Cost Analysis, Price Determination, and Total Cost of Ownership
Price analysis versus cost analysis
Price analysis compares a proposed price to the market - other quotes, historical prices, published indices, catalog prices - without opening the supplier's books. Cost analysis breaks the price into elements (material, labor, overhead, G&A, profit) and tests each for reasonableness; use it when competition is thin, the item is new, or the amount is large. Should-cost modeling builds the cost from the ground up. Learning curves explain volume effects: on an 80% curve, unit cost falls 20% each time cumulative volume doubles.
Total cost of ownership
TCO adds acquisition cost to operating cost, energy, maintenance, spares, training, downtime, quality failures, inventory carrying cost and disposal, then discounts to present value. Compare alternatives over the same horizon; when asset lives differ, convert to equivalent annual cost.
Traps
Sunk costs are irrelevant to a forward decision. Profit is not a cost. Never compare unit prices when operating costs differ, and never compare a 5-year and a 10-year asset without annualizing. Escalation clauses should reference a named published index, not "the supplier's costs".
Worked example
Pump A costs $50,000 with $12,000 per year in energy; Pump B costs $65,000 with $8,000 per year. At 8% over 10 years the annuity factor is 6.71. Present value of energy: A = $80,520; B = $53,680. TCO: A = $130,520; B = $118,680. B wins despite the higher price - an $11,840 advantage.