Homework

BUS315 Week 3 SolarCal Case Analysis

Price Analysis

Participants:

Sally- Intern

Dominic- CEO of SolarCal

Luke- Head of Productions

Jake- Head of Accounting/Finance

Melissa- Head of Government Contracting

Dominic: Good morning Sally!

How did everything work out with your job shadowing of Melissa?

Sally: Good morning to you too! Last week was amazing! Melissa was great! She showed me what her department is all about and really solidified my knowledge of government contracting.

Dominic: That is fantastic, Sally! I’m glad that this internship is really opening your eyes to not only what SolarCal does but also how the industry functions as a whole.

This week I will have you working with Jake and his department. I think this will be a great learning experience for you and will really give you another in-depth look at our day-to-day operations.

Sally: That sounds great! I’m excited to get started!

Dominic: Good morning Jake! I have brought Sally here to work with you for the week. Could you show her around and provide her with a better understanding of what your department accomplishes?

Jake: Sure thing, Dominic! I have a list of tasks for Sally.

Dominic: That is fantastic! Thank you, Jake! Sally, I will talk with you later about how everything went while you were here. Take care!

Sally: Thank you both! It’s nice to meet you again Jake! I am really excited to begin learning about the production process at SolarCal.

Jake: It’s my pleasure to be working with you, Sally! So, before we begin, are there any questions you would like for me to answer?

Sally: Well, I know you deal with the production of SolarCal’s navigation systems. The only real question I have is how do you run a price analysis for solar panel systems? I remember something about the price analysis being very important in the production phase from some business classes I took at Strayer University.

Jake: I’m glad you remembered that information. You are correct. The price analysis is very important during the production phase. You are in luck, because I have a new approach to explaining how we establish all of our price points for our products.

Let’s get started!

Jake: I just moved all of my presentations to the new tablets all managers received last week. Please take a tablet and follow along as we go over some key parts of this presentation. Keep in mind that if you want to share something, these tablets can be hooked up to a projector to highlight things you find interesting.

Sally: These tablets are really nice, and I will definitely take you up on showcasing my findings on the projector. I’m actually checking out the section on price analysis right now.

Jake: Fantastic! What can you tell me about a price analysis?

Sally: Well, a price analysis is a set of methods for determining whether an asking price is reasonable without examining the details of the cost or profit included in the price. I think this means that every time we make a purchase, we consciously or unconsciously make a price analysis, which satisfies us that what we are paying is reasonable.

Jake: That is very important information to keep in mind. I’m glad you shared that with me. I will now explain the governmental aspect of the price analysis.

We see that the government does a significant amount of contracting based on price alone, with no information on how much cost and profit are included in the price. Setting up a contract this way often results in the awarding of a fixed-price type contract.

What do you think happens when a government agency needs to acquire various products and services?

Sally: I think that the agency must forecast the price of those products and services in its budget and convince the reviewing authorities that the forecast is reasonable. I recall that once the funds are appropriated, the agency is in a position to actually buy the products and services.

Jake: That was a great response, and you are absolutely correct! I do have one more thing to add. Keep in mind that the bids, price proposals, and quotes received by the government in response to solicitations and requests for quotations must all be evaluated for price reasonableness.

Sally: I will definitely keep that in mind moving forward. What else can you tell me about a price analysis?

Jake: I have plenty more to share with you about this topic! Let’s continue our discussion by moving ahead in our tablet presentation a little bit.

Jake: It is important to understand that a price analysis must be completed when selecting a contractor for the awarding of a firm-fixed-price or a fixed-price-with an economic adjustment contract. When the government commits itself to a contract signature to pay a price, there isn’t an opportunity to amend the price unless the contract work is changed.

Sally: That is very good to know! How do companies like SolarCal negotiate prices with the government?

Jake: Well, here at SolarCal we use negotiations to reach a fixed-price type contract. We normally hold discussions on the pricing and technical aspects of each offer in the competitive range. We have noticed, however, that regardless of the size of the acquisition, the detailed cost and pricing data are not sought if a determination is made that the awarding of a contract will be based on adequate competition. For particular cases like this, we will use a price analysis to assess the reasonableness of each proposed price.

Sally: That makes a lot of sense now. Thanks for explaining that to me!

Jake: Not a problem at all. We will now look at a number of methods for conducting a price analysis.

Let’s begin!

Jake: The first method of conducting a price analysis is to do a comparison of the proposed prices received in response to the solicitation. This method usually consists of comparing offered prices against each other in order to decide which prices are most reasonable. We find that the offered prices are fairly close together, but are not the same, if adequate price competition has occurred.

Sally: Shouldn’t we be careful when using comparisons with other prices offered as the only price analysis method?

Jake: Right you are! When there is an extremely low price that is compared to others, this may indicate that the bidder did not fully understand the requirements or there was a mistake made.

Sally: I think I know another method that could be used! I’m looking at my tablet now; let me share what I have found on the projector.

Another method of conducting a price analysis is a comparison of prior prices paid. The presentation on my tablet says that this method is useful when the agency has had a history of contracting for the same products or services. It also says that there are several factors that must be considered, such as:

Reasonableness of the base price;

Time since the last buy;

Relative number of quantities sold;

Whether we are dealing with a special production item or a shelf item; and

Acquisition methods used.

Jake: Great job Sally, and thanks for showing me that method!

Let me tell you about a third price analysis method, which deals with the comparison of prior quotes. This method is very similar to comparing a present offer to the prior prices paid for the same item. However, this method will compare the present asking price to the prior quotes, and not just the price paid.

Sally: There are two other methods listed on this tablet presentation. Can I show you the fourth method?

Jake: Sure! After that, I will cover the last method of conducting the price analysis.

Sally: The fourth method of conducting a price analysis is to do a comparison of prices paid for similar items. I recall that this method is similar to the one you previously discussed, except now we have the added complication of comparing something similar rather than the same. It seems that this can be a very imprecise method to use if you are comparing the prices paid from several months or over a year ago. However, it seems that this method may be more precise if you are comparing the price you paid recently for a similar item. I think the level of precision depends on how accurately one can estimate the price change related to the differences in design.

Jake: Very good Sally! This method can be tricky if not done correctly. Now let’s look at the final method we can use.

Jake: The last method that can be used to conduct a price analysis is the use of estimating relationships. We see that federal acquisition regulations refer to this method as the use of “rough yard sticks.” Keep in mind that estimating relationships refer to measures such as dollars per pound for finished products and dollars per square foot for finished construction. The downfall of this method is that you need to continually update estimating relationships so that they will retain their usefulness. These relationships need to be updated in order to reflect the prices as they gradually change. We see that many agencies experienced in buying complex items may develop rough yardsticks for use in estimating prices, determining price reasonableness, or detecting significant variations from estimates which justify further checking.

Sally: That is very interesting! I think I definitely have a better feel for the various methods of conducting a price analysis.

Jake: That is great Sally! Please let me know if you have any other questions.

Jake: The first method of conducting a price analysis is to do a comparison of the proposed prices received in response to the solicitation. This method usually consists of comparing offered prices against each other in order to decide which prices are most reasonable. We find that the offered prices are fairly close together, but are not the same, if adequate price competition has occurred.

Sally: Shouldn’t we be careful when using comparisons with other prices offered as the only price analysis method?

Jake: Right you are! When there is an extremely low price that is compared to others, this may indicate that the bidder did not fully understand the requirements or there was a mistake made.

Sally: I think I know another method that could be used! I’m looking at my tablet now; let me share what I have found on the projector.

Another method of conducting a price analysis is a comparison of prior prices paid. The presentation on my tablet says that this method is useful when the agency has had a history of contracting for the same products or services. It also says that there are several factors that must be considered, such as:

Reasonableness of the base price;

Time since the last buy;

Relative number of quantities sold;

Whether we are dealing with a special production item or a shelf item; and

Acquisition methods used.

Jake: Great job Sally, and thanks for showing me that method!

Let me tell you about a third price analysis method, which deals with the comparison of prior quotes. This method is very similar to comparing a present offer to the prior prices paid for the same item. However, this method will compare the present asking price to the prior quotes, and not just the price paid.

Sally: There are two other methods listed on this tablet presentation. Can I show you the fourth method?

Jake: Sure! After that, I will cover the last method of conducting the price analysis.

Sally: The fourth method of conducting a price analysis is to do a comparison of prices paid for similar items. I recall that this method is similar to the one you previously discussed, except now we have the added complication of comparing something similar rather than the same. It seems that this can be a very imprecise method to use if you are comparing the prices paid from several months or over a year ago. However, it seems that this method may be more precise if you are comparing the price you paid recently for a similar item. I think the level of precision depends on how accurately one can estimate the price change related to the differences in design.

Jake: Very good Sally! This method can be tricky if not done correctly. Now let’s look at the final method we can use.

Jake: The last method that can be used to conduct a price analysis is the use of estimating relationships. We see that federal acquisition regulations refer to this method as the use of “rough yard sticks”. Keep in mind that estimating relationships refer to measures such as dollars per pound for finished products and dollars per square foot for finished construction. The downfall of this method is that you need to continually update estimating relationships so that they will retain their usefulness. These relationships need to be updated in order to reflect the prices as they gradually change. We see that many agencies experienced in buying complex items may develop rough yardsticks for use in estimating prices, determining price reasonableness, or detecting significant variations from estimates which justify further checking.

Sally: That is very interesting! I think I definitely have a better feel for the various methods of conducting a price analysis.

Jake: That is great Sally! Please let me know if you have any other questions.

Sally: Now that you mention it, I do have one more question. I remember from one of my Strayer business classes that there were two other approaches to conducting a price analysis. Could you refresh my memory?

Jake: Well, you are right - there are two other approaches that can be taken. The first approach deals with the concept of a value analysis, which can give insight into the relative worth of a product. The government may use this approach in conjunction with other price analysis techniques. The major premise behind this approach is to learn why prices are different for products of the same basic type and whether they are worth the difference.

Sally: Thanks for reviewing that with me. I think I remember what the second approach is now!

I recall that the second technique is visual analysis. This concept deals with looking at an item and using our experiences to estimate its value. I remember that this is particularly useful when making small purchases for repair parts and accessories, especially when they are only available from one known source.

Jake: That is correct - great job, Sally! There is one more thing I want to share with you. Keep in mind that federal acquisition regulations identify two preferred techniques as the best ways to complete a price analysis. One technique is to do a comparison of proposed prices received in response to the solicitation. The second technique then deals with a comparison of prior proposed prices and contract prices with current proposed prices for the same or similar items.

Sally: Jake, thank you for all of the details about how your department makes decisions on how to price contracts with the U.S. Government and General Solar. You have really expanded my knowledge, and your tablet presentation really helped me gain a better grasp on several key pricing analysis concepts.

Jake: It was my pleasure, but keep in mind that there is a lot more that goes into these decisions. We will save that for another day though!

I would now like for you to go through some interactive training materials to help build upon some key concepts from today’s lesson.

Jake-A price analysis is a set of methods for determining whether an asking price is reasonable without examining the details of the cost or profit included in the price.

Jake-A comparison of proposed prices received in response to the solicitation is a method of comparing offered prices to each other to decide which are reasonable. As a general rule, we would expect offered prices to be fairly close together, but not the same, if adequate price competition has occurred.

Jake-A comparison of prior prices paid is a method that is useful when the agency has had a history of contracting for the same products or services. Several factors must be considered, including the reasonableness of the base price, time since the last buy, the relative number of quantities sold, whether we are dealing with a special production item or a shelf item, and the acquisition methods used.

Jake-A comparison to prior quotes is a method that is similar to comparing a present offer to prior prices paid for the same item. However, it compares the present asking price to the prior quotes, not just the price paid.

Jake-A price paid for similar items comparison is a method similar to comparing prior quotes except now we have the added complication of comparing something similar rather than the same. Comparing with prices paid for similar items in the past is a very imprecise method if you are comparing with prices paid several months or a year ago. However, this method may be precise if you are comparing to the price you paid very recently for a similar item. The level of precision depends on how accurately you can estimate the price change related to the differences in design.

Jake-Estimating relationships are measures such as dollars per pound for finished products and dollars per square foot for finished construction. But you need to continually update estimating relationships so they will retain their usefulness. Relationships need to be updated to reflect prices as they gradually change.

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