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Conduct Price/Cost Analysis

Price analysis is the process of examining and evaluating a proposed price against reasonable price benchmarks, without evaluating its separate cost elements and profit that make up the price. Some form of price analysis is required for every purchase; the dollar amount and characteristics of the purchase determine the method and scope of analysis. Cost analysis is the process of examining the separate elements of cost and profit in a potential supplier's cost or pricing data. Additional information on the should-cost analysis can be found in the Conduct Should-Cost Analysis topic performed during the Collect Ideas and Build Fact Base task of Process Step 2: Evaluate Sources Process. The Pricing Analyst is responsible for determining the most appropriate technique for a given purchase.

One or more of the following techniques may be used when conducting a price analysis:

Comparison of competitive offers

Comparison with regulated, catalog, or market prices

Comparison with historical prices

Use of independent cost estimates (ICEs)

Comparison of Competitive Offers

Comparing competitive offers involves comparing proposed prices received in response to the request for proposals (RFP). The Pricing Analyst may compare the current price with those proposed in competing offers or offers for the purchase if adequate price competition exists. To determine whether adequate price competition exists, the Pricing Analyst may examine the following:

Proposed prices

Range of prices offered by competing suppliers

Production or performance experience of the suppliers

Exceptions taken by any supplier to the specifications or delivery schedule

Generally, price competition exists if two or more independent and capable suppliers submit priced proposals meeting the RFP requirements. If price competition exists, it is presumed adequate, unless:

The potential supplier offering the lowest price has such a decided market advantage that it is practically immune from competition

The Purchase/SCM Team determines that the lowest price is not reasonable

Once adequate price competition is determined to exist, price comparison between proposals should be relatively easy.

When evaluating potential suppliers' proposals, the Pricing Analyst should compare not only the price, but also the terms and conditions of the proposal. Often, these terms and conditions will differ with regard to delivery schedule and upgraded technology to the point that a direct comparison between proposals cannot be made. Therefore, the Pricing Analyst must "level" the proposals to meet the basic requirements of the RFP to ensure that the price evaluation is performed on proposals with comparable terms and conditions. This may be accomplished by removing additional or upgraded services or components from the overall proposal and proposed price so that the price evaluation can be made only with regard to the terms and conditions explicitly stated in the RFP.

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Comparison with Regulated, Catalog, or Market Prices

This technique allows the Postal Service to comply with the price as set by law or regulation and compares proposed prices with prices available in supplier's catalogs, market prices, indexes, and discount or rebate arrangements.

Regulated or legal prices are set when applicable laws or regulations specify the price and no potential supplier may charge anything other than this price.

Catalog prices are prices included in a catalog, price list, schedule, or other document that is regularly maintained by the manufacturer or supplier and is either published or otherwise available for inspection by customers. Before using catalog prices as a basis for comparison, the Pricing Analyst should ensure that:

Significant quantities are sold to a significant number of customers at the indicated prices

The complexity of the product is relatively low

Market prices are established by the interaction of market supply and demand and are usually published in trade publications or other news media.

Comparison with Historical Prices

This price analysis technique involves comparing previously proposed and contract prices with current proposed prices for the same/similar items in comparable quantities. The Pricing Analyst should ensure that historical prices are still reasonable in the marketplace and serve as a valid basis for comparison. Just because a historical price exists does not mean that it is valid for comparison purposes. The following considerations apply to comparison with historical prices:

How has the state of the market and competition changed?

What are the fixed costs of the original prices that may no longer apply to the current purchase?

How has inflation and/or deflation affected the price?

Have the supplier's sources, quantities, production, start-up costs, or terms of purchase changed?

What was the market demand/supply for the item/service at the time of previous purchase?

Is the commercial item used for comparison similar?

Was the historic purchase conducted as noncompetitive or competitive?

Did the price include additional services?

The Pricing Analyst must adjust the historical price accordingly so that a direct comparison can be made with the proposed price.

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Pricing Noncompetitive Offers

Because of the lack of competition, any of the pricing techniques above-except the comparison of competitive offers-may be used when pricing noncompetitive proposals. If price analysis does not ensure that prices are fair and reasonable, then:

A cost analysis is performed on the noncompetitive purchase

Cost or pricing data must be obtained before awarding a noncompetitive contract or modification

(Cost analysis and cost and pricing data are discussed later in this topic in further detail.)

Use of Independent Cost Estimates (ICEs)

Performing an independent cost estimate (ICE) allows the Purchase/SCM Team to compare proposed prices with independent Postal Service cost estimates to establish a reasonable price. An ICE should assess the total cost of ownership (TCO) to be incurred by the supplier if the contract is to be awarded. TCO refers to the total cost incurred over the life cycle of an item, encompassing purchase, use, maintenance, support, and disposal. Whenever adequate price competition has been obtained, comparing proposed prices with Postal Service ICEs may suffice to meet price-analysis requirements. These estimates can be a valid standard for comparison if they are based on a realistic analysis that accounts for past purchase prices, quantities, physical inspection of the product, and analysis of similar work. To determine whether the basis of the ICE is reliable and can be used as a standard for comparison, the Pricing Analyst must account for the following factors:

What was the source of the information?

What information and techniques were used?

How reliable were earlier estimates?

Is the ICE based upon the same technical approach as the current product or service?

The Pricing Analyst must consider whether the requirements or the assumptions of the RFP have changed since the ICE was performed. Often, an ICE is prepared early in the purchase process; by the time the RFP is issued and offers are received, specifications and requirements have changed. This may cause the price or the nature of the product or service to change significantly, rendering a direct comparison with the ICE invalid. A new ICE will have to be developed based on the new information.

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Cost Analysis

Cost analysis is appropriate when factors affecting the purchase will not ensure a reasonable price based on price analysis alone and/or the Postal Service needs an understanding of the cost buildup of the proposal to verify cost realism and reasonableness. Cost or pricing data must be obtained whenever price analysis is insufficient to determine reasonableness of price. Cost analysis should be limited to cost elements that need detailed analysis to protect the Postal Service's interest. When a limited number of cost elements will provide a reasonable analysis, the Contracting Officer should obtain only the data needed to support such an analysis. Cost analysis is generally most useful when purchasing nonstandard items and services.

Cost analysis involves, as appropriate:

Verifying cost or pricing data and evaluating cost elements, including:

The necessity for, and reasonableness of, proposed costs, including allowances for contingencies

Projecting the potential supplier's cost trends on the basis of current and historical cost or pricing data

Performing a technical analysis of the estimated labor, material, tooling, and facilities required and the reasonableness of scrap and spoilage factors

Applying audited or negotiated indirect-cost rates and labor rates

Evaluating the effect of the supplier's current practices on future costs - the Purchase/SCM Team must ensure that the effects of inefficient or uneconomical past practices are not projected into the future. In pricing production of recently developed, complex equipment, the Purchase/SCM Team should make a trend analysis of basic labor and materials, even in periods of relative price stability.

Comparing costs proposed by the supplier for individual cost elements with:

- Actual costs previously incurred by the same supplier

- Previous cost estimates from the supplier or from other suppliers for the same or similar items

- Independent Postal Service cost estimates

Analyzing supplier's make-or-buy decisions in evaluating subcontract costs.

Verifying that the supplier's cost submissions are in accordance with the cost principles below.

Reviewing submissions to ensure that data needed to make the supplier's proposal accurate, complete, and current have been submitted or identified in writing. The Contracting Officer must attempt to obtain such data if they are available. If data cannot be obtained satisfactorily, allowance for the incomplete data must be negotiated.

Utilizing audit services through the Office of the Inspector General (OIG) to validated cost or pricing data. More information on obtaining audit services through the OIG can be found at: www.oig.hhs.gov.

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Cost or Pricing Data

Cost or pricing data include all the facts affecting cost estimates and costs incurred that can be expected to significantly affect price negotiations. Cost or pricing data may also include:

Supplier quotations

Nonrecurring costs

Information on changes in production methods and in production or purchasing volume

Data supporting business projections, objectives, and related operating costs

Unit-cost trends, such as those associated with labor efficiency

Make vs. buy decisions

Resource estimates to meet business goals

Information on management decisions that could have a significant bearing on costs

Historical costs for the same or similar items

Whenever price analysis is insufficient to determine reasonableness of price, cost or pricing data must be obtained before awarding a noncompetitive contract or modification. Only the data needed to make the determination should be obtained. Before agreeing on price, the Contracting Officer must have the supplier update the data to the latest dates for which data are reasonably available.

The Contracting Officer must have suppliers obtain cost or pricing data for proposed subcontracts or subcontract modifications when needed to determine the reasonableness of a proposed contract or subcontract price (including negotiated final pricing actions such as termination settlements and total final price agreements for fixed-price-incentive contracts). The supplier is responsible for conducting the price or cost analysis for subcontracts and including the results as part of its cost or pricing data. In unusual circumstances, to ensure that analysis is adequate, the Contracting Officer may require the supplier to submit the subcontract data along with its own data. This does not reduce the supplier's responsibility to do the subcontract cost or price analysis and negotiate fair and reasonable subcontract prices.

If cost or pricing data are needed and the supplier refuses to provide the necessary data despite repeated requests, the Contracting Officer must withhold award or modification and refer the matter to the next higher level of contracting authority. The ultimate disposition must be documented.

Under Clause 2-30: Allowable Cost and Payment, suppliers must submit a final indirect-cost rate proposal to the Contracting Officer or Contracting Officer's Representative (COR) reflecting actual costs during the period, together with cost or pricing data.

Whenever cost or pricing data may be required when negotiating a contract or the subsequent modification of a contract, the contract must include:

Clause 5-1: Price Reduction for Defective Cost or Pricing Data - lists the conditions under which the negotiated price that was increased significantly can be reduced

Clause 5-2: Subcontractor Cost or Pricing Data - requires that before awarding any subcontract or pricing any subcontract modification, the supplier must require the subcontractor to submit cost or pricing data whenever cost or pricing data are required

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Allowable Costs

To be allowed, costs must be:


Allocable to the contract

Consistent with generally accepted accounting principles

Appropriate to the specific purchase

Consistent with the requirements and terms and conditions of the contract

Not unallowable


A cost is reasonable if it is a type of cost and amount that does not exceed what a prudent person would incur conducting competitive business. In determining the reasonableness of a specific cost, consider:

Whether it is a type of cost generally recognized as ordinary and necessary for conducting business or performing the contract

Restraints imposed by generally accepted business practices, arm's-length bargaining, and Federal and state laws and regulations

What a prudent business person, considering his or her responsibilities to owners, employees, customers, the Postal Service, and the public at large, would do under the circumstances

Any deviations from the supplier's established business practices that may unjustifiably increase costs

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Allocable to the Contract

A cost is allocable to a contract if it:

Is incurred specifically for the contract

Benefits both the contract and other work and can be distributed among them in reasonable proportion to the benefits received

Is necessary to the overall operation of the business, although a direct relationship to the contract cannot be shown

Unallowable Costs

Costs that are expressly or mutually agreed to be unallowable, including directly associated costs, must be excluded from any contract billing, claim, or proposal. A directly associated cost is a cost generated solely as a result of another cost, which would not have been incurred if the other cost had not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable. The following categories of costs are unallowable:

1. Public relations and advertising costs, except for costs of:

a. Responding to inquiries concerning company policies and activities;

b. Essential communication with the public, press, stockholders, creditors, and customers, including communications on matters of public concern;

c. Participating in community-service activities, such as blood-bank drives, charity drives, and disaster assistance (but not contributions to civil defense funds and projects);

d. Recruiting personnel needed to work under the contract;

e. Acquiring scarce items for contract performance; and

f. Disposing of scrap or surplus materials acquired for contract performance.

2. Bad debts, including actual or estimated losses arising from uncollectible accounts receivable from customers and other claims, and any costs directly associated with bad debts such as collection and legal costs.

3. Contributions or donations, including cash, property, and services, except as provided in 1(c).

4. Dividends or payments and distribution of profits.

5. Entertainment costs, including amusement, diversion, social activities, and costs directly associated with entertainment, such as tickets to shows or sporting events, meals, lodging, rentals, transportation, and gratuities. Entertainment costs include membership in social, dining, or country clubs or other organizations having the same purpose, regardless of whether the cost is reported as taxable income to the employees.

6. Fines and penalties resulting from violations of Federal, state, local, or foreign laws and regulations, except when incurred as a result of complying with specific terms and conditions of the contract or written instructions from the Contracting Officer.

7. Life insurance on the lives of officers, partners, or proprietors, unless the insurance represents additional compensation.

8. Interest on loans (however represented), bond discounts, costs of financing and refinancing capital, and the costs of preparing and issuing prospectuses and stock rights.

9. Lobbying cost:

a. including

(1) Attempts to influence the outcome of any Federal, state, or local election, referendum, initiative, or similar procedure through contributions, endorsements, publicity, or similar activities.

(2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections.

(3) Any attempt to influence the introduction of Federal or state legislation, or the enactment or modification of any pending Federal or state legislation through communication with any member or employee of Congress or a state legislature (including efforts to influence state or local officials to engage in similar lobbying activity), or with any government official or employee in connection with a decision to sign or veto legislation.

(4) Any attempt to influence the introduction of Federal or state legislation, or the enactment or modification of pending Federal or state legislation by preparing, distributing, or using publicity or propaganda, or by urging members of the general public to contribute to, or participate in, any mass demonstration, march, rally, fund-raising drive, lobbying campaign, or letter-writing or telephone campaign.

(5) Legislation-liaison activities, including attendance at legislative sessions or committee hearings, gathering information regarding legislation, and analyzing the effect of legislation, when the activities are in support of, or in knowing preparation for, an effort to engage in unallowable activities.

b. But not including:

(1) Providing a technical and factual presentation of information on a topic directly related to performing the contract in a hearing testimony, statement, or letter to Congress or a state legislature, or subdivision, member, or staff member of either, in response to a documented request (including a Congressional Record notice requesting testimony or statements for the record at a regularly scheduled hearing) made by the recipient member, legislative body or subdivision, or a cognizant staff member. Costs for transportation, lodging, or meals associated with this exception are not allowed unless incurred for the purpose of offering testimony at a regularly scheduled Congressional hearing in response to a written request made by the chair or ranking minority member of the committee or subcommittee conducting the hearing.

(2) Any lobbying to influence state or Federal legislation to directly reduce contract cost, or to impair the supplier's obligation to perform the contract.

(3) Any activity specifically authorized by statute to be undertaken with funds from the contract.

10. Losses on other contracts (including the supplier's contribution under cost-sharing contracts).

11. Taxes:

a. Federal income and excess-profits taxes.

b. Taxes in connection with financing, refinancing, refunding operations, or reorganizations.

c. Taxes from which exemptions are available to the supplier directly, or available to the supplier based on a Postal Service exemption, except when the Purchase/SCM team determines that the administrative burden of obtaining the exemption outweighs the benefits to the Postal Service. The term "exemption" means freedom from taxation in whole or in part, and includes a tax abatement or reduction resulting from the method of assessment, calculation, or other reason.

d. Special assessments on land that represent capital improvements.

e. Taxes (including excise taxes) on real or personal property, or on the value, use, possession, or sale of property, used solely in connection with work on contracts that are not with the Postal Service or the government.

f. Taxes on accumulated funding deficiencies of, or prohibited transactions involving, employee deferred compensation plans under section 4971 or 4975 of the Internal Revenue Code of 1954, as amended.

g. Income tax accruals designed to account for the tax effect of differences between taxable income and pretax income as reflected by the supplier's accounting and financial statements.

12. Costs incurred in defending against any combination of the actions below when brought by the government against a supplier, its agents, or employees, when the charges involve fraud or similar criminal offenses (including filing of a false certification) on the part of the supplier, its agents, or employees, and result in conviction (including conviction entered on a plea of nolo contendere), judgment against the supplier, its agents, or employees, or a decision to debar or suspend, or are resolved by consent or compromise (when charges of fraud are resolved by consent or compromise, the parties may agree on the extent of allowability of defense costs as a part of the resolution). The actions include:

a. Criminal or civil investigation, grand jury proceedings, or prosecution;

b. Civil litigation; or

c. Administrative proceedings such as suspension or debarment.

13. Costs incurred against Postal Service claims or appeals or the prosecution of claims or appeals against the Postal Service.

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Cost Realism

Cost realism means that the costs in a supplier's proposal:

Are realistic for the work to be performed

Reflect a clear understanding of the requirements

Are consistent with the various elements of the supplier's technical proposal

The emphasis of a cost-realism analysis is to determine whether costs may be overstated or understated. Cost realism helps to ascertain the potential risk to the Postal Service as a result of the supplier being unable to meet contract requirements.

Cost-realism analysis is an objective process of identifying the specific elements of a cost estimate or a proposed price and comparing those elements against reliable and independent means of cost measurement, and is particularly useful in the evaluation of cost reimbursement contracts. This analysis determines whether the estimates under analysis are verifiable, complete, and accurate. It also shows whether the supplier's estimating methodology is logical, appropriate, and adequately explained. As a result, the analysis helps ensure that the cost or prices proposed fairly represent the costs likely to be incurred for the proposed services, given the supplier's technical and management approach.

Other Topics Considered

Conduct Market Research and Benchmarking Analysis topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Start Request for Proposals (RFP) Development topic, Prepare Project task, Process Step 2: Evaluate Sources

Conduct Should-Cost Analysis topic, Collect Ideas and Build Fact Base task, Process Step 2: Evaluate Sources

Negotiate With Suppliers topic, Perform Preaward Activities task, Process Step 2: Evaluate Sources

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