How to Perform Effective Price Analyses on Subcontractors. Jeffery A. White, C.P.M J.A. White & Associates, Inc.

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1 How to Perform Effective Price Analyses on Subcontractors Jeffery A. White, C.P.M J.A. White & Associates, Inc.

2 Pricing Wisdom A cynic is a man who knows the price of everything and the value of nothing. -Oscar Wilde

3 Goal of This Session Our Session Me Our Workshop You Course Materials For Desktop Use

4 Purpose of Session? To provide practical how to guidance to Procurement professionals regarding the use of available Cost and Price Analyses techniques for determining the fairness and reasonableness of subcontractor pricing.

5 OVERVIEW UNIT 1 Overview Price Analysis Techniques Applicable Laws and Regulations Definition of a Price Analysis Supporting Documentation Requirements for Price Analyses Procurement Type Analysis Using the RFQ Process to Write Your Price Analysis Interaction of Subcontractor Contract Type and Price Analysis The Use of (b)(2) price analysis techniques The Role of Market Research in Price Reasonableness Documentation Requirements Interactive Questions for the Establishment of Price Reasonableness Difference between Cost Analysis and Price Analysis

6 UNIT 1 Overview of Cost and Price Analysis

7 Applicability All subcontracts and purchase orders. The requirement to perform a Cost Analysis on Subcontractor Cost and Pricing information applies to all Subcontracts with an estimated total value in excess of $750,000.00, unless an exception applies. (Truthful Cost or Pricing Data Act 10 U.S.C. 2306a and 41 U.S.C. 254b)

8 Why Perform Price Analyses? FAR requires the purchase of supplies and services from responsible sources at fair and reasonable prices (FAR ). Maintenance of an approved purchasing system

9 What is Reasonable? The concept of reasonable price has been described as the price that a prudent business person would pay for an item or service under competitive market conditions, given a reasonable knowledge of the marketplace.

10 WHAT IS Fair? A Matter of Perspective Buyer Perspective Market Value Costs are Allowable Profit is Reasonable

11 WHAT IS Fair? A Matter of Perspective Seller Perspective Price Must be Realistic Adequate ROI

12 WHAT IS FAIR? A Matter of Perspective Seller Perspective Special Considerations - Sole/Single Source Procurements

13 How To Evaluate Price Reasonableness FAR allows for multiple techniques to evaluate price reasonableness. The following three are more commonly used. Price Analysis: is the process of examining/evaluating a price without evaluating its separate cost elements and proposed profit. Cost Analysis: A cost analysis will be required whenever a price analysis cannot be performed. A cost analysis entails the review and evaluation of the separate cost elements and the proposed profit of an offeror s cost proposal. A cost analysis is conducted to perform an opinion on the degree to which the proposed cost, including profit, represents what the performance of the contract should cost, assuming reasonable economy and efficiency. Technical Analysis (Evaluation): A technical analysis is based on consultation with individuals with specialized knowledge of the equipment or service being procured who at a minimum, examine the types and quantities of materials, labor requirements and cost.

14 Technical Evaluations FAR (C) Request specialized knowledge: The contracting officer should request that personnel having specialized knowledge, skills, experience, or capability in engineering, science, or management perform a technical analysis of the proposed types and quantities of materials, labor, processes, special tooling, equipment or real property, the reasonableness of scrap and spoilage, and other associated factors set forth in the proposal(s) in order to determine the need for and reasonableness of the proposed resources, assuming reasonable economy and efficiency. At a minimum: The technical analysis should examine the types and quantities of material proposed and the need for the types and quantities of labor hours and the labor mix. Any other data that may be pertinent to an assessment of the offeror s ability to accomplish the technical requirements or to the cost or price analysis of the service or product being proposed should also be included in the analysis. The contracting officer should: Request technical assistance in evaluating pricing related to items that are similar to items being purchased, or commercial items that are of a type or requiring minor modification, to ascertain the magnitude of changes required and to assist in pricing the required changes.

15 Application of Techniques FAR Technique 1. Price analysis Analyze price of each vendor price, performance-period service, and financing individually. Application Is preferred over and requires less information than cost analysis. a. Price competition First preference, and more widely used. b. Comparison with previously proposed prices and previous government and commercial contract prices. c. Parametric estimating methods An extension of comparing proposed and past prices cost estimating relationships (e.g., dollars per ton of chiller capacity) calculated from past pricing data. Can be applicable if data is available. Use Benchmarking Tools and/or info on past pricing d. Comparison with published prices Often used e. Market research Often used f. Analysis of pricing information provided by offeror Using information from within the Prime Contractor is preferable to using information from offeror. g. Comparison of proposed prices with independent cost estimates Commonly used, but cost estimators need to be accurate and reliable. 2. Cost analysis Analyze price of each estimated cost element, each performance-period service, and financing individually. 3. Technical analysis Consultation with individuals with specialized knowledge of equipment or services being procured, who examine, at minimum, types and quantities of materials and labor requirements and costs. More costly and time-consuming than price analysis. Price analysis still needed for final reasonableness determination. Depending on the type of expertise needed, could be provided by PM, Technical Staff, Engineering staff, independent experts, or others, but would generally be professional cost estimators.

16 Price Analysis General Concepts FAR Part 15.4 provides all acceptable techniques for analyzing prices. Seven (7) acceptable Price Analysis Techniques [ (b)(2)] Competitive Price Analysis and Comparison to Pricing Previously accepted by the Government as fair and reasonable [ (b)(2)(i),(ii)] are THE preferred price analysis techniques.

17 Price Analysis - Comparison Process Select Price for Comparison Identify Factors That Effect Comparability Determine Effect of Identified Factors Adjust Prices for Comparison Compare Offered Prices With Adjusted Prices Prices for Comparison Other Proposed Prices Commercial Prices Previously-Proposed Prices, Subcontract Prices Parametric Estimates Independent Estimates Quantitative Techniques to Adjust Prices Index numbers Trend Analysis Price-Volume Analysis Graphic Analysis Learning Curve

18 Price Analysis Techniques Competitive Price Analysis [FAR (b)(2)(i)] Most favored technique Easiest technique to perform and document Provides the most reliable objective data with which downward negotiations can be held. Can be applied when only ONE Offeror responds to Competitive RFQ.

19 Standards for Competition What is Competition? FAR (c)(1) sets 3 standards for competition: 1. Two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement and if

20 Standards for Competition a) Award will be made to the offeror whose proposal represents the best value (see FAR 2.101) where price is a substantial factor in source selection; and b) There is no finding that the price of the otherwise successful offeror is unreasonable.

21 Continued Price Analysis Techniques Comparison of the proposed prices to historical prices paid, whether by the Government or other than the Government, for the same or similar items. This method may be used for commercial items including those of a type or requiring minor modifications [FAR (b)(2)(ii)]. Must establish validity and reasonableness of comparison. What can be used for analysis of offeror s proposed pricing? Historical Rates Accepted Under Government Contract Prices paid previously by the Prime Contractor Prices paid previously by other Prime Contractors

22 Price Analysis Techniques Continued Use of parametric estimating methods/application of rough yardsticks (such as dollars per pound or per horsepower, or other units) to highlight significant inconsistencies that warrant additional pricing inquiry [FAR (b)(2)(iii)] What can be used for analysis of offeror s proposed pricing? Fuel, materials, natural resources Set Percentages based on volume Examples

23 Price Analysis Techniques Continued Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements [FAR (b)(2)(iv)] What can be used for analysis of offeror s proposed pricing? Rate Sheets Online Pricing Catalog Pricing GSA Schedule

24 Price Analysis Techniques Continued Comparison of proposed prices with independent Government/Contractor cost estimates [FAR (b)(2)(v)] What can be used for analysis of offeror s proposed pricing? Contractor-Developed Estimates must be detailed and comprehensive; also pricing estimates must be easily understood and verifiable by third party reviewer. Government-Developed Estimates: IGE Contract Ceilings, Rate Ceilings etc., Labor Hour Caps per CLIN/Contract in Government RFP; RFP Q&A.

25 Price Analysis Techniques Continued Comparison of proposed prices with prices obtained through market research for the same or similar items. [FAR (b)(2)(vi)] Can be applied to Items or Services Establishing Same or Similar Nature of the Basis of Comparison is the Challenge. For Items, comparison can be based on (ranges of) technical specifications For Services, a detailed Technical Analysis is required to establish the Same/Similar nature of the comparative rate. Salary Surveys Historical Pricing information obtained through third party sources FAR Part 10

26 Price Analysis Techniques Continued Analysis of data other than certified cost or pricing data (as defined at 2.101) provided by the offeror [FAR (b)(2)(vii)] What can be used for analysis of offeror s proposed pricing? Salary information Wrap Rate Estimates Previous Quotes/PO/Invoices/Contracts Service Contract Act/Wage Determination Labor Categories Historical Pricing Information

27 Documentation

28 Documenting the Price Reasonableness Decision Price analysis is a subjective evaluation. For any given procurement, different bases for price analysis may give you a different view of price reasonableness. Even given the same information, different buyers/contracting officers might make different decisions about price reasonableness. It is the Buyer/SCA who must be satisfied that the price is fair and reasonable, but Auditors and Reviewers will question your rationale (This is one reason that documentation is so important)

29 Writing and Reviewing a Price Analysis Background The Background should be written to suggest the eventual Price Analysis Technique chosen. It should contain the following: Brief description of the task for which the proposal was submitted Type of Proposal Submitted (T&M, FFP, etc.) Business Size, Classification and Corporate HQ City of Subcontractor Competitive or Noncompetitive

30 Writing and Reviewing a Price Analysis Analysis/Explanation of Analytical Method The Analysis section should describe the Price Analysis Technique selected, the data used for the analysis and a description of the results of the initial analysis. Selecting the Analysis Technique Reasons for using the Analysis Technique chosen should be summarized.

31 Writing and Reviewing a Price Analysis Continued Analysis/Explanation of Analytical Method Describe the type of data being used for analysis (other than Competitive Analysis) Where data was derived Applicability/Relationship to Offeror pricing being analyzed Competitive Range v. Comparative Mean Determining Requirements for Negotiation State the goals of negotiation If not done already, describe how these goals were calculated.

32 Writing and Reviewing a Price Analysis Continued Conclusion Summary of Award Decision Statement that Pricing is Fair and Reasonable Signature and Date Attachments Statement that Acceptance of Pricing is in the Best Interest of the Prime Contractor and US Government

33 Your Takeaways Price paid must be fair and reasonable Competition is the preferred method of establishing price fairness and reasonableness Market research is required when conducting and documenting price analyses

34 For Additional Information Jeffery A. White, C.P.M., President/CEO J.A. White & Associates, Inc Garner Lane, Suite 104 Columbia, SC (fax) Jeff Rankin, Vice President - Operations J.A. White & Associates, Inc Wisconsin Ave. N.W. Suite 440 Washington, DC (office) (mobile) jrrankin@jawhite.com