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STUDENT GUIDE

CON 170

Fundamentals of Cost & Price Analysis

Unit 4, Lesson 3

Price Analysis Techniques

April 2019

STUDENT PREPARATION

Required Student Preparation:

Read FAR 15.4; Familiarity with CPRG (specifically Volume 1; Chapters 0, 6, and 7)

Planned Academic Time Required: 4 hours

Student performance will be informally evaluated during class discussions, and formally evaluated on Exam 2

Lesson Presentation

In this lesson, you will learn more about some of the price analysis techniques identified in the FAR and when it is appropriate to use them by analyzing several pricing scenarios and calculating a price using that technique. Price analysis is either required or recommended in every acquisition we execute. Therefore, understanding when and how to use each price analysis technique is critical to enabling contract specialists to accomplish price analysis.

In Lesson 1 we learned that there are seven price analysis techniques specified in FAR 15.404-1(b). When choosing which price analysis technique to use in an acquisition situation, consider the following table. Any and all of these techniques can be used in determining prices to be fair and reasonable, but the FAR states the first two techniques are preferred.

Price Analysis Technique

Typical Situations for Use

1. Comparison of proposed prices received in response to the solicitation

Post-solicitation, when adequate price competition exists. (One of the two preferred price analysis techniques!)

2.Comparison of the proposed prices to historical prices paid for the same or similar items.

Pre- and post- solicitation, when market research reveals historical data of the same or similar items. Especially useful in acquiring commercial requirements. (The other of the two preferred price analysis techniques!)

3. Parametric estimating methods/application of rough yardsticks

Pre- and post-solicitation, when history of the same acquisition is unavailable, and we must compare to historical data of similar acquisitions.

4. Comparison with competitive published price lists, published market prices of commodities, similar indexes, and discount or rebate arrangements

Pre- and post-solicitation, when searching for pricing information for the same or similar requirement. Common for commercial requirements, and market areas which have published indexes for finished goods or key materials and labor categories.

5. Comparison of proposed prices with independent Government cost estimates.

Pre- and post-solicitation. PCO should require some type of price estimate from the customer as part of the market research documentation. PCO must evaluate the IGE to ensure it is reasonable and defendable; then, the IGE should be used as a comparison for evaluating the proposed prices.

6. Comparison of proposed prices with prices obtained through market research for the same or similar items

Primarily pre-solicitation, as an objective of market research, and a critical element of the market research documentation.

7. Analysis of data other than certified cost or pricing data

Primarily post-solicitation, based on TINA requirements for cost or pricing data. When we request such data, we must analyze it. At a minimum, we accomplish price analysis on data other than certified data. When we require certified cost or pricing data, we shall accomplish cost analysis, but should accomplish price analysis.

Each of the price analysis techniques requires some type of comparison of proposed prices with prices or other information from the past. For all of the techniques, the analysis process begins with a robust understanding of the requirement, continues with detailed market research of Government and open sources, and may include requests for data from contractors. A critical element of making productive comparisons is comparing similar items. For example, when tasked with a purchase of side-arms for DoD deployed personnel, it may not be beneficial to compare the price trends of the 9mm Beretta handgun to the price trend of a Colt tactical knife—because there are only a few similarities. Instead, a comparison of prices of previous 9mm Beretta purchases, as well as pricing trends of the 9mm Glock may reveal useful information regarding performance, and for estimating prices in our next purchase of the Beretta model.

Pursuing comparisons in price analysis assumes there are comparable items to develop a reliable comparative analysis. The CPRG contains the following description of comparability.

"Comparability is the quality or state of being comparable. Products do not have to be alike to be compared. Any two things can be compared, but the comparison may show that they have no characteristics in common. However, if you are attempting to evaluate price reasonableness, the comparison will not be of any value if the items are unlike in every way.

For price analysis, the items being compared must have enough similar characteristics or qualities to make the comparison useful. The more similar the items are, the easier the comparison. If your examination discloses significant differences, you may need to quantify the effect of those differences (e.g., acquisition of different products, at different times, or in different places) and make adjustments before you can reach valid conclusions about price reasonableness. The greater the dissimilarities and the more subjective your adjustment, the greater the possibility for doubts about your conclusions and the less likely that your analysis will be persuasive."

Figure 1 below describes the process for selecting items for comparison and then making the comparison.

Figure 1

How to Compare Proposed Prices with Other Prices

Numbers in lower right corners indicate CPRG Vol 1 Ch 6 paragraph numbers

Select Prices for Comparison

6.1

Prices for Comparison

· Other Proposed Prices;

· Commercial Prices;

· Previously Proposed Prices and Contract Prices

· Parametric Estimates or Rough Yardstick Estimates; or

· Independent Government Estimates

Identify Factors That Affect Comparability

6.2

Determine the Effect of Identified Factors

6.3

Quantitative Techniques to Adjust Prices for Comparison

· Index Numbers

· Trend Analysis

· Price-Volume Analysis

· Cost Estimating Relationships

· Ratio Price to Direct Cost

Adjust Prices for Comparison

6.4

Compare Offered Prices with Adjusted Prices

6.5

(For additional details regarding each step in Figure 1, review Attachment 1 to this lesson)

Based upon the FAR and CPRG, our goal is to execute a price analysis by finding pricing data that is the same or similar to what we are currently purchasing, and make a comparison. But, how? The following paragraphs explain the process outlined in the CPRG image. Each step in the flowchart is described in the CPRG Volume 1, Chapter 6, paragraphs 6.1 through 6.5, and is summarized in Attachment 1 and the paragraphs below.

Step 1 - Selecting prices for comparison (CPRG paragraph 6.1). The process for gathering and selecting prices for comparison begins with a clear understanding of the requirement, continues with extensive market research, and may even include the request for cost or pricing data in accordance with the Truth in Negotiations Act, and the Pricing Policy set forth in FAR 15.402.

In every acquisition, market research is conducted prior to soliciting for goods or services. This market research yields what the CPRG refers to as the “should-pay price”-- the most likely price the government will pay for the items or services being purchased. The should-pay price is an estimate based on comparing the items or services being solicited to pricing information captured by market research.

Through the process of collecting pricing information, we must consider several factors when contemplating conducting a comparative analysis for pricing purposes.

a) Are the proposed prices comparable? Are they the best basis for analysis? Are there any extenuating factors present that require further investigation before price comparisons can be made?

b) Were the prices selected as a basis for comparison developed under comparable situations? Specifically consider the impact that the following factors could have had on the prices selected as the basis for comparison.

i. Market conditions

ii. Quantities, size, specs

iii. Geographical location

iv. Technology

v. Terms and conditions of the sale/contract (i.e., delivery terms and dates, payment terms, etc.)

vi. Economic factors (cost of living, value of the dollar/inflation/deflation, market saturation)

vii. Extent of competition

Additional information concerning each of these factors is provided in the next section of this lesson.

c)If any of the above factors are present, determine how significant a role these factors played in the development of the price being analyzed and the impact these factors have on the comparability of the items being compared.

d)Determine a methodology to measure the impact of the factors identified in item 2. (For example, inflation and deflation apply when comparing historical prices and will be covered in Lesson 3 of this unit, Price Indexing. Another example could be that one price is higher than the other based on delivery and payment term differences between one offeror and another.)

e)Compare the adjusted prices with the proposed prices, making certain that the full impact of the factors affecting the comparative analysis have been adequately analyzed. This analysis must be sufficient to allow for an objective and quantifiable determination that either the price proposed is reasonable; or in a price that the government should reasonably expect to pay.

Steps 2 and 3 - Identify factors that affect comparability, and determine their effect on price (CPRG paragraphs 6.2 and 6.3). A challenge with comparisons in price analysis is identifying the most relevant similarities and differences, and estimating the effects on price. The following factors deserve special consideration because they affect many price analysis comparisons.

When considering these factors, determine how the similarities may provide more confidence in future price estimates, and how differences can be accounted for.

Steps 4 and 5 - Adjust Prices for Comparison, and then Compare Offered Prices with Adjusted Prices (CPRG paragraph 6.4 and 6.5). After working through the first three steps, we can finally adjust our price estimates and compare our adjusted prices to the offered prices. This ensures we are conducting an “apples to apples” comparison, which will lead us to a reasonable determination of a fair price.

In order to check for understanding of this concept, answer the following questions. For each scenario, describe factors that will be similar, and factors that will be different. For factors that are different, describe how they will they affect the compared prices.

1. Your task is to purchase a security service for an Army post in a remote area of central Texas, home to 10,000 soldiers, an armory, a hospital, and a huge, on-post shopping center. Several contractors intend to respond to your solicitation. On your last deployment to hostile territory, you acquired a security service for a post for 2,000 coalition forces, with an armory, a hospital, and a small post “shopette.” Only one contractor responded to your solicitation.

2. Your task is a routine purchase for maintenance of F-22 aircraft central gearboxes at the Air Force depot at Hill AFB. The last two purchases were made during surge operations in Afghanistan. There are at least two contractors who have historically provided this service at Robins AFB.

3. Your task is to purchase a new tank turret part which has not been purchased in 10 years. You still have pricing information from the last purchase. However, the latest processes for designing and manufacturing have reduced the time required to build and deliver this part by a factor of 10. During the original design and production, there was only one qualified source. Though the part is not commercial, there are at least three contractors who could produce this part. Then and now, the production and delivery will take place in the southeast area of the United States.

The Price Analysis Techniques

With a fundamental understanding of comparative analysis, this lesson now further explores each price analysis technique listed in FAR 15.404-1(b)(2).

1. Comparison with Other Proposed Prices. The first method of comparative analysis addressed in the FAR is comparing proposed prices received in response to the solicitation being awarded. As we learned in Lesson 1, adequate price competition must be present in order to conduct this type of analysis. This is one of the two “preferred” price analysis techniques (per FAR 15.404-1(b)(3)).

This type of comparative analysis is the preferred method of comparative analysis because all prices proposed share similar characteristics. Specifically, they were prepared independently in response to the same requirements (quantity/size, market conditions, commercial or government unique requirements, technology), in the same market conditions, under static purchasing power of the dollar, implications of technology are similar, and the terms and conditions are the same. This eliminates the need to speculate on how these factors affected the different prices proposed. The offers being evaluated are technically acceptable and in Sealed Bidding, the bids being considered must be responsive.

2. Comparison with historical prices. The next comparative analysis method specified in the FAR is comparing prices proposed on the current solicitation to historical prices paid, for the same or similar items/requirements. The purchase associated with a particular price may have been made by your office or another office with similar requirements.

Price analysis based on comparisons with historical price data should answer the questions contained in the following table.

Research Element

You should be able to answer questions such as:

Trends in Supply and Demand

· When did past acquisitions take place?

· Is there any indication of prevailing market conditions at that time?

Pattern of Demand

· What quantities were solicited for each acquisition?

· What quantities were acquired?

Trends in Places

· What was the contract price?

· How did the unsuccessful offers compare with the successful offer?

Start-up Costs and Pricing Strategy

· Did the contract price include one-time engineering, tooling, or other start-up costs?

· Should future contract include similar or related costs?

· Were necessary start-up costs paid for in a manner separate from the price for the item or service?

Sources of Supplies or Services

· How many sources were solicited for the prior acquisition?

· What specific sources were solicited?

· How many sources offered bids or proposals?

Product Characteristics

Are there any significant differences between the government requirements documents for the prior contract and the current requirements?

Delivery/Performance Terms

· What was the delivery/performance period (days, weeks, months, years)?

· In what month(s) were supplies to be delivered/service to be performed?

· Did the vendor meet the delivery targets?

· What was the FOB point?

· Was premium transportation required for timely delivery?

Ownership Costs

· What costs of ownership were associated with the acquisition?

Acquisition Method

· What acquisition method was employed for past acquisition?

Contract Terms and Conditions

· What were the general terms of past contracts?

· Are there any significant differences between terms of the last contract and those recommended for the acquisition

Problems

· What problems (if any) were encountered during contract performance?

3. Comparison by Parametric Estimates and Rough Yard Sticks. As presented earlier in Unit 2 of this course, cost estimating relationships (CERs) are used to develop parametric estimates or rough yardstick estimates.

Government buying teams use this pricing technique when they are buying requirements which are similar but not the same as previous purchases. A CER is typically a simple ratio used to estimate future prices based on the relationship of past prices, based upon one or more products’ physical or performance characteristics (such as dollars per pound or dollars per horsepower).

Whenever you can relate item price with the value of one or more physical or performance characteristics, you can use the relationship to estimate the price of a similar product. Like many of the price analysis methods we have seen thus far, this method relies on historical data as the basis for our relational estimating equation.

4. Comparison with competitive price lists, market prices, indexes. Next, we explore the fourth price analysis technique listed in FAR 15.404-1(b)(2) - comparison with published price lists and other commercially available information. These categories of prices can be used for comparison purposes when purchasing the same or similar product or service. The circumstances of your purchase may be different from the commercial sales, but data on commercial sales can provide valuable information for use in contract pricing.

Using Commercial Prices (FAR 15.404-1(b)(2)). You can classify the sources of commercial pricing information into three categories:

Competitive Published Price Lists -- prices taken from a Federal Supply Schedule (such as the GSA Schedules Program, per FAR 8.402), open source catalogs and price lists, Blanket Purchase Agreements, or other verifiable and established records that are regularly maintained by a manufacturer or vendor, and routinely available for prospective customers. For pricing purposes (but not cost or pricing data exception purposes), you can consider published pricing information from the firm submitting the offer and/or published pricing information from other firms offering similar products.

Published market prices of commodities -- prices established in the course of ordinary and usual trade between buyers and sellers free to bargain that can be substantiated from sources independent of the offeror. Normally, market pricing information is taken from independent market reports, but a market price could be established by surveying the firms in a particular industry or market.

Similar Indexes. Commercial products and services prices may also be analyzed by using indexes published by the U.S. Department of Labor, Bureau of Statistics, or other commercial organizations. As we learned in Unit 2 Lesson 2, and in the CER examples presented earlier in this lesson, analyzing indexes from recent time periods, can help us estimate prices in the future. For example, a roofing contractor might justify its recent price increases based upon DoL’s index showing the increasing prices of petroleum products—which are a key ingredient for asphalt shingles. By understanding this price analysis technique, a contract specialist can independently assess the DoL’s index information, and pursue explanations for proposed price increases.

Discounts and rebate arrangements. Buyers must also assess any discounts and rebates offered in the past (such as a unit price decreases for increased quantity purchases), as well as for future purchases.

5. Comparison with Independent Government Estimates. As the name implies, an independent Government cost estimate is an estimate made by the Government. Typically this estimate is prepared by the requiring activity and is provided as part of the requirements package. It is based on market research conducted by the requiring activity in preparation of making a purchase of goods or services. Sometimes, the estimate is a formal report, often called an “IGE;” but also, it may be a summary paragraph of market research prices attached to a purchase request package. Per the CPRG, Volume 1, Chapter 6, paragraph 6.1.5, there are three types of independent Government cost estimates.

· The most common is the Independent Government Estimate that accompanies the purchase request.

· A value analysis estimate results from a specialized analysis of the function of a product and its related price. It may literally involve taking the item apart to determine how it is made and why it costs what it does.

· A visual analysis estimate results from a visual inspection of an item, or drawing of an item, to estimate its probable value.

The IGE is developed based on the most recent market research data and analysis for fulfilling the Government’s requirement, and should accompany the procurement request. The submitted cost estimate shall include a basis for the Government’s estimate using current validated data whether at the price level or at the cost element level. The dollar value, type procurement, and the complexity of the procurement will determine the level of detail in the IGE. Cost element or price values alone are not adequate without a basis to support the estimated values. The cost estimate does not have to be an exact match to the offeror’s proposal to be used as a comparison, but should have adequate information to determine how the Government’s approach to the estimate compares to the offeror’s understanding of the requirement. The IGE should not be adjusted to the offeror’s price as the offeror’s approach may have differences the Government did not account for and may warrant additional pricing inquiry.

The analyst must provide an adequate narrative validating the source or the basis of the information comprising the estimate. The details of the IGE are significantly more critical in a sole source environment where no competition exists and or where an exemption may exist from obtaining cost or pricing data from the offeror. The IGE may also be used as a comparison where two or more offers are received but only one offer is considered technically acceptable. In evaluating an IGE, consider the questions on the slide below.

6. Comparison with prices discovered during market research. The sixth price analysis technique listed in FAR 15.404-1 is comparing proposed prices with prices obtained from market research. As we have studied so far in CON 170, market research is an on-going process, and a key contributor to our ability to determine prices as fair and reasonable. We can make such comparisons using a similar process to the one we studied earlier in this lesson in Figure 1.

As we find pricing information during market research, we can analyze the information in many ways. This lesson provides an example of how to use Cost Volume Analysis to analyze prices discovered during market research. Recall from Unit 2, Cost Volume Analysis is a fundamental analysis tool used by companies to assess their total cost or price to produce an item as quantity increases. The following slide provides a brief refresher on the relationship between price and total costs.

With this in mind, work through exercise 4 at the end of this lesson, which illustrates how even a few prices captured during market research can reveal important insights into a contractor’s costs, and enable us to make smart decisions with respect to fair and reasonable prices, and contracting strategy.

7. Analysis of data other than certified cost or pricing data. The seventh and final price analysis technique listed in FAR 15.404-1(b)(2) drives price analysts to compare proposed prices to data other than certified cost or pricing data. This technique would only be used in situations when we request such data.

Remember, pursuant to Pricing Policy stated in FAR 15.402, our goal is to accomplish adequate market research that we do not need to request data from the contractor. However, when we must request such data to determine proposed prices to be fair and reasonable, abide by FAR 15.402(a)(2)(ii)(A), which states we must pursue “at a minimum, appropriate data on the prices at which the same or similar items have been sold previously, adequate for evaluating the reasonableness of the price.”

Before requesting this kind of data, price analysts should assess the gaps in their market research data and initial price analysis, request specific data that will fill those gaps, and think through how they will analyze the data upon receipt. Generally, this type of data can be analyzed using the same tools described in price analysis techniques 2 through 6.

To conclude this lesson, remember the seven price analysis techniques listed in FAR 15.404-1(b)(2) provide the contracting officer a foundation of tools to determine prices to be fair and reasonable. Understanding these tools also equips contracting officers with insight regarding what specific kinds of information to pursue during market research, and in requests for data other than certified cost or pricing data. These techniques are listed individually in FAR 15; and are applied in different situations; however, they are commonly used together when evaluating proposed prices to determine them fair and reasonable.

Exercises: Price Analysis Techniques

Learning Objective

Complete the following exercises and answer the associated questions in order to practice application of the price analysis techniques discussed in this lesson.

Introduction

This lesson provided a deeper exploration into the price analysis techniques discussed in class so far. Herein, students will have a chance to apply the different types of techniques in different situations. Complete the following problems and questions based on class lectures and discussions.

Assessment

These activities are not scored or graded.

Student Instructions: Read each exercise scenario. Perform any calculations that are required and answer any questions that follow. Your instructor will give you an approximate amount of time for each exercise and then you will discuss each as a class.

Exercise #1. Use of parametric estimating methods – using CERs to price a commodity. Your base customer is upgrading their contingency operations center with a flat screen TV monitor. Their goal is to buy the largest TV screen possible for $500 or less. They have determined a 32 inch diagonal screen is the minimum size needed, but desire a TV that is at least 40 inches diagonal. This monitor will primarily be used to display command presentations, weather maps, and the latest local, national, and international news. This TV does not need the state-of-the-art technology for resolution, sound, connectivity ports, viewing angle or styling. Their market research includes federal supply schedules, other catalogs, and newspaper ads.

So far, their market research revealed the following prices for TVs that met their requirements for size, and the product that will work best with the video input sources. They found the following prices for 32-inch and 46-inch TVs.

32 Inch

46 Inch

$289.99

$529.99

$329.99

$599.99

$344.99

$649.99

$349.99

$749.99

$379.99

$829.99

$399.99

$476.99

Last night, as you were studying your CON 170 material, your customer called you, excited with the prospect of a great deal. There was a company offering a 42-inch television that met his specifications for $479.99! It was only available online, shipping was free, and the 90-day warranty was included, all while supplies lasted. He asked for your opinion.

1. What analysis do you accomplish to help your customer?

2. What things would you counsel your customer to consider?

Let’s start with a simple CER to compare price and our customer’s most important factor—the diagonal length of the TV screen. Complete the table below to see how this 42 inch model compares to other prices from our market research.

TV Size

Average Price

Cost per inch

32 Inch

42 Inch

(Online Special)

46 inch

3. Does the online special appear to be a good deal? Why or why not?

You and your customer speak with the online sales associates about comparisons with other TVs. This conversation reveals the size of the TV is not the only driver of the price of a TV; but in addition, the price is driven by the TV’s performance features. This online special TV model did not have many of the latest features of current TVs; however, it still included the right features to work with your customer’s operations center systems.

Therefore, with his minimum performance features met, and the lowest price per square inch, you and your customer determined this price to be reasonable.

Lesson learned. In price analysis, you may discover the CER you expect to be the cost or price driver may play a smaller role in estimating price and in determining fair and reasonable than you imagine.

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Exercise #2. Comparison with competitive published price lists - commercial prices (using price indexing). In December 20X2, you are estimating a reasonable price for an office light fixture requirements contract – you plan to order via a GSA Federal Supply Schedule contract to meet this requirement. Through market research, you have been able to gather historical information for these same light fixtures from the past 3 years where the estimated quantity has also been approximately 10,000 units, with the same terms for delivery and warranty. Market research indicates the most closely related NAICS Code for this requirement is 333512, “Nonresidential Electric Lighting Fixtures.” In fact, you verified with local suppliers that they also use this NAICS code in their business forecasting. Using historical prices and available index numbers from the DOL’s PPI Detailed Reports (given below, for NAICS Code 333512), estimate a reasonable unit price for the fixture.

Year

Contract Unit Price

Index Number

Price in 20X2 Dollars

20X9

$22.40

115.3

20X0

$23.75

116.4

20X1

$24.90

121.1

20X2

121.1

?

1. Since you are ordering from a GSA Federal Supply Schedule, is the Contracting Officer still required to make and document a fair and reasonable determination for this requirement? Cite your reference(s).

2. How can you use the pricing information provided to estimate a reasonable price?

3.What is your estimated unit price per unit in 20X2? (complete the table)

4.What is your estimate of a reasonable price for up to 10,000 units?

5.Before negotiating this contract, what other market research would you consider, with respect to this price analysis technique?

For more guidance on employing these pricing techniques, see the CPRG, Volume 1, Chapter 6, paragraph 6.1.2.

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Exercise #3. Comparison with independent government cost estimates. We have received prices for our guard services solicitation for a company to provide guards at specific posts at specified times 24 hours per day and 7 days per week at the Iowa Army Ammunition Plant. To review, historical prices for the most recent three contracts were as follows.

Contract

Contract Term

Award Price

1

1/1/20X2 through 12/31/20X2

$1,346,585

2

1/1/20X3 through 12/31/20X3

$1,244,215

3

1/1/20X4 through 12/31/20X4

$1,124,490

Each of these contracts was awarded competitively using LPTA as the source selection strategy. Each contract was fixed price performance based and each offeror was responsible for developing the associated staffing and management plan to provide the level and quality of protective services required.

Each proposal received, including the proposals that were awarded, underwent a full technical analysis. Further, the Chief of Security services at Iowa Army Ammunition Plant, Ms. Nancy Wood, confirmed that the price paid for each contract purchased at least the following number of hours based on the Independent Government Estimate.

Contract

Estimated Direct Labor Hours

1

87,600

2

78,840

3

70,040

The number of hours listed above differs between contracts for two reasons:

- Different number of locations where guards were required to be stationed

- Different duty hours associated with the function, purpose and hours of operation of areas where physical protective service presence (guard/guards) was required.

At the time of award for these three contracts, the Government estimate was determined as reasonable by price analysis and the technical analysis.

Each contract is covered by the Service Contract Labor Standards (SCLS), which required the incorporation of a Department of Labor Wage Determination specifying the prevailing wage and associated fringe benefits for the local area that any contractor providing these services would be required to pay the personnel they hired to work on each contract. Each of the three contracts awarded previously had different wage rates contained in the contract’s associated wage determination.

Contract

Position

SCLS Minimum Wage Rate

1

Security Guard

$9.15

2

Security Guard

$9.45

3

Security Guard

$9.50

Price analysis of these proposals revealed the differences exhibited in award prices for each of the 3 contracts could be explained by the differences in the requirements and the different minimum wage rates required by the DOL Wage Determinations contained in each contract.

In preparing the requirements package for this year’s contact, the head of security services. Nancy Wood, sought your guidance in developing the Independent Government Estimate that was used to request funding for this contract. The estimate that she developed and her rationale for that estimate follows.

First, she looked at the hours required to fulfill the contract requirements and the total contract price. She noticed that even as the minimum wage rate went up, the total contract declined leading her to believe there was a relationship between the number of hours required to perform the contract and the price she paid for her organization. She wondered how much she was paying per hour and asked your assistance in completing this calculation.

1.How would she make this calculation for Price per Hour based on the data below?

A

B

C

D

Contract



Contract Price

1

87,600

$9.15

$1,346,585

2

78,840

$9.45

$1,244,215

3

70,040

$9.50

$1,124,490

Contract


Total Contract Award Price

Price/Hour

1

87,600

$1,346,585

2

78,840

$1,244,215

3

70,040

$1,124,490

While this information is useful, your market research also indicates the cost driver for this service contract is direct labor. Therefore, a more accurate cost estimating relationship for estimating future costs would be the markup rate between direct labor costs and the contract price.

For the contract we are currently soliciting, Nancy and her team reviewed actual payroll records from the past several years. From these records, the Government team estimated that a minimum staffing level of 75,000 hours would be necessary to fulfill the security performance requirements. Therefore, 75,000 hours were used for the preparation of the IGE.

2.Given the direct labor rate (the SCLS Minimum Wage Rate), calculate the markup rate based on the data below. (Round your answer in Column F to 2 decimal places)

A

B

C

D

E

F

Contract



Estimated Direct Labor Cost

Contract Price

Price to Direct Labor Cost Ratio

1

87,600

$9.15

$1,346,585

2

78,840

$9.45

$1,244,215

3

70,040

$9.50

$1,124,490

3.Now that we have the markup rate for our 3 prior contract awards, use the mean of the 3 to calculate a single markup rate to develop our government estimate.

4.Finally, what is the IGE for the price of this contract, if the DoL Wage Determination (pursuant to the SCLS) for security guards is now $11.50 per hour?


Estimated Direct Labor Costs

Markup Rate

Estimated Total Contract Price

Current Solicitation

Four proposals were received in response to this solicitation. Their prices are as follows.

Contractor A = $1,336,875

Contractor B = $1,509,375

Contractor C = $1,457,625

Contractor D = $1,456,990 (The incumbent for contract 3)

5.Who is the apparent winner?

6.Do you have enough information to make a justification of fair and reasonable on any of these prices?

7.What is the markup associated with each contract?

8.What, if anything would concern you about this situation?

9.Does the FAR allow you to do additional research in an LPTA source selection effort to allay your concerns? If yes, what? Cite your FAR references.

10.How would your award decision be affected if Contractor A provided Data Other than Certified Cost or Pricing Data which verified proper Service Contract Labor Standard rates were used to estimate the price?

Exercise summary: A good IGE plays a key role in price analysis particularly when comparison of proposed prices results in anomalies or unexplained differences, such as an offer that appears too low. A well thought-out IGE that has been correctly analyzed by either the contracting officer, contract specialist or a price analyst plays a key role in determining when an offer may be too low, when a company is buying-in, or when an offer is unbalanced.

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Exercise #4. Comparison of proposed prices with prices obtained through market research. For this next exercise, we will use Cost Volume Analysis to analyze prices from market research, and to determine if a single-award or multiple award IDIQ contract is more appropriate.

You are the contracting officer responsible for widget purchases for your agency. Through market research, your team captured several widget prices from two leading companies. In comparing their unit prices, you noticed a significant difference depending on the quantity ordered.

Apex

Baker

Purchase Quantity

Total Price

Unit Price

Purchase Quantity

Total Price

Unit Price

500 units

$750

$1.50

1,000 units

$1,250

$1.25

1,500 units

$1,250

$.83

4,000 units

$2,000

$.50

4,000 units

$2,500

$.63

8,000 units

$3,000

$.38

In addition to the market research pricing data, your historical data indicates the Government’s ordering pattern ranges from as low as 200 units up to as many as 7,000 units per order. Therefore, an IDIQ contract type seems appropriate, but you are not quite sure if this should be a single award, or a multiple award IDIQ arrangement.

The first source that you researched is Apex Widget. You captured the following data from the last three purchases from Apex:

Purchase Quantity

Total Price

500 units

$750

1,500 units

$1,250

4,000 units

$2,500

1.What is the variable cost per unit?

2.What is the total fixed cost?

3.What is the equation for the line that best depicts the relationship identified above?

The other source that you consider is Baker Widget. You collect the following data from the last three purchases from Baker:

Purchase Quantity

Total Price

1,000 units

$1,250

4,000 units

$2,000

8,000 units

$3,000

4.What is the variable cost per unit?

5.What is the fixed cost?

6.What is the equation for the line that best depicts the relationship identified above?

7.Based on the above information, how would you describe the differences in the production methods used by the two firms?

8.Based on the above information, what would you predict to be the most likely low offer for a quantity of:

7,000 units?

Why?

1,000 units?

Why?

3,000 units?

Why?

2,000 units?

Why?

9. With this information and analysis, would you pursue a single-award or multiple-award IDIQ contract?

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Exercise #5 – Comparison of proposed prices with prices obtained through market research & Comparison of proposed prices received in response to the solicitation

You have been tasked with analyzing price proposals received in response to a competitive solicitation issued for the purchase of 53 matching standard commercial double 60” pedestal metal desks Delivery will be F.O.B. destination, meaning the final proposed unit price must include all shipping and delivery charges. The customer’s market research conducted during the acquisition planning phase indicated this was a commercial item, widely available through open market sources found on the internet and on GSA Advantage. However, none of the GSA vendors could meet the Government’s delivery schedule for this acquisition.

The following two-part exercise consists of analyzing the customer’s estimate and reviewing the proposals found to be technically acceptable and answering a series of questions.

PART 1 – Market Research / Customer’s Estimate

MARKET RESEARCH DATA USED FOR GOV’T ESTIMATE:

Supporting data for the customer’s estimate for 53 standard double pedestal desks*

Vendor

Source

Unit Price

Ext Price

Shipping

Adj Ext Price

Adj Unit Price

Modern Office

Web

$579.00

$30,687.00

Included

$30,687.00

$579.00

Global Industrial

Web

$428.95

$22,734.35

$1,929.00

$24,663.35

$465.35

Everything Office Furniture

Web

$593.26

$31,442.78

Included

$31,442.78

$593.26

National Business Furniture

Web

$489.00

$25,917.00

$6,307.00

$32,224.00

$608.00

Int.com

Web

$619.10

$32,812.30

Included

$32,812.30

$619.10

Average Cost used for Government Estimate

$30,365.89

$572.94

*Quotes are the result of entering quantities on various websites and recording the price quoted based on a quantity of 53 and FOB Destination.

The government estimate for the purchase of these desks was for $30,365.89 with a unit price of $572.94 based on the mean value of the market research data provided. The source selection will be made based on Lowest Price Technically Acceptable.

1. What, if anything, should the Contracting Officer or Contract Specialist do to verify the accuracy of the customer’s estimate?

PART 2 – Proposals Received / Comparison of Prices

Proposals were received from 8 vendors 3 of which were technically unacceptable (and thus removed from consideration). The details of the 5 remaining technically acceptable proposals follow:

PROPOSALS RECEIVED

Vendor

Unit Price

Extended Price

F.O.B. Terms

A

$366.07

$19,401.71

Destination

B

$370.49

$19,635.97

Destination

C

$558.56

$29,603.68

Destination

D

$856.77

$45,408.81

Destination

E

$984.61

$52,184.33

Destination

Using the available resources (the customer’s estimate and proposals received), answer the following questions.

1. Which vendor should receive the award? Why?

2. How would you explain the wide range of prices received?

3. What data can you use to affirmatively support that the award price is fair and reasonable?

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Exercise #6 – Comparison of proposed prices received & Comparison of proposed prices to historical prices paid

The Government team is working to award a follow-on, single-award, IDIQ (indefinite delivery, indefinite quantity) contract through an LPTA source selection for base janitorial and cleaning supplies. Four proposals were received, including one from the incumbent contractor, “Vendor B.”

As we learned in Unit 4 Lesson 1, the preferred pricing techniques are to compare prices received in response to a solicitation, and compare prices to historical data. In this scenario, we will compare proposals among the four offerors. In addition, because we are awarding a new contract as a follow-on to a current contract, we will also compare proposed prices to our current contract prices (assume the historical prices have been indexed to current-year prices for comparison).

The following table, Exercise 6 - Table 1, summarizes the proposals received, and also includes the unit prices from the current contract.

Review Exercise 6 - Table 1, and answer the following questions:

1. If all offerors are considered technically acceptable, under an LPTA source selection, which vendor appears to offer the overall best value?

2.Now, compare each item’s proposed price compared to the other vendors, and to the current contract unit prices, and write your observations in the “Remarks” column.

Exercise 6 - Table 1

Comparison of Newly Proposed Unit Prices and Current Contract Unit Prices

Item

Est Quant

Vendor A

Vendor B

Vendor C

Vendor D

Current Contract Unit Prices

Remarks

Trash Can Liners

15,000,000

$0.08

$0.15

$0.08

$0.08

$0.08

Cleaning Cloths

1,250,000

$0.04

$0.10

$0.07

$0.05

$0.05

Sponges

750,500

$0.08

$0.02

$0.09

$0.09

$0.09

Scrubbers

150,000

$8.00

$1.00

$8.00

$8.25

$8.00

Garbage Can Liners

50,000

$0.14

$0.02

$0.15

$0.15

$0.15

Toilet Bowl Cleaner

1,500

$44.00

$25.00

$45.00

$45.50

$45.00

Dust Mop Heads

1,000

$0.74

$0.75

$0.75

$0.76

$0.75

Mop Heads

500

$0.94

$0.95

$0.95

$0.95

$0.95

Mopping Solution

255

$35.00

$35.00

$36.00

$35.75

$36.00

Furniture Polish

225

$55.00

$55.00

$55.00

$55.00

$55.00

Bathroom Cleaner

225

$29.00

$1.00

$30.00

$29.00

$30.00

Toilet Brush

100

$8.00

$8.00

$7.00

$6.50

$7.00

Wax

25

$75.00

$75.00

$76.00

$79.00

$76.00

Paint Stripper

20

$50.00

$50.00

$50.00

$45.00

$50.00

Total Price based on Estimated Quantity

$2,615,750

$2,604,935

$2,625,675

$2,676,071

2,638,175

After noticing the differences in the prices at the unit level, your team assembles the following table to compare the prices of each vendors’ total estimated price for each line item, as well as total offered price, as illustrated in Exercise 6 - Table 2.

3. From our review, the offers from Vendors A, C and D are generally comparable, yet Vendor B’s proposal appears to be __________ .

Your team conducts additional research regarding the actual quantities of supplies ordered on the existing contract. The following table, Exercise 6 - Table 3, illustrates how Vendor B’s pricing arrangement would actually cost the Government more than the other offerors if actual orders are the same as on the current contract.

4. Review FAR 14.404-2(g) and 15.404-1(g), and explain what the buyer should do next.

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Exercise #7 – Multiple Price Analysis Techniques - Annual Procurement conference 8(a) award.

This activity consists of 3 sections as follows:

Part 1 – Review the introductory requirement data to determine the type of analysis that will be performed.

· After all groups have completed Part 1, you will have a Class Reset discussion before moving on.

Part 2 – As a table group, utilize the provided information that was already available to the government to establish a price objective and/or range of reasonable prices.

· After all groups have completed Part 2, you will have another Class Reset Discussion before moving on.

Part 3 – As a class, you will examine the additional data provided by the contractor to the government to establish a final price objective.

· This will be a facilitated discussion, as a class.

Part 1

You are the contract specialist tasked with awarding the contract for your organization’s Annual Procurement Conference. The conference has been held for several years, and over the past 6 years has been awarded on a competitive basis. This year, the contract is being awarded on a sole source basis utilizing the socioeconomic 8(a) program and your agency has been authorized by the SBA to conduct these negotiations on their behalf. This requirement has been designated for Nashville WOW Events because they developed this lead for the 8(a) program and because the anticipated total value of the contract will be less than the $4M competitive threshold for non-manufacturing acquisitions. (FAR 19.8) The purchase qualifies as a commercial services acquisition. Nashville WOW Events hosts multiple conferences a year for non-governmental entities and has a variety of conference packages available with differing levels of service effort and amenities.

The Statement of Work (SOW) below outlines conference services for the DOD Acquisition Executive’s Annual Procurement Conference which includes conference management, event planning, logistics, and communications to include audio visual technical support. The Procurement Conference will be attended by approximately 340 contracting officers, contracting specialists, logistic management specialists, executives, managers, and team leaders. Locations recommended by the contractor will be considered and may be beneficial for cost savings or logistical reasons provided they meet the criteria specified in the scope of work.

The Contracting Officer is the sole person authorized to make or approve any changes in any of the requirements of this contract and notwithstanding any provisions contained elsewhere in this contract, the said authority remains solely with the Contracting Officer. In the event the Contractor makes any changes at the direction of any person other than the Contracting Officer, the change shall be considered to have been made without authority and no adjustment will be made in the contract terms and conditions, including price.

Office of Acquisition and Business

ANNUAL PROCUREMENT CONFERENCE

Statement of Work

(Key Requirements)

· Procurement Conference will be attended by approximately 340 contracting officers, contracting specialists, logistic management specialists, executives, managers, and team leaders

· The Procurement Conference will be held in Nashville, Tennessee in April 20x7 (historically it has always been in April)

· The Procurement Conference will be held Tuesday – Thursday (3 days) with travel on Monday and Friday

· Three breakfasts, two lunches and morning/afternoon snacks will be included (no evening reception or cocktails)

· Space requirements - General Session room (340 people), 6 break out rooms (60 people), 1 break out room (30 people), registration area, room block of 340 rooms for 4 nights (Monday – Thursday nights)

· The Contractor must provide all audio/visual equipment necessary for the Conference (standard services acceptable – does not require upgraded support package)

Summary of Acquisition Strategy

· Sole source utilizing the socioeconomic 8(a) program (FAR Part 19)

· Authorized by the SBA to conduct these negotiations on their behalf through DFARS 219 and a Partnership Agreement between the DOD and SBA.

· Requirement has been designated for Nashville WOW Events because they developed this lead for the 8(a) program.

· The purchase qualifies as a commercial services acquisition.

· Customer estimates a cost of $290 per person per day for a total of $295,800. ($290 per person x 340 people x 3 days)

Summary Data of Contractor’s Proposal.

· The contractor has submitted a total price of $294,811. Since this is a commercial contract, cost breakout details were not provided with the proposal for indirect rates and labor rates

· Government technical evaluators determined the proposal to be technically acceptable

Since there is no competition in this case, your task will be to negotiate a fair and reasonable price with the contractor based on analysis of their sole source proposal.

1. Is certified cost or pricing data required for this acquisition? Why or why not?

2. What type of analysis would you perform under these circumstances and what analysis techniques could you employ to verify a fair and reasonable price?

(PART 1 RESET – Discuss the questions above as a team/class before moving on to PART 2.)

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PART 2 (to be worked in groups)

You are the contracting specialist tasked with awarding the contract for your organization’s Annual Procurement Conference. Due to workload issues and the dollar value of this procurement, DCMA advises you that they will be unable to provide field support to review this proposal for at least 6 months. Since the conference occurs in 3 months, and you have no other pricing support in your organization, price analysis of this commercial services sole source contract will fall to you as the contracting specialist.

Pre-analysis Class Discussion:

Historical data for the past 6 years for this conference is as follows (all of these actions were competitively awarded and therefore determined to be fair and reasonable):

Year

Location

Length

Attendees

Price

20X1

Manhattan

3 days

340

$531,183

20X2

New Orleans

3 days

300

$261,618

20X3

Dallas

3 days

340

$263,521

20X4

Denver

3 days

340

$300,675

20X5

Boston

3 days

300

$387,523

20X6

Chicago

3 days

300

$330,958

1. What cost estimating relationships can be derived from the historical data?

2. What would we need to do before we could best utilize the historical data?

Keep in mind the following as you progress the rest of the way through this exercise:

1. As stated in the first slides, you should realize the following, per FAR 15.404-1 -- Proposal Analysis Techniques:

· Because this is a commercial service, we cannot require certified cost/pricing data; therefore, price analysis shall be accomplished

· This is also a sole-source acquisition. While it appears we have some historical data, we may also be requesting data other than certified cost and pricing data

· In such cases, it is possible we may determine it is necessary to also conduct cost analysis, at least on certain aspects of the proposal.

2. Notice, our market research includes historical data from 20X1 through 20X6 so we will have to use indexing to set all dollar values in the current year, 20X7 (assume a 20X7 procurement action)

3. Historical data indicates these conferences have been hosted in different cities so we will have to adjust the prices in order to make a comparison with this year’s location, Nashville.

· Why? - Do you think a hotel room and conference would cost the same in New York, New York compared to Boise, Idaho? If you ask a resident of Boise, “how much does a hotel room cost,” he might answer, “around $75.” Imagine his surprise when he goes to Manhattan, and has to pay $300! Location is a significant influence on price.

· (To adjust the prices with respect to location, we will use information from a web-based tool.)

4. Historical data indicates conferences differ in length so we will have to adjust prices based on the number of days of each conference, by establishing a “price per day.”

5. Conferences may differ with respect to levels of service and quality of hotel so we will have to determine our requirement level, and ensure we adjust historical prices to the same level.

6. Conferences have different numbers of attendees so we will have to understand the price per attendee. Sometimes, the “price per attendee” is what contractors advertise in catalogs and on GSA schedules. We will examine if Cost-Volume Analysis is a useful predictive tool for this services acquisition…can we plot cost on the y-axis and the “volume” or number of attendees on the x-axis and draw useful conclusions?

7. With our historical data adjusted for time, location, and number of attendees, we will estimate a range of reasonable prices.

8. Finally, students will compare our estimated price to the proposed price. If there are significant differences, we will pursue answers through fact-finding, and perhaps even by requesting additional data other than certified cost or pricing data.

Table-Group Work and Discussion Questions:

After considering the above, answer the following questions and or make the calculations described:

1. Normalize the data

a. Account for the differences in prices between locations. Utilize the provided per diem rates to develop an economic location adjustment.

Geographic location can have an impact on prices that needs to be accounted for and normalized. A variety of resources are available (Kiplinger, CNN/Money, Bank Rate, etc). Since this contract is for hotel facilities and food, for this contract you decided to calculate an adjustment utilizing per diem rates to bring everything to a Nashville equivalent price. The adjustment factor will be calculated by dividing the Nashville per diem by the other cities per diems (ex – for New York divide $220 by $341 for a factor of $0.6452 – round to 4 decimal places).

Location

Per Diem Rate April 20X7

Economic Adjustment (Nashville/Old Site)

Nashville

$220

$1.0000

New York

$341

$0.6452

New Orleans

$220

Dallas

$210

Denver

$247

Boston

$344

Chicago

$296

Once you developed factors for each location it is an easy process to calculate the derived Nashville equivalent price. All you have to do is multiply the historic price for each location by the factor you calculated utilizing the per diem rates. (ex – you multiplied the New York price of $531,183 by $0.6452 to arrive at a total Nashville equivalent of $342,719)

Year

Location

Original

Price

Economic Adjustment

Derived Nashville Equivalent Price*

20X1

New York

$531,183

$0.6452

$ 342,719

20X2

New Orleans

$261,618

20X3

Dallas

$263,521

20X4

Denver

$300,675

20X5

Boston

$387,523

20X6

Chicago

$330,958

*Adjusted for locality (Original Price x Economic Adjustment)

b. Account for the differences in prices between time periods, Utilize the provided inflation calculator factors.

Remember, since the conference data points came from prior years, you determined the need to normalize prices for the impact of inflation that occurred over the passage of time. The following factors were obtained from a BLS CPI Inflation Calculator.

If the cost was $1 in Year:

In 20X7, the cost would be:

20X1

1.09

20X2

1.06

20X3

1.05

20X4

1.03

20X5

1.03

20X6

1.02

(Student Note: We will use the inflation factors posted above to complete the rest of the exercise.)

This CPI calculator uses a database of product and service indexes to calculate “NI / OI”, as we learned to do in Unit 2, Lesson 2. Essentially, this CPI Inflation Calculator calculates NI / OI without requiring us to look up the historical index numbers. This calculated number enables us to adjust (or, “index”) historical prices for inflation and other factors for a specific product or service, as we will do in the next step.

Adjusting for the impact of inflation will involve multiplying the factor against the derived Nasvhille price for each of your historic data points. (ex – for New York multiply the 20X1 factor of 1.09 by $342,719 to adjust the price to $373,564)

Year

Location

Inflation Factor

From the CPI Calculator

(NI / OI)

Derived Nashville Price

Estimated Nashville Price in 20X7

(Inflation Factor x Derived Nashville Price)

20X1

New York

1.09

$342,719

$373,564

20X2

New Orleans

1.06

20X3

Dallas

1.05

20X4

Denver

1.03

20X5

Boston

1.03

20X6

Chicago

1.02

2. What is the cost per person for the Nashville equivalent price? (round to the nearest whole dollar)

Since the conferences have different numbers of attendees, you decide to create a Cost Estimating Relationship of price per person utilizing the prices you had previously normalized for location and year.

(ex – using your normalized New York price you divide $373,564 by 340 attendees for a price per person of $1,099)

Year

Location

Derived Equivalent 20X7 Nashville Price

Number of Attendees

Derived Nashville Price per Person

20X1

New York

$373,564

340

$1,099

20X2

New Orleans

300

20X3

Dallas

340

20X4

Denver

340

20X5

Boston

300

20X6

Chicago

300

3. Now that we have adjusted our historical data to account for location, indexed our historical data to account for inflation, and developed a price per person - what is your anticipated range of prices for an acceptable total price for this contract?

To calculate a range of estimated prices for your current requirement apply the normalized price per person to the SOW 340 attendee requirement.

(ex – multiply the New York normalized price per person of $1,099 by 340 attendees for an estimated price of $373,660)

Year

Location

Estimated Nashville Price Per Person in 20X7

SOW Required Attendees

Estimated Total Nashville Price

20X1

New York

$1,099

340

$373,660

20X2

New Orleans

340

20X3

Dallas

340

20X4

Denver

340

20X5

Boston

340

20X6

Chicago

340

(PART 2 RESET – Discuss the preceding numbers/calculations/questions above as a team/class before moving on to PART 3)

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PART 3 - Requesting Data Other than Certified Cost or Pricing Data (class discussion)

After evaluating the historic prices paid for prior government conferences, you determine it necessary to look at commercial sales data from other WOW events. We requested data on conferences in the current year that had a length of 3 days and between 300-400 attendees. The following data was provided:

Sales Data from WOW events for past 12 months:

Client

Location

Length

Attendees

Price

United Methodist Church Tennessee Valley Region

Nashville

3 days

350

$299,775

Association of Southern Health Administrators

Nashville

3 days

300

$271,970

Amway Regional Sales Director Meeting

Nashville

3 days

400

$357,872

South Central Chambers of Commerce Administrators

Nashville

3 days

320

$283,092

Comparison of historical data to sales data (discuss observations with teammates)

1. Is this sales data valid?

2. Now that we have the sales data, how can we use this data to form a valid comparison between the proposed price and the agency historical data?

Using the Historical Sales Data, notice the calculate Price per Person in the chart below.

Historical Sales Data from WOW events for past 12 months

Client

Location

Length

Attendees

Price

Price per person


Nashville

3 days

350

$299,775

$856.50


Nashville

3 days

300

$271,970

$906.57


Nashville

3 days

400

$357,872

$894.68


Nashville

3 days

320

$283,092

$884.66

3. What factors could account for the differences in the price per person for each of these conferences and what should you do to determine what the differences are?

Making the Determination of “Fair and Reasonable” Price.

In your review of the sales information we received through our request for data other than certified cost or pricing data, you asked the WOW Company to help your team understand a few of the differences between the services other clients purchased, and your own conference requirements as stated in the Statement of Work (SOW). You learned the differences were due to the number of meals, snacks, receptions, and other options that each client ordered. The summary of these findings follows.


· WOW Events confirmed that the Methodist conference services were the same as the ones we are purchasing.

The Association of Southern Health Administrators:

· No snack service – decreases their price $33 per person (we need to include to normalize)

· Includes a bottle of red and white wine per table for dinner – increases their price $58 per person (we need to remove to normalize)

Amway Regional Sales Director Meeting:

· “Supreme” option, which is an overall higher level of food service, IT service, and manpower support – increases their price by $53 per person (we need to remove to normalize)

South Central Chambers of Commerce Administrators:

· No snack service - decreases their price $33 per person (we need to include to normalize)

· Lunch not included – decreases their price $21 per person (we need to include to normalize)

· Included evening reception all 3 days with one cocktail per person – increases their price $75 per person. (we need to remove to normalize)

Now, we can factor in this new information to account for differences and to revise and better refine our estimates.

Review the additions and subtractions to the Price Per Person CER in the adjustments column, and how those changes impact the adjusted price per person.

(ex – there were no adjustments to the United Methodist Church conference, so the adjusted price per person remains at $856.50)

Adjusted Price per Person and Total Adjusted Price

Client

Length

Attend-ees

Price per Person

Adjustments

Adj Price per Person

Total Adj Price


3 days

350

$856.50

$0.00

$856.50

$299,775


3 days

300

$906.57

+33.00

$881.57

$264,471

-58.00


3 days

400

$894.68

-53.00

$841.68

$336,672


3 days

320

$884.66

+33.00

$863.66

$276,372

+21.00

-75.00

Next, apply the developed CER of adjusted cost per person to our requirement to establish a price range. What would be an anticipated price range given the data?

Now that we have an adjusted price per person based on similar sales data, we can apply that price per person to the government’s requirement of 340 attendees to establish an estimated range for the USG conference.

(ex – for each row, we multiply the adjusted price person by 340 attendees – ($856.50 x 340 = a total price of $291,210)

Client

Govt SOW

Length

Govt SOW # of Attendees

Adjusted Price per Person (from previous chart)

Total Estimated USG Conference Price based on Other Sales Data


3 days

340

$856.50

$291,210


3 days

340

$881.57

$299,733


3 days

340

$841.68

$286,171


3 days

340

$863.66

$293,644

As we approach the point where we can make a confident determination of fair and reasonableness, let’s estimate what we believe the price should be.

Of all the data we’ve captured and adjusted, what is the most relevant? Most would argue that the recent, Nashville-based sales data we captured by asking for specific “data other than cost or pricing data.” Let’s start with that.

Just looking at the prices, what is your estimate for a reasonable price for a conference with 340 people? From our analysis thus far, we would probably expect to pay somewhere between $ and $ .

We can also perform a Cost/Volume analysis to determine another data point for comparison

In our analysis of the commercial sales dated provided by the WOW company, you might have noticed that there were no conferences with the exact same number of attendees (340) as the government requirement. You also noted that after adjusting the commercial prices that there is a general downward trend in the price per person as the number of attendees increased. You remembered from the quantitative techniques you learned in CON 170 that if unit prices decline as quantities increase, it can be caused by the spreading of fixed costs. Thus, you decide to perform a cost volume analysis to determine if you can estimate where the price of 340 attendees would fall.

Utilizing the adjusted conference price for attendees 300 (the Association of Southern Health Administrators) and 400 (the Amway Sales Director Meeting) to estimate the fixed and variable element, let’s see what our anticipated price for 340 attendees would be?

First, you input the total adjusted conference price for the Association of Southern Health Administrators (300 attendees) and the Amway Regional Sales Director Meeting (400 attendees).

Client

Attendees

Tot Adj Conf Price

(# of attendees x adjusted price/person amt (from chart above))


300

$264,471

(300 x $881.57)


400

$336,672

(400 x $841.68)

Next we need to calculate the variable element per attendee. You determine there is a change in attendees between the conferences of 100 (400 less 300). To calculate the change in price, subtract the price for the 300 attendee conference price from the 400 attendee conference price. To calculate the variable element per attendee, divide the change in price by the change in attendees.

Change in Attendees

Change in Price

Variable Element per Attendee (change in price / change in attendees)

100

$72,201

$722.01

After calculating the variable element per attendee you are be able to establish the fixed element built into the total conference price. You decide to use the Amway Regional Sales Director Meeting as the basis to determine the fixed element. You will first have to calculate the total variable element by multiplying the 400 attendees by the variable element per attendee you just calculated. You will then subtract the total variable element calculated from the total adjusted conference price (found in the “Adjusted Price per Person and Total Adjusted Price” table).

Client

Attendees

Variable Element per Attendee

Total Variable Element

(Attendees x Variable Element per Attendee

Total Adjusted Conf Price

Fixed Element

(Total Price – Total Variable Element)


400

$722.01

$288,804

$336,672

$47,868

Now that you have a calculated variable element per attendee and a fixed element you can use the CVA equation (C = F + Vu*Q). You can then multiply the calculated variable element per attendee by the government requirement of 340 attendees and then add that to the calculated fixed element. This will give us (FINALLY) an estimated price for the government requirement.

SOW Required Attendees

Variable Element per Attendee

Total Variable Element

(Attendees x Variable Element per Attendee

Fixed Element

Estimated Total USG Adjusted Conf Price (Total Variable + Fixed)

340

$722.01

$245,483

$47,868

$293,351

If we were to graph this data, the CVA graph would look something like this:

Per a CVA, the estimated price for a conference in Nashville for 340 people:

$_________________

In conclusion, we can see that the data indicate an upward trend in total cost with respect to the number of attendees, and a nearly perfectly linear relationship. (Remember…our CVA assumption is the data fall on a perfectly straight line…a perfect “linear” relationship). From this line, we could estimate that a conference with 340 attendees should have a price of slightly less than value for 350 attendees, but more than the price for the conferences with 320 attendees. Our very thorough analysis supports this fact.

Based on your price analysis, (including the comparisons and the CVA price estimate), is the proposed price of $294,811 for 340 people fair and reasonable?

Ultimately, THIS IS THE POINT OF THIS EXERCISE. Yes, it has taken a while to get to this point (as it may in the field), but your job is to make a determination of “fair and reasonable” that you can support and defend.

The proposed price is $294,811. After a very thorough analysis and using “data other than certified cost and pricing data” we estimated a range that included the proposed price. In addition, cost volume analysis indicated a price of $293,351 – which is just under the proposed price. What might you do if the mission is pressing and the award must be made today? First of all, we should not be pressured without first validating the mission need. Assess the impact of waiting another day or two for contract award. Remember, several of your procurements will not be for a non-combat, simple conference, like this one. Our analysis of the most current data indicates the proposed price could be considered within reasonable ranges. So with proper documentation like above, you could likely award at this price. But…what if you have more time? In this scenario, you could certainly negotiate. While our analysis supports that we could potentially determine the price is fair and reasonable – some indicators may point to additional cost reductions being possible. We should also recognize this is a sole-source action, so there is likely room in the contractor’s price to negotiate a fair and reasonable deal. The good news here is, it does not appear the contractor is “gouging” the government in this sole-source acquisition.

.

Exercises: Price Analysis Techniques - Knowledge Review (HOMEWORK)

Learning Objective

Accurately differentiate between the different price analysis techniques.

Introduction

This lesson explores, in detail, the price analysis techniques discussed in class. Complete the following questions using the CPRG to assist you.

Assessment

This activity is not scored or graded.

Student Instructions: Read each question and answer appropriately using the CPRG provided references/citations as your guide.

1.In accordance with CPRG Volume 1, Chapter 0, Section I.2.1, why do we use price analysis to determine fair and reasonable?

2.In accordance with the CPRG Volume 1, Chapter 6.0, Introduction, what are the five general steps of price comparison to support a decision on price reasonableness?

3.In accordance with the CPRG Volume 1, Chapter 6.1, Selecting Prices for Comparison, what are the five general bases for price analysis?

4.Should you use a non-responsive or a technically unacceptable offer as a base for price analysis?

5.Can you use the price lists of firms, other than the offeror, in evaluating price reasonableness? See the CPRG Volume 1, Chapter 6.1.2 Commercial Prices.

6.Can you always assume that historical contract prices are fair and reasonable? See the CPRG Volume 1, Chapter 6.1.3, Previously-Proposed Prices and Contract Prices to help you answer this question.

7.According to the CPRG Volume 1, Chapter 6.1.4, Parametric and Rough Yardstick Estimates, what basic information is used to develop a parametric estimate?

8.Identify the eight factors that may affect price analysis comparisons. See the CPRG Volume 1, Chapter 6.2, Identifying Factors That Affect Comparability

9.When analyzing historical data, what are the factors that must be considered? See the CPRG Volume 1, Chapter 6.1.3, Previously-Proposed Prices And Contract Prices.

10.Matching Exercise ~ See the CPRG Volume 1, Chapter 7.1, Identifying Vendor-Related Differences, and match the six most common, vendor-related reasons for differences in prices.

Answer

Vendor Related Difference

Description

Responsibility

A. Processes that are labor intensive differ from processes that rely on robotics or technology.

Understanding of the Requirements

B. Unique plan of action for accomplishing the same goal. Can be process or price driven.

Technology

C. Companies can demonstrate that they have developed an approach that will meet or surpass the government’s product or service needs as stated in the solicitation.

Efficiency

D. Miscalculation of data affecting price.

Strategy

E. Plan of action designed to eliminate waste in delivering products or services.

Mistakes

F. Demonstration by a company that they have the ability to deliver the product/provide the service

11.According to the CPRG Volume 1, Chapter 7.2.1 and 7.2.2, what are common reasons for differences between the low offer, other offers, and various estimates of reasonable prices?

LESSON SUMMARY

TLO - Pursuant to FAR 15.4, accurately differentiate the price analysis techniques.

ELO(s):

· Explain appropriate situations for using each price analysis technique per FAR 15.404-1(b)

· Recognize situations where price indexing is an appropriate method of price analysis

· Given a data set, calculate a price estimate through price indexing

· Recognize situations where Cost-Volume-Profit analysis is an appropriate method of price analysis

· Given a data set, calculate a price estimate using Cost-Volume Profit analysis

· Examine an Independent Government Estimate to establish a price objective for an offeror’s proposal.

Unit 4 Lesson 3 Attachment 1

Steps, Actions and Questions to Consider when Making Price Comparisons

Step

Action

Questions to Consider

1

Select prices for comparison:

· Other proposed prices;

· Commercial prices;

· Previously-proposed prices and contract prices;

· Parametric estimates or rough yardstick estimates; or

· Independent Government Estimates.

Would this comparison be valid?

Are more comparable prices available?

Have I conducted Market Research and exhausted Government and open sources of information?

Will I need to ask the contractor(s) for certified cost or pricing data, or data other than certified cost or pricing data?

2

Identify factors that affect comparability.

Have I considered all potentially significant factors, including differences in:

· Market conditions;

· Quantity or size;

· Geographic location;

· Purchasing power of the dollar;

· Extent of competition;

· Technology; or

Terms and conditions (e.g., differences in features or capabilities, delivery lead-times, one-time costs, etc.).

3

Determine the potential impact of these factors on prices selected for comparison.

How substantial is the impact? In view of these factors and their impact, will the contemplated comparison have any credibility?

4

Adjust prices selected for comparison.

Have I accounted for all factors that can impact the price?

What techniques should be applied in making the adjustment?

How much reliance can I place on the resulting estimate?

5

Compare adjusted prices to the offer in line for award.

How much weight should I place on each comparison?

If adjusted prices differ substantially from the apparent successful offer, what price should the Government reasonably expect to pay?

Tot Adj Conf Price

300 - 400 People

Price350300400320299775264470337552276372

6 CON 170, Unit 4, Lesson 2, Price Analysis Techniques

CON 170, Unit 4 Lesson 3 - Price Analysis Techniques - Page | 4

Exercise 6 -Table 2-The solicitation stated the Estimated Quantity above (“EstQuant Tot” column)-Under LPTA, if Vendor B is technically acceptable, Vendor B will receive the award.-Under an IDIQ contract, it is possible (highly likely) the actual ordered quantities will be different than the estimated quantity. This will change the total price of the contract.-This approach by Vendor B fits the definition of Unbalanced Pricing

Est QuantVendor A Vendor A Vendor B Vendor B Vendor CVendor CVendor DVendor D

Item(Solicitation)Est Quant

Unit Price

Est Quant TotEst Quant

Unit Price


Unit Price


Unit Price

Est Quant Tot

Trash Can Liners15,000,000$0.08$1,200,000.00$0.15$2,250,000.00$0.08$1,200,000.00$0.08$1,200,000.00

Cleaning Cloths1,250,000$0.04$50,000.00$0.10$125,000.00$0.04$50,000.00$0.05$62,500.00

Sponges750,500$0.08$60,040.00$0.02$15,010.00$0.09$67,545.00$0.09$67,545.00

Scrubbers150,000$8.00$1,200,000.00$1.00$150,000.00$8.00$1,200,000.00$8.25$1,237,500.00

Garbage Can Liners50,000$0.14$7,000.00$0.02$1,000.00$0.15$7,500.00$0.15$7,500.00

Toilet Bowl Cleaner1,500$44.00$66,000.00$25.00$37,500.00$45.00$67,500.00$45.50$68,250.00

Dust Mop Heads1,000$0.74$740.00$0.75$750.00$0.75$750.00$0.76$760.00

Mop Heads500$0.94$470.00$0.95$475.00$0.95$475.00$0.95$475.00

Mopping Solution255$35.00$8,925.00$35.00$8,925.00$36.00$9,180.00$35.75$9,116.25

Furniture Polish225$55.00$12,375.00$55.00$12,375.00$55.00$12,375.00$55.00$12,375.00

Bathroom Cleaner225$29.00$6,525.00$1.00$225.00$30.00$6,750.00$29.00$6,525.00

Toilet Brush100$8.00$800.00$8.00$800.00$7.00$700.00$6.50$650.00

Wax25$75.00$1,875.00$75.00$1,875.00$76.00$1,900.00$79.00$1,975.00

Paint Stripper20$50.00$1,000.00$50.00$1,000.00$50.00$1,000.00$45.00$900.00

$2,615,750$2,604,935$2,625,675$2,676,071

Total Price based on

Estimated Quantity

Exercise 6 - Table 2

- The solicitation stated the Estimated Quantity above (“Est Quant Tot” column)

- Under LPTA, if Vendor B is technically acceptable, Vendor B will receive the award.

- Under an IDIQ contract, it is possible (highly likely) the actual ordered quantities will be different than the estimated quantity. This will change the total price of the contract.

- This approach by Vendor B fits the definition of Unbalanced Pricing

Est QuantVendor A Vendor A Vendor B Vendor B Vendor CVendor CVendor DVendor D

Item(Solicitation)Est Quant

Unit Price


Unit Price


Unit Price


Unit Price

Est Quant Tot

Trash Can Liners15,000,000$0.08$1,200,000.00$0.15$2,250,000.00$0.08$1,200,000.00$0.08$1,200,000.00

Cleaning Cloths1,250,000$0.04$50,000.00$0.10$125,000.00$0.04$50,000.00$0.05$62,500.00

Sponges750,500$0.08$60,040.00$0.02$15,010.00$0.09$67,545.00$0.09$67,545.00

Scrubbers150,000$8.00$1,200,000.00$1.00$150,000.00$8.00$1,200,000.00$8.25$1,237,500.00

Garbage Can Liners50,000$0.14$7,000.00$0.02$1,000.00$0.15$7,500.00$0.15$7,500.00

Toilet Bowl Cleaner1,500$44.00$66,000.00$25.00$37,500.00$45.00$67,500.00$45.50$68,250.00

Dust Mop Heads1,000$0.74$740.00$0.75$750.00$0.75$750.00$0.76$760.00

Mop Heads500$0.94$470.00$0.95$475.00$0.95$475.00$0.95$475.00

Mopping Solution255$35.00$8,925.00$35.00$8,925.00$36.00$9,180.00$35.75$9,116.25

Furniture Polish225$55.00$12,375.00$55.00$12,375.00$55.00$12,375.00$55.00$12,375.00

Bathroom Cleaner225$29.00$6,525.00$1.00$225.00$30.00$6,750.00$29.00$6,525.00

Toilet Brush100$8.00$800.00$8.00$800.00$7.00$700.00$6.50$650.00

Wax25$75.00$1,875.00$75.00$1,875.00$76.00$1,900.00$79.00$1,975.00

Paint Stripper20$50.00$1,000.00$50.00$1,000.00$50.00$1,000.00$45.00$900.00

$2,615,750$2,604,935$2,625,675$2,676,071

Total Price based on

Estimated Quantity

Sheet1US ArmyNight Flares$25913,2753438225US Marine CorpsNight Flares$2794,9001367100US Air ForceNight Flares$2794,0001116000US NavyNight Flares$2992,50024,6757475006,668,825*DC GovernmentNight Flares$3991,100438900*MGM StudiosNight Flares$39925099750*Commercial Firing AcademiesNight Flares$399500199500*NRA Training CentersNight Flares$2992,000598000*Alabama ArmoryNight Flares$39925099750*Paramilitary Mission CentralNight Flares$3991004,200399001,475,80028,8758,144,625Commercial %0.14545454550.1811992572Noncommercial %0.85454545450.8188007428Unit 4 Lesson 2AttendeesDaysTotal CostCost Per PersonCost/Day3003$271,970.00$906.57$302.193203$283,092.00$884.66$294.893503$299,775.00$856.50$285.504002.5$341,000.00$852.50$341.00AttendeesCost/day300$100.00320$106.67350$116.67400$160.00AttendeesAdj Cost/Day300294320273350286400288AttendeesAdj Tot Cost300264303320262080350299775400288000AttendeesAdj Tot Cost300264303320262080350299775340297,011Proposed this year

PriceDerived NashvilleEst. Nashville Price Per PersonYearIndexPrice per PersonToday*20061.12$981$1,09920071.09$849$92620081.05$812$85320091.05$765$80420101.04$818$85120111$828$828

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