Price analysis compares overall prices. Cost analysis digs into the individual cost elements. This training covers when to use each, and walks through a hands-on cost analysis exercise on a base operating support contract.
These are two different things, and the distinction matters.
Price analysis is the process of examining and evaluating a proposed price without looking at the individual cost elements that make it up. You are comparing total prices. You look at one offeror's total price next to another offeror's total price, or against a government estimate, or against historical contract prices for similar work. Price analysis answers the question: Is the overall price fair and reasonable?
Cost analysis is the process of examining and evaluating the individual cost elements (labor rates, material costs, subcontractor costs, overhead, profit) that make up the proposed price. You are looking at the building blocks. Cost analysis answers the question: Are the individual costs that make up this price realistic and reasonable?
FAR 15.404-1 lays out both techniques. Price analysis is covered in 15.404-1(b), and cost analysis in 15.404-1(c) through (e).
| Price Analysis | Cost Analysis |
|---|---|
| Compares total proposed prices | Examines individual cost elements |
| Does not require cost breakdown data | Requires the contractor to submit cost/pricing data |
| Used in most competitive acquisitions | Used primarily in sole-source and when cost data is required |
| Techniques: comparison of competing offers, comparison to historical prices, comparison to independent government estimate, published price lists | Techniques: verification of cost data, evaluation of labor rates against wage determinations, analysis of material costs against market data, evaluation of proposed profit/fee |
| Relatively straightforward | More labor-intensive; requires analytical tools and data sources |
Price analysis is sufficient in most competitive situations. If you have multiple offerors competing and you can compare their total prices against each other and against the government estimate, you generally have enough information to determine price reasonableness. FAR 15.404-1(b)(2) lists several price analysis techniques, and comparing competitive proposals against each other is the most common.
Cost analysis is typically needed when you are negotiating with a sole source. When there is no competition, you cannot compare one price against another to establish reasonableness. You need to dig into the individual costs. The contractor is proposing specific labor rates, specific material quantities, specific subcontractor prices. Your job is to evaluate whether those individual elements are realistic.
Cost analysis can also come into play in competitive negotiations, particularly for cost-reimbursement contracts where you need to evaluate the realism of proposed costs. But for most fixed-price competitive work in operational contracting, price analysis will be your primary tool.
When you are doing cost analysis, you need data from the contractor to work with. There are two categories:
Certified cost or pricing data (formerly called "cost or pricing data" under the old Truth in Negotiations Act, now codified at 10 U.S.C. 3702) is a specific, defined term. It means the contractor certifies that the data they are submitting is accurate, complete, and current as of the date of agreement on price. If they submit data that turns out to be inaccurate, incomplete, or not current, the government has a contractual right to a price adjustment. This is a powerful tool, and it comes with a significant threshold: certified data is required for non-commercial acquisitions over $2 million where no exception applies (FAR 15.403-4).
Other than certified cost or pricing data is everything else. This includes any pricing information the contractor provides that is not certified: past invoices, vendor quotes, catalog prices, labor rate build-ups, subcontractor proposals, internal cost estimates. The contractor does not certify this data, so there is no automatic right to a price adjustment if it turns out to be wrong. But it is still useful information for your analysis.
In operational contracting, you will deal with "other than certified" data far more often. Many of your requirements will be commercial items (exempt from certified data requirements under FAR 15.403-1(b)), or they will be under the $2 million threshold, or they will involve adequate price competition. In those cases, you request whatever supporting data you need to do your analysis without the certification requirement.
Cost analysis is only useful if you have reference points to compare the proposed costs against. Here are the main tools and data sources you can use:
| Tool / Source | What It Tells You | Where to Find It |
|---|---|---|
| Wage Determinations (SAM.gov) | Minimum hourly rates and fringe benefits for service contract labor categories in a specific geographic area, as required by the Service Contract Labor Standards (formerly Service Contract Act). | sam.gov/content/wage-determinations |
| Bureau of Labor Statistics (BLS) | Average wages by occupation and geographic area. Useful for comparing proposed labor rates against market data, especially for categories not covered by a wage determination. | bls.gov/oes |
| GSA Advantage / GSA Schedules | Pre-negotiated pricing for commercial products and services. Useful as a benchmark for materials and some labor rates. | gsaadvantage.gov |
| Independent Government Cost Estimate (IGCE) | Your requiring activity's estimate of what the work should cost. Should be developed independently from the contractor's proposal. | Internal to your acquisition; prepared by the requiring activity or cost analyst. |
| Historical Contract Data (FPDS) | What the government has paid for similar work in the past. Useful for sanity-checking whether proposed costs are in the right ballpark. | fpds.gov |
| DCAA Audit Reports | Defense Contract Audit Agency reviews of contractor cost proposals and accounting systems. Available for larger dollar actions. | Requested through your local DCAA office or DCAA online portal. |
| Vendor Quotes / Market Research | Direct quotes from suppliers for materials, equipment, and subcontracted services. Useful for verifying proposed material and subcontractor costs. | Direct outreach to vendors; online pricing (e.g., manufacturer websites, commercial suppliers). |
Your cost or price analysis must be documented. FAR 15.406-3 requires a price negotiation memorandum (PNM) for all negotiated actions. The PNM should describe what analysis you performed, what data sources you used, what you found, and how you determined the final price to be fair and reasonable.
For price analysis, this can be relatively brief: "Compared four competitive proposals. The proposed prices ranged from $X to $Y. The IGCE was $Z. The awardee's price of $X is within the competitive range and consistent with the IGCE. Price is determined fair and reasonable based on adequate price competition."
For cost analysis, the documentation is more detailed. You should address each significant cost element: what the contractor proposed, what your analysis found, what benchmark you used, and whether you accepted the proposed cost or negotiated a different figure. The Exercise tab walks through an example of this.
You are the contracting officer on a sole-source negotiation for Base Operating Support (BOS) services at a small installation. The requirement covers custodial/janitorial services, grounds maintenance, pest control, snow removal, and refuse collection. The contract is firm-fixed-price, one base year plus two option years. The incumbent contractor, Apex Facility Services, is the only responsible source identified through market research.
Because this is a sole-source action over the simplified acquisition threshold, you have requested other than certified cost or pricing data from Apex. They have submitted their cost proposal. Your requiring activity has independently prepared an IGCE. Both are shown below.
Your job: review the contractor's proposed costs against the government estimate and available tools, identify cost elements that need further analysis, and determine where you would push back in negotiations.
Below is the contractor's proposed cost breakdown alongside the government's IGCE for the base year. The "Delta" column shows the percentage difference (positive means the contractor's price is higher than the estimate). Rows highlighted in red have deltas that warrant closer examination.
| CLIN | Cost Element | Unit | Qty | Contractor Rate | Contractor Total | Gov't Rate | Gov't Total | Delta |
|---|---|---|---|---|---|---|---|---|
| Section A: Direct Labor | ||||||||
| 0001 | Project Manager | Hrs | 2,080 | $42.50/hr | $88,400 | $36.00/hr | $74,880 | +18.1% |
| 0002 | Custodial Supervisor | Hrs | 2,080 | $28.75/hr | $59,800 | $27.10/hr | $56,368 | +6.1% |
| 0003 | Custodial Worker (Day Shift x4) | Hrs | 8,320 | $18.90/hr | $157,248 | $18.50/hr | $153,920 | +2.2% |
| 0004 | Custodial Worker (Swing Shift x2) | Hrs | 4,160 | $19.85/hr | $82,576 | $19.43/hr | $80,829 | +2.2% |
| 0005 | Grounds Maintenance Lead | Hrs | 2,080 | $31.20/hr | $64,896 | $25.50/hr | $53,040 | +22.4% |
| 0006 | Groundskeeper (x3) | Hrs | 6,240 | $17.80/hr | $111,072 | $17.25/hr | $107,640 | +3.2% |
| 0007 | Pest Control Technician | Hrs | 1,040 | $24.00/hr | $24,960 | $23.15/hr | $24,076 | +3.7% |
| 0008 | Snow Removal Operator (Seasonal) | Hrs | 520 | $26.50/hr | $13,780 | $25.80/hr | $13,416 | +2.7% |
| 0009 | Refuse Collection Driver (x2) | Hrs | 4,160 | $21.40/hr | $89,024 | $20.75/hr | $86,320 | +3.1% |
| Direct Labor Subtotal | $691,756 | $650,489 | +6.3% | |||||
| Section B: Fringe Benefits | ||||||||
| 0010 | Health & Welfare (H&W) | Per Hr | 30,680 | $4.60/hr | $141,128 | $4.22/hr | $129,470 | +9.0% |
| 0011 | FICA / Medicare | % of Labor | 7.65% | $52,919 | $49,762 | +6.3% | ||
| 0012 | Workers' Comp Insurance | % of Labor | 3.2% | $22,136 | 2.8% | $18,214 | +21.5% | |
| 0013 | Unemployment Insurance (FUTA/SUTA) | % of Labor | 2.1% | $14,527 | 2.1% | $13,660 | +6.3% | |
| 0014 | Paid Leave (Vacation/Holiday/Sick) | Days | Various | $38,750 | $36,200 | +7.0% | ||
| Fringe Benefits Subtotal | $269,460 | $247,306 | +9.0% | |||||
| Section C: Materials & Supplies | ||||||||
| 0015 | Cleaning Supplies (Chemicals, Paper, etc.) | Month | 12 | $3,200/mo | $38,400 | $2,900/mo | $34,800 | +10.3% |
| 0016 | Grounds Supplies (Seed, Fertilizer, Mulch) | Year | 1 | $14,500 | $14,500 | $13,800 | $13,800 | +5.1% |
| 0017 | Pest Control Chemicals & Materials | Year | 1 | $8,200 | $8,200 | $7,500 | $7,500 | +9.3% |
| 0018 | Snow/Ice Treatment (Salt, De-icer) | Year | 1 | $6,800 | $6,800 | $6,500 | $6,500 | +4.6% |
| Materials Subtotal | $67,900 | $62,600 | +8.5% | |||||
| Section D: Equipment | ||||||||
| 0019 | Floor Scrubber/Buffer Lease (x2) | Month | 12 | $850/mo | $10,200 | $650/mo | $7,800 | +30.8% |
| 0020 | Riding Mower Lease (x2) | Month | 8 | $1,100/mo | $8,800 | $975/mo | $7,800 | +12.8% |
| 0021 | Snow Plow Attachment Lease | Month | 5 | $1,400/mo | $7,000 | $1,350/mo | $6,750 | +3.7% |
| 0022 | Refuse Truck Lease | Month | 12 | $2,800/mo | $33,600 | $2,650/mo | $31,800 | +5.7% |
| 0023 | Miscellaneous Hand Tools & Safety Equip | Year | 1 | $4,200 | $4,200 | $3,800 | $3,800 | +10.5% |
| Equipment Subtotal | $63,800 | $57,950 | +10.1% | |||||
| Section E: Subcontractor Costs | ||||||||
| 0024 | Elevator Maintenance (Subcontracted) | Month | 12 | $2,100/mo | $25,200 | $1,450/mo | $17,400 | +44.8% |
| 0025 | Fire Extinguisher Inspection (Subcontracted) | Year | 1 | $3,600 | $3,600 | $3,200 | $3,200 | +12.5% |
| Subcontractor Subtotal | $28,800 | $20,600 | +39.8% | |||||
| Section F: Overhead, G&A, and Profit | ||||||||
| 0026 | Overhead (Applied to Direct Labor) | % | 12% | $83,011 | 10% | $65,049 | +27.6% | |
| 0027 | General & Administrative (G&A) | % of Total Cost | 5% | $56,286 | 4% | $41,440 | +35.8% | |
| 0028 | Profit | % of Total Cost | 10% | $126,101 | 8% | $82,835 | +52.2% | |
| TOTAL PROPOSED PRICE (BASE YEAR) | $1,387,114 | $1,228,269 | +12.9% | |||||
Here is how you would approach this cost proposal, working through the highest-impact items first, then checking the rest.
Labor is the biggest cost driver. Start here.
Step 1: Pull the applicable wage determination. Go to SAM.gov Wage Determinations and look up the Service Contract Labor Standards wage determination for the installation's geographic area. This tells you the minimum hourly rate and fringe benefit rate the contractor is legally required to pay each labor category.
Step 2: Compare proposed rates to the WD. For the four custodial workers (CLIN 0003-0004), the proposed rate of $18.90/hr is close to the IGCE and likely near the WD minimum for "Janitor" (SCA code 11150). A rate that is slightly above the WD minimum is normal because the WD is a floor, not a ceiling. The 2.2% delta here is not a concern.
Step 3: Flag the outliers. The Grounds Maintenance Lead at $31.20/hr (CLIN 0005) is 22.4% above the IGCE. Check the WD for "Laborer, Grounds Maintenance" or the closest equivalent. If the WD rate is $22-24/hr, the contractor proposing $31.20 is well above the floor. That does not make it automatically unreasonable, as the contractor may be paying a premium to retain experienced workers, but it needs justification. Cross-check against BLS wage data for "Grounds Maintenance Workers" in the local area to see if $31.20/hr is within the market range.
Step 4: Address the Project Manager. The PM at $42.50/hr (CLIN 0001) is 18.1% over the estimate. The PM role may not appear on the wage determination if it is classified as exempt (salaried/supervisory). Use BLS data for "Administrative Services Managers" or "Facilities Managers" in the area. Also check what the incumbent was paid on the prior contract if that data is available from the requiring activity.
Bottom line on labor: The custodial, pest control, snow removal, and refuse lines are within a reasonable range of the IGCE. The PM and Grounds Lead are the two lines that need further discussion with the contractor. Together, those two lines account for about $25,000 of the overall gap.
Health & Welfare: The contractor proposes $4.60/hr (CLIN 0010), and the IGCE has $4.22/hr. The applicable wage determination specifies the H&W fringe rate. Pull the WD and check. If the WD rate is $4.22/hr, the contractor is proposing above the required minimum. Ask the contractor to explain the overage. They may have a more generous benefits package (which is allowed), but you need to understand why they are proposing above the WD rate.
Workers' Compensation: The contractor proposes 3.2% of labor (CLIN 0012) versus the IGCE's 2.8%. Workers' comp rates vary by state, by industry classification code, and by the contractor's claims history. The contractor should be able to provide their actual workers' comp rate letter from their insurance carrier. If their audited rate is 3.2%, accept it. If it is lower, push back.
FICA/Medicare and Unemployment: FICA is a fixed 7.65%. The delta between the contractor and IGCE on CLIN 0011 is just a function of the higher labor base. Unemployment insurance rates (CLIN 0013) are state-specific and employer-specific. The contractor's proposed 2.1% rate is in a normal range. These are not areas to spend a lot of negotiation effort.
Floor Scrubber/Buffer Lease: The contractor proposes $850/mo for two units (CLIN 0019), a 30.8% premium over the IGCE's $650/mo. This is the largest percentage delta on the equipment side. Verify the rate: ask the contractor for the lease agreement or vendor quote. Also check GSA Advantage for comparable equipment lease rates. If the market rate for commercial floor scrubbers in this class is $600-700/mo, the contractor's $850 needs justification.
Riding Mower Lease: The contractor's $1,100/mo (CLIN 0020) is 12.8% above the estimate. Request the vendor quote. Commercial mower lease rates are readily available from equipment dealers. A quick call or online check can verify whether $1,100 is reasonable for the type of mower needed.
Refuse Truck and Snow Plow: Both are within a reasonable range of the estimate (5.7% and 3.7% respectively). These are acceptable without additional analysis unless you have specific reason to question them.
Elevator Maintenance: This is the single biggest percentage outlier on the entire proposal at +44.8% (CLIN 0024). The contractor proposes $2,100/mo, the IGCE says $1,450/mo. Elevator maintenance is a specialized service. Request the subcontractor's quote. Also do independent market research: contact 2-3 local elevator service companies and ask for rough pricing for monthly maintenance on the number and type of elevators at the installation. If the market supports $1,400-1,600/mo, the contractor's $2,100 is significantly above market and needs to come down. If the market has shifted and the IGCE is outdated, the contractor may be closer to right.
Fire Extinguisher Inspection: At $3,600 vs. $3,200 (CLIN 0025), this is a 12.5% delta but the dollar impact is only $400. Request the subcontractor quote for documentation, but this is not where you spend significant negotiation time.
Overhead (12% vs. 10%): The contractor applies 12% overhead to direct labor (CLIN 0026). Overhead rates vary significantly between contractors depending on their cost structure. If the contractor has a DCAA-audited overhead rate, that is your best reference point. If not, ask the contractor to provide supporting documentation for how they calculated 12%. For a small to mid-size BOS contractor, overhead in the 8-15% range is typical.
G&A (5% vs. 4%): Same approach (CLIN 0027). G&A rates reflect the contractor's general corporate expenses allocated across their contract base. A 1% difference in G&A rate may sound small, but it is applied to the entire cost base, so the dollar impact compounds. Again, a DCAA-audited rate is the gold standard. If one is not available, request the contractor's basis for the 5% rate.
Profit (10% vs. 8%): Profit is the one area where you have the most negotiation room. There is no fixed "right" profit rate, but you should apply a structured approach. The weighted guidelines method (FAR 15.404-4(d)) considers factors like contractor risk, cost control, investment, and performance. For a firm-fixed-price BOS contract where the contractor bears performance risk but the work is well-defined, a profit rate in the 7-10% range is common. The contractor's 10% is on the high end but not automatically unreasonable. Use this as a negotiation lever, particularly if other cost elements also come in high.
After working through the proposal, here is where you would focus your negotiation effort, ranked by dollar impact:
| Priority | Item | Approx. Dollar Gap | Action |
|---|---|---|---|
| 1 | Profit rate (10% vs. 8%) | ~$43,000 | Negotiate using weighted guidelines analysis |
| 2 | G&A rate (5% vs. 4%) | ~$15,000 | Request supporting documentation; compare to DCAA-audited rate if available |
| 3 | Overhead rate (12% vs. 10%) | ~$18,000 | Request supporting documentation; compare to audited rate |
| 4 | Grounds Maintenance Lead rate | ~$11,900 | Compare to WD and BLS; request justification for premium |
| 5 | Project Manager rate | ~$13,500 | Compare to BLS; check incumbent rate; request justification |
| 6 | Elevator Maintenance subcontract | ~$7,800 | Request sub quote; get independent market quotes |
| 7 | H&W fringe rate | ~$11,700 | Compare to WD rate; request benefits documentation |
| 8 | Floor scrubber lease rate | ~$2,400 | Request lease agreement; check GSA pricing |
The remaining items (custodial labor, groundskeepers, pest control tech, snow removal, refuse drivers, most materials and equipment) are within a reasonable range of the IGCE and do not require significant additional analysis. A brief note in your PNM confirming they were reviewed and found reasonable is sufficient.
Answer the following questions based on the concepts from the Learn and Exercise tabs.
You have a competitive firm-fixed-price acquisition with four offerors. All four proposals are technically acceptable. The proposed prices range from $320,000 to $410,000. The IGCE is $345,000. What type of analysis do you need to determine price reasonableness?
You are negotiating a sole-source contract valued at $180,000 for specialized HVAC maintenance. The contractor is the only qualified source in the area. Which statement is most accurate?
You are reviewing a contractor's cost proposal for custodial services. The applicable wage determination lists the "Janitor" rate at $17.25/hr with $4.22/hr in H&W fringe. The contractor proposes $17.25/hr for labor but $5.10/hr for H&W fringe. What should you do?
You receive a cost proposal with 30 line items. You notice that 5 line items account for 78% of the total proposed cost, while the remaining 25 items account for 22%. How should you allocate your analytical effort?
A contractor proposes a labor rate of $35/hr for a position with 2,080 annual hours. Their overhead is 12%, G&A is 5%, and profit is 10%. You negotiate the labor rate down to $30/hr. Approximately how much total cost does that $5/hr reduction save, accounting for the cascading effect on overhead, G&A, and profit?