Pricing Strategies

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

[email protected]

Susan Moser, CVA, CITP, CPA

[email protected]

Monday, April 10, 2006

2:45-3:45 pm

Proposal Pricing Strategies




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




Understanding the requirements

• Read the Solicitation– Determine Contract Type(s)– Section L, Instructions, Conditions, and

Notices to Offerors– Section M, Evaluation Factors for Award




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





• 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





• 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





• 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




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




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





• 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





• 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




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





• 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





• 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





• 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





• 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





• 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





• 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





• 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





• 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)





• Separate materials from subcontracts– Create materials acquisition pool (drop-

ship equipment, software, purchased maintenance, licenses)

– Create separate subcontracts management pool

– Strategically different rates





• 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





• 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





• 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





• 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?





• 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





• Revise direct vs. indirect criteria– Does it support contract’s SOW activities?– Does it support contract deliverables?– Job titles and descriptions may need

revisions





• Refine cost escalation techniques– Consider impact of contract type on

escalation– Vary escalation by cost element– Escalate (+ or -) indirect rates– Manage promotions vs. raises




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




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




QUESTIONS?

Pricing Strategies

Business

new rates

revised rates

predictmanage rates

multiple fringe rates

indirect cost structure

contractor site overhead

pm proposal pricing

rate stability