NCMA Blue Ridge Chapter - Cost and Price Analysis 24 January 2024.pptx

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Cost and Price Analysis for
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Key Techniques and Best Practices

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Learning
Objectives
• Difference between Cost Analysis and Price
Analysis
• Understanding Cost Analysis
• Price Analysis Techniques
• Components of Cost & Price
• Documentation and Compliance
• Basis of Estimate (BOE)
• Selecting a Method of Price Analysis and
Assessing Documentation Adequacy

What is the primary goal of cost and price analysis?
A) To find the cheapest supplier
B) To ensure fair and reasonable pricing
C) To maximize company profits
D) To comply with government regulations
Poll Question #1

Cost Analysis vs. Price Analysis: Key Differences a
Understanding Cost Analysis:
•Definition:
• Cost Analysis is the process of breaking down and examining the individual
cost elements that make up the final cost of a product or service.
•Focus:
• Primarily concerned with determining the actual cost of production or service
delivery.
•Application:
• Used for budgeting, financial planning, and to inform pricing decisions based
on cost.

Cost Analysis vs. Price Analysis: Key Differences v
Understanding Price Analysis:
•Definition:
• Price Analysis involves evaluating a supplier's price by comparing it with external
benchmarks, without examining the individual cost elements.
•Focus:
• Concentrates on market price and understanding what customers are willing to
pay, rather than just the cost of production.
•Application:
• Used for assessing supplier prices, ensuring competitive pricing, and evaluating
market position.

Key Components of Cost Analysis:
Direct Costs:
• Costs directly tied to the production of goods or services, such as raw materials
and labor.
Indirect Costs:
• Costs not directly associated with production but necessary for operation, like
administration, utilities, and rent.
Fixed Costs:
• Costs that do not change with the level of production or service delivery, such as
rent, insurance, and salaries of permanent staff.
Variable Costs:
• Costs that vary in proportion to the level of production or service, including raw
materials, direct labor, and utility costs in manufacturing facilities.

Importance in Business:
Budgeting and Cost Control:
Essential for accurate budgeting, forecasting, and controlling costs.
Pricing Decisions:
Provides a basis for setting prices that cover costs and ensure
profitability.
Financial Health:
Vital for maintaining the financial health of a business by understanding
and managing production costs effectively.

Challenges in Cost Analysis:
Accurate Cost Allocation:
Ensuring that costs are correctly categorized as direct, indirect, fixed, or variable.
Adapting to Cost Variability:
Responding to fluctuations in costs, especially variable and indirect costs.
Managing Overheads:
Proper calculation and allocation of overhead costs to products or services.

Diverse Methods of Price
Analysis Techniques
• Price analysis involves various techniques to
determine the fairness and reasonableness of a
price.
• It's essential for strategic purchasing, contract
negotiations, and competitive pricing.
• Importance of choosing one method

Which technique is commonly used in price analysis?
A) Historical price comparison
B) Cost estimation
C) Market share analysis
D) Break-even analysis
Poll Question #2

Overview of 7 Key Price Analysis Techniques a
1. Competitive Bidding (aka Adequate Competition)
In this method, prices are analyzed by comparing quotes or bids from multiple vendors or
suppliers. This is most effective in a competitive market where numerous suppliers are willing
to provide the product or service, ensuring that the price paid is the most competitive.
When to Use: Best for situations where there are many suppliers and an open market.
2. Historical Pricing:
This technique examines the price history of the same or similar items. It's useful in situations
where you have recurring purchases or are dealing with long-term contracts. Historical pricing
can reveal pricing trends and patterns that might influence current purchasing decisions.
When to Use: Useful when dealing with recurring purchases or
long-term contracts.

Overview of 7 Key Price Analysis Techniques c
3. Parametric Estimating:
This method uses statistical relationships between historical data and other variables
(like production volume or technological complexity) to estimate a price. It's effective for
complex projects where similar historical data is available.
When to Use: Effective for complex projects where historical data is available.
4. Competitive Published Price Lists:
This involves comparing the prices of similar items or services in the current market. It's
particularly useful when the products or services being analyzed are standard or
common in the market, allowing for direct price comparisons.
When to Use: Ideal for standardized or common products/services.

Overview of 7 Key Price Analysis Techniques b
5. Independent Government Cost Estimates (IGCE)
Involves comparing proposed prices with government estimates. It's important when
IGCE is available, but these aren't always accessible. Significant variances might
indicate pricing issues.
When to Use: Best utilized in assessing fairness in government contracts when IGCE is
available.
6. Market Research:
This technique involves gathering and analyzing data about market trends, consumer
demand, and supply conditions. It's useful for pricing new products or services, or when
entering a new market, providing insights into current market dynamics and
expectations.
When to Use: Helpful for new products or services, or entering new markets.

Overview of 7 Key Price Analysis Techniques d
7. Analysis of Non-Certified Cost or Pricing Data::
Entails evaluating data provided by the offeror that isn't certified as cost or pricing data. Often a last
resort, used when other data sources are not available, and it may require cost analysis for
reasonableness.
When to Use: Appropriate as a fallback method when no other reliable pricing data is available.
Conclusion:
Each of these techniques has specific scenarios and applications where they are most effective.
The choice of technique depends on factors like the nature of the product/service, availability of
data, market conditions, and the specific objectives of the price analysis.
FAR 15.404-1 Proposal analysis techniques: https://www.acquisition.gov/far/15.404-1

Select One Method
Two (or more) is always better than one!?? This is not true in the world of price analysis.
If you have to cobble together two or more reasons why one vendor or proposal is better
than another, there's probably something wrong with your analysis (or the vendor or
proposal).
Buyers are often forced into selecting a particular vendor or proposal and stuck justifying
a bad situation.
A good price analysis and source selection should stand on their own and be easy
to defend. Auditors should come to the same conclusion as you.

Factors Affecting Cost and Price
Components of Prices
Part 1: Factors Affecting Cost and Price
Part 2: Components of Prices
Key Considerations:

What factor can significantly affect the cost component of a price?
A) Brand reputation
B) Material costs
C) Customer service quality
D) Marketing strategy
Poll Question #3

Part 1: Factors Affecting Cost and Price a
Market Dynamics:
Competition for government contracts and market saturation among contractors.
Impact of government spending trends and budget allocations on contract opportunities.
Economic Factors:
National economic policies and funding levels for government programs.
The effect of economic cycles on government spending and contracting.
Supply Chain Issues:
Compliance with government procurement standards and requirements.
Dependence on reliable suppliers for meeting government contract specifications.

Part 1: Factors Affecting Cost and Price b
Regulatory Environment:
Adherence to specific government regulations and standards (e.g., FAR, DFARS).
The impact of compliance costs on overall contract pricing.
Technological Advancements:
Need for advanced technology to meet government contract requirements.
Costs associated with implementing and maintaining cutting-edge solutions.

Part 2: Components of Prices
Direct Costs:
Costs directly attributable to the contract, like labor, materials, and equipment.
Compliance with government accounting standards for direct costs.
Indirect Costs (Overheads):
General and administrative expenses, including overheads allocated as per government contracting regulations.
Challenges in accurately allocating and justifying overhead rates to government contracts.
Profit Margin:
Determined within the guidelines of government contracting regulations.
Balancing competitiveness with allowable profit margins in government contracts.

Documentation and
Compliance in Price Analysis
• The Importance of Accurate and Thorough
Documentation
• Overview of Cost-Based Pricing and Value-
Based Pricing
• Details on Cost Proposals
• Using a Compliance Matrix in Government
Contracting
• Role of Documentation in Legal and Procedural
Compliance

Why is documentation important in price analysis?
A) To track changes in market trends
B) To provide evidence of fair pricing practices
C) To facilitate employee training
D) To assess the effectiveness of marketing campaigns
Poll Question #4

The Importance of Accurate and Thorough Documentation:
Ensuring Transparency and Accountability:
Critical for Trust: Accurate documentation establishes trust and integrity.
Justifying Pricing Decisions: Detailed records provide clear justification.
Facilitating Decision-Making: Aids in understanding past pricing strategies.

The Importance of Accurate and Thorough Documentation: b
Necessity for Audits and Regulatory Compliance:
Audit Readiness: Accurate documentation demonstrates compliance with contractual and regulatory requirements.
Adhering to Regulations: Proper documentation is key to proving adherence to the FAR, Supplements, and other
Regulations.
Avoiding Legal Complications: Inadequate or inaccurate documentation can lead to legal challenges.

The Importance of Accurate and Thorough Documentation: c
Maintaining Credibility with Government Agencies:
Building a Reputation: Consistently well-documented pricing decisions contribute to building a strong reputation with
government clients.
Facilitating Clear Communication: Effective documentation reduces misunderstandings and disputes.
Supporting Negotiations: Well-maintained documentation provides a solid foundation for discussions.

Overview of Cost-Based and Value-Based Pricing
Cost-Based Pricing:
Definition and Calculation:
Prices are determined by the total cost incurred in creating a product or service plus a markup for profit.
Formula Example:
Price = (Direct Costs + Indirect Costs + Desired Profit) / Quantity.

Overview of Cost-Based Pricing and Value-Based Pricing b
Value-Based Pricing:
Market-Driven Approach:
Prices are based on the perceived or estimated value of a product or service to the customer.
Less influenced by the actual cost and more by how much customers believe the product is worth.
Determining Factors:
Perceived Value:
Competitor Pricing: What similar products or services are selling for in the market.
Customer Willingness to Pay: The maximum price a customer is ready to pay based on their need and the product's
perceived advantage.

Details on Cost Proposals:
Purpose of a Cost Proposal:
Budgeting and Forecasting:
Provides a forecast of project costs for budgeting purposes.
Serves as a financial plan for managing project expenditure.
Basis for Pricing:
Underpins the development of a pricing strategy for bids and quotes.
Critical for establishing a price point that ensures coverage of costs and achieves desired profitability.

Structure of a Cost Proposal:
Direct Costs:
The primary expenses directly tied to project execution, such as salaries for labor, cost of
materials, and equipment expenses.
Indirect Costs:
Costs that are not directly linked to a specific project but support the business as a whole.
• Fringe Benefits
• Overhead (OH
• General & Administrative (G&A
• Fee or Profit

Utilizing a Compliance Matrix
Critical for Bid Acceptance:
• Government contracts often have strict compliance standards. A matrix ensures all aspects are covered,
preventing disqualification for non-compliance.
• Essential for passing initial screening processes and moving into the competitive range.
Facilitates Collaboration and Review:
• Enables team members to cross-reference requirements and collaborate effectively.
• Streamlines the review process, allowing for efficient verification against solicitation criteria.

Demystifying the
Basis of Estimate (BOE)
in Government Contracting
• Definition and Significance
• Key Elements of a BOE
• Practical Application
• BOE in Action

What is the purpose of the Basis of Estimate (BOE) in government
contracting?
A) To outline the contractor’s marketing plan
B) To detail the project management approach
C) To provide a detailed rationale for the price
D) To serve as a legal contract
Poll Question #5

Definition and Significance:
What is BOE?
A BOE is a comprehensive documentation of the facts, assumptions, and methodologies used to derive cost and
pricing estimates in a proposal.
It provides the detailed rationale for each cost element and how it contributes to the total price.
Why is BOE Important?
Fundamental for transparency and credibility in cost proposals submitted to government agencies.
Required for contract auditors to validate and verify the cost and pricing data presented.

Key Elements of a BOE:
Factual Data:
Historical cost data, quotes, and actual prices that underpin the cost estimates.
Assumptions:
Conditions assumed to be true for the purposes of estimating, such as labor rates and hours,
material costs, and indirect rates.
Estimation Methodology:
The specific techniques used to estimate costs, including analogies, parametric models,
engineering estimates, or vendor quotes.

CPSR Documentation
Documentation is key in surviving the Contractor Purchasing System Review (CPSR).
Your file should include the following (at a minimum):
• Purchase requisition or MRP requirements.
• Copy of RFQ sent to suppliers.
• List of suppliers and date RFQ sent.
• Copy of proposals/bids and responses including no-bids.
• Price analysis
• Negotiations (if applicable)
• Other government forms and compliance data

After this presentation, how would you rate your understanding of cost
and price analysis?
A) I am now an expert
B) I understand it much better
C) I have a basic understanding
D) I need to review the material again
Poll Question #6

Government Contract Accounting
Made Easy
This indispensable book cuts through the confusion to give readers clear,
actionable steps to achieving compliance, accurate pricing, and
maximizing profit.
Readers will walk away with demystified processes to:
• structure costs,
• win bids,
• and avoid profit-draining mistakes.
Consider Left Brain Professionals your guide to finally making sense of
this highly specialized world.
Available Now on AMAZON
The Uncomplicated Guide to Compliance, Pricing, and Profitability.

Discussion / Q&A

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