The Basics of Price Analysis
Presented by Edmund Kowalski
Financial Services Office (FSO)
Updated as of April 19, 2006
Pricing Wisdom
A cynic is a man who knows the price of
everything and the value of nothing.
Oscar Wilde
2
Agenda/Briefing Topics
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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
3
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!!
4
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.
5
Price Analysis
6
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.
7
In Plain English:
What is a Price Analysis?
• It’s a comparison!
• A comparison of the proposed price to
–
–
–
–
–
–
All offered prices
The current contract price
The previous/historic contract price
A similar item’s/service’s price
An IGCE
Others
8
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.
9
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.
10
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 officer’s rationale, assumptions,
calculations, and final conclusion
(reasonableness determination) are
verifiable and convincing to a third party.
11
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.
12
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
13
GAO/DoD IG Reports
(Or Why Should You Care?)
14
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.
2. 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.
15
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 52.21520), 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 .
16
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 specialist’s job
– Documentation is essential
• Opinion: There doesn’t 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
17
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
18
Two Types of
Cost or Pricing Data
19
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.
20
Second Type: Information Other
than Cost or Pricing Data
[FAR 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!
21
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 Officer’s representative in support of (the
proposal) are accurate, complete, and current as of (date
negotiations complete or price agreement reached).”
22
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
23
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.
24
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.)
25
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
26
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.”
27
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.
28
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.
29
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
30
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.
31
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
32
Price Analysis Techniques
33
Proposal Price Analysis
Techniques[FAR 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)
34
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.
35
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
36
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.
37
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.
38
Comparing Offers Received
Sample 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?
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Answer to Sample Problem on
Comparing Offers Received
• There is not enough information.
• The problem didn’t 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.
40
Commercial Items
41
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.
42
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.
43
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.
44
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 offeror’s 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)].
45
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
46
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 officer’s personal knowledge of the item being purchased;
(vi) Comparison to an independent Government estimate; or
(vii) Any other reasonable basis.
47
Price Premiums
• Per FAR 12.209: Commercial item prices are affected by factors as
– speed of delivery, length and extent of warranty, limitations of seller’s
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 Government’s
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: Boeing’s 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).
48
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.
49
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.
50
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.
51
Price Analysis Arithmetic
52
Price Analysis Arithmetic
Examples
• Calculating the price difference and
percentage change for
– a price increase
– a price decrease
• Calculating the annualized percentage
change
53
Calculating Percent Change:
Two 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
54
Calculating Percent Change,
Scenario One; Price Increase
Current or proposed price
Less previous/comparison price
Equals price change/difference
Divided by previous/comparison price
Equals
Result multiplied by 100
Equals percent change/difference
$150
($110)
$ 40
$110
0.3636
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.
55
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.
56
Calculating the Annualized*
Percentage 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 TACOM’s method per the old SOP
715-1
57
Calculating the Annualized
Percentage 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.
58
Calculating the Annualized
Percentage 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%.
59
Price Analysis Documentation
60
Competitive Procurement
Price 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?
61
Competitive Procurement PA
Example (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.)
62
Competitive Procurement PA
Example (3 of 4)
Offer
Red
Blue
Green
White
Price
$1000
$1050
$1500
$2050
$ Diff
N/A
$50
$450
$550
% Diff
N/A
5%
43%
37%
$ LO
N/A
$50
$500
$1050
% LO
N/A
5%
50%
105%
63
Competitive Procurement PA
Example (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.”
64
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).
65
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.
66
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
67
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.”
68
Commercial Versus Government
Contracting/Pricing
69
Commercial Versus
Government (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.
70
Commercial Versus
Government (2 of 3)
• Commercial
– Bottom line/profit driven
– Price is important
– Price targets determine the buyer’s bonus and
impact evaluations
– Partnering leading to more cost analysis
– Less rule driven
71
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 leadtime
Despite Acquisition Reform, government purchasing is
still rule driven
72
Basis of Contractor’s Price:
Cost 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
73
Basis of Contractor’s Price:
Cost 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.
74
Basis of Contractor’s Price:
Market 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 one’s product through advertising, high quality,
delivery, and/or customer service.
– Price Leader Pricing. Seller sets prices & price changes
followed by others.
75
Basis of Contractor’s Price:
Price 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
76
Basis of Contractor’s Price:
Price 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.
77
Basis of Contractor’s Price:
Price 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 seller’s place of business.
78
Price Comparisons Discussion
79
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.
80
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
81
Price Comparisons:
Introduction
• 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.
82
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
83
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.
84
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.
85
Price Comparison Example
(2 of 2)
• Current price
• Comparison Price
$150
$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.
86
Price Comparison:
Same Contractor? (1 of 3)
• Different contractor means different cost
structure.
• Different contractor may mean different
price/cost objectives (price strategy).
• Basis of the contractor’s price?
– Cost plus profit price (cost based)
– Market based price (price based)
87
Price Comparison:
Same 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.
88
Price Comparison:
Same Contractor? (3 of 3)
• Contractor’s 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 contractor’s past performance is also an
important price consideration.
– If a contractor is late, cannot deliver, or was terminated,
how good is his price?
89
Price Comparison:
Same 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?
90
Price Comparison:
Packaging
• Level of packaging similar?
• Packaged in bulk or is each item
packed/packaged separately?
• Commercial or Military?
• Any special instructions?
91
Price Comparison:
Transportation
• Vendor’s Geographic Location impacts the
item’s 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.
92
Price Comparison:
Economics/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?
93
Economics/Escalation:
Price 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)
94
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?
95
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.
96
Price Comparison:
Quantities/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 ?
97
Price Comparison:
Significant 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.
98
Price Comparison:
Other 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.
99
Price Analysis Techniques:
Discussion
100
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.
101
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?
102
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
103
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.
104
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
105
Comparison Price Sources:
Suggested 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
106
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.
107
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 isn’t necessarily
reasonable just because an item is in a
published price list.
108
Price Analysis:
Catalog/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?
109
Evaluating Prices on Commercial
Items
• A price listed in, or discounted from a
catalog, doesn’t 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.
110
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.)
111
Percent of Sales Test
• Previously used to define commercial sales, it is
still a valid technique for reasonableness
determination
– The item’s 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.
112
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,
113
especially if you have a TDP.
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. Don’t waste the rep’s
time. Cultivate the rep as a source of info.
• Explain: “From Government. Doing price
study.”
114
Seeking Pricing Info Over the
Phone/Internet (2 of 2)
• Have basic information ready:
– Known source. Manufacturer’s 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.
115
Discounts
116
Types of Discounts
•
•
•
•
Trade or functional discount
Promotional discount
Cash (prompt payment) discount
Quantity discount
– Cumulative
– Non-cumulative
• Mom’s price (most favored customer)
117
Trade/Functional Discounts
Defined
• 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.
118
Cash (Prompt Payment)
Discounts Defined
• Definition. Price reduction for payment of
invoice or account made within a specified
period of time.
– Seller’s rationale:
• To encourage prompt payment of invoices.
• To reduce his credit risks & cost of collecting
overdue accounts.
• To follow industry or historical practice.
119
Cash Discounts:
Seller’s 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).
120
Cash Discounts:
Application/Accounting
Practice
• (In both price and cost analysis) Credit
applied directly to the item’s 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
121
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 @ $100 total. Pay $98 within 10 days
($100*[100% - 2%]) or $100 within 30
days.
122
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).
123
Quantity Discount:
Know the Specifics
• Seller’s consideration/buyer’s 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
124
Quantity Discount: Rationale
(1 of 2)
• Larger orders reduce seller’s 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
125
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.
126
Quantity Discount & the
Learning 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).
127
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 standalone 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.
128
Discussions With Offerors
129
Discussions with Offerors
• Congressional criticism that buyers were not
getting the “best price” for the government.
– Damned if you do, damned if you don’t 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.
130
Reasons to Conduct PriceRelated 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.
131
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.
132
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.
133
Unbalanced Pricing
134
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 “rules of thumb”
– Trend analysis
• “Large” percentage variation: 20% +/» Compare base to option prices
» Compare CLINs/SLINs to those of IGCE
» Comparison of competing offerors’ prices
135
Unbalanced Pricing: Example 1
CLIN Service/Description Offeror A Offeror B Offeror C Offeror D
0001
Task 1
100
110
120
130
0002
Task 2
200
210
220
230
0003
Task 3
100
310
330
340
0004
Task 4
450
410
440
450
Total
850
1,040
1,110
1,150
136
Unbalanced Pricing:
Sustained Protest
• Al Ghanim Combined Group Gen. Trad. & Cont.
– Improper price comparisons
• Low price offer won based on the total proposed cost.
• But price analysis not conducted on separate line items.
• Question of whether winning offeror understands SOW.
– Claims Court:
• Violated FAR 15.404-1(g) Unbalanced Pricing.
• Government failed to adequately compare bidder prices.
• Government did not compare its IGCE to offerors’ line item
prices.
137
Unbalanced Pricing: Example 2
CLIN Service/Description
0001
Task 1
0002
Task 2
0003
Task 3
0004
Task 4
Total
Base
Option 1 Option 2 Option 3
100
110
120
130
200
190
220
230
300
310
320
340
400
410
420
450
1,000
1,020
1,080
1,150
138
Price Analysis and
Documentation Reference Books
• U.S. Army Contracting Agency (ACA) homepage
– Resource Library
• ACA Procedures
– ACA Cost & Price Analysis Handbook
– Prenegotiation Objective Memorandum & Price Negotiation
Memorandum Guide
– ACA Market Research Guide
• AT&L Knowledge Sharing System homepage
(DAU)
– Guidebooks & Handbooks
• Contract Pricing Reference Guides, Volumes 1- 5
139
Conclusion (1 of 2): General
• Ask questions of and/or discuss with the offeror:
– Mr. Contractor: What is the basis of the price ?
– From the User/customer: Ask for requirements
clarification when necessary.
• Pricing arithmetic:
– Use round numbers
– Accuracy has its place but…
– Be consistent in your analysis
• Remember: Many factors such as schedule,
quantity, transportation, etc., affect the price.
• Document your price analysis.
140
Conclusion (2 of 2):
Documentation
• Should be a concise, succinct narrative explanation.
– What was proposed by the contractor?
– Nature and extent of the government evaluation?
– Basis of reasonableness determination?
• Use Microsoft Excel spreadsheets for comparing
offers/prices rather than incorporating them into a Word
document.
– Professional appearance counts, lends credibility to presentation.
– Basic Microsoft Excel training available if demand sufficient.
• The FSO can review your price/cost document,
recommend an optimal format, and/or prepare the final
document.
141