Cost and Price Analysis
Cost versus price analysis
Cost analysis evaluates the individual cost elements that make up a price-labor hours and rates, material quantities and prices, equipment, subcontracts, indirects, and profit. Price analysis evaluates the reasonableness of a total price without examining every element, using competition, catalog or market comparisons, historical prices, and parametric benchmarks. Know when each is appropriate: price analysis for commercial, competitive buys; cost analysis when competition is limited or cost data are required.
Techniques to recognize
Be able to describe and apply: comparison to prior purchases, published price lists, parametric relationships, cost-based analysis, and should-cost or independent cost estimates. Understand direct vs. indirect allocation, burden rates, and how overhead and profit are applied.
Adjustments
Comparisons require normalization for quantity, time (escalation), location, technical content, and terms and conditions. A low price may reflect different scope, not efficiency.
Traps in questions
Common traps: treating lowest price as best value; ignoring scope differences in comparisons; double-counting indirects already embedded in rates; and confusing profit with fee or with contingency. Also watch for questions that describe price analysis but label it cost analysis.
Rule of thumb
When competition exists and specifications are clear, price analysis is usually sufficient. When only one source exists or cost realism matters, perform cost analysis. Always normalize before comparing.
Worked example
Two quotes differ by 12% on a pump. If quote B excludes installation that quote A includes, the apparent gap is scope, not price efficiency-normalize before judging reasonableness.