PRICE ANALY$I$: PRICE ANALY$I$ Presented by: Eric Heckelman March 27-28, 2000


Agenda: Agenda Introductions Benefits and C.Y.A. Terminology Distinctions Responsiveness and Responsibility Quiz Price Analysis Hierarchy Primary Techniques Secondary Techniques Auxiliary Techniques


IntroductionLogistics: Introduction Logistics


IntroductionReview of Handouts: Introduction Review of Handouts Slide handouts for notes “Draft” Procedure CAM 3.5.5 http://www.pd.dgs.ca.gov/acqui/355.pdf Appendix 1 - Detailed requirements of each price analysis technique Appendix 2 - Glossary Selected Exercises Tool Application Matrix Hierarchy of Techniques


IntroductionQuestions: Introduction Questions Have a Question ??? Don’t Hesitate………


Benefits of Price Analysis: Benefits of Price Analysis Use taxpayer $ wisely Credibility by establishing “baseline” for future pricing quality analysis thorough documentation Develop universal professional skills Aid in management review &/or approval Reduce Protests State - required in all procurement transactions greater than $2,500


Slide7: Communicate Your Analysis Document!


Terminology: Terminology Acquisition Bid Buyer Contract


TerminologyAcquisition: Terminology Acquisition Procuring goods and/or services To benefit the government By initiation of contract (regardless of form) Purchase order Standard 2 CMAS Master Agreement


TerminologyAcquisition Process: Terminology Acquisition Process


TerminologyBid: Terminology Bid A firm offer to enter into a binding contract Characteristics Verbal or written in response to a solicitation from one or more suppliers expected to result in award of a contract Oh, good, bids are in. Yipee!


TerminologyBuyer: Terminology Buyer A procurement professional regardless of specific job title Has fiduciary responsibility Acts as an agent for the government


TerminologyContract: Terminology Contract Verbal or Written Agreement Goods and/or Services One or more suppliers Legally enforcable an offer to buy and acceptance of offer parties capable of entering into contract for a legal purpose supported by consideration


Key Distinctions: Key Distinctions Source Selection vs. Price Analysis Price Analysis vs. Cost Analysis Responsibility vs. Responsiveness


Key DistinctionsSource Selection: Key Distinctions Source Selection How the proposed supplier was selected Competitive or non-competitive Single source Sole Source Reponsiveness Responsibility Lowest Evaluated Price Preferences are Source Selection Issues applied AFTER price analysis


Key DistinctionsPrice Analysis: Key Distinctions Price Analysis Does not include preferences Determination of Price as “Fair and Reasonable” (or “Best Obtainable”) Evaluation of a supplier’s offered price without evaluating: Separate cost elements Proposed profit


Key DistinctionsCost Analysis: Key Distinctions Cost Analysis Price = Cost + Profit Cost Analysis includes evaluation of specific, individual cost elements and profit Ask for SPECIFIC needed cost data


Key DistinctionsResponsive to Solicitation: Key Distinctions Responsive to Solicitation Conforms To Statement of Work (SOW) To Drawings and/or Specifications Without Material Deviations Meets delivery / schedule requirements Required documentation provided Terms and Conditions accepted without material deviation


Key DistinctionsResponsible Supplier: Key Distinctions Responsible Supplier 5 Categories per 2 CCR 1890 (d) Financial Technical Facilities Experience Other


R&R Quiz: R&R Quiz The solicitation required a model 12345 Super Deluxe Thingamajig with spranjous bejemois (or equivalent) Supplier ABC Company quoted their model AJ 153, which did not have the spranjous bejemois. Not Responsible Both Non Responsive Non Responsive


R&R Quiz: R&R Quiz The solicitation required model 78954, Super Widget with super do-hickeys. Supplier RST quoted their model U2, which did not have super do-hickeys. In fact, RST’s line of products had never even developed an earlier generation of do-hickeys, the forerunner of the new high-tech super do-hickeys Not Responsible Both Non Responsive Both


R&R Quiz: R&R Quiz Supplier GHI quoted 5000 cases of frankenberry juice, grade AA and evaluation of the required sample was satisfactory. However, GHI Inc. objected to the buying organization’s warranty provision and other significant terms and conditions. Not Responsible Both Non Responsive Non Responsive


R&R Quiz: R&R Quiz One bidder failed to sign the bid as required Not Responsible Both Non Responsive Non Responsive


R&R Quiz: R&R Quiz One of bidders was recently convicted of a violation of the federal Clean Air and Clean Water Acts Not Responsible Both Non Responsive Not Responsible


R&R Quiz: R&R Quiz The bidder submits DVBE paperwork incorrectly Not Responsible Both Non Responsive Non Responsive


Price Analysis Techniques: Price Analysis Techniques Primary Techniques Secondary Techniques Tertiary Techniques Auxiliary


3 Primary Techniques: 3 Primary Techniques


3 Secondary Techniques: 3 Secondary Techniques


3 Tertiary Techniques: 3 Tertiary Techniques Auxiliary


Slide30: PRIMARY TECHNIQUE Adequate Price Competition


Adequate Price Competition: Adequate Price Competition Two or more bidders Independently compete for award Responsible Responsive Award to Lowest Evaluated Price


Adequate Price Competition: Adequate Price Competition No known, qualified supplier was unreasonably denied an opportunity to compete Low bidder not immune from competition Calculation of “Price Variance” PV PV = (higher bid $ - low bid $) / low bid $ e.g., Bidder A bid $80, Bidder B bids $100 then (100 - 80) / 80 = 20 /80 = 25% variance Lowest evaluated price objectively reasonable


Adequate Price CompetitionExample 1 - Portable Generator: Adequate Price Competition Example 1 - Portable Generator


Price Variance: Price Variance Low Bidder is Alturdyne at $21,310 Second low RESPONSIVE bidder in Elbanna at $22,520 Difference is…….. $1,210 (Elbanna’s bid minus Alturdyne’s bid) $22,520 - $21,310 = $1,210 Price Variance is……….. 6% (Difference divided by Alturdyne’s bid) $1,210 / $21,310 = 0.06 or 6%


Price Variance: Price Variance What is an “acceptable” variance Depends upon good or service Buyers’ knowledge is key If unfamiliar, Rule of Thumb 30% Be careful with “Rule of Thumb” Vehicle buys - variance 1% - 2% 5% would be too high!


Price “Based On”Adequate Price Competition: Price “Based On” Adequate Price Competition No “current” competition Use “recent” competition Award made via prior competition determined fair and reasonable Market has not changed substantially Similar quantities


Slide37: PRIMARY TECHNIQUE Catalog or Market Price


Catalog or Market Price: Catalog or Market Price Catalog pricing requires a valid catalog published otherwise available for inspection Market pricing requires a valid market price established independent of supplier examples Trade publications Commodities markets


Catalog or Market Price: Catalog or Market Price 3 Key Characterstics Commercial Item Sold in Substantial Quantities To the General Public Tips Beware “special” government catalogs Help suppliers help you with catalog pricing!


Price “Based On”Catalog or Market Price: Price “Based On” Catalog or Market Price Establish prior baseline fair and reasonable What is different now? What is the value? Use other techniques e.g., buyer expertise, technical evaluation, additional market research Based on price analysis, is quoted price fair and reasonable


Price “Based On”Catalog or Market Price: See example 7 Sunscreen (required) not included in catalog priced first aid kit Catalog Price for first aid kit =$75 Quoted kit price including sunscreen = $115 How to Price the $40 difference ??? Price “Based On” Catalog or Market Price


Pricing Modified First Aid Kit Including Sunscreen: Pricing Modified First Aid Kit Including Sunscreen


Pricing the Modified Kit: $6 per bottle for the sunscreen plus a $10 administrative cost per kit I’m working on a price analysis on the first aid kit you quoted. How did you price the sunscreen ? Pricing the Modified Kit


Pricing the Modified Kit: $6.00 per bottle for sunscreen informal survey of local stores charges range from $4.95 to $18.00 per bottle $10.00 administrative charge buyer considers nominal charge compared with common shipping / handling charges Document the file! Pricing the Modified Kit


Slide45: PRIMARY TECHNIQUE Price Set by Law or Regulation


Price Set by Law or Regulation: Identify Law or Regulation that sets price Application Is supplier regulated by law / regulation ? Is the Government exempt from law /regulation ? Presumption that price is fair and reasonable Price Set by Law or Regulation


3 Secondary Techniques: 3 Secondary Techniques


Slide48: SECONDARY TECHNIQUE Historical Price Comparison Same Item


Historical Price ComparisonSame Item: Historical Price Comparison Same Item “VERY recent” historical price comparison Competition was attempted Adequate Price Competition NOT achieved Other bidder(s) were technically compliant but non-responsive in their bid Must be technically compliant Non-compliance cannot have cost impact May use price(s) from those bid(s) received in the current competition for price analysis


Assume EFD and G&S are not DVBE compliant : Assume EFD and G&S are not DVBE compliant Adequate Price Competition NOT achieved


Historical Price ComparisonSame Item: Historical Price Comparison Same Item Find “Baseline” Historical price from past buy Baseline must be fair and reasonable Escalate using indices Bureau of Labor Statistics “www.stats.bls.gov/blshome.html” both labor and material escalation indices accounts for inflation also may “de-escalate” (e.g. - computers) Be consistent in “from” and “to” dates


Escalation:Consistency in Selection of Dates: OLD ORDER Escalation: Consistency in Selection of Dates NEW ORDER


Historical Price ComparisonSame Item: Adjust for quantity differences Learning curves Price / Quantity curves Calculate “Should Cost” price compare to quoted price Is quote fair and reasonable? Document your analysis tip: use attachments! Historical Price Comparison Same Item


Slide54: Historical Price Comparison Same Item


Escalation:Consistency in Selection of Dates: OLD ORDER Escalation: Consistency in Selection of Dates NEW ORDER June 1996 March 1997


“Givens”: “Givens” Information from file Award Date June 1996 Ordered 300 @ $1,282.66 each Price was documented “fair and reasonable” Solicitation / Quote Projected award date of March 1997 Requirement for 300 Price quoted is $1,337.93 each Effort in making signs = 15% labor & 85% material


Visit BLS websitewww.stats.bls.gov: Labor Indices (Average Hourly Earning) Select “Fabricated Metal Products” index Old Order July 1996 (order was June 1996) Index = $12.51 New Order May 1997 (projected order date is March 1997) Index = $12.78 Calculate Labor Escalation Factor New Index / Old Index 12.78 / 12.51 = 1.022 Visit BLS website www.stats.bls.gov


Visit BLS websitewww.stats.bls.gov: Visit BLS website www.stats.bls.gov Material Indices Select “Aluminum Mill Shapes” index Old Order June 1996 (material indices listed monthly) Index = 147.1 New Order March 1997 Index = 147.6 Calculate Material Escalation Factor New Index / Old Index 147.6 / 147.1 = 1.003


Calculate Composite Escalation Factor: Calculate Composite Escalation Factor Labor escalation factor is 1.022 What % of the effort / price is labor? 15% escalation factor X labor% = 1.022 X 0.15 = .1533 Material escalation factor is 1.003 What % of the effort / price is material 85% escalation factor X mat’l% = 1.003 X 0.85 = .8526 Composite factor = .1533 + .8526 = 1.0059


Complete and Compare: Complete and Compare Complete “Should Cost” Old Unit Price X Composite Escalation Factor = “Should Cost” $1,282.66 X 1.0059 = $1,290.23 Compare “Should Cost” to Quote $1,290.23 - $1,337.93 = $47.70 difference Calculate Variance Difference / “Should Cost” = Variance $47.70 / $1,290.23 = .03697 = 3.7% Determine the quote is fair and reasonable


Remember……….: Remember……….


Slide62: Learning Curves Large, complex procurements Unique items Price / Quantity Curves Depends on quantity in current lot “Cheaper by the Dozen” How do I deal with difference in quantity from my “old order” to my “new order”


Slide64: SECONDARY TECHNIQUE Historical Price Comparison Similar Item


Historical Price ComparisonSimilar Item: Use same escalation techniques Price that which is different Similar to “First Aid Kit / Sunscreen” example Pricing Class example - Exercise 14 CA Conservation Corps crew vehicle truck with new “special” compartment Use escalation techniques with “old order” of crew vehicle truck as baseline Price adding new “special” compartment - How? Buyer modify “should cost” for 5% extra labor cost Technical Evaluation for material cost Historical Price Comparison Similar Item


Slide66: SECONDARY TECHNIQUE Technical Evaluation / In-House Estimate


Technical Evaluation / In-House Estimate: Technical Evaluation / In-House Estimate Seek technical input as required Prepare written estimate Independent estimate without respect to quote may have been developed during budgeting process Estimate that directly evaluates quote Determine estimated “should cost” Compare to quote Is quote “fair and reasonable” Tips: Document expertise of estimator and have estimator be specific in exceptions to bid


Technical Evaluation / In-House Estimate: Technical Evaluation / In-House Estimate


Slide69: SECONDARY TECHNIQUE Cost Estimating Relationships / Parametrics


Cost Estimating Relationships / Parametrics: Cost Estimating Relationships / Parametrics Find item for comparision Similar item Industry standard Get technical input document technical expertise determine key characteristics / cost drivers Determine CER and calculate “should cost” Compare to quote Is quote “fair and reasonable” ?


CER Example: CER Example


CER Example: CER Example Need to reinforce wings Price “per foot” using baseline of prior buy of specially machined parts


Slide73: AUXILIARY TECHNIQUES Value Analysis &Visual Analysis


Value & Visual Analysis: Value & Visual Analysis Value Analysis Establish Value to Gov’t or end user If item not procured, value of impact is ??? Potential Savings /Cost Avoidance Visual Analysis Visual Observation “Bigger than a breadbox” & made of metal Cannot stand alone, supplement other techniques


Matrix and Hierarchy: Matrix and Hierarchy Please see your packet Tools Application Matrix Hierarchies Top Level Detailed Checklist


Hierarchy Review: Hierarchy Review Adequate Price Competition Catalog or Market Price Price Set by Law or Regulation Historical Price / Same or Similar Item Technical Evaluation / In House Estimate Cost Estimating Relationships (CERs) / Parametrics Value Analysis Visual Analysis Primary Techniques SecondaryTechniques Auxiliary Techniques


Useful Websites: Useful Websites Department of General Services / Procurement Division (DGS / PD) http://www.dgs.ca.gov/pd National Contract Management Association (NCMA) home page http://www.ncmahq.org/ NCMA Gold Rush Chapter home page http://www.jps.net/mastella/index1.htm Defense Acquisition Deskbook http://www.deskbook.osd.mil/