6.1 IDENTIFY FACTORS THAT EFFECT PRICE COMPARABILITY
(Pictures – Apple and orange)
If you’ve ever bought a vehicle or a computer or any other complex item, you are already well acquainted with making price comparisons and evaluating how different features affect prices. It’s no different in your role as the business advisor. You can use that same analytical approach with your customer. So let’s see what’s involved in making these comparisons where the acquisition will be for your customer.
Each different comparison will involve different information and some bases will require substantial adjustment prior to making your analysis. In the table below, the Pricing Technique process is described in five steps. The first four of these steps are covered in this Section, along with a “Knowledge Review”. A continuing “Engine Acquisition” case will illustrate each of the five steps.
And for some suspense -- You must wait for the last step, Step 5, until Section 6.4. Step 5 is the ‘go/no-go’ step, or the decision step where you determine price reasonableness. Hence, there’s homework to do before making your decision.
Questions to Consider
Select prices for comparison:
Other proposed prices;
Previously-proposed prices and contract prices
Parametric estimates or rough yardstick estimates;
Independent Government Estimates
Would this comparison be valid?
Are more comparable prices available?
Identify the reasons for the differences among prices by identifying factors affecting comparability.
Terms and conditions (e.g., differences in features or capabilities, delivery lead-times, one-time costs, etc.)?
Identify the reasons for differences among prices by determining the potential impact of these factors on prices selected for comparison.
How substantial is the impact? In view of these factors and their impact, will the contemplated comparison have any credibility?
Due to price differences adjust prices selected for comparison so equivalent comparisons can be made.
Have I accounted for all factors that can be dollarized?
What techniques should be applied in making the adjustment?
How much reliance can I place on the resulting estimate?
Determine a reasonable price by comparing adjusted prices to the offer in line for award.
How much weight should I place on each comparison?
If adjusted prices differ substantially from the apparent successful offer, what price should the Government reasonably expect to pay?
Versatile Five-Step Process
You’ll find many parallels in the five-step pricing technique process – from buying a new car to making purchases for the Government. Once you’ve decided on the acquisition need, you’ll need to research the market to establish a clear picture of a reasonable price range.
Take a look at the example of Step 1 below where four different items are considered. The first item – buying a car – involves comparisons you’ve probably made in your personal life. However, the other items – buying a jet engine, spare parts or a tank – may be new to you.
Notice the different sources for comparison such as using ‘parametric $ per pound of thrust’. As used here, parametric means a math equation has been developed based on the performance – in this case, thrust -- of the jet engine to estimate the cost of the jet engine. Parametric is simply a fancy name for a math equation. Parametric is sometimes also called an algorithm or statistics. Another frequently used name for parametrics is cost estimating relationship (CER). For example, you are probably familiar with the ‘parametric’ of ‘dollars-per-square-foot’ for estimating the cost of a new home, or ‘miles-per-gallon’ for estimating the fuel usage of a vehicle. Hence, ‘parametric’ or a CER is simply numbers in some type of an equation designed to make estimating cost quick and easy!
Now consider the ‘inflation adjustment (indexing)’ for buying spare parts. You’re probably quite familiar with the effect of inflation on prices over time where inflation is defined as a ‘general rate of rise in prices over time’. Therefore, if you are comparing prices from different time periods, you will need to do market research on appropriate indexing as a part of your comparison step.
An Example of Step 1 -- Select Prices for Comparison
After comparing prices you’re ready for Steps 2 and 3. Try to identify the reason for any differences in price, determine if the difference is worth the added price, and assess the impact of the difference on price.
To explain differences in the price of a new car you may consider many variables such as:
Economic market conditions
Number of models in the color and options you want – available supply
Purchase for use in California or Georgia – geographic location & technology
Number of dealers available -- competition
When will you buy (before or after the new models) – technology
Rebates or dealers incentives -- finance terms and conditions
Steps 4 & 5
In Step 4, you must adjust the price of the car for comparison—equalizing the playing field.
Finally in Step 5, you determine a pricing objective to be considered fair and reasonable for the car. You negotiate the best deal for the car considering all factors, not necessarily the cheapest deal. The price then depends on what price you can negotiate with the dealer. Just as it is in Government contracting FAR 15.405(a):
“…the contacting officer is responsible for exercising the requisite judgment needed to reach a negotiated settlement with the offeror and is solely responsible for the final price agreement.”
Bases for Price Analysis
There are five potential bases for price analysis. Let’s note each and special considerations for using each.
Other Proposed Prices
Previously Proposed Prices
Parametric and Rough Yardsticks
Independent Government Estimate
Price Comparison From Everyday Life
The pictures below show everyday examples of doing comparative shopping. The first illustrates comparing prices at a new car dealership. The second depicts a grocery shopper comparing grocery prices. The third picture shows a shopper comparing prices of clothes at a retail store.
You may select any one or combination of the following bases for price analysis:
Other proposed prices received in response to the solicitation;
Commercial prices including competitive published price lists, published commodity market prices, similar indexes, and discount or rebate arrangements;
Previously-proposed prices and contract prices for the same or similar end items, if you can establish both the validity of the comparison and the reasonableness of the proposed price;
Parametric estimates or estimates developed using rough yardsticks; or
Independent Government Estimates.
Selecting Bases for Comparison
Selecting Bases for Comparison (cont)
Types of comparisons used in price analysis typically vary with the estimated dollar value of the contract.
Micro-purchases. You may solicit only one quote, if you consider the quoted price is reasonable. Your decision on price reasonableness should be based on information such as:
Previous prices paid for the same or similar items purchased competitively; or
Knowledge of the supply or service gained from published prices in catalogs, newspapers, and other sources of market information.
If you suspect that the quoted price is not reasonable or you do not have comparable pricing information readily available, take more aggressive action to collect the information necessary to determine price reasonableness. Normally, you should solicit additional quotes by phone or fax.
Other Simplified Acquisitions.Whenever possible, base price analysis on competitive quotes.
Promote competition to the maximum extent practicable.
If you only receive one quote, consider the following bases for price analysis:
Prices identified during market research;
Prices found reasonable for previous purchases;
Current price list, catalog, or advertised prices;
Consider every type of comparison that you believe will aid in establishing a fair and reasonable price.
If you have data on previous contract prices and have reason to believe that these data reflect good prior decisions on price reasonableness, then compare the apparent successful offer to those prices. If you have reason to believe that previous contract prices were not reasonable, then give little or no weight to those prices as you perform your price analysis. If you have no price history, you must rely on other comparison bases for your price analysis.
Illustration – An Engine Acquisition
(Picture – Worker with Jet Engine)
You have received a request for 196 engines to be used to refurbish trucks. The requesting activity developed a preliminary price estimate of $5,000 per engine or a total of $980,000 for all 196 engines. Four responsible and responsive offers were received as referenced in “Other proposed prices” below.
You have decided to follow the price-comparison process presented in this lesson. At the end of each price comparison step process, key points will be highlighted based on this scenario.
Select Prices for Comparison
After reviewing all offers, you have identified four bases for engine price analysis:
Historical prices -- Six months ago, the price was $5,000 each for 40 engines; one year ago, the price was $5,300 each for 30 units; and 14 months ago, the price was $5,500 each for 25 units.
Independent Government Estimate -- $5,000.
Catalog prices -- Engine Works’ (the apparent successful offerors) catalog price for 100 to 200 engines is $4,720.
Other proposed prices -- Engine Works, $925,120; General Motors Inc., $1,125,040; Acme Motors, $930,440; and Poteet Inc, $9355,160.
We can identify the reasons for differences among prices by:
Identifying factors that affect comparability
Determining the effect of identified factors
Adjusting the prices for comparison
Reasons for Differences Among Prices
The following illustrations address reasons for differences among prices. The picture on the left depicts people at an open market representing competition and quantity, the picture on the right shows a woman at a computer terminal representing technology; the last picture is a globe representing geographical location.