Cost and Price Analysis - Essay Example

Cost and Price Analysis Cost and Price Analysis Introduction Cost and price analysis is currently one of the essential tools used by governments and businesses to obtain and achieve fair and reasonable pricing from suppliers and contractors. With regard to its definition, cost analysis is primarily concerned with the examination and review of the individual cost elements that comprise the total estimated cost proposed by the anticipated contractor. On the other hand, a price analysis refers to the evaluation of the price proposed by the anticipated subcontractor relative to the prices offered by the other vendors for the same or similar item (Darrell, 2010). Once a rate has been determined using cost and pricing analysis, negotiation may be initiated to ensure that fair or reasonable price outcome is achieved. Pricing in government contracts is not only important in helping optimize the utilization of goods and services but is also useful in the maintenance of a competitive ground for contractors. Although it is the governments policy to obtain its products and services through contracting procurement at fair or reasonable prices, the actual process is often more complex as the determination of what is fair and reasonable is a matter of personal judgment. As a result, individuals may not usually agree on the reasonableness of the price. This paper critically analyzes the various critical elements that are associated with cost and price analysis in business or government contracting. Basic Pricing Policy and Concepts There are a number of basic concepts and policies issues that are currently regulating and governing cost and pricing analysis as a contracting and procurement strategy. With regard to pricing policy, government contracts are normally subject to a number of statutes such as the Competition in contracting act as well as regulations like the Federal Acquisition Regulation. The Federal Acquisition Regulation (FAR) The Federal Acquisition Regulation (FAR) is the principle set of rules that govern the policies of the Acquisition Regulation System including the various activities of government personnel in carrying out the acquisition process. For example, various policies under the current the Federal Acquisition Regulation (FAR) have been particularly formulated to promote best practices in government contracting and procurement by ensuring reasonable and fair prices are used during the contracting process. According to Tiefer and Shook (2013), FAR particularly requires contracting officers who are charged with the responsibility of determining the reasonableness of a contract to conduct a credible analysis of the relevant data and facts regarding a contract including the cost and pricing data in order to ensure that the price paid for the particular goods or services is reasonable and fair. Additionally, under the current pricing policy, requires contracting officers to obtain certified pricing or cost data along side other data necessary in helping establish the reasonableness and fairness of the price. However, the process is sometimes more complex and individuals may not usually agree on the reasonableness of the price. In such events where reasonable fair price is not possible to establish by the contracting officer from the analyses carried out on the data that has been submitted or obtained, additional data sufficient enough to support the determination of reasonable and fair price may be required. Despite the fact nearly all the government agencies are currently required to comply with the Federal Acquisition Regulations, some of the few agencies that have been exempted include the U.S Military and the Federal Aviation Administration (FAA). In such cases, the exempted agencies may be required to promulgate their own specific procurement rules in order to ensure that their purchasing procedures are consistent, standard, fair and impartial. Advantages of Pricing in Government Contracting There are a diverse number of potential advantages of pricing some of which may include enabling the government to achieve fair and reasonable pricing from suppliers and contractors as well as helping in the maintenance of a competitive market based prices for contractors. This is critically important in ensuring that the government of organizational funds are not only utilized in a cost effective manner but also conserved where resources or funds are limited. Fair and Reasonable Pricing Fair and reasonable pricing refers to the processes of determining a price point for a particular good or service that is fair to all the parties involved in the transaction. In government contracting, the determination of fair and reasonable price is normally subject to various statutory and regulatory limitations governing contracting procurement. Generally, this amount is often based on a number of agreed upon conditions, timeliness of the contract performance as well as the promised quality by the anticipated contractor in relation to the other competitors. Pricing allows the government agencies to achieve fair and reasonable pricing from suppliers and contractors. Market-Based Prices Pricing helps in the maintenance of a competitive market based prices for contractors. For example, subjecting all the potential contractors to a competitive process ensures that there are able to develop a competitive position through continuous improvement strategies in order improve their chances of winning the government contracts. In the process, the organizations are likely to improve the efficiency of their processes thereby leading to reduced cost across their supply chains. Cost-Based Prices In addition, the determination of price fairness and reasonableness through the performance of price and cost analysis can also be used when making certain decisions regarding contract proposals such as how a product should be sold in the market much a product. This is particularly important in situations where the total cost of production may be more expensive that the selling price. Obtaining Competitive Prices Seal Bidding Sealed bidding is one of the most preferred methods for contracting government supplies and purchases. When used in government tendering, sealed bidding as a method of contracting is often characterized by competitive bids that are submitted in sealed envelopes to the government by the respective vendors or anticipated contractors. Next, each of the sealed envelopes is evaluated and the contract is then competitively awarded to the lowest priced responsible, responsive and acceptable bidder. According to Murphy (2009) “sealed bidding process is normally adopted when the contracting officer determines that there is adequate price competition” (p.18). In this regard, the reasonableness of price obtained through sealed bidding is normally determined by the competitive forces. The main conditions for the award of sealed bidding as an acquisition method include sufficient time, price related factors, sufficient competition and well defined specifications. Negotiation Negotiation is another important acquisition method used by the government to obtain competitive prices. Negotiations are usually employed whenever one or more of the main perquisites for sealed bidding such as sufficient time, price related factors, sufficient competition and well defined specifications are lacking. Generally, when contracting by negotiation, the government contracting officers normally require the offerors to submit their price proposals and technical proposals separately. Unlike sealed bidding, there is no public opening of proposals. Both the price and technical proposals are simply evaluated alongside negotiations with the offerors within the competitive range (Tiefer and Shook, 2013). One f the major features of negotiated contracting procurement is the emphasis on the technical aspects of the proposal rather than focusing on price factors alone. Contract Characteristics Although government contracts often vary greatly in there are a number of similar characteristics of contracts. Firstly, contracts must be between two parties that have the capacity to legally enter into a contract. For example, the Federal Acquisition Regulation (FAR) requires that the parties must be adults who sign the contract out of their own consent. Another important characteristic of contracts is the existence of terms of agreement including a clear offer as well as a clear acceptance. However, the terms of engagement, must be fully agreed upon in order to for the contract to be binding. Fixed-Price Contracts Fixed price contracts normally refer to those contracts where the price to be paid is not subject to any adjustment regardless of the time or the amount of resources expended. This is particularly unlike a cost-plus contract which usually covers the cost as well as certain amounts of profit. Fixed price contract is commonly adopted in military and government contracts where it is normally used to put the risks on the side of the vendor (Darrell, 2010). In this regard, fixed price contracts can be said to be placing minimum administrative burdens on both contracting parties while at the same time subjecting the anticipated contractor to full responsibility and maximum risks due to potential cost escalations. However, such contracts may result in a failure in the event that the costs significantly exceed the ability of the vendor to absorb such as when working with a new untested technology. Cost-Reimbursement Contracts Also known as a cost plus contract, cost-reimbursement contracts refer to contracts whereby the allowable and reasonable costs that are incurred by the contractor during the performance of the contract are reimbursed up to a set limit plus an additional fee in order to allow for a profit. This kind of contract is commonly used in situations where the scope and nature of the work involved can not properly be ascertained and the risks involved are high. The Purpose of Price Analysis The primary purpose of price analysis is to ensure fairness and reasonableness of the final agreed to price. For example, the analysis can be used to evaluate where the overall price offered is fair or reasonable. Generally, price analysis is mainly used in situations where cost or pricing data are not needed. Forecasting likely Price Forecasting of the likely future price is a critically important part of anticipating future price levels. This is normally achieved by paying a close attention to the technical an fundamental factors during the price forecasting. Evaluating Bids, Proposals, and Quotations Once the bids, proposals and quotations have been received, an evaluation is usually carried out in order to help determine which vendor should be given the order. Generally, the award is usually given to the lowest bidder who has demonstrated responsiveness and responsibility and can be trusted to provide the best value as determined by the contracting officer. Cost Classifications Reasonable, Allowable, and Allocable The concepts of reasonability, allowability and allocability of costs normally attempts to address the legitimacy of the charged cost based on the guidelines of the sponsor as well as the federal cost principles. A Reasonable criterion requires that the cost must be appropriate and fair. On the other hand, allowability requires that he costs muct be reasonable and consistent with the federal accounting principles while allocability ensures that the cost is solely to support the specific objectives of the contract (Darrell, 2010). Variable, Fixed, and Semi-Variable Costs Variable costs refer to the costs that change with any change in the level of activity. Fixed costs are those that do not change with the changes in activity such as rent. Lastly, semi variable costs generally refer to the costs that have the characteristics of both fixed and variable costs. Cost Analysis Cost analysis refers to the evaluation and review of the individual cost elements that comprise the total estimated cost proposed by the anticipated contractor. His is particularly important in the determination of how the proposed costs relate to what the cost of the contract should be, assuming reasonable efficiency and economy. Cost Realism Cost realism is the extent, to which the proposed estimated cost elements are realistic to the nature of work to be performed taking into account the requirements, methods of performance as well as the materials that are described in the offeror’s technical proposal. Cost realism is importantly used in a number of ways some of which include on cost-reimbursement and competitive fixed price contracts among others. Conclusion In conclusion, the performance of cost and price analysis in government contracting is critically important in helping obtain fair and reasonable pricing as well as ensuring that a competitive market based prices for contractors is maintained. This is critically important in ensuring that the government of organizational funds are utilized in a cost effective manner and also conserved particularly in situations where the resources may be limited. References Darrell, J. (2010). Pricing and Cost Accounting: A Handbook for Government Contractors. Vienna: Management Concepts. Tiefer, C., Shook, W. (2013). Government Contract Law (2nd edition ed.). Carolina Academic Press. Murphy, J. (2009). Guide to contract pricing: Cost and price analysis for contractors, subcontractors, and government agencies; 5thEd. Vienna, VA: Management Concepts. Read More