How to perform a cost benefit analysis
Who is this guide for?
This guide is for all HUD grantees and funding recipients that contract for services and/or supplies using funds provided in whole or in part by HUD.
What is price analysis?
Price analysis is essentially price comparison. It is the evaluation of a proposed price (i.e. lump sum) without analyzing any of the separate cost elements that it is composed of.
What is cost analysis?
Cost analysis is the evaluation of the separate elements (e.g. labor, materials, etc.) that make up a contractor's total cost proposal or price (for both new contracts and modifications) to determine if they are allowable, directed related to the requirement and ultimately, reasonable.
Is cost or price analysis always required?
Yes. HUD?s regulations at 24 Code of Federal Regulations (CFR) Part 84, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations," and 24 CFR Part 85, "Administrative Requirements for Grants and Cooperative Agreements to State, Local and Federally Recognized Indian Tribal Governments," require grantees to perform a cost or price analysis for every procurement action, including contract modifications (e.g. "change orders"), using HUD grant funds.
When do I perform a price analysis?
You use price analysis whenever you are comparing lump sum prices. not cost estimates - received from contractors in a competitive pricing situation (e.g. when sealed bids are obtained).
What qualifies as competition?
Generally, competition means two or more responsible (e.g. not debarred or suspended, etc.) offerors ("bidders"), competing independently, submit priced offers that satisfy the grantee?s contract requirement. Obviously, the greater the number of offers received, the greater the competition and ideally, the better the pricing.
When do I perform a cost analysis?
Cost analysis is used whenever you do not have price competition. A cost analysis is required when:
- Using the competitive proposal (or "negotiated") method of contracting (see 24 CFR 85.36(d)(3) for a definition), e.g. for acquiring professional, consulting or architect/engineering (A/E) services. Under the competitive proposal method, offerors are required to submit cost proposals that show the elements (e.g. labor, materials, overhead, profit) of their proposed costs or price.
CAUTION : Modifications that change the work beyond the scope of the contract must be justified in accordance with the conditions set forth in 24 CFR 85.36(d)(4) or 24 CFR 84.43. If the out-of-scope change cannot be justified, you must procure the work competitively.
Could there ever be a situation where I don't have price competition, and I don't have to perform a cost analysis?
Yes. There are two situations:
- The price can be established on the basis of catalog or market prices of commercial products or services sold in substantial quantities to the general public. A product is considered to be "sold in substantial quantity" when the regular sales volume is large enough to constitute a real commercial market. Services are considered to be "sold in substantial quantity" when the contractor/vendor customarily provides them, using his/her regularly employed personnel and using equipment (if any is needed) regularly maintained solely to provide the services.
Do I need to analyze and negotiate profit separately?
Whenever you are required to perform a cost analysis, and you are negotiating a contract action that provides for a profit or fee, you must negotiate profit separately. When negotiating profit, you should consider all of the following:
- The complexity of the work to be performed. The more difficult the work, the more profit a contractor may be entitled to.
How do cost analysis and price analysis apply to the different contracting methods?
- Small Purchases. For routine, commercial type purchases, comparing price or rate quotes obtained from an adequate number of qualified vendors is sufficient price analysis. If the small purchase is for professional or technical services, or the HA needs to evaluate other factors than price, then at least a limited cost analysis is appropriate. In either case, the HA's analysis should include comparing the proposed prices to past prices it has paid for the same or similar items or services.
CAUTION! When only one bid is received in response to a competitive bid solicitation, you do not have price competition. If you decide to award on the basis of a single submitted bid price, i.e. without negotiation, you must justify that the price is fair and reasonable. At a minimum, you should compare the bid price to your own in-house estimate and past prices paid for the same or substantially similar item(s) in the past. You should also try to obtain information from the marketplace, if you have not already done so in developing your own estimate. If you decide to cancel the sealed bid and negotiate a contract price with the single bidder, you must obtain a complete cost breakdown and perform a cost analysis of the proposed price. If the bidder refuses to provide a breakdown of his/her costs, you may have no other choice than to resolicit bids. In any case, you must document the rationale for your award decision.
you must obtain cost breakdowns from the offerors showing all the elements of their proposed total costs and perform a cost analysis of each proposal using the appropriate set of cost principles (discussed below).
NOTE! When awarding a contract using the competitive proposal method, the type of contract (e.g. firm fixed-price or cost-reimbursement) you propose to award does not affect the requirement for a cost analysis. For example, if you intend to award a firm fixed-price contract via the competitive proposal method, you still must analyze all of the proposed costs contained in each offeror's price. However, you are not required to negotiate each individual cost element in arriving at an agreement on total price. The final price you negotiate with the contractor on a fixed-price contract normally reflects agreement only on the total price. Therefore, the overall objective should be to negotiate total prices that are fair and reasonable.
NOTE! In certain cases, the contract may specify separately priced items. This is commonly done in indefinite- delivery (e.g. indefinite-quantity, sometimes called job order, or "open ended") contracts. Under these contracts, the HA orders pre-priced items on an as-needed basis, up to a stated maximum quantity. For these contracts, agreement must be reached on each item's price before award and the prices included in the final contract document.
What other contract actions or types require cost analysis?
- Contract Modifications. If you are negotiating a modification (including change orders) to any contract (even if the basic contract was awarded competitively through sealed bidding) that changes the scope of work previously authorized and impacts the price or estimated cost, you must use cost analysis to arrive at a reasonable cost. The only exception to this rule is a contract modification based on pricing terms already established in the contract document. Keep in mind that changes in scope do not always result in increased costs. Elimination or reduction of contract work may result in a decrease in the contract price. Regardless of the direction of the price change, these modifications require cost analysis using the cost principles to determine that the price change is fair and reasonable.
NOTE! For contracts with for-profit entities and nonprofits listed in Attachment C to OMB Circular A-122, the cost principle at FAR 31.205-42 specifically addresses termination costs.
NOTE! Because of widely varying factors in construction work such as the nature, size, duration, and location of the construction project, advance agreements for such items as home office overhead, partners' compensation, employment of consultants, and equipment usage costs, etc. can be particularly important in construction and A/E contracts. When appropriate, they serve to express the parties' understanding regarding work starts and any costs are incurred. This helps to avoid possible disputes or disallowances later. Guidance on the use of advance agreements is found at FAR 31.109.
How do I perform an analysis?
Here are some basic techniques.
- Price analysis . Use as many of the following techniques as applicable and appropriate:
- Compare competitive prices received in response to the solicitation to one another. This assumes you receive a large enough number of competitively priced offers from the current marketplace.
- Verify the accuracy of the cost and pricing information submitted, and evaluate:
- The reasonableness of the proposed costs, including allowances for contingencies. To be considered reasonable, proposed costs must meet three critical tests. The costs must be:
- Allowable. The applicable cost principles (see section below) will usually state whether a type of cost is allowable or not.
- Actual costs previously incurred by the same contractor for the same or similar work. If it is a repetitive type of work or service, how much has it cost in the past. Apply any appropriate inflation factors for past work.
What are cost principles?
Cost principles describe the allowability of various types of costs (e.g. labor, travel, communications, etc.). The HUD regulations at 24 CFR Part 85, "Administrative Requirements for Grants and Cooperative Agreements to State, Local and Federally Recognized Indian Tribal Governments" (specifically, section 85.22, "Allowable costs"), and 24 CFR Part 84, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations" (specifically, section 84.27, "Allowable costs") require you to use them when performing cost analysis.Source: portal.hud.gov