While both price analysis and cost analysis are familiar terms in business, the two terms are sometimes confused with one another or their true meanings are took out of context. We want to help you clear them both up as business analytics are always valuable to a company that knows how to read such data.
Cost analysis and price analysis are two unique methods of projecting costs for projects and programs. Price Analysis looks purely at the unit price from a vendor while Cost Analysis incorporates the reasonable cost to the vendor of producing that item to determine if the price quotes are fair and appropriate.
The Basics Of Price Analysis
Now, price analysis is usually the preferred method to analyze the price options for a product. With this concept, the price of one company’s products or services are compared against other products that would be an alternative. For example, if there’s 7 competitors submitting bids or proposals for a particular project, a price analysis would include a detailed review of the benefits each product/service could deliver based on their quoted price.
Price analysis has 4 basic components;
- Analysis Of Existing Price History
- Comparing Competitive Bids From Multiple Vendors
- Comparing Price To Internal Projections
- Using Catalog Or Government Prices For An Item
Price analysis can be used whenever there’s several suitable and relatively equivalent options in a purchase decision. Let’s use government contract jobs as an example. Price analysis can be applied here, when several companies that offer the same services apply for a government contract, the company that can bid the lowest often wins. Requirements for pricing analysis also usually include that the product or service is available on the open market and that alternatives are relatively similar in benefits.
The Basics Of Cost Analysis
A cost analysis can be more of a challenge, this is because it usually involves more working pieces. Using this method involves a thorough review of the itemized product, service elements and related costs of the solution. Many businesses have purchasing managers or members who evaluate the value proposition of a proposal. Using past history, experience and general awareness of the costs of each part of the solution, a final decision can be determined based on the merits of the solution alone.
Cost analysis has 5 core considerations;
- Personnel That’s Required
- Total Hours Of Work By The Personnel
- Evaluation Of Costs As Necessary And Reasonable
- Resource Cost (Includes Raw Components And Machine Time)
- Projected Indirect Costs (Could Be Warehousing, Transportation, Taxes, Fees)
The most simple point about cost analysis application is that it is used when price analysis isn’t possible. This is usually because there aren’t alternative solutions for comparison or no related proposals were submitted for a job. New types of research or product development work or solutions based on unique patents or products commonly require cost analysis. The challenge with cost analysis is trying to determine fair value with no marketable comparison.
Using Price Analysis And Cost Analysis Together
Most project managers will set up cost and price analysis worksheets in order to perform both projections at once. This allows a true 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 important as an item might be considered to be a “good deal” but not necessary to the company’s business model.
We want cost and price analysis to 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 additional reviews may be required.
In most scenarios, this analysis is a great tool for companies to standardize both cost analysis and price analysis expectations to ensure your employees and specific departments are adhering to strategic cost control methods set by supply chain leadership. This unity of process ensures a consistent approach to project value and one that you want to follow consistently.