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HUD Procurement Handbook 7460.8 REV 2
This handbook is originally from the U.S. Department of Housing and Urban Development (HUD)

                                                 Handbook No. 7460.8 REV 2


A cost or price analysis must be performed in connection with every procurement action 
including contract modifications. The method and degree of analysis is dependent on the facts 
surrounding the particular procurement situation. An independent estimate must be made before 
receiving bids or proposals.

•   When evaluating competitive proposals;

•   When there is a sole source (or non-competitive proposal);

•   When after solitciting bids, only one bid is received, the PHA does not have sufficient data 
    on costs to establish price reasonableness (such as prior purchases of similar nature), and the 
    PHA is considering making an award to the sole bidder;

•   When negotiating modifications to contracts that impact the price or estimated cost;

•   When terminating a contract and the contractor is entitled to payment of reasonable costs 
    incurred as a result of terminiation; or

•   When awarding a cost-reimbursement contract.

The following lists the basic steps in conducting a cost analysis (please refer to chapter 10 for 
more when a cost analysis is required):

    A.  Verify cost and price information, including:

        1.  The necessity for, and reasonableness of, the proposed cost;

        2.  Technical evaluation or appraisal of the proposed direct cost elements;

        3.  Application of audited or pre-negotiated indirect cost rates, direct labor rates, etc.;

    B.  Evaluate the effect of the offeror/contractor’s current practices on future costs;

    C.  Compare costs proposed by the offeror/contractor with the following:

        1.  Actual costs previously incurred by the same firm;

        2.  Previous cost estimates from the same firm or other firms for the same or similar 

        3.  The methodology to be used to perform the work (are the costs consistent with the 
            technical approach being proposed?);

        4.  The independent cost estimate (ICE).

    D.  Verify that the offeror/contractor’s cost proposal complies with the appropriate cost 

    E.  Verify that costs are allowable, allocable, and reasonable.

The major categories of costs are:

    A.  Direct Costs, which include:

        1.  Direct Labor (personnel)


                                                 Handbook No. 7460.8 REV 2

        2.  Equipment

        3.  Supplies

        4.  Travel and Per Diem

        5.  Subcontractors 

        6.  Other Direct Costs
Cost Proposal

Cost Principle

For-Profit or commercial organization

FAR Part 31

State or local governments

OMB Circular A-87

Private, non-profit organizations

OMB Circular A-122

Educational institutions

OMB Circular A-21

    B.  Indirect Costs, which includes:

        1.  Overhead

        2.  General and Administrative Expenses

        3.  Profit (or Fee)

In the process of analyzing costs, profit should be analyzed separately.  In analyzing profit, 
consideration should be given to: 

    A.  Complexity of the work to be performed;

    B.  Contractor’s risk in performing the contract; 

    C.  Contractor’s investment in the contracted effort;

    D.  Amount of subcontracting;

    E.  Contractor’s record of past performance; and

    F.  Industry profit rates in the general area for similar work.

Remember: The objective is to establish overall cost reasonableness and not individual 



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