Cost/Price Reasonableness FAQ

What is cost/price reasonableness -- a.k.a. cost analysis?

Cost analysis is the process of analyzing the individual cost elements of a subcontractor's proposal in order to determine the reasonableness of each element.  Most subcontracts issued by the University of Iowa are cost-reimbursement subcontracts (i.e. the UI reimburses the subcontractor only for the actual costs incurred in the performance of the subcontract and the subcontractor does not make a profit on the work performed).  Thus, cost analysis is the usual verification required for University subcontracts.

What are direct cost elements?

Direct costs are those costs that are directly related to producing a product or performing a service for a particular subcontract, such as labor, material, supplies and equipment.

What are F&A cost elements?

F&A (Facilities and Administrative) costs, which were formerly known as indirect costs, are those costs that are only partially or indirectly related to producing a product or performing a service for a particular subcontract.  F&A costs are shared or applicable to more than one contract and cannot be directly identified with the services performed under a particular subcontract.  F&A costs include building use allowance, equipment depreciation, general operations and maintenance.  The University of Iowa will not pay subcontractors F&A costs that exceed their federally approved F&A rate.

How do I analyze costs?

The emphasis of cost analysis is on determining whether a cost is reasonable and necessary for the scope of work.  To analyze a cost the following questions must be considered:

  • Is the cost necessary to perform the work?
  • Is the cost reasonable for the services to be performed?
  • Is the subcontractor performing in accordance with sound business practices, applicable laws and regulations, acceptable accounting procedures, and the prime award requirements?
  • Would a prudent businessperson take this action in a competitive environment?
  • Has the cost been increased by deviations from the subcontractor's normal practices?
  • How does the cost compare with other estimates from the same offerer or other offerers?

How do I analyze costs for personal services?

Reasonableness of costs for personal services can be measured by conformity with compensation practices of other organizations of the same size, in the same discipline or industry, and in the same geographic area.

What is price analysis?

Price analysis is the justification / evaluation of a vendor's total price proposal based on the documentation listed below.  Price analysis typically occurs when the subcontractor is a commercial entity that makes a profit on the work performed.

How do I document cost or price analysis?

Cost analysis and price analysis may be documented by:

  • Comparison of Competitive Proposals. At least two responsible suppliers submit bids that can satisfy the University's requirements, are independently submitted, are responsive to the solicitation, and are within a competitive price range.

  • Established Catalog Price and Any Applicable Discounts. Applies only to commercial supplies/services sold in substantial quantities to the general public. An established catalog price is a published price included in a catalog or price list that is regularly maintained by the supplier, is available for inspection by potential buyers, and states the current sales prices for the supplies/services. A copy of the supplier's price list will generally suffice to substantiate the fairness and reasonableness of the supplier's quotation.

  • Comparison of a Current Quotation with a Prior Cost or Price-Justified Subcontract for the Same or Similar Supplies/Services. If a prior price paid for supplies/services was determined to be fair and reasonable, then the same or similar current price for such supplies/services may also be presumed to be fair and reasonable, allowing for any minor differences.

  • Established Market Price. Applies only to commercial items sold in substantial quantities to the general public. An established market price is a current sales price for supplies/services, established in the normal course of trade between buyers and sellers free to bargain that can be substantiated from sources independent of the supplier. Market price substantiation may be documented by obtaining copies of other customers' orders from the supplier for the same or similar item, along with an explanation of any price differences.

    • Definition of Commercial Item: Regularly used for other than government purposes

    • Definition of Sold in Substantial Quantities: If there are sales of more than a nominal quantity based on the norm of the industry segment. Models, samples, prototypes and experimental units are not substantial quantities. Substantial quantities may be established by sales orders, contracts, shipments, invoices, or other such records.

  • Vendor's General Services Administration (GSA) Federal Supply Schedule. The Federal Government negotiates formal contractual agreements each year with its major suppliers. These GSA agreements list terms and conditions of sale and current sales prices for direct purchase by the government.

  • Prices Set by Law or Regulation. When a subcontractor's price is set by law or regulation, the University need only obtain a memo from the subcontractor identifying the regulatory authority and stating that the price quoted is not in excess of that permitted by law or regulation.

  • Government Assist Audit. Subcontractors sometimes prefer to keep cost and pricing data confidential. In this case, the University can request the Defense Contract Audit Agency (DCAA) to perform an assist audit of items in question regarding the vendor's proposal. This is often necessary for high-dollar value, sole-source proposals.

    • When an assist audit is requested, the DCAA will review the vendor's labor rates, overhead, etc. to determine acceptability. The DCAA normally will not furnish any specific vendor cost or pricing data; it will merely verify or question the acceptance of the data furnished by the vendor to the University. It remains the University's responsibility to evaluate and justify the reasonableness of the vendor's proposal or negotiate a subcontract that the University considers to be fair and reasonable. For example, if the University agrees the number of labor hours proposed are reasonable and the DCAA advises that the hourly rates are acceptable, the fairness and reasonableness of vendor's proposed labor charges is substantiated.

  • Asking the subcontractor to separately identify each of the direct costs, advise why each is required, and provide supporting documentation to substantiate each charge, such as:

    • Catalog price lists and any applicable discounts;

    • Copies of the subcontractor's orders from others for the same or similar items, including explanations for cost variations;

    • Subcontractor's internal cost estimate, or

    • Documentation of whatever means the subcontractor used to arrive at the charge.

How much time should I spend analyzing the subcontract cost or price?

Time spent on cost or price analysis should be proportional to the dollar amount of the subcontract.  The most time should be spent analyzing the larger dollar items, especially those items whose validity may be in doubt.  Emphasis should be on the need and reasonableness of the cost.