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Price analysis compares quoted totals on equivalent terms, while cost analysis examines supplied cost components and profit. Work through the same supplier quotes both ways and see which questions each method can answer.
Cost and price analysis in procurement answer different questions: price analysis asks how an offer compares with equivalent offers, while cost analysis examines the components a supplier has disclosed. Use the same quantity and commercial scope for both. Do not work backward from a selling price and present assumed costs as supplier facts.
The federal procurement definitions provide a useful distinction. FAR 15.404-1 describes price analysis as evaluating a proposed price without evaluating separate cost elements and profit, and cost analysis as examining those elements. These are federal acquisition rules; a private company's purchasing policy determines its own approval requirements.
| Question | Price analysis | Cost analysis |
|---|---|---|
| What is evaluated? | The comparable proposed price | Disclosed cost components and proposed profit |
| Main evidence | Quotes, relevant prior prices, supported price references | Supplier cost workbook and supporting assumptions |
| What must match? | Item, quantity, service, delivery and commercial terms | The same scope plus component definitions and allocation bases |
| Main output | Comparable evaluated totals and price differences | Component differences and questions about their support |
| What is not established? | The supplier's underlying profit or cost structure | That every estimate will become an actual cost |
Neither method removes the need to assess delivery capability and quality. A quote can be arithmetically correct yet fail the required specification. A detailed cost workbook can reconcile perfectly while relying on an unsupported labor assumption.
A US equipment distributor needs 1,000 identical replacement housings delivered to its Ohio facility. Both suppliers quote the same specification, quantity, delivery date, payment terms and inspection requirement. For this example, no taxes, rebates or additional charges apply beyond the freight shown.
Save the quote identifier, revision, item specification, quantity, unit of measure, currency, validity date and freight treatment. Written confirmation matters when an inclusion is unclear. A blank freight cell should remain unresolved until the supplier confirms whether delivery is included.
Price comparisons also need a valid reference period. FAR 15.404-1 explains that historical prices may need adjustment for changed quantities, terms and market conditions. Do not describe an old invoice as a current alternative unless its terms remain available.
Evaluated purchase total = Quoted unit price × Required quantity + Applicable charges − Applicable discounts
| Supplier | Quantity (units) | Unit price (USD) | Extended quote (USD) | Freight (USD) | Evaluated total (USD) |
|---|---|---|---|---|---|
| A | 1,000 | 9.50 | 9,500 | 600 | 10,100 |
| B | 1,000 | 9.80 | 9,800 | 0 | 9,800 |
Supplier A's extended quote is 1,000 × $9.50 = $9,500. Add its $600 freight charge and the delivered purchase costs $10,100. Supplier B's $9,800 quote includes delivery, so the confirmed additional freight charge is zero.
A has the lower unit price, but B has the lower evaluated total. The difference is $10,100 − $9,800 = $300, or $300 / $10,100 = 2.97% relative to A. Percentages here are rounded to two decimal places.
That is a price conclusion. It does not establish that B has lower manufacturing costs or accepts a lower profit. Keep the reference supplier explicit whenever quoting a percentage difference; changing the denominator changes the percentage.
The broader procurement spend-analysis workflow uses historical AP lines to identify review priorities. This quote comparison supports a particular purchasing decision and should stay separate from that historical total.
Both suppliers also provide component workbooks for this order. The figures below are supplied proposal components, not costs inferred from their prices. Material, labor and overhead exclude the separately listed delivery charge.
| Supplied component | Supplier A (USD) | Supplier B (USD) | B minus A (USD) |
|---|---|---|---|
| Materials | 5,000 | 5,200 | 200 |
| Direct labor | 1,800 | 1,700 | -100 |
| Allocated overhead | 1,200 | 1,400 | 200 |
| Proposed profit | 1,500 | 1,500 | 0 |
| Quoted product subtotal | 9,500 | 9,800 | 300 |
| Separate freight | 600 | 0 | -600 |
| Evaluated purchase total | 10,100 | 9,800 | -300 |
For A, $5,000 + $1,800 + $1,200 + $1,500 = $9,500. For B, $5,200 + $1,700 + $1,400 + $1,500 = $9,800. Add the confirmed freight amounts and both cost workbooks reconcile to the evaluated totals in the first table.
The component differences also prove the result: $200 − $100 + $200 + $0 − $600 = −$300. B's supplied product components total more, but the freight difference reverses the purchasing comparison.
Do not conclude that B incurs no delivery cost. The table only confirms that B adds no separate freight charge to this quote. Its delivered offer may recover delivery expense elsewhere, and the supplied workbook would need further detail to answer that question.
Ask what material quantities and rates support the material line. Ask whether labor uses the same production quantity and whether setup time is included. For overhead, request the allocation base and identify which costs it already contains. An expense included in both overhead and freight would distort the review.
Keep the request proportionate to the purchasing decision. In its federal scope, FAR 15.403-3 addresses obtaining data needed for price evaluation and limits certain commercial sales-data requests to relevant items and periods. For this private-company example, document what information is needed and why rather than requesting unrelated supplier records.
Use procurement cost analysis for the deeper review of purchasing costs. A separate supplier-switch business case should assess transition costs and operational effects before a change is approved.
Suppose A revises only its freight charge from $600 to $300. Its product quote stays $9,500, so the evaluated total becomes $9,500 + $300 = $9,800. The two offers now tie on evaluated price.
The revised freight line must also flow into A's component reconciliation. Nothing in the revision establishes a change to its materials, labor, overhead or proposed product profit. Save the revision as the new comparison input and retain the old version as supporting history.
Bring the quote files, supplied cost workbooks and the scope notes used to normalize them. Covirage maps the columns, and its tools compute and check the comparisons; the external AI model explains the result with every figure traced to its rows. Create a free Covirage account, then set up your business and bring a sample of your own purchasing files.
See cost and variance analysis in Covirage for the wider business context.
Use price analysis when comparable supplier quotes, relevant prior purchases or other supported price references are available. Normalize specifications, quantities, freight and terms first. A cheaper quoted unit price can produce a higher delivered total when charges outside that unit price are included.
A quoted price does not disclose the supplier's material, labor, overhead or profit. Use an actual supplied breakdown for cost analysis. If procurement prepares an estimate, label its assumptions and uncertainty explicitly rather than presenting it as the supplier's actual cost structure.
An evaluated price establishes a comparable commercial amount, not the entire award decision. Procurement must also apply the approved specifications, delivery requirements, quality criteria and risk review. Document any choice to pay more and the evidence supporting the expected business benefit.