Description
Cost and price analysis are two different approaches to making decisions on the appropriate value of products or services prior to purchase.
These types of analyses are used by government organisations as well as private businesses and consumers to evaluate contract work or goods being considered.
Together with other analysis, such as spend analysis, demand analysis and value chain analysis, one would get a well-rounded view of the organisation’s internal information.
To determine whether a price is fair and reasonable in a competitive marketplace, it is essential to know how to identify and utilize the correct resources
during the assessment process. Identifying the best price involves using the price analysisstrategy, which requires performing a marketplace competition comparison.
Cost analysis, a more complex process, is a thorough assessment of the direct and indirect costs leading to the final price of the product or service.
Once either of these strategies is applied and expenses are identified, negotiation may be necessary to ensure the best price.
Below is an explanation of some essential factors associated with these two strategies.
Objective:
- These types of analyses are used by government organisations as well as private businesses and consumers to evaluate contract work or goods being considered.
Output:
- Price comparison of the item(s)
- Cost breakdown of item(s)
WHAT IS PRICE ANALYSIS?
Price analysis is essentially price comparison. Price analysis is the process of deciding whether the purchase price is fair and reasonable without
analyzing any of the separate cost elements that it is composed of. It is basically a process of comparing a price with known indicators of reasonableness.
Price analysis is effective when applied to items that can be “compared” with other similar items. It is used to assess whether the price is reasonable.
- Compare the item/service with historical prices, market prices, published prices.
- Price analysis can be used to corroborate the conclusions of the cost analysis.
- Perform general internet searches on the item using shopping sites and search engines to get an idea of the market and published prices.
- Contact manufacturers directly for suggested retail prices.
- Get quotes of the same item from competitor brands or manufacturers.
- Get price indices
WHAT IS COST ANALYSIS?
Cost analysis is the element-by-element examination of the estimated or actual cost of the item (e.g., labor, materials, etc.) that make up a
supplier’s total cost proposal or price to determine if they are allowable, directly related to the requirement and ultimately, reasonable.
The goal is to form an opinion on whether the proposed costs are in line with what reasonably economical and efficient performance should cost.
Cost analysis involves determining the direct(traceable) and indirect(non- direct expenses) costs that make up the purchase price.
When conducting a Cost analysis, keep the following in mind:
- It is useful when the item cannot easily be compared or is considered “unique”.
- When asking for this information, convince your supplier that your intent in obtaining costing information is not to reduce their profit.
- Is assists in understanding the cost drivers behind the product/service.
- Identify direct costs (costs directly attributable to the final product):
- E.g. base salary, labour, fringe benefits, materials, transport, warehousing
- Identify indirect costs (costs that are not directly associated with the final product):
- E.g. advertising & marketing, legal fees, travel, rent, office supplies, insurance, taxes, utilities, depreciation, overheads.
- Profit is usually included in both the direct and indirect costs. It represents the complexity of the work performed and the risk assumed during the work performed.
As with price analysis, once a rate has been determined, then a negotiation may be necessary to ensure the best price outcome.
In all price and cost analysis, time is required. It is recommended to begin the process as early as possible, even if funding has not yet been guaranteed.
In all circumstances, the Procurement staff will be happy to assist.