Estimating and Bidding - Washington...

Estimating and Bidding

Creating a System for Profitability

Part One

Mark Little MAOL, CPPO

Dale Colbert BA, CPPB, CPPO

Darrell Sundell MBA, CPCM, CFCM

Procurement Technical Assistance Center (PTAC)

Sponsored by the

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Table of contents

• Government Buyer Pricing Objectives

• Estimating and Pricing

• Understanding the Requirement

• Understanding the Contract

• Know the Assumptions

• Costs

• Beginning the Estimate

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The Goal

Win the Bid / Get the Job

Perform to Expectations

Make Money

Estimating project and product costs is the foundation for strategic pricing. The

effectiveness of your process can be the difference between profits and losses.

Government Pricing Objectives

The primary government buyer pricing objective for all contract actions is to acquire supplies and services at fair and reasonable prices from responsible vendors that submit responsive bids.

The objective of this training is to help you be that vendor.

Fair and Reasonable

Fair and Reasonable Prices. What Is Fair? Buyers and sellers may have different perceptions on what price is fair. To be fair to the buyer, a price must be in line with or below either the:

· The fair market value of the contract deliverable if that can be ascertained through price analysis; or · The cost of providing the contract deliverable that would have been incurred by a well-managed, responsible firm using reasonably efficient and economical methods of performance and production.

The government expects to pay the fair market value, given the prices of market transactions between informed buyers and sellers under similar competitive market conditions for deliverables with similar product, quality, and quantity requirements.

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The government buyer should consider a price that is TOO HIGH to be unfair. If they agree to a price that is too high:

· They have failed to fulfill your most basic responsibility as a Government contracting official; · They will have wasted scarce Government funds; · They are publicly accountable and may have to answer to management, the auditors, elected and appointed public officials, and the public at large.

Why do government buyers care if a low offer is unrealistic?

Because an unrealistic price puts both parties at risk. The risk is that the firm; to cut its losses; might:

· Cut corners on product quality; · Deliver late;

· Default, forcing a time-consuming re-procurement; or, · Be forced out of business entirely. To be fair to the seller a price must be realistic in terms of the seller's ability to satisfy the terms and conditions of the contract and cover the seller’s realistic and reasonable costs and profit expectations.

What is reasonable? A reasonable price is a price that a prudent and competent buyer would be willing to pay, given available data on market conditions; the current economic trends in supply, demand, general economy, and the competition.

Market conditions change constantly. A price that is reasonable today may not be reasonable tomorrow. The forces of supply and demand can have a significant effect on product prices:

· If demand is constant, decreasing supply usually results in higher prices, while increasing supply usually results in lower prices; alternately,

· If supply is constant, decreasing demand usually results in lower prices, while increasing demand usually results in higher prices.

General economic conditions affect the prices of all products, but the effect will NOT be the same for every product. Inflation and deflation affect the value of the dollar. Boom, recession, and depression affect available production capacity.

The bottom line is, know your market.

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Responsible Bid

In determining whether the bidder is a responsible bidder, the agency must consider the following elements:

• The ability, capacity, and skill of the bidder to perform the contract or provide the

• service required;

• The character, integrity, reputation, judgment, experience, and efficiency of the

• bidder;

• Whether the bidder can perform the contract within the time specified;

• The quality of performance of previous contracts or services;

• The previous and existing compliance by the bidder with laws relating to the

• contract or services; and

• Such other information as may be secured having a bearing on the decision to

• award the contract.

RCW 39.26.160 http://app.leg.wa.gov/rcw/default.aspx?cite=39.26.160

Responsive Bid

A bid that conforms in all material respects to the terms and conditions, the specifications, and other requirements of a solicitation. Common mistakes that result in a nonresponsive determination include:

• Bidder fails to provide or submit all information as required;

• Bidder does not possess the required credentials, qualifications, certifications

personnel, equipment, or resources to be eligible for consideration; • Bidder fails to meet the minimum specification requirements;

• Bidder fails to accept the terms, conditions, or requirements of the solicitation;

• Bidder will not accept an award unless the solicitation terms and conditions are

modified or altered;

• Bidder indicates that it will only accept an award for all line items when the

solicitation allows award by line item or aggregate grouping of line items;

• An authorized signature page is not signed and there is no satisfactory evidence

submitted prior to due date and time which clearly indicates the Bidder’s desire to be bound by his/her bid such as a signed cover letter; or

• The item bid does not meet the stated specifications and the Bidder has not

indicated the item bid is an alternate.

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Price Analysis

Government Buyers will perform price analysis. Price analysis always involves some form of comparison with other prices, such as:

• Proposed prices received in response to the solicitation;

• Independent Government Estimates;

• Parametric estimates or estimates developed using rough yardsticks;

• Prices obtained through market research for the same or similar items;

• Commercial prices including competitive published price lists, published

commodity

• market prices, similar indexes, and discount or rebate arrangements;

• Previously-proposed prices and contract prices for the same or similar end items.

In analyzing offers, the Government Buyer is required to perform “due diligence”. They must perform some analysis on behalf of the taxpayer to insure that taxpayers are not burdened with pricing that is unacceptable. One litmus test is “the reasonable man”. If a reasonable man on the street would see the price as reasonable, the buyer has passed the first level of scrutiny. However, if a bit of investigation would reveal; that better prices were available, the buyer has still fallen short.

Estimating

Estimating is the process of converting a Statement of Work into a quoted price. It is the process of determining the price to charge to complete a job, deliver a service, build a structure, develop equipment, or solve a problem. It begins with understanding the requirements and carries through to developing a winning price. Ideally the estimated price provides enough revenue for the contractor to cover the direct costs, the appropriately allocated indirect costs and their desired profit. Through the process of estimating the contractor will determine the bid price used in response to the solicitation – an RFQ, ITB or RFP.

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Pricing

The quoted price is the final product of the estimating process. You will see that to determine the price for a product or service your business should:

Understand the Scope of Work, the requirements and the solicitation;

Understand the contract Type and Risk; and,

Understand the details of the Terms and Conditions.

You will want to determine and quantify the risks, and the assumptions, you will want to research how the market will respond to your product or service pricing, what the competitors are offering and what their costs and desired profit are likely to be. You will want to develop an overview of your own cost structure.

Scope of Work

The Description of What is Needed An Indication of What is Not

The scope is the core of the project. It may also be called the Statement of Work, Statement of Objectives, Performance Work Statement, Specifications, Plans & Specifications, Requirements or, the Solicitation Deliverables. Study and understand every line. Make a list of questions. When you review other parts of the document; look for the answers. Document the answers you have found, and make special note of those you have not.

It is from this list of questions that you will develop your questions for the pre bid meeting and for questions to the Procurement coordinator.

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Understanding the Requirement

Engineering Scope Defined by the Plans and Specifications One aspect of the scope statement may deal with engineering. Engineering requirements will be defined by the plans and specifications. The Engineering Scope is concise and defines:

• Quality and the quantity; • Depth, breadth, and width dimensions; • Materials; • Functional engineering requirements; • Make & Model specifics; and • Construction details.

Context Scope Defines the Context or Environment in Which the Project Will Be Built or Conducted Another aspect of the scope may be the context. This aspect establishes and defines the context or environment in which the project will be built or conducted. The Context Scope is environmental and defines:

• Ongoing operations; • The technology to be employed; • Location; • Conditions of the work area; • Economic factors; • Political factors; • Applicable regulations; and • Anticipated weather factors.

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Execution Scope

Defines the processes to be used to construct the project in the context And the Execution aspect which establishes and defines the processes necessary to construct the project. The Execution Scope establishes “how” and defines:

• The means and methods; • The equipment to be used, maintenance to be performed and the labor type and

qualification; • Any temporary structures to be constructed to accommodate construction; • Applicable lead times, and travel terms; • Office requirements on the site; and • Mobilization and demobilization.

Understand the Contract

Plan to attend the site visit or pre-bid meeting if one has been scheduled. It is your opportunity to:

Be engaged, bring and ask questions;

Build rapport if you can;

Identify customers’ key concerns;

Record necessary information;

Take measurements if appropriate;

Make assessments; what needs to be done, difficulty of jobs, ease of access,

conditions, supplies and equipment needed;

Timing and schedule; and

Materials needed.

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Risks

All contracts bring risks. It is important to note that the risk to the Government Buyer is the inverse of your own. Things that protect the public buyer are transferring risk to you. Different types of contract structures place risks differently.

Firm fixed price contracts represent the lowest risk type of contract from the buyer’s perspective, but the highest risk for vendors. While labor hour contracts would be the highest risk to the buyer, because the agency is agreeing to pay for an unknown number of hours to do the job. Even if a ceiling amount was put in place, when the ceiling is reached the project objectives might not yet be accomplished. Here are some types and their respective risk to the contractor.

Contract Types Risk to Seller Risk to Buyer

Firm Fixed Price Highest Risk Lowest Risk

Cost Plus Lower Risk Higher Risk

Time and Materials Lowest Risk Highest Risk

Other Risks

Create a custom risk assessment. Think in terms of the current project. How much might it cost to prevent possible liability; thinking in terms of the current project. Risks can be classified. There are known and controllable risks. For these; estimate the cost of dealing with the causes. There are also unknown and uncontrollable risks. With these you can only anticipate possible consequences. How much might it cost recover from some unexpected setbacks? Would you be able to use insurance as a safety net?

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When you develop your estimate, put a dollar value in your plans for known risks. Price your mitigation plan to cover the things which can be done for treating the causes of known risks. Add to that, a set aside fund to deal with possible consequences for managing uncontrollable risk, factoring in what the likelihood of trouble might be and how much it might cost. For unknown risks you just have to set aside a contingency fund as a percentage of the total cost. This is also an area to weigh your insurance options as a safety net.

Terms and Conditions

Be sure you have a good understanding of the implications for the terms. Check any special

requirements, the planned rollout schedule, and the insurance requirements. Look at:

• Special requirements; • Schedule; • Insurance and Bonding; • Invoicing and payment; and • Liquidated Damages.

Know the Assumptions

Every estimate involves assumptions. What assumptions were made? Knowing, understanding and documenting those assumptions can give you a basis for testing the reliability of your estimate. The estimator needs to be familiar with relevant cost factors and market forces that affect contract pricing. The rationale used to develop the estimate should be clear and reasonable. Identify assumptions that are not consistent with market realities and reconsider. Ask:

• What assumptions were made? • Based on what known data? • How recent is the basis? • How relevant?

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Direct and Indirect Costs

Direct cost is any cost that can be identified with a final objective Indirect cost is any cost that CANNOT be identified with a single objective The first step in estimating, is knowing, your base costs. Understand which costs are direct. Direct Costs are those directly involved with ‘doing the work’ of the project. Indirect Costs are costs involved with ‘being in business’. While these costs would be incurred whether a project is undertaken or not, they may be affected by an increase in activity. Identify any indirect costs that fluctuate with activity.

Direct Costs are Variable Costs for the project These are the costs that are generated by the project, such as labor, materials, subcontractors, and equipment utilized in the work of the project.

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Direct Labor

The Cost of Personnel Directly Involved

Direct Labor is All Inclusive

Direct Labor is Fully Loaded

Direct Labor is the fully burdened total labor cost for the project. It includes labor on the job site and hours put in by others when their work is specifically in support of the project. Labor also includes the overhead costs of the staff working on the job; such as the costs of supervisors, payroll taxes ( FICA and FUTA), holiday set-aside, L&I, retirement and unemployment contributions.

Direct Material

The Cost of Material Directly Involved

Direct Materials All Inclusive

Direct material is the fully burdened total material cost for the project. It includes

material used in the project on the job site and consumed by others when their work is

specifically in support of the project.

Other Direct Costs

Subcontractors hours working on the project and of equipment not owned by the

contractor, which was used on the project are among “other direct costs”. This category

would also include the cost of operations or storage facilities used but not owned by the

contractor to support the project.

Freight or transportation costs directly related to the products or supplies used are “other direct costs” as well.

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Indirect Costs

Indirect Costs are also Called Overhead

They need to be Included in Your Estimate

Incurred Even if there is No Work

Support the Entire Business

A portion of the total company indirect costs will need to be included in your overall cost estimate. Project work needs to carry the cost of the business. Each project should be allocated a portion of the overhead cost, to keep the support structure for the basic business healthy.

Indirect costs are costs of ‘being in business’. Some of these are:

office rental, maintenance, utilities, expenses & supplies

depreciation of equipment and facilities

property taxes, business licenses, dues, & subscriptions

auto & liability insurance

postage & delivery

telephone, fax, & internet

legal & accounting fees

interest on loans

sales & marketing

executive & administrative salaries

estimators & purchasing agent salaries

warehouse rental

other allowable expenses that benefit more than one job

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Beginning the Estimate

Project Breakdown

Project Reassembly

Begin by dismembering the project, breaking it down into smaller components. These may be stages, phases or specific tasks. The idea is to reduce the portion under consideration to the point where it can be fairly accurately considered. Give each stage or task a name and start a worksheet. For each portion, list and indicate the items and costs for that specific portion. Labor, equipment, consumables, insurance, freight, material, etc. Don’t forget to add in costs for risks. You will need to look at your actual cost records. This may not come right from your profit and loss statement, as some of the entries there may be blended figures that include several cost factors or sources. Continue this process until each stage, or task has a complete cost picture. Review your work. What have you forgotten? Will there be additional overhead costs as result of extra volume? Next, think through a reassembly of the components you have just disassembled. As you imagine the development of the project, the construction through the tasks or stages; do additional costs come up? If so, go back and add them in to the appropriate portion. Here is a sample project cost matrix. The project is building construction. This is very simplistic for our purpose. More complex projects would have a page for plumbing, electrical, or maybe HVAC.

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For each portion, I have listed items and costs. Labor, equipment, consumables, insurance, freight, and material. I added in a bit for risk. In site prep, I added a few thousand in the equipment field as there could be inclement weather. In the cement task, I added two thousand in the subcontractor field, again in case of bad weather. I also added two thousand into the trades field of the finish task, just in case there is something to straighten out that is unexpected.

Storage Building Project

Cost Matrix

Prep Cement Walls Roof

Finish Total

Trades $ 5,000.00 $ 1,000.00 $ 55,000.00 $ 15,000.00 $ 18,000.00 $ 94,000.00

Supervision 1 ,000.00 1,000.00 $ 3,000.00 $ 4,000.00 $ 4,000.00 13,000.00

Total Labor 6 ,000.00 2,000.00 $ 58,000.00 $ 19,000.00 $ 22,000.00 107,000.00

Equipment 10,000.00 0 $ 3,000.00 $ 5,000.00 $ 2,000.00 20,000.00

Materials 3,000.00 $ 12,000.00 $ 68,000.00 $ 25,000.00 $ 5,000.00 113,000.00

Subcontractor 0 $ 8,000.00 $ 15,000.00 $ 12,000.00 $ 1,000.00 36,000.00

Other 2,000.00 $ 2,000.00 $ 4,000.00 $ 3,000.00 $ 1,000.00 12,000.00

Total Variable Costs (TVC) $21,000.00 $ 24,000.00 $ 148,000.00 $ 64,000.00 $ 31,000.00 $ 288,000.00

Appendix

Some research sources

· FOIA and Public Records Requests

· GSA Federal Supply Schedules (FSS)

· USASpending or FPDS.gov for Federal Contract Data

· Manufacturer And Dealer Catalogs

· Product Brochures And Promotional Material

· Trade Associations and Journals

· Source Identification Publications

Thomas Register of Manufacturers

Reference USA and Library Research

Internet Searches, Yellow Pages, Etc.

· Government or Independent Testing Websites

· Government Economic Data