Bust out your crystal balls everyone, we’re predicting the future!
Ok, not exactly, but sometimes it can feel like we’re being asked to use mystical powers to estimate how much we will spend.
First, let’s look at the difference between a cost analysis and a forecast.
Definitions
A cost analysis is a documented estimate of what you intend to spend during a timeframe.
A forecast is an estimate of how much of something you will purchase in a given timeframe.
The forecast (quantity) is certainly going to impact the cost analysis (price), so they go hand in hand.
Uncle Sam requires you to do a cost analysis any time you’re going to exceed the Simplified Acquisition Threshold, and when you amend those contracts. I would encourage you to do it even at lower amounts too; you just don’t need to keep documentation. It does serve a benefit to you.
Benefits of a Cost Analysis
There are many benefits to you by conducting a cost analysis.
Let’s look at them.
Choosing the Right Procurement Method
First, conducting a cost analysis makes sure you’re using the right procurement method.
Sometimes you’re not thinking about how the changes you’re planning on making might tip your total cost over a certain threshold.
Budgeting
Another benefit is that it helps you think through the impact of the changes they’re making for the upcoming year on your contract award or your budget.
For example, if you throw items on the bid without looking at how much it costs, and you buy items that are too expensive, you may overspend your budget.
Additionally, this is a natural time to think through how a change will impact your bottom line.
For example, if you plan on adding several pre-packaged cut produce to your bid, conducting a cost analysis will help you estimate how this will impact your budget line item for food/produce.
Correctly Awarding Bids
Your forecast impacts which vendor will win the award.
Therefore, buying actual quantities that are not reflective of the bid forecast can lead to bids being awarded to the wrong vendor.
Awarding Example
For example, let’s say you issue a bid for 100,000 units of 1% white milk and 300,000 units of nonfat chocolate milk. Then, you receive two responses:
| Units | Amazing Milk Company Bid Price (per unit) | Amazing Milk Company Extended Price | Bovine Enterprises Bid Price (per Unit) | Bovine Enterprises Extended Price | |
| White Milk | 100,000 | $0.2062 | $20,620 | $0.2107 | $21,070 |
| Chocolate Milk | 300,000 | $0.2514 | $75,420 | $0.2495 | $74,850 |
| Total | 400,000 | $96,040 | $95,920 |
Based on this forecast, you would award the bid to Bovine Enterprises, since their total bid costs less.
But let’s say you’ve been getting pressured to take chocolate milk off the breakfast menu. Therefore, you decide to make this change next year. However, you still base your forecast on historical data and don’t update your estimates based on this change in policy.
Not serving chocolate milk at breakfast results in using more white milk and less chocolate milk than your historical data. You also have less students take milk overall since chocolate is not available at breakfast. Your actual usage looks like:
| Units | Amazing Milk Company Bid Price (per unit) | Amazing Milk Company Extended Price | Bovine Enterprises Bid Price (per Unit) | Bovine Enterprises Extended Price | |
| White Milk | 175,000 | $0.2062 | $36,085 | $0.2107 | $36,872.50 |
| Chocolate Milk | 200,000 | $0.2514 | $50,280 | $0.2495 | $49,900 |
| Total | 375,000 | $86,365 | $86,772.50 |
Based on your actual usage, you should have awarded the bid to Amazing Milk Company. This is because they have a better price on white milk, so when the proportion of white milk usage increased, it turned out they would cost you less money.
Your total cost analysis is also going to be off since fewer students took milk, which will cause you to be underspent for that line on your budget.
See how having an accurate forecast can make a difference?
Steps in a Cost Analysis
Now that you know how important accurate forecasts and cost analyses are, let’s break down each step in completing a cost analysis, which will answer the following questions.
- What items are you going to buy?
- How many of each will you need?
- How much will it cost?
Step 1: What items are you going to buy?
The basis for a cost analysis is knowing what you’re going to buy.
This seems obvious, but with a long list of items on a contract, it can be easier said than done.
For a one-time purchase or items or services you’ve never received before, this comes a little more naturally. You’re instinctively going to research what you want to buy.
For example, if you need to purchase a new serving line, you probably don’t need me to tell you that you’re going to need to do some research to find out what your options are.
On the other hand, pre-existing, on-going purchases, like food, milk, pest control, inspections, etc., are often overlooked.
A lot of directors find themselves in a time crunch and just take the list of items and quantities from their last contract and reissue it. This will inevitably be inaccurate.
At a very minimum, you want to go through the list and delete things you don’t buy and include the items you want to add. However, the gold standard is planning your menus first.
Ok, I heard you groan.
Every time I’ve been in a room where the State says you should plan your menu before you do your procurement, I can feel the exasperation from the audience as they’re sarcastically thinking yeah right.
I totally hear you.
I write in detail about my simplified menu planning process that my team does prior to a bid in my article on How to Fit Menu Planning into Your Procurement Process.
To sum it up, we make a flexible list of the entrees and vegetables we think we want to menu the next year, rather than write an entire menu plan. It’s faster and more adaptable, and it’s a great starting point for estimating our needs for a bid. If the idea of writing full menus is too overwhelming, try the simplified process instead!
Step 2: How many of each will you buy?
This is the forecast. But you knew that right? Cuz you’re reading along and very smart.
There are multiple approaches you can take, depending on the situation.
Situation 1: Budget-Based Purchasing
Sometimes your forecast is based on how much money you have in the budget to spend. Therefore, the number you will buy depends on how much you can afford to buy.
For example, we only have $1,000 to spend on new utility carts. I estimate each will cost $250.
Divide your budget by the estimated cost per unit. In this case, you’ll divide $1,000 by $250. You can afford to buy 4 new utility carts.
You’ll obviously know the ending cost in this situation, but you still need to figure out how many or how much you’ll be buying before you start the procurement process.
Situation 2: New Items or Services
For new items, this can be a guess, but at least make it an educated guess. You can look at similar items you’ve purchased in the past and get an idea of how much you’ll need to purchase.
For example, if you’re adding a new entree, you can look at usage of a similar entree to compare. For example, let’s say you are adding a burrito on bid, which you’ve never served. You could look at a quesadilla to see how many servings of those you use in a year to estimate your burrito usage.
Don’t forget to account for differences in pack sizes!
For example, let’s say your burrito is coming in a case of 52 per case, your quesadillas come 98 per case, and you currently use 175 cases of quesadillas per year. You’ll take 98/52 x 175 = 330 cases of burritos.
Situation 3: Current Items
For current items, you can look at historical usage and account for any upcoming changes that will impact usage.
To find historical usage, ask your vendor for a “usage report” or “velocity report” for a designated period of time.
I like to look at what I bought the first semester and double it. You could look at the entire previous year instead if you hate math that much. However, the current year is, well, more current, so it will probably be closer to what you’ll actually use.
This is where most directors stop, but as we already discovered in the milk bid example above, this is a mistake.
Next, you have to factor in any changes for the upcoming contract period.
This could include planned menu changes, enrollment changes, changes in school counts due to opening/closing of schools, policy changes, etc.
For example, if you’re currently menuing burgers twice a cycle and decided in the previous step to cut it down to once per cycle, you’ll need to adjust your forecast to about half of what you currently use.
Step 3: How much will it cost?
There are two methods for estimating how much you’re going to spend: research-based or historical-based.
The research-based cost analysis method works well for one-time purchases or items or services you’ve never purchased. The historical-based cost analysis method works well for current, ongoing purchases.
Research-Based Cost Analysis Method
If you’ve never purchased the item before, you don’t have any previous experience to draw upon. For a one-time purchase, the cost usually varies so much that you have to research the market before every purchase.
An example of not having previous experience to draw upon would be hiring a company to sharpen your knives on a regular basis. Once you’ve done this once, you can use the historical method, but the first time you are procuring this service, you won’t have historical data to look at.
An example of a one-time purchase with varying costs is equipment. It’s rare you can buy the exact same oven you bought last time due to changing technology, space requirements, gas or electric capabilities, etc. This means you have to do research just about every time you do this procurement.
In the research method, you’re looking at sources outside your program to find the approximate cost of what you will spend. This can be done through:
- Web Searches: for physical items, you can often find approximate prices online. Services are usually harder to find prices posted online, but you can find contact information to follow up. Since knife sharpening is a service, you might not find any pricing online, but you could find some companies to contact.
- Companies: if you’re contacting companies to do a cost analysis, be sure to make it clear to the vendor that you’re not asking for a quote; you just want a ballpark estimate of what it might cost. In our knife-sharpening example, a manufacturer of knives might know what knife sharpening costs.
- Brokers: brokers might have an idea of the approximate cost of an item or service. For example, a broker that reps a company that makes knives might know what knife sharpening costs.
- Peers within your district: if it’s something your district may have purchased in the past, you can check with those peers or your purchasing office. In this case, there may be a culinary program in your district who receives a knife-sharpening service.
- Peers outside your district: fellow school nutrition directors may have purchased something similar or can get you a lead on who to contact that might know. You can ask your peers if they employ a knife-sharpening service.
Historical-Based Cost Analysis Method
With the historical-based cost analysis method, you use your own purchase history to estimate how much you will spend.
To effectively do this method, you need to factor in the cost of the changes you decided on in Steps 1 and 2 and factor in inflation.
In Step 1, you may have added, deleted, or changed items to your bid that will change the cost of the contract. You’ll need to factor in those changes to your estimated cost.
In Step 2, you may have changed the number of items you plan on buying that will affect your cost. You’ll need to factor those changes to your estimated cost.
Lastly, you want to factor in inflation for a new contract. A good resource is the Bureau of Labor and Statics, which publishes many CPIs and PPIs. Just find one relevant to your procurement. A CPI I like to use for food is the 12-month percentage change for food away from home. Keep in mind this is a suggestion for estimating inflation of food for a new contract, not what you should use for calculating price changes during contract renewal.
Whether you use the research-based or historical-based method, be sure to take notes and save any supporting documents if you are going to exceed the small purchase threshold. Your state will ask for this information during a procurement review.
Putting it All in Action
Let’s look at an example.
We’ll go back to a milk contract example.
Step 1: What items will you buy?
We currently buy white 1% milk cartons and chocolate nonfat milk cartons.
Let’s say we want to add strawberry milk too.
Now I have my list of:
- White 1% milk cartons
- Chocolate nonfat milk cartons
- Strawberry nonfat milk cartons
Step 2: How many of each will you buy?
Some of those students who used to drink white or chocolate milk will now choose strawberry. You might also have more students choose to drink milk if strawberry is the only milk they like.
Estimating how much you’re going to use is tough when you don’t have anything to base it on.
If I were in this situation, I would reach out to my milk vendor and ask:
- We’re doing a new bid, and we’re considering adding strawberry milk. I’m trying to estimate usage. When other districts have white, chocolate, and strawberry milk on bid, what percentage of each do they buy?
- Have you had any that recently added strawberry? Did it increase their total milk sales?
- Can you ballpark how much strawberry milk will cost? Is it the same cost as chocolate?
They might come back with:
- Usually districts with those three flavors sell 60% chocolate, 20% white, and 10% strawberry.
- When a district adds strawberry milk to their bid, it increases milk unit sales by 5%.
- Strawberry milk is more expensive to produce. You can expect to pay about a penny more per carton than what you pay for chocolate.
Now we can do some math.
Our historical usage is:
- White Milk: 100,000 units
- Chocolate Milk: 300,000 units
- Total: 400,000 units
The milk vendor said to expect a 5% increase in total units.
400,000 x 1.05 = 420,000 units
They also said we can expect 60% to be chocolate, 20% white, and 10% strawberry.
- Chocolate: 420,000 x 0.60 = 252,000 cartons
- White: 420,000 x 0.20 = 84,000 cartons
- Strawberry: 420,000 x 0.10 = 42,000 cartons
And that’s how you estimate how much of something you’ll buy when you add items.
What if your vendor doesn’t provide you any helpful information? In that case, I would reach out to other districts to try to get the data. If I couldn’t find any, I would just do my best to guess and document the efforts I made.
Step 3: How much will it cost?
You’re adding a more expensive item AND you will be using more milk, so you need to come up with a more accurate estimate of how much you’ll spend.
Your vendor currently charges you $0.2495 per carton of chocolate milk and $0.2107 per carton of white milk. Your milk vendor told you the strawberry milk will be about $0.01 more than the chocolate milk, so expect to pay $0.2595 per carton of strawberry milk.
- Chocolate: 252,000 x $0.2495 = $62,874
- White: 84,000 x $0.2107 = $17,698.80
- Strawberry: $0.2595 = $10,899
- Total: $91,471.80
This is what we would expect to pay if there are no price increases to our milk contract, but that’s usually not the case when re-bidding, so we also should adjust for inflation.
You could find a milk-specific index. I like to keep it simple and look at the Food Away From Home index.
Let’s say that the index is currently saying a 3.2% increase over the last 12 months.
$91,471.80 x 1.032 = $94,398.90
That’s our cost analysis!
You’ll want to keep all documentation for how you got to that number. So you might have a velocity report from the previous year/semester, the email or phone notes from where you contacted your milk vendor, and your math jotted down. Save this for your procurement review!
Cost Analysis with Contract Amendments
You’re also required to do a cost analysis anytime you make an amendment to your contract.
If it is going to impact the cost, you’ll need to make sure it doesn’t constitute a material change. This is typically interpreted as when the change exceeds 10% of your current contract.
Contract Amendment #1
Let’s look at our strawberry milk example.
Instead of assuming it was a new contract, let’s assume it is a bid addition to your current contract.
You need to ensure that the addition of this flavor doesn’t change the cost by more than 10% of the original contract. For purposes of this, I wouldn’t include inflation – that’s for new contracts and budgetary purposes.
Using original bid pricing with 100K white and 300K chocolate, your total estimate for white and chocolate milk was $86,772.50.
Before we factored in inflation, we estimated the total cost we’d spend if we had white, chocolate, and strawberry milk was $91,471.80.
You calculate the percentage change with this formula:
New Cost – Original Cost
Original Cost
($91,471.80-86,772.50)
$86,772.50
$4,699.30
$86,772.50
5.4%
Because this is under the 10% threshold permitted in contract changes, this would typically be allowed!
Be sure to keep all your backup documentation.
Contract Amendment #2
Let’s look at another example. Let’s say your current contract for grease trap cleaning states:
“Grease traps will be cleaned as needed, at the fire marshal’s request. The vendor will be contacted each time a cleaning is requested.”
While that’s how you’ve always done it, your fire marshal recently told you that you need start cleaning them quarterly, or they will start fining you.
You want to update your contract language to state:
“Grease traps will be cleaned quarterly. The vendor will create a schedule to ensure each school’s grease trap is cleaned quarterly and will provide that schedule to the School Nutrition Director.”
Even though your vendor isn’t changing your prices, you still need to do a cost analysis first because you are amending your contract. The purpose here is to measure the financial impact of every amendment to your contract.
Let’s say you have 10 schools, you’re charged $300 per cleaning, and you typically pay $6,300 per year on grease trap cleaning.
With the contract amendment, you are going to need quarterly cleaning. That’s $300, four times per year, for 10 schools. $300 x 4 x 10 = $12,000.
Now calculate percent change.
($12,000 – $6,300)
$6,300
90.5%
This contract is going to increase by 90.5% with the new contract terms. Yikes!
Because this is over the 10% threshold, this is a material change and cannot be done with an amendment. You’re going to have to do a new, competitive solicitation. Sorry!
But now you’ve done the math, you know it will cost you $12,000, so you can choose the correct procurement method based on your state and local requirements.
Contract Amendment #3
What if you are just modifying some language that doesn’t impact cost? For example, your bread contract used to state:
Deliveries will be made between 6am and 1pm daily.
Your managers are in their schools until 2pm, and they can check in a delivery without any other staff help. Your vendor asks you to accept deliveries until 2pm, so you update the language to state:
Deliveries will be made between 6am and 2pm daily.
Is your cost going to change with these new terms? No, but you still have to prove you thought about it.
I would just write out a quick statement on our letterhead, sign it, and keep it on file:
A cost analysis was completed in conjunction with this amendment. The modified contract terms will not impact cost.
Signed: Kristen Nauss
Donzo.
Summary
The forecast and cost analysis are an important step in the procurement process. Be sure to complete one accurately and document your process.
