Price Analysis Techniques

With any purchase of goods or services, including sole source items, some type of cost analysis is required. A part of this analysis is verification of pricing. There are many ways to analyze the pricing of a product or service. Techniques for comparing price can be found in the Federal Acquisition Regulation (the FAR). Some of the techniques recommended include:

Comparison of Competitive Bids

Obviously, this is one of the best means for validating price. By asking three or more suppliers of their prices for the same product, we can determine if a particular price is reasonable. However, this does not preclude total cost analysis. The lowest bid may not always represent the lowest cost. The total cost of acquisition must be analyzed. There may be cost associated with making the lower cost product perform to standards, the additional cost of early replacement or the cost of redesign and/or testing required to make the lower cost product applicable. This "total cost of acquisition" is the real cost that must be compared. A brief statement as to why a particular quotation is selected is required.

Comparison of Prior Quotations
In some circumstances, it may be most effective to compare recent (with the past 24 months) quotations for the same product or service to determine the viability of the current quotation. This is particularly helpful when timing of the acquisition is critical and solicitation of the competitive quotes would delay the procurement. An explanation of why comparison of prior quotations was used must accompany this procedure.

Comparison of Published Price List
This method should only be used for materials that are sufficiently similar to items or services are available to the general public and whose price would appear in a published price list. However, when comparing these price lists, it is important to consider standard industry discounts for the items or services. As an example, most electrical supply houses will offer standard discounts to purchasers doing a particular dollar or quantity volume. Such discounts must be considered when comparing list prices and noted in the procurement documentation.

Prices Set by Law or Regulation
Sometimes, prices are set by a law or regulation. When this occurs, there is usually a "pronouncement" of some form type that references the pricing structure. This must be referenced when procuring such items.

Similar Item Comparison
When an item or service is fairly unique, it is possible to compare items that are similar to those being purchased. A statement as to why the common item will not meet the specification should accompany the price comparison.

Rough Yardstick Comparisons
This technique uses a rough comparison between like items based on measurable similarities such as price per pound, cost per horsepower or price per test sample. Again, an explanation of the similarities must accompany this analysis.

Many times, it is difficult to find comparable items or services. In these situations, it may be necessary to rely on a technical analysis. While time consuming, this is the best method to use when validating price for complicated sole source items. In this analysis, the supplier of the goods or services is asked to provide:

  1. List of materials and their cost.
  2. Number and kinds of labor hours required.
  3. Any special tooling and facilities proposed.
  4. A reasonable plan for use and disposal of scrap.
  5. Any other cost, including profit, relevant to the cost of providing the service or item.
Each item on the supplier's bill of materials is then analyzed using the above noted techniques. Negotiation of variables such as overhead and profit can occur as well. Again the exercise must be documented.

In all price and cost analysis, time is required. We recommend beginning the process as early as possible, even if funding has not yet been guaranteed. In all circumstances, the Procurement staff will be happy to assist.

Last updated: June 6, 2007