Your Key Starting Points for Cost and Price Analysis

Cost and price analysis are two interdependent methods of projecting project and program costs. Price analysis looks purely at the unit price from a vendor, while cost analysis incorporates the reasonable cost to the vendor of producing the item to determine the fairness and appropriateness of the price quoted.

Depending on the method of procurement and the items in question, cost and price analysis can have very similar or very different results in supply chain decision making. Cost and price analysis both start with cost per unit. Neither ends with that simple measure.

Price analysis has four basic components:

  • Analysis of any existing price history
  • Comparing price to internal projections
  • Comparing competitive bids from multiple vendors
  • Using existing catalog or government prices for an item

Cost analysis breaks down into 5 core considerations:

  • Personnel required
  • Hours of work by the personnel
  • Resource cost (raw components or machine time)
  • Projected indirect costs (warehousing, transportation, taxes, fees)
  • Evaluation of costs as necessary and reasonable

Many project managers will set up simple cost and price analysis worksheets in order to perform both projections in tandem. This allows a coherent comparison of the results so that they can be considered in the framework of a true value comparison of plans or alternatives.

Value consists of a constant evaluation of whether a process step or an item is critical to customer satisfaction or final execution. This is critical as an item might be a "good deal" but not be necessary to the company’s business model.

Cost and price analysis must always be framed within the framework of a value analysis. Quality expectations affect the long-term value of a business project. The lowest cost or price vendor may not deliver sufficient quality and life span of product to meet the organizational needs.

A critical portion of the cost and price analysis is a clear and precise recommendation. If the analysis does not definitively lead to a value measure of the program or item in question, then more review is critical to a sound decision.

Often, it is a useful tool for organizations to standardize both cost analysis and price analysis expectations to ensure that individuals and departments are adhering to strategic cost control methods set by supply chain leaders. This unity of process ensures a consistent approach to project value.

 

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