 CFR 84.44(c).) These types of
contracts reward contractors for incurring greater costs, which is just
the opposite of what is in your, the buyer's, best interest.*

***How do cost analysis and price analysis apply to the different
contracting methods?***

-   *Small Purchases*. For routine, commercial type purchases, comparing
    price or rate quotes obtained from an adequate number of qualified
    vendors is sufficient price analysis. If the small purchase is for
    professional or technical services, or the HA needs to evaluate
    other factors than price, then at least a limited cost analysis is
    appropriate. In either case, the HA's analysis should include
    comparing the proposed prices to past prices it has paid for the
    same or similar items or services.

-   *Sealed Bidding*. This is the preferred method for contracting for
    supplies, equipment and construction. (See 24 CFR 85.36(d)(2) for a
    definition.) Normally, the competitive pricing forces of the
    marketplace determine the reasonableness of the low price obtained
    through sealed bidding. Nevertheless, the HA should always compare
    its own independent cost estimate to the low competitive bid
    received. In the event they are significantly different, the HA will
    need to examine each to verify that either its own estimate or the
    market price is valid. Otherwise, no further price or cost analysis
    is required under sealed bidding.

> ***CAUTION!*** *When only one bid is received in response to a
> competitive bid solicitation, you do not have price competition. If
> you decide to award on the basis of a single submitted bid price,
> i.e., without negotiation, you must justify that the price is fair and
> reasonable. At a minimum, you should compare the bid price to your own
> in-house estimate and past prices paid for the same or substantially
> similar item(s) in the past. You should also try to obtain information
> from the marketplace, if you have not already done so in developing
> your own estimate. If you decide to cancel the sealed bid and
> negotiate a contract price with the single bidder, you must obtain a
> complete cost breakdown and perform a cost analysis of the proposed
> price. If the bidder refuses to provide a breakdown of his/her costs,
> you may have no other choice than to resolicit bids. In any case, you
> must document the rationale for your award decision.*

-   *Competitive Proposals*. This method is most often used to contract
    for professional, consulting, and architect/engineering (A/E)
    services. (See 24 CFR 85.36(d)(3) for a definition.) To determine
    the reasonableness of proposed costs, you must obtain cost
    breakdowns from the offerors showing all the elements of their
    proposed total costs and perform a cost analysis of each proposal
    using the appropriate set of cost principles (discussed below).

> ***NOTE!** When awarding a contract using the competitive proposal
> method, the type of contract (e.g., firm fixed-price or
> cost-reimbursement) you propose to award does not affect the
> requirement for a cost analysis. For example, if you intend to award a
> firm fixed-price contract via the competitive proposal method, you
> still must analyze all of the proposed costs contained in each
> offeror's price. However, you are not required to negotiate each
> individual cost element in arriving at an agreement on total price.
> The final price you negotiate with the contractor on a fixed-price
> contract normally reflects agreement only on the total price.
> Therefore, the overall objective should be to negotiate total prices
> that are fair and reasonable.*
>
> ***NOTE!*** *In certain cases, the contract may specify separately
> priced items. This is commonly done in indefinite- delivery (e.g.,
> indefinite-quantity, sometimes called job order, or "open ended")
> contracts. Under these contracts, the HA orders pre-priced items on an
> as-needed basis, up to a stated maximum quantity. For these contracts,
> agreement must be reached on each item's price before award and the
> prices included in the final contract document.*

-   *Noncompetitive Proposals*. These are sometimes called sole source
    contracts and are different from single bids. No competition is
    intended, and usually, there is no market to help set the price or
    estimated cost. Since there is no price competition to tell you if
    the price or estimated cost is reasonable, you must obtain a
    breakdown of the proposed costs and perform a cost analysis.

***What other contract actions or types require cost analysis?***

-   *Contract Modifications*. If you are negotiating a modification
    (including change orders) to any contract (even if the basic
    contract was awarded competitively through sealed bidding) that
    changes the scope of work previously authorized and impacts the
    price or estimated cost, you must use cost analysis to arrive at a
    reasonable cost. The only exception to this rule is a contract
    modification based on pricing terms already established in the
    contract document. Keep in mind that changes in scope do not always
    result in increased costs. Elimination or reduction of contract work
    may result in a decrease in the contract price. Regardless of the
    direction of the price change, these modifications require cost
    analysis using the cost principles to determine that the price
    change is fair and reasonable.

-   *Contract Terminations*. Terminating a contract means unilaterally
    ending it before its stated end. Contracts can be terminated for the
    convenience of the grantee or for cause (also called default).
    Contracts are usually terminated for convenience when the buyer no
    longer has a need for the service or products as they are specified
    in the contract, or when it is not possible to substantiate that the
    contractor's performance is poor enough to terminate him/her for
    cause. Contracts may be terminated for cause when the contractor
    fails to perform the contract as written. If you are terminating a
    contract of any type (fixed-price or cost-reimbursement) for
    convenience, or a cost-reimbursement contract for cause, you must
    use cost analysis - and the appropriate cost principles - to
    negotiate the final amount of the termination settlement.

> ***NOTE!*** *For contracts with for-profit entities and nonprofits
> listed in Attachment C to OMB Circular A-122, the cost principle at
> FAR 31.205-42 specifically addresses termination costs.*

-   *Cost-reimbursement Contracts*. In determining reasonable costs
    under any cost-reimbursement contract, a cost analysis using the
    cost principles is required.

-   *Architect/Engineer Contracts*. Cost analysis is required in
    determining if the cost portion of an A/E contract is fair and
    reasonable.

-   *Construction Contracts*. This includes all contracts and contract
    modifications negotiated on the basis of cost for construction
    management or construction, alteration or repair of buildings,
    bridges, roads, or other kinds of real property. It does not include
    contracts for equipment, or other kinds of personal property.
    Construction contracts awarded using sealed bidding ***do not***
    require cost analysis (see *Sealed Bidding* above), but construction
    contracts awarded using any method other than sealed bidding, and
    modifications to construction contracts do require cost analysis
    (see *Modifications* above).

> ***NOTE!*** *Because of widely varying factors in construction work
> such as the nature, size, duration, and location of the construction
> project, advance agreements for such items as home office overhead,
> partners\' compensation, employment of consultants, and equipment
> usage costs, etc., can be particularly important in construction and
> A/E contracts. When appropriate, they serve to express the parties\'
> understanding regarding work starts and any costs are incurred. This
> helps to avoid possible disputes or disallowances later. Guidance on
> the use of advance agreements is found at FAR 31.109.*

***How do I perform an analysis?***

Here are some basic techniques.

***Price analysis***. Use as many of the following techniques as
applicable and appropriate:

-   Compare competitive prices received in response to the solicitation
    to one another. This assumes you receive a large enough number of
    competitively priced offers from the current marketplace.

-   Compare proposed prices with prices under existing contracts and
    with prices proposed in the past for the same or similar
    items/services. Be sure to factor in any market changes (e.g.,
    commodity price changes) or other influences (e.g., inflation).

-   Apply rough yardsticks (e.g., dollars per pound, per square foot,
    per hour, etc.) to compare prices and highlight significant
    inconsistencies that warrant additional pricing inquiry.

-   Compare competitive price lists, published catalog or market prices
    of commodities and products, similar indices and discount or rebate
    arrangements.

-   Compare proposed prices with your independent (i.e., in-house) cost
    estimates.

***Cost Analysis***.

-   Verify the accuracy of the cost and pricing information submitted,
    and evaluate:

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-   The reasonableness of the proposed costs, including allowances for
    contingencies. To be considered reasonable, proposed costs must meet
    three critical tests. The costs must be:

    -   *Allowable*. The applicable cost principles (see section below)
        will usually state whether a type of cost is allowable or not.

    -   *Allocable*. This means that the costs are logically related to,
        or required in the performance of the contract. Many costs may
        be allowable but not related to the work required under the
        contract.

    -   *Reasonable*. This term is generally defined as what a prudent
        business would pay in a competitive marketplace. A cost can be
        allowable and allocable, and still not be what a prudent
        businessperson would pay (e.g., first class airfare for a
        proposed subcontractor).

-   The necessity for proposed cost items. Technical personnel (e.g.,
    engineer, architect, information systems specialist, etc.) should
    review the proposed direct cost elements to determine their
    necessity to perform the contract and reasonableness (e.g., in
    comparison to market rates). A cost may be allowable under the cost
    principles and even allocable to the type of work to be performed,
    *but* still not be necessary for the specific contract.

-   Application of audited or pre-negotiated (e.g., by the Federal
    Government) indirect cost (e.g., overhead) rates, labor and fringe
    benefit rates, or other factors.

-   Effect of the offeror\'s current practices on future costs. Does the
    offeror have a track record of containing costs (completing
    contracts at or "under cost")? Does he/she overrun costs?

-   The projection of the offeror\'s cost trends. Is there any
    indication that his/her costs are likely to increase or decrease
    over the life of the contract?

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-   Compare costs proposed by the offeror with:

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-   Actual costs previously incurred by the same contractor for the same
    or similar work. If it is a repetitive type of work or service, how
    much has it cost in the past. Apply any appropriate inflation
    factors for past work.

-   Actual costs of previous the same or similar work performed by other
    contractors.

-   Previous cost estimates from the offeror or other offerors for the
    same or similar items.

-   The methods proposed by the offeror with the requirements of the
    solicitation (i.e., do the costs reflect the technical approach
    proposed and the work required?).

-   The HA's independent cost estimate, either created by HA staff or
    for the HA by an independent architect, engineer, appraiser, etc.

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-   Verify that the offeror\'s cost submissions comply with the
    appropriate set of cost principles.

**What are cost principles?**

Cost principles describe the allowability of various types of costs
(e.g., labor, travel, communications, etc.). The HUD regulations at 24
CFR Part 85, "Administrative Requirements for Grants and Cooperative
Agreements to State, Local and Federally Recognized Indian Tribal
Governments" (specifically, section 85.22, "Allowable costs"), and 24
CFR Part 84, "Uniform Administrative Requirements for Grants and
Agreements with Institutions of Higher Education, Hospitals, and Other
Non-Profit Organizations" (specifically, section 84.27, "Allowable
costs") require you to use them when performing cost analysis.

**Which cost principles do I use?**

It depends upon the type of organization with which you are contracting.
The use of one set or another is contract-specific. For example, if the
contract is with a private business concern, use the principles in FAR
Subpart 31.2 (see below). Here is a list of the cost principles and the
types of organizations covered by each:

> State, local and tribal governments Office of Management and Budget
> (OMB)
>
> Circular A-87
>
> Private nonprofit organizations other OMB Circular A-122

than institutions of higher education

or hospitals

> Educational institution OMB Circular A-21
>
> Private, profit-making entities Federal Acquisition Regulation (FAR),
>
> and nonprofits listed in 48 CFR Chapter 1, Subpart 31.2

Attachment C of OMB

Circular A-122

***NOTE!*** *When applying the cost principles in FAR Subpart 31.2, the
following terms shall be read to refer to the HUD grantee/funding
recipient: "Government," "agency," "contracting officer" and
"administrative contracting officer" ("ACO"). The term "contractor"
shall refer to the grantee's/funding recipient's contractor. FAR 31.001
contains a glossary of technical terms used in Subpart 31.2.*

**Where can I find the cost principles?**

The cost principles are available online:

> OMB Circulars: http://www.whitehouse.gov/omb/circulars/index.html
>
> FAR Subpart 31.2: http://www.arnet.gov/far/