Price analysis can be considered a stage of bid evaluation depending on the provisions of a legal and regulatory framework. It is an assessment of the evaluated price of a responsive bid to ascertain that it is not unreasonably high nor unreasonably low, but fair enough to the procuring entity and the supplier. In the Millennium Challenge Corporation (MCC) Program Procurement Guidelines (PPG) and the accompanying MCC Procurement Guidance Note: Price-Reasonableness Analysis (MCC-PGN-PRA) used by Millennium Challenge Accounts (MCAs) around the world, price analysis is a mandatory requirement during bid evaluation. After bid evaluation, the Procurement Agent does a price reasonableness analysis to determine if the price is reasonable. The price reasonableness analysis may be included in the evaluation report or documented separately and referenced in the evaluation report. The unreasonableness of an evaluated bid price could be described as unreasonably high or unreasonably low. If the price reasonableness analysis proves that the price of the lowest evaluated bid is unreasonable, the bid is rejected.
According to Section 6.4 of the UN Procurement Practitioner’s Handbook 2017 (UN-PPH), in cases of a non-competitive procurement method (such as direct procurement or sole source), negotiations for price reduction can be entered into to ensure a reasonable price.
What is Price Reasonableness Analysis?
Price reasonableness analysis, according to MCC-PGN-PRA, is a review of the prices proposed by a contractor, supplier or consultant to ensure that the prices offered in the bids or proposals are fair to both parties considering the effort required to complete the task, the quality of the bid or proposal, and the comparability of the prices on similar projects in local and international markets. The essence of price reasonableness analysis is to avoid the payment of more than what is considered commercially reasonable to be paid for a particular good, works or service. Thus, after price evaluation, it is essential to conduct a price reasonableness analysis. Price analysis ensures price fairness such that an entity doesn’t pay prices that are higher or lower than what is considered reasonable. Remember that the interest of the market (profit) is significant to be considered, as a lower satisfaction from the market (due profit) is a potential risk factor for poor performance and procurement failure.
When Can We Consider Price Reasonableness Analysis a Stage of Bid Evaluation?
In my opinion, there are cases wherein we can conclude that price reasonableness analysis is a stage of the bid evaluation process. In non-competitive procurement procedures (direct procurement) and instances where price is not an evaluation factor (e.g.: use of Quality-Based Selection to procure consultants), negotiations may be used to achieve a reasonable price. The negotiations will be documented, and contract award depends on the outcome of the negotiations. Where price analysis is a mandatory requirement for all procurements, such as in the case of the MCC-PPG, an unreasonable price is a reason for rejecting a bid.
In some public procurement legal and regulatory frameworks such as the African Development Bank Procurement Guidelines and the Public Procurement and Concessions Act of Liberia and its accompanying regulations, price-reasonableness analysis is neither mentioned nor required to be documented in a bid evaluation report. Under such legal frameworks, evaluation reports don’t need to indicate it as a decision-making factor during evaluation. In the case of the MCC-PPG as provided for in the MCC-PPG Price Reasonableness Analysis 2019, Section 2, evidence of undertaking price reasonableness analysis must be documented for all procurements.
Under guidelines which do not require the formal documentation of price-reasonableness analysis, we cannot consider it a stage in evaluation, because it is not considered or indicated as a decision-making factor during evaluation. We can, therefore, consider price-reasonableness analysis a stage of the bid evaluation process if the legal and regulatory framework requires it to be done formally as a basis for determining the most economically advantageous bid or if a bid evaluation report clearly documents it as a decision-making factor and stage.
Difference Between Price and Cost Reasonableness Analysis
Cost and price analysis, though done to achieve the principle of value for money, are different concepts. Cost analysis is a scrutiny of the production cost of an item to ensure its reasonableness, while price analysis is a comparison of offered price to ensure it is commercially fair (UNDP, 2016, p.150). When conducting cost reasonableness analysis, individual cost elements are examined. Price analysis, on the other hand, examines the total price. The difference between cost and price is profit. According to MCC-PG N-Price Reasonableness Analysis 2019, Section 2, Paragraph 4, for the Millennium Challenge Corporation, price analysis is done for fixed cost contracts and cost analysis required for cost reimbursable contracts.
Price Analysis Methods
According to the MCC-PGN-PRA, price analysis methods include Competitive Price, Historical Price, Catalogue Price, Published Price, Planned Budget, and Comparison with Similar Price.
Competitive Price Method
This method is used when several acceptable qualified bids are received. The different prices are compared to determine the variations. If there are reasonably minimum differences between the prices, it can be safely concluded that the prices are reasonable.
Historical Price Method
In the historical price method, the price of the recommended bid is compared to prices offered in the past for similar contracts.
Catalogue Price Method
The catalogue price method is used for off the shelf items where there exists a price catalogue which is used as a basis for comparison for reasonableness.
Comparison with Published Price Method
In the case of published price method, the offered price is compared to the published price from the press or a government regulatory body such as the Ministry of Commerce in some countries. In most countries, products such as fuel, water, and essential health products are regulated by such regulatory body. From my experience with the evaluation of bids for the supply of petroleum products (gasoline and diesel fuel) in the Republic of Liberia, when conducting price reasonableness analysis in this case, the price offered must be reasonably lower or equal to the published price as published by the Ministry of Commerce of the Republic of Liberia. The Ministry publishes price ceilings for commodities such as gasoline, diesel fuel, rice, transportation fair for distances across the country, etc. Anyone going above the price ceiling for a particular commodity is in violation of the Ministry’s mandates.
Use of Planned Budget
In the case we have an independent estimate or a planned budget has been prepared, this independent estimate or planned budget may be used as an element for price reasonableness if considered valid and appropriate at the time of award.
Comparison with Prices of a Similar Item
For the procurement of goods, if a supplier can demonstrate the prices of a similar item, and justify its price difference based on additional or different features, the proposed price can be considered reasonable lien. The differences between the supplier’s price and the price of a competitor should be detailed and justified, and the referenced prices should be available from verifiable independent sources (not only from the supplier itself).
United Nations Development Program (2016). Handbook, Advanced Certificate in Public Procurement Level 3. Procurement Services Unit, United Nations Development Program, (Copenhagen, Denmark), 150.