Performing a Cost or Price Analysis under the Uniform Guidance
Published: 10/24/24
Author Name: Crista M. Cuccaro
Failure to perform a cost or price analysis is one of FEMA’s “Top 10” procurement mistakes made by recipients and subrecipients. Due to Hurricane Helene, many local governments in Western North Carolina are already or will be entering into contracts that require a cost or price analysis. This blog post explains how to perform a cost or price analysis, with a particular focus on FEMA-eligible contracts.
What is a cost or price analysis?
A cost or price analysis is required by the Uniform Guidance, which are the administrative standards that apply when federal funds are being used by local governments. Pursuant to 2 C.F.R. 200.324(a), a recipient or subrecipient must perform a cost or price analysis for every procurement transaction, including contract modifications, in excess of the simplified acquisition threshold. The primary purpose of this analysis is to ensure the recipient does not pay unreasonably high prices to third party contractors. Additionally, the analysis serves to avoid excessively low pricing, which can result in substantial cost overruns.
To effectively perform a cost or price analysis in compliance with the Uniform Guidance, local governments should follow these two steps:
- Develop an independent estimate prior to soliciting bids or proposals.
- Compare received offers against the independent estimate and, if applicable, to other offers to determine that the pricing is reasonable.
Remember that proper documentation is critical for federal financial assistance compliance. Local governments can use or adapt the worksheets available in this blog post to develop independent estimates and perform the cost or price analysis.
It is important to understand that an “independent” estimate does not necessarily have to be prepared by a third party. Rather, an independent estimate is one that is formulated without the influence of a person or entity with a financial stake in the award. In other words, it is up to the local government to conduct the cost or price analysis for contracts above the simplified acquisition threshold, and a local government should not base its estimate solely on pricing provided by a potential vendor.
What is the simplified acquisition threshold?
The simplified acquisition threshold is the dollar amount used to determine whether a contract is subject to the informal or formal bidding methods set forth in 2 C.F.R. 200.320. Generally, contracts costing below the threshold may be procured using the informal methods, while contracts above the threshold must be formally bid. At present, the federal simplified acquisition threshold is $250,000.
However, because recipients must follow the most restrictive rule across local, state, and federal law and policies, the simplified acquisition threshold for certain types of procurement will differ depending on the type of procurement. In North Carolina, the threshold for formal bidding of purchase contracts and for competitive qualifications-based selection of architectural or engineering services are more restrictive than the federal simplified acquisition threshold of $250,000. As a result, the simplified acquisition threshold under North Carolina law varies for different types of local government procurement contracts, as follows:
- Purchase of Goods: $90,000
- Construction or Repair: $250,000
- Architectural/Engineering Services: $50,000
- Other Services: $250,000
What is the difference between a cost analysis and price analysis?
The easiest way to understand the difference is that a price analysis is based solely on reviewing the total cost or price of a contract, while a cost analysis examines the cost of the component parts of a contract.
More specifically, a price analysis evaluates a proposed price without evaluating individual cost elements or proposed profit. This method of analysis is typically used in competitive procurements for commercially available products that are sold to the general public, like vehicles. A price analysis is not appropriate for specialized services or unique items without comparable cost benchmarks.
Conversely, a cost analysis entails evaluating separate cost elements and the proposed profit of an offeror’s cost proposal. This analysis is commonly used for construction or repair contracts with multiple cost elements, and it also applies to contracts for professional services, or sole-source services. Ultimately, a cost analysis is used when a price analysis is not feasible, such as when an item or service is not commercially available, when it is unique, or when “adequate price competition is lacking. A cost analysis is also required for contract modifications and change orders.
How do you perform a price analysis?
Performing a price analysis involves estimating a reasonable price range for the cost of a good or service being procured prior to solicitation. Then, the local government can compare the pricing of bids or proposals received to determine if the price aligns with the estimate and is reasonable. To conduct a price analysis, a local government can research existing or similar pricing for the item or service being procured. Techniques for developing a price analysis include the methods explained below. Local governments should gather and document as much relevant data as possible to substantiate their analysis. This information is crucial for creating an independent estimate before issuing a solicitation, and it will also be used to evaluate bids or proposals once they are received.
- Compare past prices. Review previous contracts for the same or similar items or services to estimate current procurement pricing. The products do not need to be identical, but it is important to compare their capabilities and account for any price differences. Also, be aware of factors that may impact pricing, such as changes in quantity, quality, delivery schedules, or economic conditions.
- Apply yardsticks. Ensure you are making like-for-like comparisons. Use “yardsticks” or consistent units of measurement (e.g., dollars per pound, per square foot, per hour, etc.), to identify significant inconsistencies that may require further investigation into pricing.
- Compare catalog pricing or published price lists. Catalogs and published price lists are valuable because they establish a product’s commercial demand. Local governments should confirm that the catalog or list is publicly available rather than an internal pricing document and obtain a copy for reference. For FEMA-eligible procurements, the FEMA equipment pricing guide and equipment schedule are useful resources for price information.
- Conduct market research. If a seller does not have a catalog or price list but has previously sold the same item to other buyers, you can verify pricing with prior purchasers. A great place to research this information is by asking your colleagues on the purchasing listserv.
- Compare proposals. After issuing the solicitation receiving responses, you can compare the competitive prices submitted by different vendors. This comparison helps identify the most reasonable and competitive price among the received bids or proposals.
How do you perform a cost analysis?
Performing a cost analysis involves evaluating the separate cost elements of a contract to determine a fair and reasonable price. Since a cost analysis is used when a good or service is not readily available in the commercial marketplace, it may seem more complicated to conduct than a price analysis. However, the primary objective remains straightforward: to evaluate each element of the whole cost to ensure that pricing is reasonable.
Typical cost elements include direct costs like labor hours, travel, and materials, as well as indirect costs, such as overhead, and proposed profit. To estimate the separate cost elements, you need to understand the fee schedule components that will be in the eventual contract. For example, in a construction contract, the following cost elements could be included: mobilization fees; materials (e.g., pipe, gravel, asphalt); specialized labor listed by job type; equipment usage by hours; and fuel fees. Additionally, for post-disaster procurements, you may need to consider whether fees are influenced by economic conditions, such as fuel shortages, the need for generators, and transportation and travel affected by detours.
Various techniques, listed below, can be applied to conduct a cost analysis. Local governments should gather and document comprehensive data to support their cost analysis. This information will be essential in creating an independent estimate before issuing a solicitation and in evaluating proposals once they are received.
- Compare the same contractor’s pricing. Review the actual costs previously incurred by the same contractor for completing the same or similar work. This comparison helps identify consistency in pricing and cost allocation.
- Compare other contractors’ pricing. If the offeror has not previously completed the same or similar work, evaluate the actual costs incurred by other contractors for comparable projects. This allows you to benchmark costs against industry standards.
- Compare previous cost estimates. Use past cost estimates from the same offeror or from other contractors for similar work to determine whether the proposed pricing is fair and reasonable.
Are there any templates available for a cost or price analysis?
Yes.
While FEMA does not offer specific templates for conducting cost or price analyses, other local governments and recipients of federal funds have developed templates that can serve as useful models; these are linked below. Some of the worksheets are narrative-based, and focus on providing detailed explanations and justifications for the cost or price analysis. These are suitable when more context and rationale are needed for each cost element or price comparison. Some of the worksheets are Excel workbooks, which primarily involve entering numbers and calculations with minimal narrative. These are designed for straightforward comparisons and quantitative analysis of cost elements or prices. These templates provide flexibility, allowing you to choose or adapt an approach that best fits the complexity and requirements of your procurement.
- Cost Analysis for Federally Funded Contracts (Source: GoTriangle)
- Cost Analysis Worksheet (Source: Carteret County)
- Cost or Price Analysis Worksheet (Source: Corporation for Public Broadcasting)
- Independent Estimate Form (Source: Harris County Department of Education, Texas)
- Cost or Price Analysis Form (Source: Harris County Department of Education, Texas)
If I am performing a cost analysis, am I required to negotiate profit separately?
No.
Before October 1, 2024, 2 C.F.R. 324 required local governments to “negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed.” However, in the 2024 revisions to the Uniform Guidance, the Office of Management and Budget (OMB) removed this requirement. Despite this change, local governments can still choose to negotiate profit separately if they find it necessary. For local governments affected by Hurricane Helene, the 2024 revisions to the Uniform Guidance apply to the FEMA disaster declarations.
To establish a fair and reasonable profit, prior guidance offered that local governments should consider several factors, including the complexity of the work to be performed, the risk undertaken by the contractor, the contractor’s investment (e.g., mobilization or facilities), the amount of subcontracting, the quality of the contractor’s record of past performance, and industry profit rates in the surrounding geographical area for similar work.
Do I need to conduct a cost or price analysis for contract amendments?
Yes.
An independent estimate and cost or price analysis is required for procurement actions such as contract modifications and change orders. In the case of a change order, a cost analysis of the contractor’s proposal is mandatory. For change order costs that are not explicitly defined by regulation or contract terms, you will need to verify the reasonableness of the costs. Examples of costs to evaluate are direct labor rates or hours, materials, and proposed profit. Other key questions to address for a change order include:
- What is prompting the change? Describe the necessity for the change in the scope of work.
- What was the original cost for the work? Revisit the initial agreed-upon cost before the change.
- What will the change in work cost the contractor? Evaluate the revised costs the contractor will incur due to the change.
- Are there any savings or additional costs for the changed work? Assess whether the change introduces cost savings or additional expenses for the recipient.
Do I need to conduct a cost or price analysis if I am using the emergency or exigency exception?
Yes.
Even when a procurement is noncompetitive, a local government must still perform a cost or price analysis to determine that the cost or price of the contract is fair and reasonable. This is true regardless of the reason for the noncompetitive procurement, such as emergency or exigent circumstances or any other allowable exception under 2 C.F.R. 200.320(c). You can read more about the emergency or exigency exception according to FEMA here.
Do I need to conduct a cost or price analysis if I am using the sole source exception?
Yes.
The method and degree of analysis needed depends on the facts surrounding the particular procurement transaction. Thus, if the sole source procurement is for standard commercial items sold to the general public, then a price analysis would be sufficient. On the other hand, if the procurement is for services, then a cost analysis is necessary.
Are there any other key considerations related to cost or price analysis?
Yes.
A critical component of the cost or price analysis is determining that the costs for the contract are reasonable. According to 2 C.F.R. 200.404, a cost is reasonable if it does not exceed that which would be incurred by a prudent person under the circumstances at the time the cost is incurred.
Additionally, under a federal award, costs or prices are permissible only if they comply with the Cost Principles in Subpart E of the Uniform Guidance. This means that in addition to being reasonable, costs or prices must be allowable and allocable. “Allocable” costs are logically related to the performance of the contract and “allowable” costs are those that meet federal regulations and guidelines, meaning federal funds are authorized to be spent on those specific expenses.
Are there any requirements below the simplified acquisition threshold?
Yes.
As noted in the above question, the Uniform Guidance Cost Principles apply to expenditures of federal grant funds. Therefore, all costs charged to a federal award must be reasonable, allocable, and allowable. The key distinction is that a local government is not required to perform a formal cost or price analysis under 2 C.F.R. 200.324 for procurements below the simplified acquisition threshold. However, the unit must still determine (and document) that costs are reasonable and necessary, allocable to the federal award, and allowable. Importantly, some documentation must be maintained to support this determination. Accordingly, some research may be necessary to support a claim of reasonableness even for costs under the simplified acquisition threshold.
How can I learn more?
At an upcoming office hours session, the School of Government will be facilitating a discussion about conducting a cost or price analysis. Keep an eye on your email for more information and mark these dates on your calendar for upcoming office hours:
- Wednesday, October 30, 12:00-1:00 pm
- Monday, November 4. 8:30-9:30 am
- Thursday, November 14, 12:00-1:00 pm
- Monday & Tuesday, November 18-19, 9:00 am to 1:00 pm: Disaster Response Training
- Wednesday, November 20, 8:30-9:30 am
- Monday, November 25, 8:30-9:30 am
1
Coates’ Canons NC Local Government Law
Performing a Cost or Price Analysis under the Uniform Guidance
Published: 10/24/24
Author Name: Crista M. Cuccaro
Failure to perform a cost or price analysis is one of FEMA’s “Top 10” procurement mistakes made by recipients and subrecipients. Due to Hurricane Helene, many local governments in Western North Carolina are already or will be entering into contracts that require a cost or price analysis. This blog post explains how to perform a cost or price analysis, with a particular focus on FEMA-eligible contracts.
What is a cost or price analysis?
A cost or price analysis is required by the Uniform Guidance, which are the administrative standards that apply when federal funds are being used by local governments. Pursuant to 2 C.F.R. 200.324(a), a recipient or subrecipient must perform a cost or price analysis for every procurement transaction, including contract modifications, in excess of the simplified acquisition threshold. The primary purpose of this analysis is to ensure the recipient does not pay unreasonably high prices to third party contractors. Additionally, the analysis serves to avoid excessively low pricing, which can result in substantial cost overruns.
To effectively perform a cost or price analysis in compliance with the Uniform Guidance, local governments should follow these two steps:
- Develop an independent estimate prior to soliciting bids or proposals.
- Compare received offers against the independent estimate and, if applicable, to other offers to determine that the pricing is reasonable.
Remember that proper documentation is critical for federal financial assistance compliance. Local governments can use or adapt the worksheets available in this blog post to develop independent estimates and perform the cost or price analysis.
It is important to understand that an “independent” estimate does not necessarily have to be prepared by a third party. Rather, an independent estimate is one that is formulated without the influence of a person or entity with a financial stake in the award. In other words, it is up to the local government to conduct the cost or price analysis for contracts above the simplified acquisition threshold, and a local government should not base its estimate solely on pricing provided by a potential vendor.
What is the simplified acquisition threshold?
The simplified acquisition threshold is the dollar amount used to determine whether a contract is subject to the informal or formal bidding methods set forth in 2 C.F.R. 200.320. Generally, contracts costing below the threshold may be procured using the informal methods, while contracts above the threshold must be formally bid. At present, the federal simplified acquisition threshold is $250,000.
However, because recipients must follow the most restrictive rule across local, state, and federal law and policies, the simplified acquisition threshold for certain types of procurement will differ depending on the type of procurement. In North Carolina, the threshold for formal bidding of purchase contracts and for competitive qualifications-based selection of architectural or engineering services are more restrictive than the federal simplified acquisition threshold of $250,000. As a result, the simplified acquisition threshold under North Carolina law varies for different types of local government procurement contracts, as follows:
- Purchase of Goods: $90,000
- Construction or Repair: $250,000
- Architectural/Engineering Services: $50,000
- Other Services: $250,000
What is the difference between a cost analysis and price analysis?
The easiest way to understand the difference is that a price analysis is based solely on reviewing the total cost or price of a contract, while a cost analysis examines the cost of the component parts of a contract.
More specifically, a price analysis evaluates a proposed price without evaluating individual cost elements or proposed profit. This method of analysis is typically used in competitive procurements for commercially available products that are sold to the general public, like vehicles. A price analysis is not appropriate for specialized services or unique items without comparable cost benchmarks.
Conversely, a cost analysis entails evaluating separate cost elements and the proposed profit of an offeror’s cost proposal. This analysis is commonly used for construction or repair contracts with multiple cost elements, and it also applies to contracts for professional services, or sole-source services. Ultimately, a cost analysis is used when a price analysis is not feasible, such as when an item or service is not commercially available, when it is unique, or when “adequate price competition is lacking. A cost analysis is also required for contract modifications and change orders.
How do you perform a price analysis?
Performing a price analysis involves estimating a reasonable price range for the cost of a good or service being procured prior to solicitation. Then, the local government can compare the pricing of bids or proposals received to determine if the price aligns with the estimate and is reasonable. To conduct a price analysis, a local government can research existing or similar pricing for the item or service being procured. Techniques for developing a price analysis include the methods explained below. Local governments should gather and document as much relevant data as possible to substantiate their analysis. This information is crucial for creating an independent estimate before issuing a solicitation, and it will also be used to evaluate bids or proposals once they are received.
- Compare past prices. Review previous contracts for the same or similar items or services to estimate current procurement pricing. The products do not need to be identical, but it is important to compare their capabilities and account for any price differences. Also, be aware of factors that may impact pricing, such as changes in quantity, quality, delivery schedules, or economic conditions.
- Apply yardsticks. Ensure you are making like-for-like comparisons. Use “yardsticks” or consistent units of measurement (e.g., dollars per pound, per square foot, per hour, etc.), to identify significant inconsistencies that may require further investigation into pricing.
- Compare catalog pricing or published price lists. Catalogs and published price lists are valuable because they establish a product’s commercial demand. Local governments should confirm that the catalog or list is publicly available rather than an internal pricing document and obtain a copy for reference. For FEMA-eligible procurements, the FEMA equipment pricing guide and equipment schedule are useful resources for price information.
- Conduct market research. If a seller does not have a catalog or price list but has previously sold the same item to other buyers, you can verify pricing with prior purchasers. A great place to research this information is by asking your colleagues on the purchasing listserv.
- Compare proposals. After issuing the solicitation receiving responses, you can compare the competitive prices submitted by different vendors. This comparison helps identify the most reasonable and competitive price among the received bids or proposals.
How do you perform a cost analysis?
Performing a cost analysis involves evaluating the separate cost elements of a contract to determine a fair and reasonable price. Since a cost analysis is used when a good or service is not readily available in the commercial marketplace, it may seem more complicated to conduct than a price analysis. However, the primary objective remains straightforward: to evaluate each element of the whole cost to ensure that pricing is reasonable.
Typical cost elements include direct costs like labor hours, travel, and materials, as well as indirect costs, such as overhead, and proposed profit. To estimate the separate cost elements, you need to understand the fee schedule components that will be in the eventual contract. For example, in a construction contract, the following cost elements could be included: mobilization fees; materials (e.g., pipe, gravel, asphalt); specialized labor listed by job type; equipment usage by hours; and fuel fees. Additionally, for post-disaster procurements, you may need to consider whether fees are influenced by economic conditions, such as fuel shortages, the need for generators, and transportation and travel affected by detours.
Various techniques, listed below, can be applied to conduct a cost analysis. Local governments should gather and document comprehensive data to support their cost analysis. This information will be essential in creating an independent estimate before issuing a solicitation and in evaluating proposals once they are received.
- Compare the same contractor’s pricing. Review the actual costs previously incurred by the same contractor for completing the same or similar work. This comparison helps identify consistency in pricing and cost allocation.
- Compare other contractors’ pricing. If the offeror has not previously completed the same or similar work, evaluate the actual costs incurred by other contractors for comparable projects. This allows you to benchmark costs against industry standards.
- Compare previous cost estimates. Use past cost estimates from the same offeror or from other contractors for similar work to determine whether the proposed pricing is fair and reasonable.
Are there any templates available for a cost or price analysis?
Yes.
While FEMA does not offer specific templates for conducting cost or price analyses, other local governments and recipients of federal funds have developed templates that can serve as useful models; these are linked below. Some of the worksheets are narrative-based, and focus on providing detailed explanations and justifications for the cost or price analysis. These are suitable when more context and rationale are needed for each cost element or price comparison. Some of the worksheets are Excel workbooks, which primarily involve entering numbers and calculations with minimal narrative. These are designed for straightforward comparisons and quantitative analysis of cost elements or prices. These templates provide flexibility, allowing you to choose or adapt an approach that best fits the complexity and requirements of your procurement.
- Cost Analysis for Federally Funded Contracts (Source: GoTriangle)
- Cost Analysis Worksheet (Source: Carteret County)
- Cost or Price Analysis Worksheet (Source: Corporation for Public Broadcasting)
- Independent Estimate Form (Source: Harris County Department of Education, Texas)
- Cost or Price Analysis Form (Source: Harris County Department of Education, Texas)
If I am performing a cost analysis, am I required to negotiate profit separately?
No.
Before October 1, 2024, 2 C.F.R. 324 required local governments to “negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed.” However, in the 2024 revisions to the Uniform Guidance, the Office of Management and Budget (OMB) removed this requirement. Despite this change, local governments can still choose to negotiate profit separately if they find it necessary. For local governments affected by Hurricane Helene, the 2024 revisions to the Uniform Guidance apply to the FEMA disaster declarations.
To establish a fair and reasonable profit, prior guidance offered that local governments should consider several factors, including the complexity of the work to be performed, the risk undertaken by the contractor, the contractor’s investment (e.g., mobilization or facilities), the amount of subcontracting, the quality of the contractor’s record of past performance, and industry profit rates in the surrounding geographical area for similar work.
Do I need to conduct a cost or price analysis for contract amendments?
Yes.
An independent estimate and cost or price analysis is required for procurement actions such as contract modifications and change orders. In the case of a change order, a cost analysis of the contractor’s proposal is mandatory. For change order costs that are not explicitly defined by regulation or contract terms, you will need to verify the reasonableness of the costs. Examples of costs to evaluate are direct labor rates or hours, materials, and proposed profit. Other key questions to address for a change order include:
- What is prompting the change? Describe the necessity for the change in the scope of work.
- What was the original cost for the work? Revisit the initial agreed-upon cost before the change.
- What will the change in work cost the contractor? Evaluate the revised costs the contractor will incur due to the change.
- Are there any savings or additional costs for the changed work? Assess whether the change introduces cost savings or additional expenses for the recipient.
Do I need to conduct a cost or price analysis if I am using the emergency or exigency exception?
Yes.
Even when a procurement is noncompetitive, a local government must still perform a cost or price analysis to determine that the cost or price of the contract is fair and reasonable. This is true regardless of the reason for the noncompetitive procurement, such as emergency or exigent circumstances or any other allowable exception under 2 C.F.R. 200.320(c). You can read more about the emergency or exigency exception according to FEMA here.
Do I need to conduct a cost or price analysis if I am using the sole source exception?
Yes.
The method and degree of analysis needed depends on the facts surrounding the particular procurement transaction. Thus, if the sole source procurement is for standard commercial items sold to the general public, then a price analysis would be sufficient. On the other hand, if the procurement is for services, then a cost analysis is necessary.
Are there any other key considerations related to cost or price analysis?
Yes.
A critical component of the cost or price analysis is determining that the costs for the contract are reasonable. According to 2 C.F.R. 200.404, a cost is reasonable if it does not exceed that which would be incurred by a prudent person under the circumstances at the time the cost is incurred.
Additionally, under a federal award, costs or prices are permissible only if they comply with the Cost Principles in Subpart E of the Uniform Guidance. This means that in addition to being reasonable, costs or prices must be allowable and allocable. “Allocable” costs are logically related to the performance of the contract and “allowable” costs are those that meet federal regulations and guidelines, meaning federal funds are authorized to be spent on those specific expenses.
Are there any requirements below the simplified acquisition threshold?
Yes.
As noted in the above question, the Uniform Guidance Cost Principles apply to expenditures of federal grant funds. Therefore, all costs charged to a federal award must be reasonable, allocable, and allowable. The key distinction is that a local government is not required to perform a formal cost or price analysis under 2 C.F.R. 200.324 for procurements below the simplified acquisition threshold. However, the unit must still determine (and document) that costs are reasonable and necessary, allocable to the federal award, and allowable. Importantly, some documentation must be maintained to support this determination. Accordingly, some research may be necessary to support a claim of reasonableness even for costs under the simplified acquisition threshold.
How can I learn more?
At an upcoming office hours session, the School of Government will be facilitating a discussion about conducting a cost or price analysis. Keep an eye on your email for more information and mark these dates on your calendar for upcoming office hours:
- Wednesday, October 30, 12:00-1:00 pm
- Monday, November 4. 8:30-9:30 am
- Thursday, November 14, 12:00-1:00 pm
- Monday & Tuesday, November 18-19, 9:00 am to 1:00 pm: Disaster Response Training
- Wednesday, November 20, 8:30-9:30 am
- Monday, November 25, 8:30-9:30 am