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Who
is this guide for?
This
guide is for all HUD grantees and funding recipients that contract
for services and/or supplies using funds provided in whole or
in part by HUD.
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What
is price analysis?
Price
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.
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What
is cost analysis?
Cost
analysis is the evaluation of the separate elements (e.g., labor,
materials, etc.) that make up a contractor's total cost proposal
or price (for both new contracts and modifications) to determine
if they are allowable, directed related to the requirement and
ultimately, reasonable.
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Is
cost or price analysis always required?
Yes.
HUD’s regulations at 24 Code of Federal Regulations (CFR) Part
84, "Uniform Administrative Requirements for Grants and Agreements
with Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations," and 24 CFR Part 85, "Administrative
Requirements for Grants and Cooperative Agreements to State, Local
and Federally Recognized Indian Tribal Governments," require
grantees to perform a cost or price analysis for every
procurement action, including contract modifications (e.g., "change
orders"), using HUD grant funds.
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When
do I perform a price analysis?
You
use price analysis whenever you are comparing lump sum prices
– not cost estimates - received from contractors in a competitive
pricing situation (e.g., when sealed bids are obtained).
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What
qualifies as competition?
Generally,
competition means two or more responsible (e.g., not debarred
or suspended, etc.) offerors ("bidders"), competing
independently, submit priced offers that satisfy the grantee’s
contract requirement. Obviously, the greater the number of offers
received, the greater the competition and ideally, the better
the pricing.
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When
do I perform a cost analysis?
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 (see 24 CFR 85.36(d)(3) for a definition),
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., labor, 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 (see 24 CFR 85.36(d)(4)), you must obtain 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, you receive only one
bid, and it differs substantially from your independent
estimate of the contract price. If you determine that the bid
is unreasonable and decide to not recompete (e.g., market survey
tells you that you wouldn’t get competition), then you may formally
cancel the solicitation and negotiate a contract price with
the single bidder. In that case, you must obtain a cost breakdown
of the single bid price and use cost principles to After soliciting
competitive sealed bids,
- Negotiating
a modification (including change orders) to any
type of contract, if the modification changes the work authorized
under the contract, and changes the price or total estimated
cost, either upwards or downwards. You must obtain a
detailed breakdown of the contractor's proposed cost - not a
lump sum proposal - before negotiating the change in contract
price.
CAUTION:
Modifications that change the work beyond the scope of the contract
must be justified in accordance with the conditions set forth
in 24 CFR 85.36(d)(4) or 24 CFR 84.43. If the out-of-scope change
cannot be justified, you must procure the work competitively.
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Could
there ever be a situation where I don't have price competition,
and I don't have to perform a cost analysis?
Yes. There are two situations:
-
The price can be established on the basis of catalog or market
prices of commercial products or services sold in substantial
quantities to the general public. A product is considered to
be "sold in substantial quantity" when the regular sales volume
is large enough to constitute a real commercial market. Services
are considered to be "sold in substantial quantity" when the
contractor/vendor customarily provides them, using his/her regularly
employed personnel and using equipment (if any is needed) regularly
maintained solely to provide the services.
or
- The
price is set by law or regulation.
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Do
I need to analyze and negotiate profit separately?
Whenever you are required to perform a cost analysis, and you
are negotiating a contract action that provides for a profit or
fee, you must negotiate profit separately. When negotiating profit,
you should consider all of the following:
- The
complexity of the work to be performed. The more difficult the
work, the more profit a contractor may be entitled to.
- Contractor’s
risk. How much risk – either performance or cost to the contractor
- will the contract create? The higher the risk, the higher
the reward, i.e., profit.
- Contractor's
investment (labor, oversight, etc.). How much and what type
of resources will the contractor have to dedicate to performing
the contract? The greater the investment of resources the more
profit.
- Subcontracting.
The amount of profit depends upon the size, nature and oversight
needs of the subcontracts the contractor will use. Will the
contractor perform most of the work, or will he/she sub out
some of it, and if so, how much? Will subcontracted work be
routine or complex? What amount and level of oversight and management
will subcontracted work require of the contractor? Simple subcontracts
for routine supplies of services should not be worth as much
profit as complex subcontracts that require a lot oversight
by your own highly skilled staff or management.
- Quality
of the contractor's past performance. Profit should reward the
contractor for a proven record of high quality performance.
A consistent record of delivering quality goods or services
on time within cost, indicates that the contractor will likely
"deliver the goods" to you, too. (Note: You probably won't be
considering a poor performer for a new contract award.) Performance
under the current contract must be considered when negotiating
a modification.
- Industry
profit rates in the surrounding geographical areas for similar
work. What's the "going rate," especially for standard, more
commercial types of work? CAUTION: Be careful
to not pay going rates when the work required is not really
covered by those rates, e.g., paying specialty rates for routine
work.
CAUTION!
The "cost-plus-a-percentage-of-cost" and "percentage-of-construction-cost"
contract types are prohibited. (See also 24 CFR 85.36(f)(4), and
24 CFR 84.44(c).) These types of contracts reward contractors for
incurring greater costs, which is just the opposite of what is in
your, the buyer's best interest.
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How
do cost analysis and price analysis apply to the different contracting
methods?
- Small Purchases. For routine, commercial type purchases,
comparing price or rate quotes obtained from an adequate number
of qualified vendors is sufficient price analysis. If the small
purchase is for professional or technical services, or the HA
needs to evaluate other factors than price, then at least a
limited cost analysis is appropriate. In either case, the HA's
analysis should include comparing the proposed prices to past
prices it has paid for the same or similar items or services.
- Sealed Bidding. This is the preferred method for contracting
for supplies, equipment and construction. (See 24 CFR 85.36(d)(2)
for a definition.) Normally, the competitive pricing forces
of the marketplace determine the reasonableness of the low price
obtained through sealed bidding. Nevertheless, the HA should
always compare its own independent cost estimate to the low
competitive bid received. In the event they are significantly
different, the HA will need to examine each to verify that either
its own estimate or the market price is valid. Otherwise, no
further price or cost analysis is required under sealed bidding.
CAUTION! When only one bid is received in response
to a competitive bid solicitation, you do not have price competition.
If you decide to award on the basis of a single submitted bid
price, i.e., without negotiation, you must justify that the
price is fair and reasonable. At a minimum, you should compare
the bid price to your own in-house estimate and past prices
paid for the same or substantially similar item(s) in the past.
You should also try to obtain information from the marketplace,
if you have not already done so in developing your own estimate.
If you decide to cancel the sealed bid and negotiate a contract
price with the single bidder, you must obtain a complete cost
breakdown and perform a cost analysis of the proposed price.
If the bidder refuses to provide a breakdown of his/her costs,
you may have no other choice than to resolicit bids. In any
case, you must document the rationale for your award decision.
- Competitive Proposals. This method is most often used
to contract for professional, consulting, and architect/engineering
(A/E) services. (See 24 CFR 85.36(d)(3) for a definition.) To
determine the reasonableness of proposed costs, you must obtain
cost breakdowns from the offerors showing all the elements of
their proposed total costs and perform a cost analysis of each
proposal using the appropriate set of cost principles (discussed
below).
NOTE! When awarding a contract using the competitive
proposal method, the type of contract (e.g., firm fixed-price
or cost-reimbursement) you propose to award does not affect
the requirement for a cost analysis. For example, if you intend
to award a firm fixed-price contract via the competitive proposal
method, you still must analyze all of the proposed costs contained
in each offeror's price. However, you are not required to negotiate
each individual cost element in arriving at an agreement on
total price. The final price you negotiate with the contractor
on a fixed-price contract normally reflects agreement only on
the total price. Therefore, the overall objective should be
to negotiate total prices that are fair and reasonable.
NOTE! In certain cases, the contract may specify separately
priced items. This is commonly done in indefinite- delivery
(e.g., indefinite-quantity, sometimes called job order, or "open
ended") contracts. Under these contracts, the HA orders
pre-priced items on an as-needed basis, up to a stated maximum
quantity. For these contracts, agreement must be reached on
each item's price before award and the prices included in the
final contract document.
- Noncompetitive Proposals. These are sometimes called
sole source contracts and are different from single bids. No
competition is intended, and usually, there is no market to
help set the price or estimated cost. Since there is no price
competition to tell you if the price or estimated cost is reasonable,
you must obtain a breakdown of the proposed costs and perform
a cost analysis.
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What
other contract actions or types require cost analysis?
-
Contract Modifications. If you are negotiating a modification
(including change orders) to any contract (even if the basic
contract was awarded competitively through sealed bidding) that
changes the scope of work previously authorized and impacts
the price or estimated cost, you must use cost analysis to arrive
at a reasonable cost. The only exception to this rule is a contract
modification based on pricing terms already established in the
contract document. Keep in mind that changes in scope do not
always result in increased costs. Elimination or reduction of
contract work may result in a decrease in the contract price.
Regardless of the direction of the price change, these modifications
require cost analysis using the cost principles to determine
that the price change is fair and reasonable.
- Contract
Terminations. Terminating a contract means unilaterally
ending it before its stated end. Contracts can be terminated
for the convenience of the grantee or for cause (also called
default). Contracts are usually terminated for convenience when
the buyer no longer has a need for the service or products as
they are specified in the contract, or when it is not possible
to substantiate that the contractor's performance is poor enough
to terminate him/her for cause. Contracts may be terminated
for cause when the contractor fails to perform the contract
as written. If you are terminating a contract of any type (fixed-price
or cost-reimbursement) for convenience, or a cost-reimbursement
contract for cause, you must use cost analysis - and the appropriate
cost principles - to negotiate the final amount of the termination
settlement.
NOTE! For contracts with for-profit entities and nonprofits
listed in Attachment C to OMB Circular A-122, the cost principle
at FAR 31.205-42 specifically addresses termination costs.
- Cost-reimbursement
Contracts. In determining reasonable costs under any cost-reimbursement
contract, a cost analysis using the cost principles is required.
- Architect/Engineer
Contracts. Cost analysis is required in determining if the
cost portion of an A/E contract is fair and reasonable.
- Construction
Contracts. This includes all contracts and contract modifications
negotiated on the basis of cost for construction management
or construction, alteration or repair of buildings, bridges,
roads, or other kinds of real property. It does not include
contracts for equipment, or other kinds of personal property.
Construction contracts awarded using sealed bidding do
not require cost analysis (see Sealed Bidding
above), but construction contracts awarded using any method
other than sealed bidding, and modifications to construction
contracts do require cost analysis (see Modifications
above).
NOTE! Because of widely varying factors in construction
work such as the nature, size, duration, and location of the
construction project, advance agreements for such items as home
office overhead, partners' compensation, employment of consultants,
and equipment usage costs, etc., can be particularly important
in construction and A/E contracts. When appropriate, they serve
to express the parties' understanding regarding work starts
and any costs are incurred. This helps to avoid possible disputes
or disallowances later. Guidance on the use of advance agreements
is found at FAR 31.109.
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How
do I perform an analysis?
Here
are some basic techniques.
- Price
analysis. Use as many of the following techniques as
applicable and appropriate:
- Compare
competitive prices received in response to the solicitation
to one another. This assumes you 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, published catalog 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.
- Cost
Analysis.
- Verify
the accuracy of the cost and pricing information submitted,
and evaluate:
- The
reasonableness of the proposed costs, including allowances
for contingencies. To be considered reasonable, proposed
costs must meet three critical tests. The costs must
be:
- Allowable.
The applicable cost principles (see section below)
will usually state whether a type of cost is allowable
or not.
- Allocable.
This means that the costs are logically related
to, or required in the performance of the contract.
Many costs may be allowable but not related to the
work required under the contract.
- Reasonable.
This term is generally defined as what a prudent
business would pay in a competitive marketplace.
A cost can be allowable and allocable, and still
not be what a prudent businessperson would pay (e.g.,
first class airfare for a proposed subcontractor).
- 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.
- Application
of audited or pre-negotiated (e.g., by the Federal Government)
indirect cost (e.g., overhead) rates, labor and fringe
benefit rates, or other factors.
- Effect
of the offeror's current practices on future costs.
Does the offeror have a track record of containing costs
(completing contracts at or "under cost")? Does he/she
overrun costs?
- The
projection of the offeror's cost trends. Is there any
indication that his/her costs are likely to increase
or decrease over the life of the contract?
- Compare
costs proposed by the offeror with:
- 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?).
- The
HA's independent cost estimate, either created by HA
staff or for the HA by an independent architect, engineer,
appraiser, etc.
- Verify
that the offeror's cost submissions comply with the appropriate
set of cost principles.
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What
are cost principles?
Cost
principles describe the allowability of various types of costs
(e.g., labor, travel, communications, etc.). The HUD regulations
at 24 CFR Part 85, "Administrative Requirements for Grants and
Cooperative Agreements to State, Local and Federally Recognized
Indian Tribal Governments" (specifically, section 85.22, "Allowable
costs"), and 24 CFR Part 84, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations" (specifically,
section 84.27, "Allowable costs") require you to use them when
performing cost analysis.
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Which
cost principles do I use?
It
depends upon the type of organization with which you are contracting.
The use of one set or another is contract-specific. For example,
if the contract is with a private business concern, use the principles
in FAR Subpart 31.2 (see below). Here is a list of the cost principles
and the types of organizations covered by each:
| State,
local and tribal governments |
Office
of Management and Budget (OMB) Circular A-87 |
| |
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Private
nonprofit organizations
other than institutions of higher education or hospitals |
OMB
Circular A-122 |
| |
|
| Educational
institution |
OMB
Circular A-21 |
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|
Private,
profit-making entities and
nonprofits listed in Attachment C of
OMB Circular A-122 |
Federal
Acquisition Regulation (FAR),
48 CFR Chapter 1, Subpart 31.2 |
NOTE!
When applying the cost principles in FAR Subpart 31.2, the following
terms shall be read to refer to the HUD grantee/funding recipient:
"Government," "agency," "contracting officer" and "administrative
contracting officer" ("ACO"). The term "contractor" shall refer
to the grantee's/funding recipient's contractor. FAR 31.001 contains
a glossary of technical terms used in Subpart 31.2.
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Where
can I find the cost principles?
The
cost principles are available online:
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