# Presentation: 224741

## 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.

**Notes:**
Here is the definition of Price Analysis from FAR 15.404-1(b) (1) and (2)

## Worried about pricing?

## Know the Difference

- PRICE VERSUS COST
- PRICE ANALYSIS VERSUS COST ANALYSIS

## 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
**It’s a subjective evaluation!**

- FAR 15.404-1(b)

**Notes:**
The Government may use various price analysis techniques and procedures to ensure a fair and reasonable price.  Examples of such techniques include but are not limited to those shown on this slide.  The first two techniques are the preferred techniques.  However, if the KO determines that information on competitive proposed prices or previous contract prices is not available or is insufficient to determine that the price is fair and reasonable, the contracting officer may use any of the remaining techniques as appropriate to the circumstances applicable to the acquisition.

Comparison of proposed prices received in response to the solicitation normally satisfies the requirement for adequate price competition and establishes price reasonableness.
Comparison of previously proposed prices and previous Government contract prices with the currently proposed prices for the same or similar items.  However both the validity of the comparison and the reasonableness of the previous price must be established.

## Price Analysis

- Have you ever done any Price Analysis?

**Notes:**
Ask one of the students:  Have you ever done any Price Analysis?  Was it in your job or in your personal life?   

Since many of you are new to the contracting field, you may not have conducted price analysis in your jobs yet.  However, I bet that you all have conducted price analysis in your personal life at one time or another.  In fact, you probably are subconsciously conducting some form of price analysis with every purchase that you make.  Whether it is something very expensive, like a house or a car, or something relatively inexpensive like an item at the grocery store, you all have conducted price analysis.  

When we conduct price analysis we are using the market research that we have conducted at the time, maybe just looking at two or three different brands of like items on the grocery store shelves or comparing it in our mind with historical prices that we’ve paid for the same or similar items in the past to ensure that we are paying what we consider to be a fair and reasonable price.

## Price Analysis

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

**Notes:**
Ask the students:  How would you conduct Price Analysis if you were buying a house?

Find out from the county tax assessor how much was paid for the house the last time it was sold.  Find out how much other houses on the street cost.  Must make sure you are comparing similar size/style houses.

You could use a parametric estimating tool, such as cost per square feet to estimate the cost of the house.  
Search the internet for list prices of similar houses.

## 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 offeror’s 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.

**Notes:**
Here’s the definition of Cost Analysis, also from FAR part 15.404.

We will talk more about Cost Analysis tomorrow in the Cost Integrated lesson and exercise.

## 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)

**Notes:**
See FAR 2.101 for the definitions of Micro-Purchase and the Simplified Acquisition Threshold.   These various dollar thresholds are explained as part of the definition.  You can also find the threshold for the SAT in the FAR definition.

The SAT for contingency operations recently changed to these dollar amounts so my recommendation is that you check the latest FAR to make sure you are using the current amount.
You can use Simplified Acquisition Procedures under the Test Program for Certain Commercial Items per FAR part 13.5.  This amount is increased to $10,000,000 for acquisition entered into under the authority of 12.102(f)(1) for supplies or services that, as determined by the head of the agency, are to be used to facilitate defense against or recovery from NBC attack, as an acquisition of commercial items.

## 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)

**Notes:**
The definition of Cost or Pricing Data can be found in FAR 2.101.

## Cost or Pricing Data Exceptions

- 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

## Competition Requirements

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

## Other Than Cost or Pricing Data

- Not Certified
- Should be tailored
- Request only needed items
- No cost to government
- Use the Contractor’s Format

## Price Analysis Calculations

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

## 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-index.htm](http://www.acq.osd.mil/dpap/contractpricing/chap-index.htm)_

**Notes:**
(This slide is used as a lead-in to instruction on Price Index Numbers and Cost-Volume-Profit analysis.)

Transitional Statement:  Before we open any of the responses, we will first cover 2 of the commonly-used pricing techniques when performing Price Analysis:  Price Index Numbers and Cost-Volume-Profit Analysis.  This slide shows some of the various pricing techniques that Contract Business Advisors may have within their “tool kits.”

ASK THE STUDENTS:  
Do you use a hammer every time you use a tool from your tool box at home? (No!)  
Therefore, you will not necessarily use the same pricing technique for every procurement.  As at home, you have to use the right tool(s) for the job.

Important: Regardless of the technique used, keep in mind that we are only developing an estimate.  The contractor’s actual price/cost will depend on several factors such as market conditions, quantity or size, geographic location, technology, organizational structure, business strategy, and/or efficiency.

## 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

## 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

## IMPORTANCE OF INDIRECTS

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

## ALLOWABILITY TEST

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

**CONTRACT**

## REASONABLE TEST

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

## 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?

## 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.

## 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?

## INDIRECT COST RATES

## 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

## INDIRECT COSTALLOCATION BASE

- 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

## KYLLAND SYSTEMS

**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.

| Proposal Element | Proposed Cost |
| --- | --- |
| Purchased Parts
Commercial Items
Material Overhead @ 2.2%
Direct Engineering Labor
Engineering Overhead @ 84.0%
Direct Manufacturing Labor
Manufacturing Overhead @ 200.0%
  Total Manufacturing Cost
G&A Expense @ 5.1%
  Total Cost* | $75,000
$125,000
$4,400
$20,000
$16,800
$75,000
$150,000
$466,200
$23,776
$489,976 |

| Actual Indirect Cost Rates |  |  |  |  |
| --- | --- | --- | --- | --- |
| Indirect Cost Rate | 2004 | 2005 | 2006 | 2007 |
| Material
Engineering
Manufacturing
G&A | 2.1%
66.7%
155.0%
5.7% | 2.0%
70.3%
150.0%
5.0% | 2.1%
73.3%
159.1%
5.2% | 2.4%
75.4%
178.6%
5.6% |

| Indirect Cost Rates (Audit Recommend) | 2008 |
| --- | --- |
| Material
Engineering
Manufacturing
G&A | 2.2%
73.5%
169.8
5.4% |

**What would the Government objective be using audit recommended indirect rates instead of proposed rates?**

## Questions?

- Conclusion

**Questions?**