Competitive pricing fundamentals

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Competitive pricing fundamentals

The federal government has entered an extreme phase of cost competitiveness where a majority of bids are being awarded on the basis of lowest price, technically acceptable.

This means that you need to have competitive pricing information readily available in order to develop winning pricing strategies and cost proposals.

The most successful government contractors make a long term commitment to developing and adhering to a comprehensive price-to-win process. They also build a set of repeatable pricing models (either in Excel or from pricing vendors), hire experienced pricing specialists (directly or as consultants) and start the pricing process well before the release of an RFP.

Pictured below are several key components for determining what price you should bid (commonly referred to as the Price-to-Win).

Key Proposal Pricing Components

Available Funding: Determining the government’s ceiling price and confidence factor for the target pursuit informs your bid/no bid decision and bid strategy development.

Companies can easily spend a lot of money chasing work only to see the funding shifted or pulled back. Unfortunately, funding information for specific government programs can be very difficult to ferret out. However, data is often available at the agencies website and commercial market research databases as well as through relationships with government program managers and independent expert consultants.

To make an educated guess at available funding, you should:

  • Read articles by industry analysts
  • Talk with other companies in the same industry
  • Read about similar awards in trade magazines
  • Examine agency budget data and priorities

Legislative affairs experts can help decipher existing budget documents to segregate a specific program your company might be interested in. An agency’s previous contract spending history is also a valuable window into the likelihood of a program being funded and, if so, at what level. This information resides in the Federal Data Procurement System which is available in more timely searchable formats through FEDMINE.

Once you’ve identified the available funding for a project, you are in a better position to estimate a ceiling price. In other words, the most the government would probably be willing to pay for the solicited products or services. The funding and how confident you are that this funding will be made available are key components of a good decision.

To identify which projects are most likely to have recompetes that are well-funded, look for how much the agency has spent thus far compared to the total contract value.

For example, if a three-year contract has reported an amount close to the spending ceiling in the first year, there is a good chance it will be recompeted early with a fully funded follow-on contract. If the reported spending is on track, it is a good bet that the contract will run its full term with a well-funded follow-on contract, unless the incumbent has performance issues or the budget is unexpectedly cut.

By contrast, if the agency’s reported spending on the procurement is well below the budget baseline or expected spending, then the contractor might be performing poorly, the program might not be seen as really required by the customer, or the program might be targeted for restructure or early recompete.

Should Cost: Understanding what the government believes a program “should cost” should be a key component of your pricing strategy.

As the name implies, this essentially constitutes the amount that the agency has determined the project should cost; it does not necessary reflect the amount of the resulting contract award.

Quite often it’s driven by the agency’s need to get approval for the project’s budget and comprises internal agency management costs, contractor costs and acquisition costs.

For instance, a should-cost analysis for an information technology project could include, among other things:

  • Software development
  • Total ownership
  • IT services including ongoing support
  • IT infrastructure

More and more, the government is using the total life cycle cost of a project rather than just up-front expenses in its procurement cost estimates. Life cycle costs are a more accurate determination of a budget, as opposed to just developing something and then finding out that the maintenance costs are considerably more than you thought.

A preliminary project work breakdown structure (WBS) will provide you with a structure that defines how the job will be done – a way to organize the work elements and to ensure that all the necessary activities have been considered. This is particularly applicable to hardware and software development contracts. However, it can also be used on task and deliverable oriented labor contracts.

There are several approaches to defining a WBS – for instance, by deliverable, process (function) or by activity. Regardless, it should clearly identify necessary tasks and should be used to develop schedules, cost estimates, skill sets and project risks. Here is detailed guidance for developing an effective WBS.

For services contracts, provide a detailed itemization of the resources to be allocated to each major work activity in the project WBS. Specify the numbers and required skill levels of personnel for each work activity.

It is important to get a copy of any teaming agreements to understand the commitments that may have been made as well as RFP and proposal subcontracting requirements so you can factor these into your staffing plans.

You should then develop a staffing approach that takes into consideration the desired mix of internal assignments versus new hires. You should ascertain internal staff availability and skill match. Be sure to balance personnel qualifications and skill levels with contract labor requirements and your estimated budget.

There are several experts and expert companies in GOVPROP.com that can help to determine what a product or service should cost. Many of them have developed pricing models over many years for a specific segment of industry. For instance, weapon platforms, logistics systems, software development, professional services and communications networks.

Most construction companies have internal pricing models which they use to determine what a project should cost.

Of course, what a project “should cost” and what your company actually bids will depend on several other factors such as the anticipated competition’s bidding history as well as government’s previous contract award tendencies.

Customer Award History: A key pricing component is knowing the award tendencies of the customer. Find out if they are more likely to award to the contractor who proposes the best solution at a reasonable price or to the lowest priced technically acceptable (LPTA) bidder. Other companies, consultants and customer staff can often provide some of this background.

There is a significant amount of information available in commercial market research databases like FEDMINE that will enable you to reverse engineer existing contracts to determine the burdened labor rates, direct labor rates and average labor rate per hour. The same holds true for hardware and software projects. If you can’t find all the information you need to perform this analysis, GOVPROP.com experts can often dig it out for you.

Price Competitiveness: Analyze your company and/or business unit cost pool structure and cost elements, bidding practices related to these pools, and disclosure statement details to determine if you are competitive in a particular market. Here is an overview of the calculation of indirect rates on government contracts.

Wrap Rate Analysis (for labor contracts): Research GSA and other rate schedule, labor category, burdened labor rates for your specific service areas and target agencies; map these labor categories to various salary surveys; and calculate the burden to each labor category. Identify and discard gamed rates; and average remaining rates into competitive wrap rates.

This analysis provides you with insight into the wrap rates of competitors and bidding strategies. Unfortunately, most companies don’t have the internal resources to perform this analysis; yet it is critical to surviving in this new cost competitive environment. That’s why when it comes to competitive pricing a GOVPROP pricing consultant might be your best friend.

Financial Analysis: Perform reverse engineering on similar awarded contracts with available financial information to determine burdened labor rates, direct labor rates, average rate per hour and total contract value, as appropriate. This provides you with data to assist in determining whether to bid on a recompete or similar contract and if so, what the competition, including the incumbent(s), might bid.

Cost Estimation: There are two basic ways to develop cost estimates for hardware and software projects: (1) top-down, based on similar projects, and (2) bottom-up, based on the estimated cost of each element of a project. Cost estimates will be more or less difficult depending on what the government is purchasing. A pure labor contract is much easier than major system development. The should cost analysis described before will provide valuable input to this activity. However, you will also need to factor in your own unique solution to the government’s requirements as well as competitive landscape.

Competitive Price Determination: The previous seven components should inform your pricing activities. Other important inputs for determining the price you will bid are the competitive lanscape, the customer’s likes and dislikes, the agency’s pricing/award history, the competition’s likely pricing, a cost basis and justification, and your company’s ability to successfully perform at the bid price, especially on fixed-price or performance-based contracts. Here is a summary of the major risks associated with different government contract types:

  1. Cost-plus fixed fee – Kind of like investing in certificates of deposit. A lower known profit with no upside potential but minimal financial risk.
  2. Cost-plus award fee – Either some or all of the potential profit is awarded based on pre-defined performance criteria. A good deal for reliable companies – not so good for poor performers.
  3. Cost-plus incentive fee – Same protection from overruns but with performance based fee.
  4. Time and materials – Depending on how the contract is written, there is the potential for higher profit if you hire and manage to your negotiated labor rates. The opposite is also true.
  5. Cost-plus with rate limits – Something for everyone and, if you ask some people, nothing for anybody!
  6. Firm-fixed price level of effort – Too many variables that can go wrong for labor contracts. Usually best to avoid these.
  7. Performance based – Not “officially” a contract type. But, very suitable when the government knows what it wants. When it doesn’t, this can be a nightmare. Hence it is higher on the risk spectrum.
  8. Fixed price deliverable – Depending on the product or service to be delivered, this isn’t necessarily that risky. But, it is particularly onerous for system development projects including commercial off-the-shelf software procurements that need considerable enhancements to meet the customer’s real, often unstated, requirements.

For product (hardware/software) procurements, you build your price around contract risk, your anticipated costs, additional burdens and profit. For labor contracts, you establish a target salary, burden (wrap rate) and profit for each labor category. You then compare this to the competitive range – – the anticipated low and high bid prices. You can then determine the amount of risk your company is willing to take to achieve the desired target price.

This diagram provides a very simple view of a possible outcome of a competitive price assessment based on the information described in the previous pricing slides.

Competitive Pricing Range

It summarizes the results of an analysis of the government’s most likely should cost estimate and a determination of the most likely competitive range for source selection.

By understanding where your company falls in the competitive range as it relates to the customer’s probable should cost and the likely competitors, you can determine if you should even bid the job and, if so, what changes or actions you might need to take to your capture strategy including staffing mix to achieve your target price.

Competitive Range

If this contract was a best value procurement, then your company’s position as shown here might be sufficient assuming you have outstanding key personnel, client relations and past performance.

On the other hand, the delta between your price and the Company A and B prices probably wouldn’t allow the government to award you the contract on a lowest price, technically acceptable procurement.

There are, of course, much more sophisticated pricing tools and methodologies. But, for many smaller contractors, even a simple cost competitive exercise can make a big difference.

Clearly, this is not an activity for the faint of heart! GOVPROP.com pricing experts can help reduce some of the stress.

– Mike Lisagor & Kathleen Sievers, DELTEK

By | 2019-02-21T14:10:33+00:00 October 26th, 2014|post, Pricing, Estimating & Reviews, Uncategorized|0 Comments