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.
This is the third discussion in our “Price Analysis of a Unicorn” series. We will continue to talk about specific methodologies that you can use to analyze unique items and services that have never been purchased before. We will focus on bottoms-up analysis techniques, technical evaluations, also known as “tech evals”, and third party help that is available to get the job done.
I’m Patrick Mathern, the president of SpendLogic. If you’re not familiar with us, SpendLogic provides cost and price analysis services, tools, and training. So, if you’re a federal contractor, either prime or sub and you need help in price analysis, cost analysis, commercial item determination, or source justification, we’d love to hear from you.
We can help you with whatever it is you need, especially companies that are facing CPSRs or have approved procurement systems that you’re looking to continue forward with in the future. So, check us out at spendlogic.com. And let’s get going. So, this is session number three of three and it’s around the price analysis of a unicorn. And so if you haven’t watched sessions one and two, you can find them on our website or on our YouTube channel.
You can check out what that’s all about. So, this is going to be a continuation of what we’ve done in those first two sessions. I’m going to walk through a little bit very, very short review of those sessions, but then get right into an example. That’s where we want to focus today. So, everything’s kind of been building up to today. And I want to say, as I get started here that every price analysis, obviously, is going to be a little different.
Every unicorn is a snowflake if you will. And so what I’m going to show you is one example of one way it could work. Your real-life example is obviously going to be different than what I show. And this may be an oversimplification of what it is you’re looking at, maybe not. This is actually based on some real-world experience that we’ve sanitized and made to be fictitious. So, this is accurate of what could happen out there, but, again, it may not be exactly what you’re seeing.
If you need help or this isn’t quite what you’re looking at, feel free to reach out to us. You can email us anytime at [email protected] or [email protected] and we can give you some assistance. So, to start out with, as a review, really what we’re talking about is price analysis, right?
And what is price analysis? Well, I’ll tell you what it’s not. It’s not a justification of the price that you’ve paid. So, what you’re trying to do is establish a fair and reasonable price that you can go into negotiations with. Right there, that changes a lot of things that a lot of people do and a lot of people believe. In fact, just this morning, I was working with a client on price analysis. And she’s a buyer.
And she was really struggling with getting the right answer in SpendLogic. And I said, “I don’t understand. It looks like you’ve got a great price analysis.” And she says, “Well, yeah, but the price analysis doesn’t match the price that I negotiated.” And I had to have a level set. And number one, it shouldn’t match what you negotiated because your price analysis should be done ahead of time.
And number two, it doesn’t need to match, right? Your price analysis is an independent look at price so that you can walk into negotiations knowing what a reasonable price would be to get your supplier to agree to. So, in a nutshell, that’s what we talked about in the first two sessions. And in session two, we talked about some of the steps that you can go through to actually analyze a unicorn. I’m going to go through those steps now with a “real-life” example.
So, the example that we’re looking at, again, totally fictitious. This is a real item, but it doesn’t have the features that I’ve invented here. What we’re looking at is we have a requisition or a requirement to buy 50 of these nuclear-powered military strobes that also have built-in drone controllers.
So, you can see a picture of it here. It’s a small item. The price is around 9,500 bucks each or $475,000 total. So, right from the beginning, we understand basically what it is, we see what it looks like. We have some very basic information.
So, the first thing I want to do in any price analysis is do an initial assessment and say, “Okay. How much time should I actually spend on this and make sure that I keep sight of that as I go forward?” There’s a lot of times that we have folks that, you know, they’re trying to do a price analysis and they’re trying to get super scientific about it when it’s only a $10,000 procurement.
You don’t want to spend $20,000 of internal labor on a $10,000 procurement, right? It doesn’t make sense. So, here’s a couple of questions that we always go through and I’d recommend that you look at each time. So, number one, is this high cost and therefore high risk? And by high risk, I mean is this likely to get pulled in an audit?
And if it gets pulled, how deep is somebody going to go into it? How closely is an auditor going to dive into this? Number two, is it over TINA? And by TINA, I mean the truthful cost of pricing data threshold. So, therefore, is a cost analysis required? It’s amazing how often people come to us with, you know, a request for help and it’s a $4 million procurement and we’re saying, “Geez, you can’t do a price analysis. You have to do cost analysis.”
So, right off the bat, you need to be looking at that. And last, how complex is the item or service? So, as we go back, you know, taking a look at this, how valuable is this? $475,000 in total, you know, 9,500 bucks each. So, I’d put it at a medium value, right? And as far as complexity goes, you know, this nuclear-powered thing, that’s not something you’d typically see in a handheld item.
So, I would say that it’s probably medium to, you know, maybe a little higher complexity as far as the technical aspects go. But it’s below TINA. So, that $475,000, that is below the TINA threshold. Currently, it’s 2 million bucks. So, what I would say is that you’ve got something that is of medium value and medium complexity here.
So, you should be able to… And it’s below TINA. So, that kind of sets the standard. We’re going to do a price analysis that needs to get into some detail, for sure, because we’re kind of in that medium range. But it doesn’t need to get super complex. We don’t need to go get certified cost or pricing data, for sure, because it’s below TINA. So, really, that’s just to kind of set the standard for what we’re about to do.
Next thing I need to do is determine, okay, what’s my basic plan? All right? You already have some idea because this is a unique item. We’re calling it a unicorn. You’re only buying it from one supplier. It’s not available in the marketplace. There’s nothing that you’ve purchased in the past.
So, really, you know, you have a basic idea that, okay, this is going to take a little bit more work, but how can we…what’s our plan for moving forward? A couple of questions here. So, number one, is there anything comparable in the marketplace? Number two, did the supplier provide any insight into cost? And number three, who was it internally that made the decision to buy this? And that’s important because we’re going to have to go back and get some more information from them down the road, probably.
So, as I look at this, you know, is there anything comparable in the marketplace? Again, there’s lots of strobe lights out there. Let me go back to the picture. This is a nuclear-powered strobe with a drone controller. So, the first thing that we do when we come up with something like this is can it be broken into pieces? All right?
What are the individual pieces that make this thing up? So, sometimes the pieces consist of just labor and material. I’ve got some labor that I need to analyze and I’ve got some material. In this particular case, and this was the case in the example that this is based off of, it’s really a combination of items that are pulled together in a way that really doesn’t exist anywhere else.
And what throws this off, so this strobe, that actually is a picture of a strobe that’s available out there and it’s a mil-spec item. But really, so when you take that strobe and you modify it to add a nuclear power source, right, which is totally bunk by the way, but then you also add in this built-in drone controller, right? This is something only the military would want.
So, when you add all those things together, you have something very unique. You have your unicorn. But your unicorn consists of individual items. And if you pull those out and pull those apart, then you now have a basis for doing an analysis of each of those individual parts. Now you can wrap your head around it and you can get to the point where you can do your analysis. So, what I’ve done here is I’ve said, “Okay. My tech evaluator is Fred. Fred is the one that requested that we go buy this thing, so I’m going to keep Fred’s name in the back of my head. I’ve got his email address ready.”
I don’t quite know what I’m going to ask Fred yet. But I’ve determined that this thing consists of a military strobe, okay, a drone controller, a nuclear power source, whatever that means, and some integration to pull it all together. So, again, if you have something that looks to be an amalgamation of pieces, right, pull apart the pieces, get yourself down to the point where you can understand each of the individual items, and then figure out how to proceed on each of those items.
So, the next thing I’m going to do is I’m going to go to the supplier, right? And I’m going to ask for a little bit more information. My first question is always, “Hey, is this similar to something that you sell to other customers? Is there something out there that you already sell?” And my supplier in this case says, “Yeah, actually, you know, we sell strobes all day long, but you’re the only ones that are buying, you know, the integrated version. So, nobody else buys a nuclear-powered strobe and nobody buys the one that has the integrated drone controller. We’ve taken our standalone strobe and then we’ve integrated these based on your needs and requirements.”
I said, “Okay. Got it.” Well, in my mind, you know, as the price analyst here, that’s very valuable information because what they’ve told me is, “Yes, we have strobes. We sell strobes all day long.” Great. It’s the other pieces that are going to be problematic. So, going back to my cheat sheet here, my notes sheet, I already know from the top that it’s medium value in complexity.
I’m talking to Fred. I’ve got these pieces. And I can look at each one of these pieces and create a plan that’s specific to each. So, the first one is the military strobe. All right. They sell that to other customers already. So, what that means is I can go back to that supplier and I can get information on how much they’re selling those for.
Right? Who are your customers? Is this possibly a commercial item? How can I go about doing an analysis? And it turns out that that one’s going to be pretty simple. If I can find something that they sell to other customers, if I can get redacted invoices and proof of prices paid by others, then that type of a price analysis is a slam dunk, right?
So, again, I’m going to have a price analysis that pulls all these pieces together, but what it’s really going to consist of is four individual price analysis reports that speak to each piece. All right? Second, I’ve got a drone controller. Okay? It turns out it’s an integrated controller from a third party. Okay, not sure exactly what that means, but we’re going to continue on.
The nuclear power, this is truly unique. The suppliers told me they don’t do this for anybody else. There’s nothing like it in the marketplace. So, what I have is I’ve got…that’s going to take some labor and material. The nuclear pieces of it, that’s the material, and then the engineering effort to create this and the manufacturing to produce it, that is going to be my labor.
All right? Last but not least, I’ve got the integration of all these three pieces. This is truly unique. Again, nobody else does this. And it’s going to be labor only. There’s no material in the integration. It’s just simply a labor function.
All right? So, I’m going to go back to the supplier again and request those redacted invoices for the strobe. All right? They’ve sold this, they’ve told me they’ve sold it, so I’m going to get that information from them. On the controller, I’m going to ask them, you know, “Okay. You’ve told me that this is an integrated third-party controller. It’s basically off the shelf and you integrated it into yours one way or another.”
So, what I want to do is I want to get as much information that they can provide. Now, they may not be willing to give me invoices, you know, copies of invoices to show me exactly how much they’ve paid, but whatever cost data they can provide me or whatever specifications, if they can provide you with information on what controller they’re using, then it’s very likely you can go out and use that spec to do a comparison to other things in the marketplace.
Drone controllers are a dime a dozen. Now, you can get a $50 drone controller or you can get a $2,000 drone controller. So, you need to understand what it is that you’re looking at. But that’s how we would go about tackling that. And last but not least, we’ve got the nuclear power source and the integration of all these pieces.
So, again, you know, the supplier is your best resource. They are going to know exactly how they came up with the price that they came up with, and so you should always turn to them first. Right? Nobody is going to know more information about this than your supplier. So, on nuclear power and integration, what you want to do is you just want to learn. “Tell me, you know, what assumptions did you make? Tell me how you came up with, you know, your assumptions. Did you use something similar to something else that you do? What effort did you assume? What labor categories? Just give me a feel for how you came up with this.”
Now, what you’re going to use that for, you’re going to have to review it, right? All of this information that comes back, you’re going to have to review and determine, “Do I have enough information here or do I need to go deeper?” So, now that I’ve gotten more information, okay, military strobe, that turns out that’s going to be a slam dunk.
All right? You’re going to be able to support this with redacted invoices and a quantity correction. This is for 50. Typically, they sell them in batches of 10 or something. So, you have enough information to do some calculations and show that your price analysis, you know, you’re going to be able to show some price for that particular line item. Second, on the drone controller, you have the spec, you understand what it is, you can go ahead and go out to third-party drone controller manufacturers and figure out what the price is.
This is an item that is available in the marketplace, so it’s pretty simple to pull some comparables out of the marketplace. And, you know, with some adjustments for functionality or whatever, you can make a price analysis for that piece. So, now you’ve got two that are slam dunks. Number three is the nuclear power module, right? So, they’ve come back and they’ve given you some hours and some very, very basic information.
That’s enough to go back to your engineer with and say, “Hey, you know, this is the type of information that I have on the hours. Can you help me out?” Now, on the other side of things, you’re also going to need to figure out the rates. So, every labor category or every labor analysis is going to have a rates piece and an hours piece. Your engineer is going to be able to help you with the hours.
And on the rates side, if you’re lucky enough to have something like SpendLogic, then that can help you set the rates. And once you understand what these folks are doing and what their occupation is, be it an engineer, a systems engineer, a manufacturing tech, or whatever it is, you can go in and create rates for those. Once you marry those up with your engineer’s feedback on hours, all of a sudden, you have everything that you need for a price analysis for that piece.
And that goes with integration as well. The engineer is going to probably have to come up with some sort of a bottoms-up estimate. But once they do, you’ll also have, you know, SpendLogic to rely on for the services aspect to that, the rate and factor analysis. Now, that last piece of going out to the technical evaluator. You can go to your technical evaluator or you can go out to a third party.
When you do that, you really have to be specific in what it is that you’re asking for. So, the biggest problem that we see in asking engineers for assistance is that people don’t ask for the right things or they don’t ask questions that are clear enough. For example, we’ve seen cases where, you know, the buyer takes this proposal for these military strobe lights and they send it straight over to the technical evaluator, their engineer, and they say, “Hey, I need a tech eval on this.”
And the engineer says, “Okay.” They propose 9,500 bucks. I don’t know. That’s not a lot of money, so I’m going to go ahead and say that’s reasonable. That will fail every day in an audit, be it a CPSR or a review by a contracting officer, whoever it is, DCAA, DCMA. That will fail all day long.
Now, what the buyer should have done is said, “Okay. Listen, I’ve got this strobe light, but really what I need feedback on is this nuclear power thing. And what I need from you, Mr. or Mrs. Engineer, is I need an approximation of the hours it would take to produce this thing, just the nuclear power piece, as well as some idea of the material that’s going to be involved, right? I’m going to have to have a miniature reactor or something. Give me some feel for what it is I’m looking at. And if there’s something somewhere close to it in the marketplace, just help me do that.”
If your engineer understands that you’re not trying to go out to the marketplace and find a replacement for this item, because they truly want it, they’ve already made that determination that this is the item they want, what you’re trying to do is you’re trying to determine whether the price is reasonable, then they’re more likely to play ball.
And if you can focus their attention on very, very specific items, then you’re going to have a lot more luck. Remember, they don’t know anything about labor rates. They may have some notional idea that 150 bucks for an engineer is about reasonable, but that makes a lot of assumptions. What flavor of engineer, how much education and experience, you know, it’s all kind of lumped into one.
So, make sure that they understand that you’re really looking to them for feedback on the technical aspects and whittle that down as much as possible. So, you know, focus them on labor and focus them on material and make your ass very, very clear and objective, all right? Last but not least, when you request information from them, explain to them, “I need you to explain to me how you came up with the answer, not just the answer itself.”
So, again, if they come back with, “Yeah, 9,500 bucks looks great. Go ahead and accept it,” that doesn’t actually give you the information that you need. You can’t cite that as a tech eval and have it pass audit. What an auditor is going to be looking for and what you should be looking for is the how. Why do you think that $9,500 is reasonable?
How did you come up with that assumption that, okay, I’m going to go ahead and accept this? Once they get into the numbers and the thinking behind it, now you’ve got something you can play with. So, everybody has a different method for doing their price analysis, but more and more are turning to SpendLogic.
This is what it would look like in SpendLogic if you were to do this. Now, you can’t do a price analysis, you know, we’ve determined, on the overall item because there’s nothing to compare it to. Every price analysis is a comparison of known pricing to something unknown. So, what you would do is you would break it apart. All right? And in SpendLogic, this is what it would look like. You would have four different line items.
Okay? You’ve got your military strobe, you’ve got your drone controller, the nuclear power module, and then the services or the rates and factors associated with each of those parts, including the integration. So, again, SpendLogic will lead you through the steps required to do an analysis on each of these. Right now it’s showing that all of these are market comparables.
You can do price history, you can do parametric, you can do published price list, whatever makes sense. I’ve just set it up so that it’s market comps in this case. But again, SpendLogic will lead you through that process, so if you’re not familiar with how to do a price analysis on something like this, you can use SpendLogic. The rate and factor tool is very unique in the marketplace and we can help you work through that.
If you have any trouble with cost or price analysis, we are always here to help you. You can write to us. You can go on our website. There’s a chatbox there. If you’ve got a quick question, we’re happy to lead you through that. So, feel free to reach out to us.
This is going to be the last webinar here for a couple of weeks. We’re going to take a break and reach out to some of you and get some feelers on what worked and what didn’t work. If you have feedback for us, let us know at [email protected] We will be back to do more of these, so be sure to go to our website, spendlogic.com/events, and subscribe to our YouTube channel and that’s where you’ll see updates and you’ll be notified when we have new content available.
Thanks for tuning in these past several weeks, and we look forward to doing this again very soon. Take care.