Financing and Pricing Strategies For Federal Contractors

Financing & Pricing Strategies for Federal Contractors

MARIA ASUELIMEN | MANAGING DIRECTOR| AMA CONSULTING

110104 SENATE DRIVE SUITE 208 LANHAM MD 20706 WWW.AMACONSULTONLINE.COM

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AMA Consulting Capabilities Federal Contracting Consultation Certifications & Schedules SupportProposal Management Support Leadership Training & Executive Coaching


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How We Work

Values: Excellence, Diligence, Integrity and Compassion Outcomes Oriented Agile Approach Ease of Interaction Networks


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Our Clients Small Businesses: 8(a), WOSB, HUBZONE, SDVOSB, VOSB Small Business Categories

Industries:

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Pricing: Why is it important?•Optimizing your pricing strategy will boost your competitive advantage•Better pricing grows your sales and margins• Pricing is related to Value and Brand Image


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ObjectivesPricing TerminologiesContract TypesOverview Of Pricing StrategiesCost Proposal Process and ToolsWrap rates and Pricing Concerns


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Pricing TerminologiesPricing: The process of establishing a reasonable amount or amounts to be paid for supplies or services.

Direct Cost: Usually Variable cost that is identified specifically with a single cost objective (Project). E.g labor and Materials

• Direct labor costs: labor costs that can be explicitly attributed to a particular task, work order, program, or contract

• Material Costs: Cost of Direct materials that can be explicitly attributed to a particular task, work order, program, or contract

•Other Direct Costs (ODCs): In other words, an other direct cost is a cost that can be identified specifically with a final cost objective that the offeror does not treat as a direct material cost or a direct labor cost e.g. Special tooling, equipment, consultant services, royalties, preservation, packaging & production, bonding


Pricing Terminologies •Indirect Cost: Any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective.

• General & Administrative Cost: The residual costs necessary to run a business, regardless of whether you have government contracts. E.g. Rent, office supplies, marketing, conference fees, professional fees, dues & Subscriptions, and management & admin salaries.

• Overhead Cost: Overhead costs support the efforts of the direct labor workforce, not necessarily related to a specific contract. E.g. a portion of facility costs (For use for performance of contract), benefits (Fringe), payroll taxes, leave, travel.

• Fringe Benefit: payroll taxes, 401K, leave, medical etc.

•Profit/Fee: Remuneration for risk of executing contract.

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Pricing Terminologies• Unallowable costs: Costs expressly defined as unallowable FAR31.205 e.g. First class travel, alcoholic beverages, entertainment, bad debt.

•Wrap Rate: Fully burdened labor rate without profit/fee. Includes the contractor's direct labor wage rate, overhead costs rate, and other costs rate.

•Independent Government Cost Estimate: Government’s estimate of the resources and projected cost of the resources a contractor will incur in the performance of a contract.

•Cost or Pricing Data: This show all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred e.g Historical Accounting Data, salary info.


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Contract TypesFixed Price Time & Material Cost Plus

One amount for goods/services for a fixed time

Based on number of hours on a fixed rate. Focus is on labor categories

Reimbursement for cost + negotiated fee (Used for a lot of defense contracts)

Price Breakdown ExampleDirect Cost: $1MIndirect Cost: $900KTotal Price: $2M

Price Breakdown ExampleHrs Rate 5000 $100/hr Price $500K

Price Breakdown ExampleDirect labor: $100KOther Direct Costs: $30KG&A: $20KFee (6%): $9000Total monthly Price: $159K

Used when scope is well defined. Important to know the work and customer. Contractor bears majority of contract risk, no govt oversight of cost.

In between FP and Cost Plus

Scope not well defined, Govt bears majority of the risk, heavy Govt oversight of costs, DCAA Accounting/Cost Accounting System, Certified Cost Data


Overview of Pricing StrategiesKey Points• Understand the importance of price to customer• Have a reasonable definition of best value• Know the agency’s history of evaluating and awarding contracts• Know your competitors vulnerability and tolerance for risk• Have access to more than one accurate pricing data source• Have a standard system for estimating costs


Overview of Pricing Strategies Don’ts• Presume that the Gov’ts estimated contract value, state contract ceiling, currently available funding is reflective of an ideal target evaluation price of competitive range• Let pricing be done at the last minute• Use pricing templates without tailoring it for compliance• Use only once pricing data source


Overview of Pricing StrategiesTypesPrice to Win Price to Perform

Results based assessment of price your competitor is most likely to bid

Actual price it will take to execute the contract: Is price sustainable with current Indirect rate multiplier?

Mostly based on your competitors cost structure and ROI goals

Based on your company’s cost structure: How much growth base & Organic should I consider to be equitable?

May show you opportunity to lower price and increase value

Can be limited to contractor’s perspective not what the customer is “accustomed to” paying for goods/services

Has to be developed early in the bid cycle: Time required to gather intelligence of competitors

Requires: Mature accounting system to extract and distribute costs


Overview of Pricing StrategiesTechniques

Reality Modeling: Best prediction of what changes will occur during the life of the contract and bid with changes in mind.

Ask yourself, what is being evaluated? What will actually be purchased? Example: Staff Changes

Gaming: Notate the inefficiencies and imbalances in a solicitation and strategically price accordingly.

Ask yourself, are there overlapping tasks? Will a deliverable require more than is stated?


Cost Proposal Process & Tools Uniform Contract Format


Section Title

A Solicitation/contract form

B Supplies or services and prices/costs

C Description/specifications/statement of work

D Packaging and marking

E Inspection and acceptance

F Deliveries or performance

G Contract administration data

H Special contract requirements

Part II—Contract Clauses

I Contract clauses

Part III—List of Documents, Exhibits, and Other Attachments

J List of attachments

Part IV—Representations and Instructions

K Representations, certifications, and other statements of offerors or respondentsL Instructions, conditions, and notices to offerors or respondents

M Evaluation factors for award

Cost Proposal Process & ToolsPricing Data SourcesDATA Primary Secondary

Accounting Records X

Cost Reports X

Historical Databases X

Labor Distribution Reports X

Indirect Cost Report X

Contract Brief X

Competitor Intel X

Recruiting/SME/Tech Databases X

Cost Proposals X

Focus Groups/Research Papers X

Salary/labor Surveys X


Cost Proposal Process & ToolsHourly Rate Build Up

Raw Labor - $48.08/hour Fringe – 32% - 48.08 x 32% = $15.38 Overhead – 24% - (48.08 + 15.38) x 24% = $15.23 G & A – 8% -(48.08 + 15.38 + 15.23) x 8% = $6.29 Total Cost = $69.75 Fee 10% = $6.98 Total Bill Rate = $76.73


Direct Labor (DL) x Fringe Benefits (FB) Rate

DL x FB = Amount

x Overhead (O/H) Rate

(DL + FB) x O/H = Amount

x Fee Percentage

x General and Administrative (G&A) Rate(DL + FB + O/H) x G&A = Amount

(DL + FB + O/H + G&A) x Fee% = Amount

Sabrina Sylvester

Cost Proposal Process & ToolsWrap Rate Build Up

Assumptions - Fringe 32% - Overhead 24% - G&A 8% Calculation - 1.32 x 1.24 x 1.08 = 1.767 Target Wrap Rates - 1.5 to 1.8 is a good range to be in



Cost Proposal Process & Tools Pricing Build-up Matrix

Wrap Rate & Pricing Concerns Common Pricing Concerns Pricing is completed at last minute Subcontractor rate not in alignment with your pricing strategy Lack of understanding of cost structure: Undercharging or Overcharging: Reducing management layers, addressing fringe, opening new division to allocate costs Budget challenges: LPTA, limitation of escalation rates, fewer resources


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Economy & Finance

Financing and Pricing Strategies For Federal Contractors