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During proposal preparation a government contractor has two major objectives: submit a winning bid and making money. These two objectives can sometimes work against each other. Submitting a competitive bid and making money requires analyzing the contract requirements, developing a basis of estimate, understanding your fully burdened cost and profit margins, and developing a competitive price. In this blog, we discuss how to strike the right balance between these competing objectives. We present general management strategies that will help when developing competitive pricing as well as strategies to consider when bidding a contract. We describe the cost components you'll need to consider when building your price. We explain why competitive indirect rates are important to competitive pricing. We also discuss how to build a basis of estimate that supports how you will build a competitive price. Developing effective pricing capabilities can be difficult and takes a team with years of experience in government contracting. These capabilities and skills require significant experience, time and money to put in place. If your organization does not have effective pricing capabilities this will significantly impact your win rate. Utilizing managed services for competitive pricing support can offer many benefits.
Government contractors can employ several management strategies to develop competitive pricing for their proposals. Here are some effective strategies:
Market Research: Conduct thorough market research to gain insights into industry pricing trends, competitors' pricing strategies, and government contract pricing history. Analyze similar contracts, benchmark pricing data, and understand the cost structures and profit margins prevalent in the market. This information will help in developing a competitive pricing strategy.
Cost Analysis and Cost Control: Perform a comprehensive cost analysis to understand the direct and indirect costs associated with the contract. Identify areas where costs can be reduced or controlled without compromising quality or compliance. Implement cost control measures, such as streamlining processes, optimizing resource utilization, and negotiating better terms with suppliers, to lower overall costs.
Efficient Resource Allocation: Efficiently allocate resources, including labor, materials, and equipment, to minimize waste and maximize productivity. Properly align resources with project requirements and timelines to avoid unnecessary costs and delays. This strategy ensures optimal resource utilization and cost-effectiveness.
Strategic Partnerships: Collaborate with strategic partners, subcontractors, or suppliers to leverage their expertise, resources, and competitive pricing. Forming partnerships can provide cost advantages, access to specialized skills, and enhanced competitiveness in bidding on government contracts.
Lifecycle Cost Analysis: Consider the entire lifecycle of the project when developing pricing. Evaluate the long-term costs associated with maintenance, operation, and support to provide a more accurate and comprehensive pricing proposal. Taking into account the lifecycle costs demonstrate a thorough understanding of the project requirements and can contribute to a competitive advantage.
Value Engineering: Implement value engineering techniques to optimize the project's value while minimizing costs. Focus on identifying opportunities for cost savings, performance improvements, and efficiency enhancements without compromising quality. Value engineering ensures that the proposed pricing aligns with the value delivered to the government agency.
Competitive Indirect Rates: As discussed earlier, maintain competitive indirect rates by controlling overhead costs and improving operational efficiency. Lower indirect rates allow for more competitive pricing by allocating a larger portion of the budget to direct project-related costs.
Price-to-Win Analysis: Conduct a price-to-win analysis to assess the competitive landscape and the pricing strategies of other contractors bidding on the same contract. This analysis helps determine the pricing range that is likely to be successful while considering factors such as the customer's budget, evaluation criteria, and the contractor's capabilities.
Continuous Improvement: Regularly assess and improve pricing strategies based on lessons learned from previous contracts. Incorporate feedback received during the bidding process and contract performance evaluations to refine pricing methodologies and increase competitiveness.
Collaboration with Contracting Officer: Maintain open communication and collaborate with the contracting officer during the proposal development phase. Seek clarifications, understand the agency's pricing objectives, and discuss any innovative pricing structures that may benefit both parties. A collaborative approach can lead to a better understanding of the agency's requirements and increase the chances of developing a competitive pricing proposal.
When bidding on a government contract, the price proposal typically includes several components. These components may vary depending on the specific requirements of the contract and the agency involved. However, here are some common components of the price when bidding on a government contract:
Direct Costs: Direct costs are the expenses directly attributable to the performance of the contract. These costs are usually itemized and include items such as labor, materials, equipment, subcontractor costs, travel expenses, and any other costs directly tied to the contract's execution. Contractors must provide a breakdown of these costs and justify their inclusion.
Indirect Costs: Indirect costs represent the overhead expenses incurred by the contractor that are not directly tied to a specific contract but still contribute to the overall cost of doing business. Examples of indirect costs include overhead expenses, facilities costs, fringe benefits, depreciation, general and administrative (G&A) expenses, and other indirect expenses. Indirect costs are typically allocated to contracts using an indirect rate, which may be based on predetermined formulas or negotiated with the government agency. In the next section, we explain why having competitive indirect cost can be a key factor for competitive pricing.
Profit or Fee: Profit or fee is the amount added to the direct and indirect costs to cover the contractor's desired profit margin. The government agency may specify the allowable profit or fee rate or provide guidelines on how it should be calculated. Profit or fee can be a fixed dollar amount or a percentage of the total cost.
Other Direct Charges (ODCs): ODCs are costs that are directly identifiable and allowable under the contract but are not included in the direct costs. These can include specific expenses such as travel costs, equipment rentals, material purchases, or any other costs specifically associated with the contract's performance. ODCs should be separately identified and justified in the price proposal.
Cost-Related Factors: In addition to the direct and indirect costs, there may be cost-related factors that influence the pricing. These factors can include inflationary adjustments, escalation rates, cost contingencies, or any other costs that may be applicable during the contract's performance period. Contractors may need to provide detailed explanations and justifications for these cost-related factors.
Basis of Estimate (BOE): When bidding on a government contract, it is essential to provide a detailed cost breakdown and supporting documentation, referred to as a basis of estimate. This includes a clear breakdown of costs by category, supporting documentation for direct and indirect costs, labor rates, material pricing, subcontractor quotes, and any other relevant information to substantiate the proposed price. In the next section, we explain how
It's important to note that government contracts may have specific requirements and regulations regarding pricing, and contractors should carefully review the solicitation documents to ensure compliance. The government agency may also conduct a cost analysis or price evaluation to assess the reasonableness and competitiveness of the proposed price
Competitive indirect rates play a crucial role in supporting competitive pricing for government contractors. Indirect rates refer to the overhead costs incurred by a contractor, such as administrative expenses, facilities costs, fringe benefits, and other indirect costs. These rates are typically applied to the direct costs of a contract to determine the total price.
Here's how competitive indirect rates support competitive pricing:
Cost control: Competitive indirect rates indicate that a contractor has efficient cost controls in place. By managing and minimizing indirect costs, contractors can offer more competitive pricing to win contracts. Lower indirect rates allow contractors to allocate a larger portion of their budget to direct project-related costs, making their overall pricing more attractive.
Improved efficiency: Contractors with competitive indirect rates are often more efficient in their operations. They streamline their administrative processes, optimize resource allocation, and find ways to reduce unnecessary overhead costs. This efficiency translates into cost savings that can be passed on to the government as competitive pricing.
Enhanced competitiveness: When competing for government contracts, contractors are often required to submit cost proposals. These proposals must include the applicable indirect rates. Contractors with lower indirect rates can offer more competitive pricing, making their proposals more attractive compared to those with higher rates. It increases their chances of winning the contract.
Strategic planning: Contractors that actively manage their indirect rates engage in strategic planning to optimize their cost structure. They identify areas for cost reduction, invest in technologies that improve efficiency, negotiate favorable contracts with suppliers, and implement best practices. This proactive approach helps them achieve competitive rates, enabling them to offer more competitive pricing.
Customer value: Competitive indirect rates allow contractors to deliver better value to their government customers. By offering cost-effective solutions, contractors can provide high-quality products or services at a competitive price. This value proposition can differentiate them from their competitors, resulting in a higher likelihood of winning contracts.
Long-term viability: Government agencies often seek contractors who can provide reliable and sustainable services over the long term. Contractors with competitive indirect rates demonstrate financial stability and the ability to manage costs effectively. This reassures the government that the contractor can deliver on its commitments without excessive cost escalations, contributing to the contractor's competitiveness.
In summary, competitive indirect rates support competitive pricing for government contractors by enabling cost control, promoting efficiency, enhancing competitiveness, facilitating strategic planning, delivering customer value, and ensuring long-term viability. By managing indirect costs effectively, contractors can offer more attractive pricing while maintaining profitability.
A Basis of Estimate (BOE) is a document or methodology used by government contractors when bidding on a government contract to provide a detailed and well-documented estimate of the costs, resources, and assumptions associated with the proposed work. It serves as a foundation for establishing the proposed price and justifying the cost elements included in the bid.
The BOE provides transparency and accountability to the government agency, allowing them to evaluate the reasonableness, realism, and completeness of the contractor's proposed costs. It helps the agency understand how the contractor arrived at the proposed price and the underlying considerations and assumptions.
Here are key components typically included in a Basis of Estimate:
Scope of Work: Clearly define the scope of work and the deliverables required by the contract. This includes outlining the tasks, activities, milestones, and any specific requirements or constraints.
Work Breakdown Structure (WBS): Develop a hierarchical breakdown of the work to be performed, typically using a Work Breakdown Structure (WBS). The WBS provides a systematic way to organize and categorize the work elements and facilitates cost estimation and resource allocation.
Cost Elements: Identify and describe the cost elements associated with the contract. This includes direct costs (e.g., labor, materials, subcontractor costs), indirect costs (e.g., overhead, G&A expenses), and any other cost categories relevant to the contract.
Cost Estimation Methodology: Describe the methodology used to estimate costs for each cost element. This may involve using historical data, industry benchmarks, vendor quotes, expert judgment, or other relevant techniques. Provide detailed calculations, assumptions, and data sources to support the estimated costs.
Basis of Pricing: Explain the basis on which the proposed pricing is developed. This includes the cost elements included the cost structure (e.g., fixed-price, cost-reimbursable), and any other pricing considerations or adjustments.
Assumptions and Constraints: Clearly state any assumptions made during the estimation process, such as labor rates, material pricing, productivity levels, or project-specific conditions. Identify any constraints that may impact the estimated costs, such as regulatory requirements, availability of resources, or schedule limitations.
Supporting Documentation: Include supporting documentation to validate the estimate, such as historical cost data, market research, subcontractor quotes, or any other relevant information. This helps substantiate the proposed costs and demonstrates the reliability of the estimate.
Risk Assessment: Assess and address potential risks and uncertainties that may impact the estimated costs. This includes identifying and quantifying risks, proposing risk mitigation strategies, and considering contingencies in the pricing.
The Basis of Estimate should be comprehensive, well-documented, and transparent to facilitate a thorough evaluation by the government agency. It provides the necessary information for the agency to evaluate the reasonableness and realism of the proposed costs, compare bids, and make informed decisions when selecting a contractor for the contract award.
The following pricing techniques may vary based on solicitation requirements and the type of contract. Also, contractors with a Forward Pricing Rate Agreement cannot utilize most of these techniques.
Modifying the fee structure is the simplest way to be more competitive on the pricing while still maintaining a level of profitability. Many times, the fee percentage can be reduced to a level that still allows for a modest profit. In other cases, the pricing allows for an award fee and a base fee. The contractor will opt for a lower base fee and bank on making money in the award fee. This shows the contractor's confidence in their ability to perform well enough to maximize the award fee.
Contractors may want to look at their indirect rate structure to find ways to be more competitive with their pricing. This technique can be tricky and should be analyzed carefully to make sure other contracts are not impacted by these decisions. This technique may involve contract specific fringe or overhead pools, utilizing on-site vs off-site overhead pools, or creating a handling pool. While modifying your indirect rate structure may help the contract being proposed, it could have a negative impact on other contracts. The impact on future work should also be considered.
Many companies subcontract a portion of their work to a company with expertise in certain areas. Or companies will look to create a teaming arrangement in order to bid a contract. These teaming or subcontracting arrangements allow for companies to structure the pricing in the most competitive way. Since most government contracts required labor, build competitive labor rate by teaming can be a good strategy. You should carefully review the labor categories and develop target rates that will help you achieve a lower price.
Bidding the Contract at a Loss
It seems hard to believe that anyone would bid on a contract knowing they would lose money, but it is very common. There are several reasons a company would take a risk on proposing a price that is less than fully burdened cost. Some of the reasons that this may make sense are:
Not all of these strategies work for all contractors, but you should analyze your pricing from various angles to see if there's a strategy that you can utilize to make you both competitive and profitable when you are awarded the contract. It's very important to 'run the numbers' to make sure that any pricing strategies that you use do not impact any of your existing contracts or lock you into something that will hurt pricing of future contracts.
By combining these strategies, government contractors can develop pricing proposals that are both competitive and aligned with the agency's needs, enhancing their chances of winning contracts.
Utilizing managed service support can contribute to competitive pricing when bidding on government contracts in several ways:
Cost Efficiency: Managed service providers (MSPs) specialize in delivering cost-efficient services by leveraging their expertise, economies of scale, and streamlined processes. By engaging an MSP, government contractors can benefit from the MSP's optimized resource allocation, standardized procedures, and efficient service delivery models. This can result in reduced costs compared to developing and maintaining an in-house team to provide the same services.
Scalability and Flexibility:MSPs often offer scalable service models, allowing government contractors to adjust the level of support based on the contract's requirements. This scalability ensures that contractors can align their costs with the project's needs, avoiding unnecessary expenses. MSPs can quickly ramp up or down the service levels as per the contractor's demand, providing flexibility and cost optimization.
Access to Specialized Expertise: MSPs typically have a pool of specialized professionals with expertise in various domains. By utilizing managed services, contractors can access these professionals who possess the necessary skills and knowledge to support specific contract requirements. This eliminates the need to hire and train in-house staff, saving recruitment and training costs.
Reduced Overhead Costs: Engaging an MSP can help reduce overhead costs associated with maintaining dedicated staff, infrastructure, and technology. MSPs often operate from their own facilities and utilize their own equipment and systems, relieving contractors from the burden of investing in expensive infrastructure. Contractors can then focus their resources on core business activities, further contributing to cost savings.
Predictable Pricing Models: MSPs typically offer predictable pricing models, which can be beneficial when developing pricing for government contracts. These models often involve fixed or tiered pricing structures that allow contractors to forecast and budget the costs more accurately. Predictable pricing enables contractors to develop competitive proposals and avoids unexpected cost escalations during the contract execution.
Leveraging Technology and Innovation: MSPs are often at the forefront of technological advancements and innovations in their respective fields. By engaging an MSP, government contractors can benefit from access to the latest technologies, tools, and best practices. This enables contractors to deliver high-quality services efficiently and effectively, enhancing their competitiveness in the bidding process.
Focus on Core Competencies: Utilizing managed services allows contractors to focus on their core competencies and strategic priorities. By outsourcing non-core functions to MSPs, contractors can concentrate their resources and efforts on delivering value-added services and meeting the specific requirements of the government contract. This focus on core competencies can result in improved performance and increased competitiveness.
When engaging a managed service provider, it's essential for government contractors to conduct due diligence, including evaluating the MSP's track record, reputation, and ability to meet contract requirements. Contractors should also carefully assess the pricing structure and ensure that it aligns with their budgetary constraints and the overall competitiveness of their bid.
Overall, by leveraging managed service support, government contractors can benefit from cost efficiencies, scalability, access to specialized expertise, reduced overhead costs, predictable pricing models, technological advancements, and the ability to focus on core competencies. These advantages can contribute to developing competitive pricing when bidding on government contracts.
AtWork Systems designed OneLynk to enable GovCon's to navigate through the challenges of growing a GovCon business by providing a DCAA compliant ERP system to deliver exceptional performance. While a government contractor is maturing in the government market, as either a prime or subcontractor, OneLynk is there to instill the processes and systems needed to help achieve government compliance. AtWork Systems offers fractional subject matter experts - across functions like accounting, HR, financial, contract and project management - to help startups step out on the right foot or to help more mature firms transform ad hoc or inadequate processes into higher levels of performance. The combination of AtWork Systems' OneLynk and associated professional services is available as a comprehensive, secure, and affordable means of gaining the competitive advantage.
AtWork Systems is an Arlington, Virginia based managed services and software development company. Its principals have decades of experience doing business with and working for federal, state, and local government. They developed OneLynk as a configurable and scalable SaaS platform that digitizes and optimizes processes while providing just in time business intelligence for decision making. OneLynk contains a suite of easily configurable web applications for automating and monitoring business transactions, including: human capital management, accounting, timekeeping, expense management, procurement, contracts and project management, payroll services and more. Discover the latest ERP System for Government Contractors at www.atworksys.com.