Price analysis is easy, as long as you’ve got a historical price to rely on! But what about those cases where you have a sole source procurement, less than the TINA threshold, of an item you’ve never purchased? Now what!? In this series of videos, we dive right into it. Session 1 will focus on the basics of price analysis to set the stage for more advanced concepts in follow-on videos.
Hey, happy Friday. Welcome back. It’s time for another webcast here. I’m Patrick Mathern, President of SpendLogic. What we’re going to be talking about today is doing the price analysis of a unicorn.
This is another in a series of 15-minute webinars that we’re doing on a weekly basis. And today, we’re going to be getting into an introduction session around this topic. It’s going to continue for several weeks after this. So even after today’s session, go ahead and tune back into us next week, and we will continue the conversation.
If you’re not familiar with us, SpendLogic, we do price analysis really, really well. Actually, we have a piece of software called SpendLogic, and what it is, is it’s an online price analysis tool. And it’ll help you through all your price analysis needs. We cover all the price analysis methods found in the FAR. If you’re having issues with price analysis, be sure to check it out.
You can look at it at spendlogic.com. We’ve got free trials up there and everything else. If you need services, we can also do cost analysis and price analysis, proposal development, DCAA, audit support, whatever you need. So give us a buzz, or reach out to us. You can email us at [email protected], or just go to our website and check it out. All right, let’s get started.
So the price analysis of a unicorn. This is something that we get asked about quite a bit quite honestly. People are always wondering, “Okay, well, I’ve got this super special thing. SpendLogic works great if I’ve got price history, or I know what I’m doing, but when I actually have to analyze something I’ve never purchased before or I don’t understand it, I’m having trouble,” okay?
Got it. We hear you loud and clear. This is the biggest problem in price analysis. And so I’m going to walk through some of the reasons that’s the case and also kind of get into, you know, how you can move forward. Again, today is going to be the introduction. So we’re not going to get into any specific methodologies today, but today’s going to be very important for setting the stage in what we do in the following weeks.
So hang on to your hats. Here we go. All right. So let’s start out with the purpose of a price analysis, okay? And this is foundational, I get it. A lot of you understand this already, but I’m hoping that some of you kind of get tripped up by this.
Okay, so there’s something wrong with the statement that’s shown here on the screen, right? The purpose of a price analysis is to justify the price paid for an item or service. We see this a lot. Okay, I deliver a lot of training to a lot of different companies. And invariably, people figure out what’s going on here. See if you can spot it. But this is actually what happens a lot of times.
This is how people are actually using price analysis in the real world, if you will. The problem that we have with this is twofold. Number one is the word justify, okay, you’re justifying a price, and number two is that you’re justifying a price that’s been paid, which means that it’s happened in the past, right?
So let’s start with justify. A price analysis is not a justification. Otherwise, it would be called a price justification, right? It’s a price analysis, so you’re analyzing something and you’re developing an analysis of a price. Again, not a price paid or something that’s done in the past. That’s the second point here.
If you’ve already paid it, then you’ve kind of missed the whole point of the price analysis, right? You’re analyzing price, but the analysis is really telling you how much is this thing actually worth. If you’ve already accepted their price, what does it matter what it’s worth at this point, right? So really, what we want to do is establish a fair and reasonable price for use in negotiations. That’s the point of price analysis.
You do it upfront so that you can then understand what it is you’re buying and what a fair and reasonable price is for taxpayers. You should be going out and using the price that you find in negotiations, okay? So in the simplest, simplest of terms, all right, all price analysis is, is the use of various comparison techniques to determine a fair and reasonable price, okay?
We do this every day, all of us. Anytime that you buy anything at a restaurant or, these days, on Amazon, perhaps, you look at the price that’s being offered, even if you’ve never purchased it before. If you go to a restaurant, and it’s a new restaurant you’ve never been to, and they’ve got this super special hamburger, right, that they only make there, it’s very unique, it uses Wagyu beef, you know, so it’s expensive.
But in your mind, you do some sort of price analysis, right? You’re comparing it to what you know the price of a hamburger is, “Okay, I can get one for a buck or two at McDonald’s. How does this compare to that?” You know, there’s a service component, there’s a lot of things going on, so you’re already doing price analysis.
What makes it a little tricky, and where people get caught up here in one spot is you have to document it appropriately, all right? Your compliance group, or if you’re in the compliance group, you’ve probably said this yourself. It’s all about telling the story, right? So if you tell the story of what your price analysis methodology is and how you’re comparing two things, then you’ve done your job.
The FAR calls out some specific methodologies to use and some specific comparison techniques. And that’s what most companies snap to. It also says in there, you know, that you can basically use any method that you want, in not so many words, but the ones that are found in the FAR are most likely to be approved in like a CPSR, or in price negotiations with a contracting officer.
So by and large, that’s what most companies use. That’s also what SpendLogic uses. So if you’re using our online tool, then we snap to the definitions that are found in the FAR. So let’s get into, you know, this analyzing a unicorn, all right? I’m going to assume that most of the folks that are watching this, you’re already pretty familiar with the way that this industry works, right?
So what we’re talking about with a unicorn, what makes this difficult is let’s say that it’s an item that you have never ever, nobody in your company has ever purchased it. So you have no history whatsoever within your company, no purchase price history, so you can’t do a historical analysis on it, or the price history that you have is from, you know, 20 years ago.
And I know that a lot of us in this industry are in that position as well. The item, let’s say, that it’s truly unique. And what I mean by that is there’s only one company in the world that makes unicorns, okay? You’ve got one supplier, they’re absolutely the only ones in the world. Now, there’s a lot of cases where we say that that’s the case. They’re the only ones in the world.
But in reality, there’s probably other companies that have that same capability. We’ll get into that, you know, in some follow-on sessions here, but for now, let’s say that it is truly the only company in the world that does this thing. Therefore, the next point is that competition is not possible. So not only can you not compare it to somebody else, or anything else in the marketplace, but competing this is just, by definition, not possible because there’s only one supplier.
So it’s a one-bid competition, which is not a competition at all. And last, it’s under the threshold for certified cost or pricing data. This is the kicker, right? So, today, if it was two million bucks or over, you could go ahead and require certified cost or pricing data.
You would have all the visibility in the world, you can figure out exactly what this thing costs, and go down that path. But we can also say that it’s over the TINA threshold, if you will, and perhaps it’s commercial, or there’s some reason that you can’t get certified cost or pricing data. So that’s what we’re talking about today and in the next couple of weeks, is really this concept of a unicorn, you have no insight into cost, you have no insight into price, there’s nothing to compare to, and you’ve never purchased this in the past, all right?
So some inherent issues here. This is probably pretty obvious to you, but as taxpayers, we deserve a fair price, all right? As buyers and supplier managers and compliance managers, really what we’re doing is we’re ensuring that the taxpayers are getting a fair price.
And that’s what the government’s doing. So when the DCMA comes in for our CPSR, they’re looking to make sure that we have a systematic approach to purchasing goods and services in a way that ensures that a reasonable price is paid by taxpayers, okay? In this particular case, unicorns, right?
We have one buyer and one seller. The seller effectively can name their price, okay? If this was the commercial marketplace, that would absolutely be the case. So, you know, a company that, you know, has something that is totally, totally unique, that nobody else can offer, in theory, they have their…they can make name their price, whatever price they want to charge.
In reality, there are typically substitutes, okay? You know, where you don’t have substitutes are where we get into really sticky problems. And I would say, you know, outside of government contracting, the only other really good, you know, comparable situation is in healthcare. So in healthcare, you have no other choice, right?
You have to buy whatever it is. You’ve got some generics in some cases, right, generic drugs. But at the end of the day, if you need that drug to live, you’re going to buy whatever it is, and you’re going to have to pay whatever price you have to pay. So that’s the kind of situation we’re talking about. I’m going to call it “life and death,” all right, but obviously, it’s not life and death here in government contracting.
But that’s the basic idea. Just lost my screen, here we go. And last but not least, the buyer has no other option but to purchase from this particular seller. So they have to buy it. Like I said, life or death, they got to buy it.
And this is really what happens in government contracting, isn’t it? So let’s say that, you know, you’re selling to the government, or you’re selling to a prime, or you’re buying from a sub, right, and you’re contracting and negotiating around a titanium weldment or something, right? So you have one supplier that is set up to do this.
It’s a special process, it’s a milspec part. The government has to have it, or the prime has to have it. The sub has nobody else that they could possibly sell these things to. They’ve got raw material, they’ve got tooling. And so we’re all caught in this, you know, really tough situation where we really have to get a deal.
We have to get to a point where we are selling what we’re selling and we’re buying what we’re buying, and it has to be from these people that we’re working with. So it makes a really, really difficult situation, especially when you get into unicorns, which we’re very often looking at because there’s nothing to compare to. And they have to sell it, I have to buy it, you know, so you get the idea where this is very special and very unique to government contracting.
So some mistakes, myths, and misunderstandings, okay? And, Michael, I see your question down there. I will get to that. I’m going to loop back around at the end and speak to any questions that show up. So mistakes, myths, and misunderstandings, I’m going to walk through each of these.
I’m going to let you know that number three, that’s going to be really what we get into in follow-on sessions here, okay? I’m going to talk about it a little bit today, but really, that’s an introduction into where we’re going to go. Again, today is really setting the stage. So number one, the proposed price becomes the target price for the analysis.
This is the biggest problem and the biggest myth that there is with difficult price analysis or price analysis of a unicorn, okay? You have to have this very fundamental realization that, even in government contracting, a seller can propose whatever they want.
They don’t have to propose a fair and reasonable price. Now, you don’t always want to walk in to an analysis and assume that the price is not fair and reasonable, but you should not make the assumption that it is fair and reasonable. And the reason I say that is because your price analysis really has zero, you know, reliance on the proposed price.
There is no relationship between those two values. So when you get a proposal for a million dollars for this specialized piece of equipment, there’s no reason that it’s actually worth a million dollars. We don’t know, right? You should be able to start your price analysis even before you receive the proposed price. This is going to be a little bit of blasphemy for some of you, but there is no reason that you need a proposal.
If you need your proposal first, right, there’s one of two things going on, okay? Number one is perhaps you don’t understand what it is that you’re buying, okay? In certain cases, maybe there’s a case to be made to say, “Okay, I need to, you know, have the proposal because, you know, this is very fuzzy, it’s a cost-reimbursable contract, you know, this, that, and the other,” so maybe you need a proposal for shared cost in a case like that, like an R&D case.
But if it’s something that you’ve purchased before and it’s something that you understand, you should be able to conduct your price analysis without looking at it. What happens when you have a proposal in hand is you end up anchoring on the price that is shown. That becomes kind of your target price. And that happens a lot.
And I’m sure that most, if not all of you, know what I’m talking about. You have the supplier’s proposed price of a million bucks, and now you feel that your job is to go in and create a price analysis that ends up showing that the million bucks is fair and reasonable or has some relationship to the million dollars. The reality of the situation is you just need to come up with a price analysis. Analyze, you know what you’re buying, create a documented opinion of price, and provide that to the supplier.
If it’s way different than what they’ve proposed, then there’s probably a misunderstanding somewhere, and you need to talk about it. All price analysis is, is getting to the facts, getting to the baseline. Now, at the end of the day, we have issue number two. If your price analysis isn’t high enough, you’re going to get a CPSR finding. Okay, we hear this a lot, companies that come to us and say, you know, or individuals that say, “Hey, I need help with my price analysis because it’s so low, and I’m going to have to negotiate to this price. My supplier will not move, they said this is the only price they will ever offer, and it is what it is, and I can’t show this because I’m going to get a finding in a CPSR.”
Okay, the reality of the situation is that having your price analysis or your negotiated price below your price analysis is as bad, just about as bad, as having it above your negotiated value every time. You don’t want variability that shows one thing or the other every single time. So if your price analysis is consistently lower, right…
I’m sorry, if your negotiated value is consistently lower than your price analysis, then it means that your price analysis needs to be adjusted. And oftentimes, contracting officers will do just that. They will apply a negotiation decrement. They’ll say, “Okay, well, you know, you always negotiate lower than price analysis, so, therefore, I’m going to give you an offer, Mr. or Mrs. Prime, that is actually below price analysis value because I know that you always negotiate under that anyways.”
So it works both ways, and you don’t want to be consistently higher or consistently lower. And the reality of the situation is that sometimes you have no choice, right? We all have those suppliers out there that they say, “Listen, I’m the only one that’s going to be selling you this item. You can’t buy it from anyone or anybody else, I know you can’t. This is what it’s worth for me to sell it. I would rather go out of business than sell you this at a lower price or the price that you’re offering me.”
Not much you can do in those situations. So what do you do? Do you write up that the price is fair and reasonable? No. You know that it’s not fair and reasonable, so you document that the price is what the price is. The magic words that we use typically is “best obtainable,” the price the supplier will not come down, and you make a note to file so that the CPSR team can see what’s going on.
Now, what the government’s going to expect is that you have a couple of things, number one, that your management agrees with you. So best practice is to have somebody at one higher level, at least management or somebody document in there that, “Okay, we reviewed this, and we have attempted, and the price is best attainable.
But number two, they’re also going to expect that you provide some insight in how you’re not going to get into this situation in the future. So, you know, something to the effect of, you know, “We are going to reverse-engineer this,” or, “We’re going to look at changing the spec,” or, “We’re going to…” you know, whatever it is. What they don’t want to see is that, “Listen, the price is double what it should be. This is the best obtainable price. And, oh, by the way, we’re going to continue doing this forever and ever.”
That’s the wrong answer, right? So that’s the only way that you actually lose, is if you just, you know, acquiesce to this unreasonable, unfair price and have no path forward on how you’re going to get around that in the future, okay? And the last one here is that price analysis is “impossible.” My original note here said that this is not true, okay?
But I’m going to say that this is very rarely true, okay? We actually haven’t run into this situation in a very long time, and we do a lot of price analysis, okay? Typically, what’s going on here is that there’s just not enough information. You or your company doesn’t have the expertise that you need to do the analysis, or you’re not really receiving the support that you need from your technical evaluators, or you haven’t asked the right questions of the technical evaluators, or you haven’t explored some of the other methodologies that you could be using.
So today, I really focused on just the build-up to, “Okay, here’s what we’re talking about, and here’s why price analysis is difficult in these situations.” Next week, I’m going to get into the specific tactics for how to actually tackle this. So some of the things we’re going to be talking about is, you know, number one, asking the supplier for their analysis.
What is that all about, right? Well, you know, this is actually something that some of our clients are doing. They’re saying, “Hey, go out, create your own price analysis. And, by the way, please use SpendLogic because it will walk you through, Mr. or Mrs. Supplier, it’ll walk you through the steps that I need to conduct a compliant analysis.” If your supplier can provide that type of information, then you’ve got somewhere to start, right?
That’s all you need from your supplier, somewhere to start. Typically, when you can’t do a price analysis, it’s because you have no idea where to begin. The second, conducting similar-to analysis. A lot of times, people fall down on, you know, how to do this, and we’ll get into the similar-to analysis methodology and how to get through that.
Third, requesting technical evaluation. There are specific things that you need to ask for and specific formats that you need in order to make that happen. And last but not least, if you don’t have any path forward, get third-party help. There’s lots of companies, consulting companies, that can help, and we’re one of those. So I’m going to walk through each of those in more detail and give you some tactical things that you can do and try out on your own.
So join us next week when we talk about that stuff. I’m going to take a look at the chat before I wrap up here. So let’s see here. Oh, I see. So Michael says, “Okay, how do small businesses, small business status, play into this?”
Small business status doesn’t play into it. You know, their small business status could impact CAS and how they are reporting and recording costs. But for the most part, regardless of whether you’re a large business or a small business or anything in between there, you still have the requirement that you have to do a price analysis.
And your supplier, by the way, still has a requirement that they have to support their price. So really, it’s a give and take. It’s a push and pull. You have to be able to, you know, have that conversation and come to a level of understanding and a level playing field. When we’ve done CPSR preparation for different clients, I’ve actually seen source justifications. And this might be along the lines of what you’re talking about.
But we’ve seen source justifications that said a price analysis is not required because it’s a small business, or my favorite is, you know, certified cost or pricing data is not required because it’s a small business. Neither of those exist, okay? Regardless of whether they’re small business or large business, you still have the responsibility to determine what price reasonableness is.
All right. Looks like that’s it for the questions today. If you have other questions, if you were unable to sign in, just drop us a note, [email protected]. We have additional resources and training if you check out our website. And if you have any questions for us, again, drop us a note. We do quite a few of these cost analysis and price analysis reports.
So if you have a need for those services, we are more than happy to help. We’d love to set up time and talk to you about it. We have quite a few clients that we do all of their cost and price analysis on their behalf. We also do the other side of the coin, which is proposal preparation. So if you have a need in that area, we’d love to talk to you.
Reach out to us. Go to spendlogic.com/events, and you can check out future websites or our future webcast, which I believe still needs to be updated as of this video. But we’ll be back next week Friday 10 a.m. Pacific, 1 p.m. Eastern Time, and we will be getting into the gory details of analysis of a unicorn.
Thanks for joining us today, and I look forward to seeing you again soon.