Question

Compare and contrast price analysis versus cost analysis, explain how they differ, and describe when it is appropriate to use price analysis versus cost analysis. Select one of the two methods and determine under what condition(s) it would not be appropriate for use. If you believe that the methods apply to any circumstance, justify your response.

Explain the importance of these two types of analysis in the context of government contracts. Provide an example of how each is clearly used.

Answer 1

Price analysis is used for the purpose of evaluating and comparing product options. Under this analysis the price of one product or service is compared with the price of another product or service. Price analysis is used generally in case of purchase decisions when there are several options available. In such a case price of each option along with the benefits being offered is compared. In other words price analysis helps in determining if the asking price of a product or a service is fair and reasonable.

Cost analysis is a more comprehensive approach in which element-by-element examination is done with regards to the estimated cost or the actual cost with regards to contract performance. This analysis helps in determining the probable cost to the concerned vendor. Usually cost analysis is done in those situations in which price analysis does not lead to a fair and reasonable price. Price analysis cannot be sued when cost data are required in accordance with the prime contract clauses; in such cases cost analysis is more useful.

In the context of government contracts some form of cost and price analysis is made as well as documented in the procurement files of the concerned department or unit. Government agencies do price analysis by doing a comparison of price quotations submitted, market prices and     similar indicia, together with discounts. On the other hand in case of cost analysis government department and agencies do a review and evaluation of different elements of cost so as to be able to determine reasonableness and allocability.

Examples: The contracting officer is responsible for evaluating the reasonableness of the offered prices. Price analysis is used when certified cost or pricing data are not required. On the other hand cost analysis is done when certified cost or pricing data are required. For example in case of price analysis the contracting officer compares offered price to catalog price of same items or similar items. The contracting officer will compare the proposed prices that are received in response to RFP (request for proposal). In case of cost analysis the contracting officer will go for this when competition is inadequate and the level of analysis required is detailed. This type of method is generally used in case of specialized defense contracts of the government.