Transcript
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management2
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Breakout Session # 903
Cherry, Bekaert & Holland, LLP
Beverly Arviso, CFCM, CPCM, CPA
barviso@cbh.com
Susan Moser, CVA, CITP, CPA
smoser@cbh.com
Monday, April 10, 2006
2:45-3:45 pm
Proposal Pricing Strategies
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management3
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Objectives
• Understanding the requirements
• Fundamental Cost vs. Pricing Concepts
• Direct Labor Rate Development
• Indirect Rate Development
• Evolution of Indirect Rates
• Proposal Pricing Strategies
• Common Pitfalls and Helpful Hints
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management4
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Understanding the requirements
• Read the Solicitation– Determine Contract Type(s)– Section L, Instructions, Conditions, and
Notices to Offerors– Section M, Evaluation Factors for Award
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management5
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Fundamental Cost vs. Pricing Concepts
• Contract Pricing permitted for:– GSA Schedules (with exceptions)– T&M or FP contracts with adequate price
competition– Commercial items or services– Prices set by law or regulation
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management6
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Fundamental Cost vs. Pricing Concepts
• Contract Pricing is:– Driven by market forces– Not subject to FAR Cost Principles or CAS– Full of deviations and innovations– Unauditable because….
• Not determined by cost accounting
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management7
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Fundamental Cost vs. Pricing Concepts
• Contract Costing required for:– Cost reimbursement contracts (always)– T&M (sometimes)– Fixed Price (occasionally)– Letter Contracts (usually)– Contract Terminations (many, but not all)– Contract Changes (FAR & Supplement,
other factors
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management8
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Fundamental Cost vs. Pricing Concepts
• Contract Costing is:– Driven by historical and/or projected costs– Constrained by applicable regulations
(FAR, CAS, OMB Circular, DFARS, etc.)– Sensitive to unallowable and unbillable
costs– Required to be consistent (FAR 31.202 &
203, CAS 401, 402)– Subject to audit
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management9
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Direct Labor Rate Development
• Actual direct labor rates
• Labor category rates
• Blended rates (covers several categories)
• Weighted average category rates
• Category rates when using prime and subcontractor labor
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management10
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Indirect Labor Rate Development
• Creating Your Indirect Cost Structure• Define direct costs• Aggregate indirect costs into logical groupings
– Key Terms= Homogenous, Causal/beneficial Relationship
• Identify allocation bases (objective & verifiable)• Document system of pools and bases
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management11
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Indirect Labor Rate Development
• Forward pricing rate agreements (FPRAs) (FAR 15.407-3) are voluntary agreements entered into to facilitate negotiations of contracts and modifications
• FPRAs represent reasonable projections of specific costs that are not easily estimated for or identified with a specific contract
• FPRAs may include rates for labor, indirect costs, material obsolescence and usage, spare parts provisioning and material handling
• FPRAs may cover multiple years• Allocation of pools and bases should be consistent with
accounting practices
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management12
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Indirect Labor Rate Development
• Changing your indirect rates for bidding– Consider new rates for changing conditions, esp. large bids– Calculate and document new rate projections– Bid revised rates now!, then….– Submit revised Forward Pricing Proposal – Provide narrative explaining how rates are applied, e.g.,
overhead is applied to the sum of direct labor– For CAS covered contractors, MUST be consistent with
disclosure statement
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management13
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Evolution of Indirect Rates
• Start-up and smaller companies tend to have– Lower fringe benefits rate
– Widely varying overhead rate(s)
– Medium to high G&A rate
– Difficult to predict/manage rates
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management14
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Evolution of Indirect Rates
• As companies expand and grow to medium size– Lower fringe benefits typically increase– overhead rate(s) approach industry norm– G&A is unlikely to remain low as
infrastructure is developed– Rate stability improves somewhat
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management15
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Evolution of Indirect Rates
• As companies become large businesses– Fringe benefits stabilize– Contractor site overhead rates may increase (nicer
facilities)– G&A declines as base expands– Rates are stable and predictable– New contracts don’t have as much impact on rate
structure
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management16
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Evolution of Indirect Rates
• Reasons for the evolution of indirect rate structures– New requirements from current customers– New customers– Competitor’s actions– Need costing flexibility– Organic growth and diversity– acquisitions
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management17
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Warning:– These strategies have been successfully
employed by at least one contractor, but they may not be appropriate or acceptable for your company and your circumstances
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management18
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Create multiple fringe rates– Define labor classes according to fringe
benefits– Customize benefits for employees,
especially semi-retired– Benefits packages by division
Note: Monitor compliance with DOL and 401(k) Rules
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management19
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Diversify overhead rate(s) to reflect– Customer site vs. contractor site– Government vs. commercial– Geographic distinctions– Product/service lines– Long term vs. short term projects
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management20
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Create project-specific overhead rate– A dedicated effort within a business unit– Employees dedicated to project– One rate for “on-site” (contractor) and “off-
site” (customer) employees– Indirect costs may be direct
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management21
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Eliminate/reduce indirect cost applied to pass-throughs– Change G&A base from TCI to value-
added– Create material handling pool(s)– Define subcontracts vs. consultants
(beware of FAR 44.101)
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management22
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Separate materials from subcontracts– Create materials acquisition pool (drop-
ship equipment, software, purchased maintenance, licenses)
– Create separate subcontracts management pool
– Strategically different rates
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management23
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Establish Multiple Business Units– Each unit has own G&A rate– Some TCI, some value-added– Create home office expense pool– Manage where B&P/IR&D is incurred and
expensed
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management24
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Create service centers– Easier way to account for common indirect
costs– Manage costs between indirect pools
• Common examples: facilities, IT, Telephone & Communications
• Other candidates: accounting, HR, administration
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management25
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Create direct charge service centers– Accumulate labor, fringe, and other costs– Pooled costs may become direct cost on
contracts– May also go to other indirect pools
• Examples: IT, facilities, PMO
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management26
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Refine allocation bases– Examine relationship between pool and
base• Define classes of consultants, and• Overhead applied to consultant company
facilities• Which ODCs get G&A vs. MH?
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management27
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Refine pool composition– Move cost elements to lower level pools
when possible• E.g., bonuses, training in fringe benefits
– May or may not change multiplier
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management28
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Revise direct vs. indirect criteria– Does it support contract’s SOW activities?– Does it support contract deliverables?– Job titles and descriptions may need
revisions
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management29
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Proposal Pricing Strategies
• Refine cost escalation techniques– Consider impact of contract type on
escalation– Vary escalation by cost element– Escalate (+ or -) indirect rates– Manage promotions vs. raises
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management30
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Common Pitfalls and Helpful Hints
• Review solicitation web site often for changes • Prepare, update, and deliver your proposal
using a compliance matrix that is updated as changes to the solicitation are noted
• Reduce math errors or inconsistencies in the price/cost proposal by:– Use rounding– Have independent party verify cost proposal on a
calculator
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management31
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
Common Pitfalls and Helpful Hints
• Negotiation of subcontract type• What should you do when your customer only has x
dollars and you know it will cost more to perform the work?
• may want to consider offering discounts to GSA rates and materials when using a GSA contract vehicle
• Promise something in technical, but failed to account for the cost in the cost proposal
• Cost proposal not prepared consistent with accounting practices can create problems
NCMA World Congress 2006:
Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management32
April 10–12, 2006Hyatt Regency AtlantaAtlanta, GA
QUESTIONS?
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