HKSM

Key Points

• Developed by the buyer or an unbiased third party to set an objective should-cost baseline.
• Supports evaluation of supplier proposals by highlighting unusually low or high pricing.
• Relies on a clear scope, WBS, and realistic assumptions about labor, materials, and market rates.
• Includes direct costs, indirect costs, profit, contingency, and considers contract type and risk.
• Significant variances prompt clarification, negotiation, or reconsideration of the procurement approach.
• Kept confidential to avoid anchoring supplier bids or distorting competition.

Purpose of Analysis

The analysis aims to establish a fair, defensible benchmark for what the buyer should expect to pay, reducing pricing risk and supporting sound selection and negotiation decisions.

• Validate the reasonableness of proposed prices.
• Detect scope misunderstandings and unbalanced pricing.
• Strengthen negotiation positions with data-driven targets.
• Inform budgeting, approvals, and contract strategy choices.

Method Steps

• Confirm procurement scope, acceptance criteria, and constraints.
• Decompose work using the WBS and quantify key cost drivers (quantities, hours, deliverables).
• Select estimating approaches (analogous, parametric, bottom-up, three-point) appropriate to data and maturity.
• Gather current market rates, vendor catalogs, historicals, and location factors; adjust for inflation and currency.
• Build the estimate, including directs, indirects, overhead, profit, and risk/contingency allowances.
• Document the basis of estimate, assumptions, exclusions, and data sources.
• Compare to received proposals; analyze variances and investigate outliers before award.

Inputs Needed

• Procurement statement of work, specifications, and acceptance criteria.
• WBS and WBS dictionary with quantities and deliverables.
• Historical cost data and lessons learned from similar procurements.
• Market intelligence, labor/material rate sheets, and vendor catalogs.
• Schedule, location, logistics, and capacity constraints affecting cost.
• Risk register, contingency approach, and contract type considerations.
• Organizational cost policies, taxes, duties, inflation, and currency assumptions.

Outputs Produced

• Independent cost estimate report with summary and cost breakdown.
• Basis of estimate (assumptions, methods, data sources, exclusions).
• Variance analysis comparing ICE to supplier proposals.
• Negotiation targets and questions for bidder clarifications.
• Recommendations (clarify requirements, renegotiate, re-bid, or adjust strategy).
• Updates to procurement documents, budget forecasts, and risk register.

Interpretation Tips

• Define acceptable variance ranges; investigate material deviations rather than rejecting immediately.
• Check scope alignment first—large gaps often reflect misunderstandings, not pricing issues.
• Assess total cost of ownership, not just initial price.
• Adjust expectations for contract type; profit and risk are priced differently in fixed-price vs time-and-materials.
• Treat the ICE as a benchmark, not a cap or a price to beat.
• Maintain confidentiality to avoid anchoring or collusion risks.

Example

A buyer prepares an ICE of USD 1.2M for a complex system integration, based on bottom-up labor hours, software licenses, and a 10% contingency. Three proposals arrive: USD 0.8M, USD 1.18M, and USD 1.9M. The team validates that the lowest bid omitted data migration and training, requests clarification, and negotiates scope and price adjustments before proceeding.

Pitfalls

• Building the estimate on incomplete or ambiguous scope.
• Using outdated rates or ignoring market volatility.
• Omitting overhead, profit, or contingency, making the ICE unrealistically low.
• Double-counting or misapplying location and escalation factors.
• Leaking the ICE to suppliers, undermining competition and negotiations.
• Overconfidence in a single point estimate without sensitivity analysis.

PMP Example Question

During source selection, your independent cost estimate is USD 2.1M. One proposal is USD 1.1M and another is USD 2.0M for the same scope. What should you do next?

1. Award to the lowest-priced bidder to maximize savings.
2. Request clarifications and validate scope, assumptions, and pricing with the low bidder before proceeding.
3. Cancel the procurement and redo the statement of work.
4. Disclose the ICE to all bidders to guide best and final offers.

Correct Answer: B — Request clarifications and validate scope, assumptions, and pricing with the low bidder before proceeding.

Explanation: A large variance from the ICE suggests possible scope gaps or pricing issues. Investigate and reconcile differences before making an award decision.