In Part 1 - A Framework for Success, we described a framework for successfully exiting the SBA 8(a) program. In Part 2 - Building Capabilities Required for Success, we focused on building the capabilities required to implement a successful exit strategy. In Part 3 the final installment of this blog series, we focus on the role competitive indirect rates will have on your ability to bid and win more. While building capability, a critical objective is to leverage technology to reduce the reliance on manual processes. Doing this well will have a significant impact on creating competitive indirect rates. This will be a key factor for successfully competing in full and open competitions.
Let's assume you've done well in the SBA 8(a) program; your firm has developed a great capability and it has great past performance. Before graduation, you should ask how you can improve your ability to win full and open competitions. The table below provides significant insight that should shape your strategy. The bottom line, you'll need to make some hard decisions focused on creating competitive indirect rates. In full and open competitions, you'll be competing with larger firms that will have much lower indirect rates.
| Indirect Rates By Annual Revenue | |||||
| Indirect Rate Type | Average | $0-<10M | $10-<25M | $25-<50M | $50M+ |
|---|---|---|---|---|---|
| Fringe Rate | 27% | 26% | 28% | 24% | 29% |
| Overhead Rate for Contractor Sites | 25% | 18% | 30% | 37% | 20% |
| Overhead Rate for Customer Sites | 17% | 13% | 21% | 21% | 16% |
| Material/Subcontractor Handling Rate | 4% | 5% | 3% | 3% | 3% |
| General and Administrative Rate | 19% | 21% | 22% | 20% | 11% |
| Wrap Rate Without Fee | 1.81 | 1.74 | 1.93 | 1.93 | 1.65 |
Contractors with more than $50 million in revenue enjoy distinct advantages regarding their indirect rates. If your indirect rates aren't comparable, winning full and open competitions will be difficult. This is a leading cause of why many organizations fail to graduate out of the 8(a) program.
How have your competitors accomplished this?
In today's government contracting market, many of the full and open competitions will be decided based on lower cost technically acceptable (LPTA) criterion. To fully understand why managing indirect rates play such an important role in winning competitive bids, we'll examine two important contracting trends: competition and the bidding processes:
The use of GWACs has created more commoditization of competitors i.e., you're competing with many firms with comparable capabilities.
The evaluation factors for a typical government contract full and open competition usually consist of three factors:
Many RFPs are done in two stages: (1) the government selects a list of potential vendors using their past performance and creates a down-select list, then (2) they conduct a competition between the selected vendors that usually involves submitting a management/tech and cost proposal. If vendors don't provide adequate past performance, they won't make the down-select list. Here's the catch! Often the management/tech proposal doesn't require enough detail for vendor organization to describe all the great things their organization can deliver. This makes it very difficult for the selection to be made solely on management and technical factors.
In most full and open competitions, the cost has become the dominant factor in award decisions, considering:
Here's an additional catch! Direct costs, such as the salaries paid or the materials bidders need to buy, are determined by the market, whereas indirect costs are controlled by each bidder's organization. Therefore, an important question you need to be constantly asking yourself is, what's the plan for focusing on your organization's indirect rates? Competitive indirect rates are the KEY factor in your pricing strategy!
Here is a short list of things you need to focus on that will help you better manage your indirect rates. You'll need to fine-tune your processes and systems to help you implement a plan for each of these factors.
Prime contractors are required to utilize small businesses ... on some contracts as much as 40% of the work must be allocated to small businesses.
Primes are looking for:
As you build your organization's corporate past performance be thoughtful in how you grow all these factors. They will be critical to successfully teaming up with Primes.
While all the factors listed are important, if your indirect rates are too high it can be a deal killer.
Here are a few tips that you want to keep in mind as you are developing your 8(a) exit strategy.
Overall, the process can seem daunting, but with the right team, and an early start (5 years or more 'til graduation), your organization can mitigate or eliminate most of the risks and set you up for long-term success.
AtWork Systems specializes in supporting you the government contractor and carries decades of experience which is transferred into the products we develop specifically for the industry. Step into the journey and transform your business into a thriving growing pillar of success that is resilient to the ever-changing and highly regulated GovCon industry.