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Breakout Session 906 Beverly Arviso, Fellow, CPA, CPCM, CFCM

Proposal Pricing Strategies. Breakout Session 906 Beverly Arviso, Fellow, CPA, CPCM, CFCM Partner, Cherry, Bekaert & Holland, LLP April 24, 2007 3:20-4:20 pm. Objectives. Pre-Bid Process Understanding the requirements Fundamental Cost vs. Pricing Concepts

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Breakout Session 906 Beverly Arviso, Fellow, CPA, CPCM, CFCM

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  1. Proposal Pricing Strategies Breakout Session 906 Beverly Arviso, Fellow, CPA, CPCM, CFCM Partner, Cherry, Bekaert & Holland, LLP April 24, 2007 3:20-4:20 pm

  2. Objectives • Pre-Bid Process • Understanding the requirements • Fundamental Cost vs. Pricing Concepts • Direct Labor Rate Development • Indirect Rate Development • Proposal Pricing Strategies • Common Pitfalls and Helpful Hints

  3. Pre-Bid Process • Bid/No Bid Decision • Teaming Relationships • Prime or Sub? • Importance of Teaming Agreements and Non-Disclosure Agreements • Gathering data from teammates

  4. Understanding the requirements • Read the Solicitation • Determine Contract Type(s) • Section B, Supplies or Services and Prices/Cost • Section C, Statement of Work • Section L, Instructions, Conditions, and Notices to Offerors • Section M, Evaluation Factors for Award

  5. 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

  6. 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

  7. 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

  8. 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 • FAR 15.408, Table 15-2 • Certificate of Current Cost or Pricing Data

  9. 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

  10. 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

  11. IV. Indirect Rate Calculation

  12. IV. Indirect Rate Calculation

  13. IV. Indirect Rate Development and Strategy • Forward Pricing Rate Agreements (FAR 15.407-3) are voluntary agreements entered into to facilitate negotiation 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 pools and bases should beconsistent with accounting practices

  14. IV. Changing Your Indirect Rates Winning proposal would result in increases to direct labor

  15. IV. Modified Indirect Rates for Bidding

  16. IV. Summary – Bid Changes to Indirect Rates • Winning the proposal would change cost structure: • 30% increase in direct labor • 40% increase in direct subcontract labor • Resulting in changes to indirect rates

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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)

  24. 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

  25. 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

  26. 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

  27. 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 • Certified Cost or Pricing Data • Profit/Fee Objectives

  28. 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

  29. QUESTIONS?

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