University Purchasing Department

Cost and Price Analysis for Sponsored Transactions

INTRODUCTION

Price analysis must be performed on all sponsored transactions valued at over $3,500 (the current Federal Acquisition Regulation (FAR) micro-purchase threshold (MPT)) and cost analysis either above $150,000 or any non-competitive transaction above the MPT ($3,500). The objective of price or cost analyses is to ensure that prices paid by the University when procuring through Sponsored funds are fair and reasonable. This is a higher standard than the commercial practice of “whatever the market will bear”. Price and cost analyses incorporate various techniques to accomplish this objective. This primer presents those techniques and provides guidance on how to negotiate and document fair and reasonable prices.

The responsibility for applying various analysis techniques rests with the Departmental Administrators (DA’s) and/or Purchasing Contract Officers. The particular technique chosen, and the extent of the analysis, will depend on:

  • The type of product or service
  • Dollar value of the procurement
  • Urgency of the requirement
  • Experience and expertise of the DA

If price analysis and negotiation fail to achieve fair and reasonable prices, cost analysis may be performed. Ask the supplier for a detailed cost breakdown of the proposal cost elements.

The goal of this primer is to facilitate the attainment of procurement prices that are:

  • Compliant with Government guidelines
  • Supportable in customer audits
  • In the best interest of the University

How do cost and price analysis apply to the different competitive procurement methods?

  • Small Purchases ($3.5K - $150K). For routine purchases, comparing price or rate quotes obtained from an adequate number of qualified suppliers is sufficient price analysis. If the small purchase is for professional or technical services, or the there is a need to evaluate other factors than price, then at least a limited cost analysis is appropriate, unless such services are firm and fixed and not recurring. (see price analysis methods below)
  • Sealed Bidding( $150K). This is the preferred method for contracting for supplies, equipment and construction. Normally, the competitive pricing forces of the marketplace determine the reasonableness of the low price obtained through sealed bidding. Nevertheless, it is preferredto compare an independent cost estimate to the low competitive bid received. In the event they are significantly different, this difference should be reviewed further 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 the decision is to award on the basis of a single submitted bid price, i.e., without negotiation, justification that the price is fair and reasonable must be documented. At a minimum, a comparisonof the bid price to the in-house estimate and past prices paid for the same or substantially similar item(s) in the past. There should also be an effort to obtain information from the marketplace, if not already done so in developing your own estimate. If the decision is to cancel the sealed bid and negotiate a contract price with the single bidder, a complete cost breakdown must be obtained and perform a cost analysis of the proposed price. If the bidder refuses to provide a breakdown of their costs, there may be no choice other than to resolicit bids. In any case the rationale for the award decisionmust be documented.
  • Competitive Proposals( $150K). 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, cost breakdowns must be provided by the suppliers showing all the elements of their proposed total costs and perform a cost analysis of each proposal.
    NOTE! When awarding a contract using the competitive proposal method, the type of contract (e.g., firm fixed-price or cost-reimbursement) still requires the completion of a cost analysis. For example, if the intention is to award a firm fixed-price contract via the competitive proposal method, there still must be an analysis of all the proposed costs contained in each supplier’s price. The final price negotiated 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 (sometimes called job order, "open ended" or blanket order) contracts. Under these contracts, the business owner 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. Known assingle/sole source transactions 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 validate if the price or estimated cost is reasonable, a breakdown of the proposed costs must be obtained from the supplier and a cost analysis is to be performed.

What other contract actions or types require cost analysis?

  • Contract Modifications. If a modification is being negotiated (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, cost analysis must be used 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 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 University 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 them 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 to negotiate the final amount of the termination settlement.
  • 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).

How is Price Reasonableness Determined?

1. INTRODUCTION:

University Purchasing plays a significant role with Schools and Departmentsin support of establishing transaction value(s) that contribute to the decision making process leading to the purchase of goods and services required by the University community. Frequently, these purchases involve the expenditure of sponsored funds where a main consideration is to assure that the price to be paid for goods and services is fair and reasonable. This is essential to insure that sponsored funds are utilized in a cost effective manner and to conserve funding where resources are limited. Each price analysis or cost analysis MUST be documented in writing using the University’s approved templates.

2. WHY PRICE OR COST ANALYSIS:

The most basic reason for requiring that price or cost analyses be performed and documented is that it is a sound business practice. This, as noted above, insures that funds are expended in the most cost effective manner and conserves limited resources. A price that is excessive or unreasonable fails completely to accomplish this important goal; a price which is determined to be fair and reasonable is the fulfillment of this important objective. This is applicable for purchases in excess of $3,500.

3. WHAT IS A PRICE ANALYSIS:

In simple terms, a price analysis is a review of the price proposed by a supplier and an assessment or evaluation as to whether or not it is fair and reasonable. A determination that a price is fair and reasonable is really a conclusion that the proposed price is fair to both parties, considering the quality, delivery and other factors. The basis for reaching the conclusion is found in the facts and information considered and analyzed by the and/or the departmental business manager. This is what is called price analysis.

4. WHAT IS A COST ANALYSIS:

A cost analysis is different from a price analysis. The major difference is that a price analysis looks at the whole price. It does not involve an examination of the individual cost elements or components that collectively comprise the supplier's total price.

A cost analysis examines the individual cost elements that comprise the total proposed price. Depending on the purchase, these elements may vary but generally include such things as direct labor hours, labor rates, material costs, overhead or indirect rates, a cost of money factor, general and administrative expenses (G&A) and a profit or fee.

5. METHODS COMMONLY USED IN PRICE ANALYSIS:

In performing a price analysis, that is, determining a price to be fair and reasonable without examining the individual components of the price there are a variety of available methods. Which method is used and its suitability depends on the details of the individual transaction. What follows is a listing of the most common methods or criteria used to determine a price fair and reasonable by price analysis.

  1. PRICE COMPETITION:

When two or more acceptable offers are received and the lowest price is selected, the price of the lowest offered can be concluded to be fair and reasonable. It is noted that generally where the difference in prices between the two offers differs by less than 25%, then price competition is said to exist (aka Competitive Range*). A price that is very low it is advisable to ensure that the supplier understands what is being asked for and has made no errors.
Example: Supplier A proposes a price of $2,592; Supplier B, a price of $2,550 and Supplier C, a price of $1,400. Supplier C is low but the difference is too great. This must be checked to see if Supplier C is proposing the same item(s) and has made no errors in the proposed pricing. If selection is made to other than the low, acceptable offer, the price must be determined to fair and reasonable by other means.

*DEFINITION: “COMPETITIVE RANGE” INCLUDES ALL PROPOSALS THAT HAVE A REASONABLE CHANCE OF BEING SELECTED FOR AWARD, ON THE BASIS OF COST, PRICE, AND OTHER FACTORS

A common guideline in establishing the competitive range is a 25% margin between the low bidder and the next low bidder. The DA’s determination also depends on the item being purchased and the number of responsive bids. A bid margin of greater than 25% may indicate:

  • An unfair advantage exists
  • A “buy-in” situation
  • Poor source selection
  • Bid rigging or collusion
  • A misunderstanding of requirements
  • A mistake in pricing

If any of these situations exist, the competition is not adequate, and the DA must use another price analysis technique to analyze and negotiate the price.

  1. COMPARABLE TO PRICE SOLD TO FEDERAL GOVERNMENT:

The Federal Government often enters into contracts with various companies to establish the prices of items that will be sold to the Government General Services Administration (GSA). These are presumed to be fair and reasonable. If a Supplier cites a GSA contract price, it must also provide the GSA contract number. If the GSA price is available from a website, a copy of the webpage must be provided. This then is adequate rationale to determine the price fair and reasonable. The actual price may be lower than the GSA due to discounts, (if this is the case, it should be noted in the written analysis), or higher based upon volume sales discounts (supplier should provide their price break structure for volume sales).

  1. CATALOG OR ESTABLISHED PRICE LIST:

Where only one offer is received and the supplier has a published or established price list or catalog, available to the general public, which sets forth the price of an item, this fact can be used to find the price fair and reasonable. The catalog should be current (within one year, generally). Provide a dated page from the catalog along with the page where pricing is identified (this could be a printout of a web page). Often, discounts off of the price list are offered. If this is the case, it should be noted in the written analysis. The item to be purchased should generally be a commercially produced one sold to the general public in substantial quantities.

Definitions:

Commercial Items:Supplies or services regularly provided to the general public in the course of normal business operations.

Substantial Quantities:Quantities sufficient to constitute a commercial market. Items must be in production. Nominal quantities, such as models, samples, prototypes, or experimental units are not substantial.

General Public:A significant number of customers other than the Government. The item involved must not be for Government end use.

Negotiation

Since established commercial catalog prices are considered fair and reasonable, discounts from established catalog prices are considered fair and reasonable. However, DA’s should always attempt to negotiate discounts from catalog prices for the following reasons:

TYPICAL LIST PRICE IS BASED ON: / TYPICAL INDUSTRIAL PURCHASE FEATURES:
Retail price / Wholesale price
Price is for ONE unit / More than one unit
Item is for end-user / Item is for resale
One-time sale / Repeat buys
One item only / Numerous items

The table above presents circumstances that warrant negotiating from established catalog prices. Even after negotiation, a DA may still be uncertain as to whether he/she has obtained the best possible pricing. In these cases, he/she may obtain a price warranty or Most Favored Customer (MFC) clause, similar to this example:

“PRICE WARRANTY: OFFEROR REPRESENTS AND WARRANTS THAT THE PROPOSED PRICES ARE AS LOW OR LOWER THAN THOSE CURRENTLY BEING QUOTED TO COMMERCIAL OR INDUSTRIAL USERS OR THE GOVERNMENT FOR THE SAME PRODUCTS IN LIKE QUANTITIES UNDER SIMILAR CIRCUMSTANCES.”

Such warranties should not be relied upon as substitutes for price analyses.

  1. MARKET PRICES:

Where an item has an established market price, verification of an equal or lower price also establishes the price to be fair and reasonable. Example: the purchase of metals such as lead, gold, silver, or commodities such as grains.

  1. HISTORICAL PRICES:

If the buyer has a history of the purchase of the item over several years, this information, taking into account inflation factors (based on appropriate pricing indices such as PPI, CPI, etc.), can be used to determine a price fair and reasonable. The historical pricing summary must be supported by appropriate documentation (copies of previous PO’s or invoices).

  1. PRICE BASED ON PRIOR COMPETITION:

It may be that only one Supplier will make an offer. If this is the case and the item was previously purchased based on competition, this may be acceptable. In such cases, cite the price of prior purchase and note if it was competitive or based on catalog price or other. An increase in price, with no current catalog or competition, should be about the current rate of inflation between the time of the last competition and the commitment of the current order.

  1. INDEPENDENT UNIVERSITY (In-house) ESTIMATE:

If an independent estimate of the item has been prepared prior to contacting suppliers, and no other method or information is available, a price can be compared to the estimate and if it compares favorably, this can be a basis to find a price fair and reasonable. The estimate, however, must be independent. Use of a Supplier's pricing to make an independent estimate is NOT independent.

  1. COMPARISON TO A SUBSTANTIALLY SIMILAR ITEM:

Often an item is very similar to a commercial one, but has added features that are required. If the Supplier can provide the price of the base item, by a catalog, and then state the costs of the additional features, the buyer can then find the price reasonable based on these two factors. Differences should be detailed and priced. The reasonableness of the extra cost can be a) checked against other purchases that had the extras, or some of them, or, b) based on an evaluation of the extra cost by technical personnel.

A historical price of a similar product can be used for price analysis if 4 requirements are satisfied:

  • It was a validated price
  • It is adjusted for quantity
  • It is adjusted for inflation
  • Identify and analyze differences
  1. SALES OF THE SAME ITEM TO OTHER PURCHASERS:

If the Supplier has no catalog but has sold the same item to others in the recent past, the price can be determined to be fair and reasonable by verifying with those other purchasers what price they paid. This must be noted in the written documentation with name, telephone number, date of confirmation and price paid (copy of an email with the previous purchaser indicating the pricing and product information would be preferable). A copy of another customer’s invoice will suffice.

  1. AWARD SPECIFICALLY IDENTIFIES ITEM/PERSON AND PRICE:

Under federally funded grant awards if the award references a proposal that a) specifically identified the manufacturer, model and the price (only if a supplier quotation accompanied the proposal), or b) identified a specific person with an hourly rate for fixed price for that person, then the contracting officer has accepted that price as being deemed reasonable by the proposer and nothing else needs be done as long as the final price does not exceed the budgeted line item.
If, however, the award is a federally funded contract or purchase order, then the proposer must formally provide rationale with the proposal (using one of the above methodologies in a through i) to determine price reasonableness at the time of the proposal before this method of price reasonableness is acceptable. Under FAR regulations, it is the responsibility of the proposer to determine price reasonableness, either at the time of proposal or at the time an acquisition is made.
Documentation (copy of the award page related to the acquisition and any supporting documents, i.e. copies of quotations, in-house estimates, other customer invoices, GSA pricing, etc.) supporting either of the above situations must be provided to the Purchasing Department.