Price vs cost Analysis

8/11/2019 Price vs cost Analysis

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PRICE ANALYSIS COST ANALYSISPrice analysis is essentially price comparison.

It is the evaluation of a proposed price (i.e.,

lump sum) without analyzing any of the

separate cost elements that it is composed of

Cost analysis is the evaluation of the separate

elements (e.g., labour, materials, etc.) that

make up a contractor's total cost proposal or

price (for both new contracts and

modifications) to determine if they areallowable, directed related to the requirement

and ultimately, reasonable.

Function

Price analysis is applied whenever the

estimator comparing lump sum prices

not cost estimates - received from

contractors in a competitive pricing

situation (e.g., when sealed bids are

obtained). Generally, competition means two or

more responsible (e.g., not debarred or

suspended, etc.) offerors (bidders),

competing independently, submit priced

offers that satisfy the grantees contract

requirement.

Obviously, the greater the number ofoffers received, the greater the

competition and ideally, the better the

pricing.

Cost analysis is used whenever you do not

have price competition. A cost analysis is

required when:

Using the competitive proposal (or

negotiated) method of contracting,

e.g., for acquiring professional,consulting or architect/engineering

(A/E) services. Under the competitive

proposal method, offerors are required

to submit cost proposals that show the

elements (e.g., labour, materials,

overhead, profit) of their proposed costs

or price

Negotiating a contract with a sole

source, i.e., not soliciting competitive

bids or offers. When a sole source is

appropriate and justified, one mustobtain a complete cost breakdown from

the sole source contractor and perform

an analysis using the cost principles to

establish a fair and reasonable price or

estimated cost.

After soliciting competitive sealed bids,

one receives only one bid, and it differs

substantially from one independent

estimate of the contract price. If one

determine that the bid is unreasonable

and decide to not recompete (e.g.,market survey tells him/her that he/she

wouldnt get competition), then one may

formally cancel the solicitation and

negotiate a contract price with the single

bidder. In that case, one must obtain a

cost breakdown of the single bid price

and use cost principles to determine if

that price is reasonable.

Negotiating a modification (includingchange orders) to any type of contract, if

the modification changes the work


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authorized under the contract, and

changes the price or total estimated cost,

either upwards or downwards. One must

obtain a detailed breakdown of the

contractor's proposed cost - not a lump

sum proposal before negotiating thechange in contract price.

The Technique

Compare competitive prices received in

response to the solicitation to one another.

This assumes one receive a large enough

number of competitively priced offers

from the current marketplace.

Compare proposed prices with prices

under existing contracts and with prices

proposed in the past for the same or

similar items/services. Be sure to factor in

any market changes (e.g., commodity

price changes) or other influences (e.g.,

inflation

Apply rough yardsticks (e.g., dollars per

pound, per square foot, per hour, etc.) to

compare prices and highlight significant

inconsistencies that warrant additional

pricing inquiry.

Compare competitive price lists, publishedcatalog or market prices of commodities

and products, similar indices and discount

or rebate arrangements.

Compare proposed prices with your

independent (i.e., in-house) cost estimates

Verify the accuracy of the cost and

pricing information submitted, and

evaluate: The reasonableness of the

proposed costs, including allowances for

contingencies.

The necessity for proposed cost items.

Technical personnel (e.g., engineer,

architect, information systems specialist,

etc.) should review the proposed direct

cost elements to determine their necessity

to perform the contract and

reasonableness (e.g., in comparison to

market rates). A cost may be allowable

under the cost principles and even

allocable to the type of work to be

performed, but still not be necessary for

the specific contract.

Compare costs proposed by the offerorwith:

Actual costs previously incurred by

the same contractor for the same or

similar work. If it is a repetitive type

of work or service, how much has it

cost in the past. Apply any

appropriate inflation factors for past

work.

Actual costs of previous the same or

similar work performed by other

contractors. Previous cost estimates from the

offeror or other offerors for the same

or similar items.

The methods proposed by the offeror

with the requirements of the

solicitation (i.e., do the costs reflect

the technical approach proposed and

the work required?).


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COST ANALYSIS

It is a systematic breakdown of cost data to facilitate examination and comparison of cost.

(I.H.Seeley, 1996)

It is a systematic breakdown of cost data, generally based on elemental structure, to assist inthe preparation of a cost plan for future scheme. (A.Ashworth, 1998)

Reasons for Cost Analysis

The reasons the cost analysis for a building is prepared are:

i. To show the cost relationship between several sections/part of building if there are

any.

ii. To allow comparisons of cost with other different projects.

Uses of Cost Analysis

1. Appreciation: it enables clients and designers to know and appreciate how cost it is

distributed among the functional components of a building and compared to the overall

cost of building

2. Judgement: it enables client and designers to develop ideas as how element costs could

have been allocated to obtain more balanced design. This judgement is important to

gauge the effectiveness of cost and quality of a building.

3. Belated remedial action: allow remedial action to be taken on receipt of high tender, by

revealing the sources of over-expenditure that is by making comparisons between

estimated cost and tender price. This will enable belated remedial action to be taken.4. Planning: the cost analysis be used as a sources of cost information to help with the cost

planning of future building project.

Types of cost analysis

1. Brief or concise cost analysis : cost is distributed according to group and individual

elements

2. Detailed elemental cost analysis

3. Amplified elemental cost analysis

Preparation of Cost Analysis

The following are required to prepare the analysis:

1.

Complete contract document

2.

Working drawings and the specification to calculate the quantity factor and others

3.

Tender reportobtain information regarding the market, number of tenderers etc

4.

Manual for preparing cost analysis

5. Standard form for cost analysis


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Principles of Analysis

The basic principle in the preparation of the cost analysis of a building as below:

1.

Buildings within a project shall be analysed separately

2.

Information shall be provided to facilitate the preparation of estimates based onabbreviated

3.

Analysis shall be in stages with each stage giving progressively more details; the total

detailed costs in each stage should equally the costs the relevant group in the

proceeding stage.

4.

Preliminaries shall be dealt with as a separate item (not apportioned amongst

elements).

5.

Lump sum adjustment shall be spread pro-rate amongst all elements if the buildings

and external works, excluding Prime Cost Sum (PC) and the Provisional Sum (PS)

contained within the elements

Documents

Price vs cost Analysis