Q. What is the difference between a cost analysis and a price analysis?
A. A “price analysis” will be the usual procedure followed in a competitive situation and in situations where items are being procured which are sold in the commercial marketplace to the general public. A “price analysis” is an evaluation of the offeror’s price relative to the prices being offered by other vendors and being paid by the general public for the same or similar items. The essential factors, which must be present in order to make a “price analysis,” are as follows:
- The product must be a “commercial product” (i.e., one for which there is a basis of comparison in the commercial marketplace). Price analysis would not be suitable, for example, for research and development items, or for one-of-a-kind items for which there was no basis of comparison.
- It is not necessary that competing products be exactly identical to the product being offered, but you must be able to compare the products’ capabilities and their respective price differences in light of those varying capabilities. By such comparisons one is able to make value judgments that a particular product’s performance capabilities warrant a higher or lower price than a competing product.
A “cost analysis” will be required whenever a price analysis cannot be performed. A cost analysis entails the review and evaluation of the separate cost elements and the proposed profit of an offeror’s cost proposal. A cost analysis is conducted to perform an opinion on the degree to which the proposed cost, including profit, represents what the performance of the contract ‘should cost’, assuming reasonable economy and efficiency. A cost analysis will be appropriate in the following situations:
- The product or service being offered is not susceptible to being evaluated against other commercially available items of similar products or services. Examples would include a procurement for professional services where no competing price proposals are submitted, as in a procurement for architectural-engineering services where only one cost proposal is solicited from the highest ranking firm, or a sole-source procurement for other types of services.
- When change orders are issued to contracts requiring the contractor to do work whose cost can only be evaluated by examining the various cost elements, such as labor, materials, travel, etc.
(Reviewed: July, 2010)
Q. For sole source small purchases and micro-purchases, is a cost analysis always required?
A. Every contract award must include a determination that the price is fair and reasonable. The extent of the analysis depends on the value and nature of the contract. For small purchases that are sole sourced, it would depend on the nature of the product or service. For example, if the procurement was for standard commercial items sold in substantial quantities to the general public, then a price analysis would be sufficient. If the procurement were for services, then some breakdown of the price would be required to determine that the labor hours, rates, profit, etc., were reasonable. For micro-purchases you need to make a determination that the price is reasonable, but that can be based on the buyer's familiarity with the product or service, etc., and need not entail a cost breakdown or detailed analysis of cost elements. (Revised: July, 2010)
Q. What is the formula for calculating the competitive range between offers? If I have offers ranging from $59,000 to $89,000, what is the range? Is it (89,000-59,000/59,000) = 51% or (89,000-59,000/89,000) = 34%?
A. The determination of which proposals to include in the competitive range is a subjective one and should normally include all those offers that stand a reasonable chance of being selected for award, considering all evaluation factors, including price. The FAR discusses this subject at FAR 15.300. (Revised: July, 2010)
Q. Are all negotiated procurements greater than $250,000 subject to Pre-Award audits for federally funded Agreements (FTA, FHWA) or are only negotiated procurements for architectural, engineering and related services subject to Pre-Award audit requirements for federally funded Agreements?
A. FTA has not established a dollar threshold for conducting pre-award audits of contractor cost proposals. FTA does require grantees to conduct a cost analysis of a contractor’s cost proposal whenever there is not adequate price competition to determine the reasonableness of the proposed price. The Best Practices Procurement Manual (BPPM) discusses cost and price analysis requirements in Section 4.6. The BPPM is available online: https://www.transit.dot.gov/funding/procurement/third-party-procurement/best-practices-procurement-manual.
A cost analysis will be necessary whenever adequate price competition is lacking and for sole source procurements, including contract modifications or change orders, unless price reasonableness can be established on the basis of a catalogue or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation.
From the above you can conclude that all A&E service contracts that must be awarded using qualifications-based selection procedures will require a cost analysis. So too will all negotiated procurements that are sole-source. We would also include competitive cost-type contracts where offerors are not committing to fixed prices and are submitting cost elements for evaluation and negotiation.
When a cost analysis is required, a pre-award audit of the contractor’s cost proposal is usually necessary. But FTA leaves this judgment to the grantee. For example, the grantee may have current audit information for a particular contractor on hand from a recent procurement and related pre-award audit. In this case a pre-award field audit may not be required; a desk review would suffice. But where cost elements have to be evaluated in order to conduct negotiations, and current audit data is not available, it will generally be necessary to conduct a pre-award audit in order to determine reasonableness. (Revised: May 2017)
Q. What is the appropriate net profit for a cost plus work of $200,000?
A. The FTA Best Practices Procurement Manual (BPPM) discusses the negotiation of profit on Cost Plus contracts in Section 4.6 – Cost and Price Analysis. With respect to profit, the BPPM guidance in Section 4.6.14 reads:
Profit/Fee - To negotiate a fair and reasonable profit, consideration should be given to:
- The complexity of the work to be performed,
- The risk borne by the contractor,
- The contractor's investment,
- The amount of subcontracting,
- The quality of its record of past performance, and
- Industry profit rates in the surrounding geographical area for similar work.
We would suggest you review the fees negotiated with this particular contractor by other agencies, as well as the fees these agencies are paying other A&E firms on cost-type contracts with a similar mix of direct labor vs. subcontracted effort, and the complexity of the work being done. (Revised: May 2017)
Q. We issued an IFB for crossing panels to 15 potential suppliers, but we received only one bid. Most bidders failed to bid due to overload from rail companies. Similar products have been procured by other light rail transit agencies. Crossing panels are made of steel and concrete. However, both steel and concrete are being sold at a premium at this time. The value of the procurement is about $400,000.
- Can we perform a price analysis or must we perform a cost analysis?
- If we perform a PRICE analysis, must we compare with more than one agency?
- Do the results of the analysis have to be reported to the FTA region offices?
A. The question is whether these panels are something sold to the general public (like CSX and other rail companies) in substantial quantities. It sounds like that is the case but you will have to document that in your file. If that is the case, a price analysis is sufficient. As far as looking at what other agencies paid - it would not be sufficient to simply look at other prices (even as a price analysis) without an analysis of what price fluctuations, delivery terms, quantities, grade/quality requirements, etc. may have on your purchase. It is also important that you develop a good independent cost estimate before you look at bids or proposals.
We would advise you to get as much market pricing data as you can, not only for this product but for competing products as well. The pricing data should of course be from competitive procurements, catalogue prices if applicable and if the items are sold in substantial quantities to the general public. There is no requirement for you to report this to data to FTA offices. (Revised: July, 2010)
Q. Please kindly provide an industry price benchmark on the hourly rate for specification/scope developers/writers. We are completing a bus operations/administrative facility and we have fast track packages for communications, signage, tenant improvement and security that we would need third party consultant assistance to help out with scope development.
A. We are not aware of an industry price benchmark for the hourly rate for consultants that would provide technical services as you describe. We would think the variables concerning the complexity of the work would require a range of skills and experience, from persons with limited technical experience to those with professional engineering and software credentials. We would suggest you contact a number of transit properties to determine if they have employed consultants in these disciplines and determine what the various hourly prices were. (Reviewed: July, 2010)
Q. Our region has invested a significant amount of money and infrastructure into our transit software and hardware (Automatic Vehicle Locators, scheduling, mapping software, etc.). We need to purchase a particular type/brand of mobile data terminal. Does this require a cost analysis or a price analysis? We understand it requires one or the other (i.e. price or cost analysis). This is knowing that we can't go directly to a catalog and competition is somewhat scarce for the MDTs.
Our transit department is referring to the Best Practices Procurement Manual and is insisting that a price analysis is sufficient. This is due to the fact that the same MDTs were procured less than a year ago and a full-blown price analysis was performed at that time. Our Procurement Department is insisting that a cost analysis needs to be facilitated. Isn't a cost analysis more germane to construction projects or projects where indirect and direct costs are outlined and evaluated as well as profit?
A. Your question as to whether you are required to do a cost or price analysis for the MDTs depends on whether these systems will be purchased separately or as part of the vehicles. If you are purchasing the MDTs as a separate, stand-alone procurement, you will be required to do some form of cost or price analysis in order to determine that the price offered for the MDTs is fair and reasonable.
If you solicit bids or proposals for the paratransit vehicles, and the MDTs are a required system within the vehicle specifications, then the requirement for a cost or price analysis rests with the prices offered for the completely assembled and functional vehicle. FTA does not require any separate cost or price analysis for individual systems like the MDT, (any more, for example, than it would require a cost or price analysis for brakes or transmissions). The cost to the vehicle supplier of the MDT is of no concern to your agency if the supplier is offering you a firm fixed price for the entire vehicle. It is the vehicle price that you must determine to be fair and reasonable, and thus that price is the only one with which you need to be concerned as far as a price analysis is concerned. (Reviewed: July, 2010)
Q. We need service performed on 38 vehicle tracking units. The vendor has provided a work scope and cost. This will be a $99,000 non-competitive, single source purchase. I have requested a cost break down for travel, labor and material. The vendor will only provide lump sum amounts for each of these categories and they have indicated that they do not want to go into that level of detail. What are my options for obtaining this information?
A. FTA Circular 4220.1F requires a cost analysis when negotiating noncompetitive proposals. We would suggest you send this Circular to the vendor and inform them you must comply with this FTA requirement because Federal funds are involved. We would escalate the issue to the vendor’s top management if necessary. If that fails you should contact your FTA regional representative and discuss the feasibility of obtaining an FTA waiver from this requirement. (Reviewed: July, 2010)
Q. There used to be a form that was used to prepare the cost analysis. Do you know where I could find it? Also, do you have any information on how to perform a cost analysis for a sole source bid?
A. The National Transit Institute (NTI) at Rutgers University has developed a Cost and Price Analysis Guide for FTA Grantees. (Revised: July, 2010)
Q. Our agency is processing a sole source, follow-on procurement of software systems for 31 buses. These systems must be identical to 73 already purchased. The vendor has not been willing to give us a cost proposal with cost-element details. Since the FTA Procurement Circular requires a cost analysis for all sole source procurements, what must we do to satisfy FTA's requirement for a cost analysis, and do we need written permission from FTA prior to procuring these systems?
A. FTA requires a "cost analysis" (i.e., evaluating the contractor's specific elements of estimated cost and profit) when contracting on a sole source basis. We would advise issuing the supplier a formal written request for a cost proposal in a format that your technical personnel could most effectively evaluate. If the supplier refuses to cooperate in furnishing a detailed cost proposal, we would suggest notifying FTA and seek the advice of your regional FTA representative. You may, for example, be able to gather some meaningful pricing information from prior buys for similar items. If your first procurement of these items from the vendor could be evaluated to demonstrate that the prices being quoted now are comparable to the original prices, and assuming the original prices were established competitively, then you may have a valid data point for a price analysis rather than a cost analysis. You may also be able to use procurements of other agencies that have bought similar equipment. (Revised: July, 2010)
Q. Does any further cost analysis need to performed when using GSA M.O.B.I.S rates (Consulting Services, SINS 874-1) as the basis for a negotiated sole source procurement, since they have already been audited by the GSA?
A. A grantee should perform a cost analysis for all sole source procurements. A price negotiated with the Government for a GSA contract would not constitute a "cost analysis.” A cost analysis must examine the proposed labor rates, overhead rate, profit rate, etc. One cannot assume the GSA did a cost analysis of the consulting rate; e.g., the rate might have been established on the basis of adequate price competition. But even if GSA did perform a cost analysis, the question would arise as to the details of the costs submitted to GSA for that procurement and whether the cost elements were still current and valid for your procurement. The cost projections and rate of profit that might have been appropriate for the GSA contract might not be appropriate for your contract. Such issues as the term of the contract, the degree of risk being assumed by the contractor under the particular contract terms you are using vs. the GSA terms, the location of the work (a factor that could affect the overhead rates to be negotiated), etc. The GSA contract prices would constitute one item of comparison if one were doing a "price analysis," but here again you would need to look carefully at the particulars of each procurement, as noted above. (Reviewed: July, 2010)
Q. Is a price analysis allowable for a sole-source buy if a grantee can establish price reasonableness through justifiable catalog, market, or statutory price evidence?
A. A grantee is permitted to perform a price analysis of a non-competitive proposal when buying commercial items, and when the price proposed is based on a catalog or market price of the commercial product. To qualify as a commercial product, the item must be sold in substantial quantities to the general public. You may also perform a price analysis for items whose prices are set by law or regulation. The commercial item may be the only thing you are buying in the subject procurement or the commercial item may be part of a larger package of items and services. In the latter case you would be required to obtain a cost breakdown (and perform a cost analysis) for costs not related to commercial items, but you could evaluate the commercial items within the proposal from a price analysis standpoint using catalogue or market prices for those items. (Reviewed: July, 2010)
Q. We issued an RFP for Fareboxes. Only one response was received to the RFP. We requested the vendor's participation in the Cost Analysis. The vendor has refused to participate. What should we do now?
A. FTA requires a cost analysis "when price competition is lacking . . ., unless price reasonableness can be established on the basis of a catalog or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation." Your procurement of fareboxes is clearly one where price competition is lacking; however, it also is one that appears to be for a commercial item that is sold in substantial quantities to the general public." This would mean you could establish the reasonableness of the price offered by this supplier from price catalogs or from prices that the vendor has established in the commercial marketplace for this farebox. Since the farebox is a commercial item, we would not expect the vendor to be willing to submit cost and profit regarding the production costs of this item, but we would expect the vendor to provide historical price information regarding sales to other customers so that you can establish the reasonableness of the price quoted on your procurement. (Revised: July, 2010)
Q. In Circular 4220.1.E, paragraph 10, it is specified that grantees must perform a cost or price analysis in connection with every procurement action, but as a starting point, grantees must make an independent estimate before receiving bids or proposals. However, in the Best Practices Manual under the heading "Discussion", the first sentence states that "a logical element of your annual procurement plan is a cost estimate for each major procurement."
Is an Independent Cost Estimate required for every procurement or only for those that are major? Would major procurements only be those in excess of $100,000 where an RFP or IFB is used?
A. The intent of FTA Circular 4220.1F, with respect to cost and price analysis (which logically begins with an in-house cost estimate) is to capture every procurement, not just "major" procurements. The degree of the analysis and the degree of detail of the in-house cost estimate depend on the size and complexity of the procurement. The BPPM is somewhat misleading in beginning the discussion of in-house cost estimates with a reference to "major procurements." Later on, in the fourth paragraph of the "Purpose" section, the BPPM discusses the requirement for a cost or price analysis for "every contract," and then relates this analysis to an in-house cost estimate as the starting point. The conclusion, then, is that an in-house cost estimate should be developed for each procurement, and the estimate must be documented in some form. (Reviewed: July, 2010)
Q. Is the following language permissible for use as instructions to requisition originators requiring a statement reflecting the efforts made to prepare an independent cost estimate?
"The budget amount or the engineer’s estimate will suffice as an independent cost estimate. The assumption is that each requisitioning department will have performed some estimating effort prior to budget development that was independent of future bidders and contracts and procurement department. For small dollar items included in a larger operating budget, a statement on the form that the requisition originator has knowledge of the estimated value or the attachment of some form of documentation (i.e.; published price lists, catalogue pricing, advertised pricing) will also suffice".
A. The proposed language in your instructions is generally acceptable; however, we would recommend you add a statement to the effect that the requisition originator must document in some form his/her cost estimate so that it can become a part of the procurement file/record. (Reviewed: July, 2010)
Q. Is a cost analysis required for change orders that will be performed by a vendor in a time and material contract where the contractor is directed to perform work? Can you provide an example where a cost analysis is not required in a time and material contract?
A. A cost analysis is required whenever "adequate price competition is lacking and for sole source procurements, including contract modifications or change orders, unless prices can be established on the basis of a catalogue or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation." Since you are dealing with a change order to the contract, you will be required to perform a cost analysis of the contractor's proposal. For costs set by state law or fixed by the terms of the contract, you will not have to perform a cost analysis (e.g., indirect cost rate established by the state). But for other costs not established by regulation or contract, such as direct labor rates/hours and materials, and for the proposed profit, you will need to verify the reasonableness of the costs and profit proposed. You will also have to ensure that there are no costs being proposed as direct charges to you that should be recovered by the overhead charge (i.e., ensure there are no cost duplications in the proposal). Evaluation of the materials costs would normally be accomplished by reviewing the prices quoted competitively to the contractor, or prices quoted in catalogues for items sold to the general public. Although you are looking at "prices" quoted by materials suppliers, they are "costs" to your contractor and this would be the standard way of performing a "cost analysis" of materials costs. Keep in mind that either a price analysis or a cost analysis is required for every procurement action, and there are no exceptions.
The requirement to perform a cost analysis is not determined by the type of contract [e.g., Time and Material (T&M), Cost plus Fixed Fee (CPFF), Firm Fixed Price (FFP)], but by the adequacy of price competition in your procurement action. When there is adequate price competition, the grantee may make a determination that the winning bid or proposal offers a reasonable price because the prices offered by other contractors establishes the reasonableness of that winning bid or proposal. For services contracts, which may use the T&M or CPFF contract approach, the quality of the labor effort may be difficult to determine from one contractor's proposal to another, and since the contractor is not promising to deliver a product in accordance with an "objective" specification, it may be impossible to simply compare proposed billing rates for various labor categories and do a "price analysis" of the proposals. You should solicit a detailed cost breakdown from the offerors and verify the estimated labor costs, overhead charges and the reasonableness of the proposed rates of profit. If you have a T&M contract where the billing rates have already been fixed by the terms of the contract, and the contract states that change orders will be priced using the billing rates stipulated in the contract, then no analysis of the rates themselves would be required, but you would still need to examine the estimated materials costs and document your file that the rates used were required by the terms of the contract. As far as awarding a new T&M contract, we can think of no circumstance where a cost analysis would not be required for those cost elements not established by law. (Reviewed: July, 2010)
Q. Are there any cost proposal evaluation tools available? One of our operations groups is seeking to assist a client and was asked to help them find available cost proposal evaluation tools.
A. We would suggest a course offered by the National Transit Institute (NTI) at Rutgers University titled "Cost and Price Analysis and Contract Negotiation." It is a four-day course offered free of charge to FTA grantees but it is also open to the public for a fee. You can contact NTI at (732) 932-1700 or on the Internet athttp://www.ntionline.com/. (Reviewed: July, 2010)
Q. What are the tools available for cost analysis?
A. The FTA Best Practices Procurement Manual, Section 4.6 – Cost and Price Analysis, discusses various tools for cost analysis. FTA has published a “Pricing Guide for FTA Grantees” that is available online. The Guide offers helpful guidance concerning both price and cost analysis, which you should find helpful. (Revised: May 2017)
Q. When using cost analysis, how are the direct/indirect costs, fringe benefits, and overheads evaluated?
A. The Best Practices Procurement Manual, Section 4.6 – Cost and Price Analysis, discusses the issues involved in cost analysis.
Basically, if you are going to evaluate indirect costs, such as overhead and fringe benefits, you will need some competency in accounting/auditing to do this. The Federal Government, for example, makes use of field audit personnel who go to the contractor's facility to examine their books. You will have to review the various methods for allocating indirect costs to contracts and determine that the allocation methods are fair and reasonable, and are in accordance with Generally Accepted Accounting Principles (GAAP). You will also have to evaluate the company's business projections for the coming year to determine if the projected indirect rates reflect a realistic assessment of future business, because if the projected rates are based on sales projections that are too low, then the proposed indirect rates will be too high. Another concern when reviewing indirect rates is to be sure that all customers are treated equally and fairly in the allocation methods, and that there are no duplications between direct costs and indirect costs that would cause one customer to pay not only for its direct costs, but also to absorb a portion of another customer's costs through overhead charges.
We would also note that if the company can produce current letters from the Defense Contract Audit Agency or any other cognizant Audit Agent of the Federal Government indicating approved overhead rates, then they can be used. In addition, independent audits by outside Certified Public Accountants can be used to assist in determining correct rates. (Revised: May 2017)
Q. In response to our RFP, we received 15 proposals for a new design, low-pressure valve and other items. We are buying 10,000 units of this valve made largely of stamped parts to replace an older type of valve that had a number of casting and machining items. We performed an in-house estimate to manufacture the valves before receiving the proposals, arriving at a unit price of $8.66 for the item. Of the proposals received, nine were in the range of $9.20 to $10.40, and four ranged from $11.60 to $15.20. The two lowest bidders, who are well-established metal forming companies, were at $6.16 and $7.44. All companies provided detailed cost breakdowns with their prices in the same format that we prepared our in-house estimate.
What factors might have caused the variance between the low bidder's price and our estimate? What factors might have caused the variance between the cost estimates of the two low bidders? What conclusions can you draw concerning the reliability and usefulness of cost estimates made by our company and the value to be gained from the comparison of one vendor's quotation with that of another?
A. The number of variables that could account for the different cost estimates is large, and for us to try to comment would be very speculative. We also lack the expertise to analyze the manufacturing processes involved producing these valves. As to the differences in cost estimates, we would think that obtaining competitive price quotes from a number of companies would give you a legitimate basis for doing price analysis instead of cost analysis. For example, the Federal government's requirements concerning "Proposal Evaluations" are stated in the Federal Acquisition Regulation (FAR) Part 15.305.
Normally, competition establishes price reasonableness. Therefore, when contracting on a firm-fixed-price or fixed-price with economic price adjustment basis, comparison of the proposed prices will usually satisfy the requirement to perform a price analysis, and a cost analysis need not be performed.
While you are not bound to follow the FAR, the principle stated there concerning price analysis vs. cost analysis is still valid. You appear to have received 15 price proposals from various companies for these valves, and assuming this will be a fixed price contract, we believe you have very adequately established the reasonableness of the most favorable price quoted. This also assumes that everyone is bidding on the same specification and not offering different products.
We do not see any value in comparing cost estimates of the various vendors with one another or in comparing them with the buyer's estimate except to be sure that the low bidder understands what the specifications require and is competent to perform the contract. Sometimes an examination of cost elements will reveal that the low bidder has failed to take into account some aspect of your requirement, and therefore does not completely understand those requirements. Beyond this assurance that the low bidder understands the requirement, we see no reason to analyze cost estimates since the reasonableness of the price has been demonstrated through adequate competition. (Reviewed: July, 2010)
Q. A city government awarded a noncompetitive, federally funded contract to a company that will provide management services, transit service operations, bus preparation services, and bus rehabilitation projects. The contract is the largest of any type in the city's history; its term is for 3 years with an option for an additional 2-year period. An internal agency performed a cost analysis that only evaluated management services, and the analysis occurred subsequent to contract award. The bus prep services and rehab services had also been awarded noncompetitively to the same contractor under separate contracts, and no documentation was on file for cost analysis. Do these conditions indicate violations of FTA requirements?
A. The contract you describe would certainly require the agency to receive from this contractor a detailed cost proposal, and the agency would be required under FTA regulations to evaluate the various cost elements and the proposed profit prior to conducting negotiations and awarding the contract. The file must reflect the extent of the analysis conducted on the individual cost elements and the profit, together with the negotiations conducted by the agency and the contractor on those elements and profit in arriving at the contract price as awarded. The only way to avoid this requirement for an analysis would be if there was adequate price competition leading to the award or if the procurement was for goods or services whose price was set by law or regulation (e.g., utility services). (Revised: July, 2010)
Q. If I am doing an RFP solicitation for a consultant service, and one of the criteria for evaluations is price, can I use the price information submitted by all vendors to determine price reasonableness and thereby avoid having to perform a cost analysis (by doing a price analysis instead), which is typically required when specific detailed cost information is requested?
A. We understand the RFP was for a fixed price contract award to do a Complete Operational Analysis of the Agency’s operations. The estimated value of the contract will be about $250,000, and the statement of work is sufficiently definitive (in the Agency’s opinion) to allow consulting firms to give you firm fixed price proposals. It is your expectation that five or more firms may submit proposals for this work.
We believe you should be able to perform a price analysis of the competitive proposals and make an award on the basis of adequate price competition. The Agency needs to develop an independent cost estimate (ICE) prior to receiving proposals, and this ICE should be the starting point of your proposal evaluation process. If competition turns out to be inadequate based on too few proposals received, you will have to perform a cost analysis. The FTA Best Practices Procurement Manual (BPPM) discusses Cost and Price Analysis in Section 4.6. (Revised: May 2017)
Q. On a multi-year procurement for buses where price increases are tied to a change in the producer price index (PPI) for that commodity, is a cost/price analysis required for purchases of the item after the initial purchase? If so, how, since the PPI is a constant that would apply to all vendors of the same goods?
A. If you have a contract for buses and the contract contains a price escalation clause using the PPI for that commodity, you are not required to do a cost or price analysis before adjusting the prices based on the PPI. The supplier is entitled contractually to a price adjustment based on the PPI—you do not have to defend the price adjustment or somehow demonstrate that the adjusted price is still fair and reasonable. If, however, you are going to add quantities to an existing contract or award a new contract for buses, you will have to document the file with a price analysis and make a determination that the price to be paid is fair and reasonable. In this case the PPI might be one data point in your analysis. (Reviewed: July, 2010)
Q. Is it required to complete a cost and price analysis when a purchase is being procured through a competitively bid contract? If so, where can we locate said forms?
A. The FTA Best Practices Procurement Manual (BPPM) discusses the requirements for cost and price analysis in Section 4.6. When competitive price proposals are obtained, a price analysis, not a cost analysis, is required. In general, if at least two quotes are received, competition may be considered as adequate to support a determination that the low price is reasonable. Following is an excerpt of the guidance from the BPPM.
The accepted forms of price analysis techniques discussed in the Pricing Guide for FTA Grantees are:
- Adequate price competition;
- Prices set by law or regulation;
- Established catalog prices and market prices;
- Comparison to previous purchases;
- Comparison to a valid grantee independent estimate; and
- Value analysis.
Adequate price competition requires the following conditions:
- At least two responsible offerors respond to a solicitation.
- Each offeror must be able to satisfy the requirements of the
- The offerors must independently contend for the contract that is to be awarded to the responsive and responsible offeror submitting the lowest evaluated price.
- Each offeror must submit priced offers responsive to the expressed requirements of the solicitation.
If the four conditions above are met, price competition is adequate unless:
- The solicitation was made under conditions that unreasonably deny one or more known and qualified offerors an opportunity to compete.
- The low competitor has such an advantage over the competitors that it is practically immune to the stimulus of competition.
- The lowest final price is not reasonable, and this finding can be supported by facts.
(Revised: May 2017)
Q. Since the publication of FTA Circular 4220.1F, have the thresholds for sole source procurement cost analyses changed? Do we need a cost analysis for sole-source small purchases?
A. The new Circular 4220.1F has not changed the requirements for cost analysis for sole source procurements. Cost analysis requirements are discussed in Chapter VI, paragraph 6. We would note, however, that the Federal micro-purchase threshold is now $3,000, and for non-competitive awards of $3,000 or less, you need only document that the price is fair and reasonable. You are not required to perform a cost analysis for micro-purchases. For sole source awards above $3,000, some degree of cost analysis is required.(Revised: July, 2010)
Q. We are piggybacking on the Akron, Ohio bus contract. There were three bids submitted and the low bidder was selected. How does one perform a price reasonableness analysis to determine if the price is fair?
A. The Akron contract award appears to have been made to the low bidder on the basis of adequate price competition and if so then you may assume the contract prices are reasonable without further analysis. You should obtain the proposal evaluation documents from Akron for your files to document the fact that prices were obtained from responsible suppliers and the selected contractor’s price was best. The Best Practices Procurement Manual (BPPM) Section 4.6 - "Cost and Price Analysis,” discusses various forms of price analysis techniques, including adequate price competition.
Adequate price competition requires the following conditions:
- At least two responsible offerors respond to a solicitation.
- Each offeror must be able to satisfy the requirements of the solicitation.
- The offerors must independently contend for the contract that is to be awarded to the responsive and responsible offeror submitting the lowest evaluated price.
- Each offeror must submit priced offers responsive to the expressed requirements of the solicitation.
(Revised: May 2017)
Q. The FTA Circular 4220. IE states that Procurement by noncompetitive proposals may be used only when the award of a contract is infeasible under small purchase procedures, sealed bids, or competitive proposals and at least one of the following circumstances applies: A cost analysis, i.e., verifying the proposed cost data, the projections of the data, and the evaluation of the specific elements of costs and profit, is required. Can you expound on this and provide an example of what they mean?
A. If a grantee is awarding a contract, or a contract modification such as a change order, without obtaining competitive prices, then the grantee is expected to obtain cost information from the contractor to support the contractor's price to the grantee. This cost information would represent the contractor's estimated costs for direct labor, overhead, other direct costs (subcontracts, travel, materials, etc.) and profit. The grantee is required to evaluate the contractor's cost estimates and proposed profit, and determine whether they are reasonable. The exception to this requirement for cost analysis would be if the grantee can justify price reasonableness based on catalogue or market prices of a commercial product sold in substantial quantities to the general public or prices set by law or regulation. See FTA Circular 4220.1F, vice 4220.1E, Chapter VI, Section 6. "Cost And Price Analysis."
We would also direct you to read the new Circular's coverage of sole source awards in Chapter VI, Section 2.i. - "Other Than Full and Open Competition," as this may clarify the regulation and policy on sole source contracting as compared with Circular 4220.1E, which you cited. The FTA Circular 4220.1F may be found online. (Posted: October, 2010)
Q. (1) Are you required to get the elements of cost and perform a cost analysis for a Brooks Act procurement of A&E services under $100,000? (2) For a small purchase of A&E, can a price analysis be done instead, whereby a lump sum price is compared to the independent cost estimate? (3) If a price analysis is acceptable, how much variance from the independent cost estimate is acceptable? Would ten percent or less variance mean that further cost analysis is not needed? And do you have to negotiate if the price offered is below the independent cost estimate?
Background: 49 CFR (f) states "...A cost analysis must be performed when the offeror is required to submit the elements of his estimated cost, e.g., under professional, consulting, and architectural engineering services contracts. ..." Question: is a cost analysis required even for Small Purchases?
FAA guidance states that an analysis of fee is required when the proposed price varies from the independent cost estimate by 10%. Would the FAA's 10% variance criteria be acceptable for FTA grantee procurements?
A. FTA requires a cost analysis for all awards for which competitive cost/price proposals are not obtained. This would always include A&E (Brooks Act) contracts, including small purchases (i.e., those under $100,000). The grantee is required to obtain a cost breakdown from the A&E contractor and evaluate the direct and indirect costs and proposed profit. The independent cost estimate (ICE) must be structured on a cost element, not lump sum, basis since the FTA policy requires a detailed cost proposal and the ICE's usefulness as a cost analysis tool can only be realized if the ICE enables an evaluation of the cost elements in the proposal. As for negotiating a price that exceeds the ICE, FTA has no policy restrictions in this regard but does require the grantee to explain (1) how the various costs and profit were evaluated, (2) how contract price was negotiated, and (3) to make an affirmative written determination that the price agreed upon is fair and reasonable. FTA requirements concerning cost and price analysis may be found in the FTA Circular 4220.1F, Chapter VI, Paragraph 6, Page VI-20. (Posted: January, 2012)
Q. 1) Are you required to get the elements of cost and perform a cost analysis for a Brooks Act procurement of A&E services under $100,000? 2) For a small purchase of A&E, can a price analysis be done instead, whereby a lump sum price is compared to the independent cost estimate? 3) If a price analysis is acceptable, how much variance from the independent cost estimate is acceptable? Would ten percent or less variance mean that further cost analysis is not needed? And do you have to negotiate if the price offered is below the independent cost estimate background = 49 CFR (f) states "...A cost analysis must be performed when the offeror is required to submit the elements of his estimated cost,e.g., under professional, consulting, and architectural engineering services contracts. ..." Question: is a cost analysis required even for Small Purchases? FAA guidance states that an analysis of fee is required when the proposed price varies from the independent cost estimate by 10%. Source: 49 CFR Part 18.36
A. FTA requires a cost analysis for all awards for which competitive cost/price proposals are not obtained. This would always include A&E (Brooks Act) contracts, including small purchases (i.e., those under $100,000). The grantee is required to obtain a cost breakdown from the A&E contractor and evaluate the direct and indirect costs and proposed profit. The independent cost estimate (ICE) must be structured on a cost element, not lump sum, basis since the FTA policy requires a detailed cost proposal and the ICE's usefulness as a cost analysis tool can only be realized if the ICE enables an evaluation of the cost elements in the proposal. As for negotiating a price that exceeds the ICE, FTA has no policy restrictions in this regard but does require the grantee to explain (1) how the various costs and profit were evaluated, (2) how contract price was negotiated, and (3) to make an affirmative written determination that the price agreed upon is fair and reasonable. FTA requirements concerning cost and price analysis may be found in the FTA Circular 4220.1F, Chapter VI, Paragraph 6, Page VI-20. The circular is available online: http://www.fta.dot.gov/legislation_law/12349_8641.html (Posted: January, 2012)
Q. Does Paragraph 10 FTA 4220.1D address Cost and Price analysis for bids and proposals only or all procurements and repairs? In the case of sole source component repairs or a replacement procurement many suppliers would consider a detailed cost analysis as proprietary information. When a sole source component is needed or repairs are completed and a supplier does not want to provide the detailed cost analysis information, what is the suggested remedy?
A. The current FTA Procurement Circular is FTA Circular 4220.1F.
Chapter VI, Page VI-21, Paragraph 6, "COST AND PRICE ANALYSIS," is reproduced in part below. As you will see, FTA "expects," but not does not require, that grantees will seek to obtain a detailed cost proposal (with cost and profit elements) when only a sole source is available for the supplies or services. However, if the grantee can determine that the prices offered are fair and reasonable based on the supplier's catalogue or market prices, and that the items are commercial items sold in substantial quantities to the general public or prices set by law or regulation, then a cost analysis is not necessary.
"6. COST ANALYSIS AND PRICE ANALYSIS. The Common Grant Rules require the recipient to perform a cost analysis or price analysis in connection with every procurement action, including contract modifications. The method and degree of analysis depends on the facts and circumstances surrounding each procurement, but as a starting point, the recipient must make independent estimates before receiving bids or proposals.
a. Cost Analysis. The recipient must obtain a cost analysis when a price analysis will not provide sufficient information to determine the reasonableness of the contract cost. The recipient must obtain a cost analysis when the offeror submits elements (that is, labor hours, overhead, materials, and so forth) of the estimated cost, (such as professional consulting and A&E contracts, and so forth). The recipient is also expected to obtain a cost analysis when price competition is inadequate, when only a sole source is available, even if the procurement is a contract modification, or in the event of a change order. The recipient, however, need not obtain a cost analysis if it can justify price reasonableness of the proposed contract based on a catalog or market price of a commercial product sold in substantial quantities to the general public or based on prices set by law or regulation."
(Posted: January, 2013)
Q. Does the FTA allow the same flexibility for their grantees that the FAR allows for federal contracting officers based on:
FAR part 15.403-1, where it states that a cost analysis is not required:
(3) When a commercial item is being acquired;
(5) When modifying a contract or subcontract for commercial items (see standards in paragraph (c)(3) of this subsection)
A. The FTA Circular 4220.1F, Chapter VI, paragraph 6.a, discusses cost analysis and states, "The recipient need not obtain a cost analysis if it can justify price reasonableness of the proposed contract based on a catalogue or market price of a commercial product sold in substantial quantities to the general public or based on prices set by law or regulation." As a general rule commercial item prices cannot be evaluated as to their reasonableness by cost analysis; in these cases price analysis is normally the only realistic approach to determining the reasonableness of the commercial item price. (Posted: August, 2013)Q.
Q. We need a conceptual design drawn up by an A & E firm for a small construction project. Our in-house independent cost estimate (ICE) for the conceptual drawings is well under $20,000 and is based on past awards and established industry practice. I understand that we must use the Brooks method to select the most qualified A & E firm but I would like to know if we must perform a formal cost analysis on the selected A & E's proposed price or can we just negotiate a price that falls within our established ICE and award the contract?
A. The FTA Circular 4220.1F, Chapter VI paragraph 6, requires grantees to perform a cost analysis or price analysis in connection with every procurement action. The method and degree of analysis depends on the facts and circumstances of the procurement. Independent cost estimates (ICEs) are merely the starting point for the required cost analysis. ICEs by themselves do not satisfy FTA requirements for a cost analysis.
Grantees should obtain a cost breakdown for all sole source contract awards, including those for A&E services where price competition is not available. The various cost elements and profit of the A&E proposal should be evaluated by the grantee, using the ICE as starting point for the evaluation. (Posted: October, 2013)
Q. We want to issue a 5-year $200k blanket PO with a proprietary vendor for Light Rail Vehicle parts. We know some of the parts we will purchase under this blanket PO, but not all. How do I do a cost analysis when the vendor has refused to provide any cost information and the blanket PO is for a lump sum amount for known and unknown proprietary parts?
A. There are two aspects to this issue that we would address. First is the requirement for an independent cost estimate (ICE) prior to receipt of bids or proposals. It is obvious you cannot do an ICE without knowing what parts you are procuring. This would mean that the ICE be done once the specific parts needed are defined and prior to receiving the vendor's price proposal for those specific parts. Thus a meaningful ICE could probably not be done prior to award of the blanket PO, but only as the needed parts became known. The second aspect of the issue involves how to do a cost/price analysis of the parts themselves for purposes of evaluating the vendor's prices for negotiations. It is not uncommon for a vendor in this situation to refuse to furnish cost data for its products since that information is proprietary. The only option you have is to do a price analysis if the vendor will not furnish cost data.
FTA has published a “Pricing Guide for FTA Grantees” that is available online. Section II of this Guide offers several ways to conduct a price analysis, which you should find helpful.
One acceptable approach would be to determine if the parts are standard commercial items sold in substantial quantities to the general public. If so you may rely on the vendor’s published catalogue prices for those items. The idea here is that the marketplace will work to keep the prices competitive. Another approach would be to do a “value analysis,” i.e., to get pricing information from other transit agencies for other manufacturer’s parts that serve a similar function on their vehicles. Based on this comparative pricing data you can then determine if the prices being quoted by your vendor are reasonable given what other competing vendors are quoting for commercial items that serve a similar function.
(Posted: December, 2014)
Q. Circular 4220.1.F specifies that grantees must perform a cost or price analysis in connection with every procurement action, including contract modifications. We are executing a change order to include a provisional sum of $50,000 in the contract amount.
This provisional sum (PS) is a "holding account" to cover the cost of work directives (also called field directives). Work directives (WDs) are field changes that can severely impact project schedule and budget and therefore, the Contractor is allowed to proceed with the work prior to the execution of a formal change order. The PS allows prompt payment to the contractor while the change order is being executed internally. As the work under the WD is being performed, a change order is negotiated and once a change order is executed, the PS account is replenished. During closeout of the contract, a deductive change order will be executed to deduct any remaining funds in the PS account. In this case, is an ICE or cost analysis required where the work that may potentially be performed under WDs is unknown and unquantifiable?
A. We would not consider your "provisional sum" funding modification a "procurement action" requiring a cost or price analysis. The contract modification you describe will not affect the price of the contract, nor will it authorize any work. The action is simply an administrative type of contract modification that establishes a funding source for later "procurement actions" that will actually authorize work under the contract. (Posted: November, 2015)