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It’s Always About Price –
The Role of Strategic Pricing
In Effective Capture Strategy
Breakout Session #103
James S. Phillips, Esq.
July 19th, 2010
11:00 AM
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Why Is Price Important?
• The Contracting Officer must evaluate
price on all procurements > $3,000.
• The Contracting Officer must
determine that the price proposed for a
new contract is “fair & reasonable.”
(FAR 15.402)
• Note: For purposes of this discussion
we are treating price and cost
synonymously.
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Why Is Price Important?
• On “best value” procurements, the Customer
may favor non-price considerations
(technical capability, past performance, key
personnel) over price.
• In this case the Source Selection Official
must document the basis for the “best value”
determination.
• Bottom Line: If you are significantly higher in
price, you make the Customer justify why
your higher price is worth paying. That’s
always a risk!
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Why Is Price Important?
• An increasingly popular variant on “best value” is “low
price/technically acceptable” source selection. FAR
15.101-2. Per this method, the Customer opens price
proposals first and sorts the bid in order of low price.
• Then the lowest priced offer is evaluated. If technically
acceptable, it is selected for award. If you are not low
price, your proposal often is not read!
• If the lowest price is not acceptable, the evaluation
moves to the next lowest priced offer until the award is
made. Price clearly drives the source selection process!
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Why Is Price Important?
Summary
• You can sometimes win with other than
the lowest price.
• Low price is not a guarantee that you
will receive the award.
• But you improve your chances of being
selected substantially if your price is
highly competitive with other “capable”
offerors.
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The Essential Elements of
Price/Cost
Price
• On FFP contracts, price is the sum total paid
to the contractor for accomplishing all
contract requirements or deliverables. The
price includes all allocable direct costs,
indirect costs plus profit or loss.
• On T&M contracts, price is the sum total of
the proposed labor charges, billed at hourly
or daily rates, plus authorized ODCs. The
labor charges are FFP because they include
all direct & indirect costs associated with the
labor, plus profit on the labor.
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The Essential Elements of
Price/Cost
Cost
• On cost-type contracts, the contractor
is paid its allowable and allocable
direct and indirect cost, plus either no
fee or a fixed fee (CPFF), an award fee
(CPAF) or an incentive fee (fee).
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Competitive Pricing vs.
Strategic Pricing
Competitive Pricing
• Competitive Pricing is your computed price to do the work
applying your typical direct labor costs (including subs) to the
estimated level of effort (FFP or T&M), your indirect costs
allocations & a reasonable/modest profit/fee.
• While profit is a motivator to contractors, competitive pricing
always starts with cost estimating. And with the exception of
some supply contracts, cost of labor and indirect costs are
usually the prime drivers of total cost.
• At its essence, you always have to factor three questions:
 How many hours are required?
 What is the direct cost of the labor?
 What indirect costs will be allocated to the labor?
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Competitive Pricing vs.
Strategic Pricing
• Strategic Pricing is the price it takes to win
the job based on what other likely
competitors will charge for the same or
similar level of effort.
• You need to perform Strategic Pricing on
major bids and proposals in addition to
Competitive Pricing in order to ensure you
are in the ball game!
• Strategic Pricing is often referred to as “Price
to Win.”
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Competitive Pricing vs.
Strategic Pricing
• Strategic Pricing is a totally separate
discipline from Competitive Pricing because
it requires you to look outside of your firm
and evaluate what others are doing!
• Unless you have a very clear technical/
experience advantage or a very strong
customer rapport, you cannot be successful
on major bids if your Competitive Pricing is
much higher than your competitors.
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Benefits of Strategic Pricing
1.
•
How Do You Stack Up
Strategically vs. Others?
Strategic Pricing allows you to determine how you
will strategically market your firm.

If you are consistently higher in price, then you better
have a much better value proposition! Otherwise you
need to reduce cost!

If you are consistently lower in price, then you likely need
to focus on your value propositions in order to be
successful.
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Benefits of Strategic Pricing
2. Better “Capture” Plans
• Effective competitive organizations routinely perform “bid/nobid” and develop “capture” plans before committing time &
resources to new proposals.
• An essential element of any “bid/no-bid” & capture strategy is
how you match up against the likely competitors, particularly
on price.
• Reality - It is extremely difficult to unseat an incumbent unless
you can undercut them on price.
 Where you are the incumbent, you need to understand whether
you are vulnerable to being underpriced!
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Benefits of Strategic Pricing
3. Better Margins Analysis
•
Profit/Fee analysis will be enhanced
because you will have a good sense of
how much margin you have to work with
on your competitive bids.
 If you are high priced, you can’t sustain
significant profit/fee.
 If you are low priced strategically, you have the
ability to charge greater profit/fee!
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Benefits of Strategic Pricing
4.
It Drives Corporate Change
•
You can’t fool the market – if your price is
consistently too high, you will be forced to change
your business operations and reduce costs.
Otherwise you die!
•
By performing strategic pricing you will be able to
initiate corporate changes to become more
competitive before its too late!
•
More on this follows.
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Sources of Strategic Pricing
Information
• Your own bid and pricing databases – keep
information on your past successful & unsuccessful
proposals.
• Public Databases – FPDS; FedSpending.Gov;
USASpending.Gov.
• FOIA – Request copies of competitors contracts
• Private Sources – INPUT, Eagle-Eye, E-Pipeline,
etc.
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Elements to Consider to
Enhance Strategic Prices
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Direct Labor - Generally
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Use salary surveys to determine appropriate
compensation of different occupations. Recruit
and compensate accordingly.
•
What is your FTE work year? 1855 Hrs? 1880
Hrs? 1920 Hrs?
•
Too much seniority?
•
Treatment of Uncompensated OT?
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Elements to Consider to
Enhance Strategic Prices
2. Direct Labor – Long Term Contracts
• Consider substitution of key personnel over time.
• New hires vs. incumbents?
• Use consultants/staffing firms & subs to offset high
priced internal resources.
• Avoid exceeding labor quals without tangible
benefits.
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Elements to Consider to
Enhance Strategic Prices
3.
Fringes/Benefits
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Determine appropriate level of vacation and
voluntary benefits (cafeteria plans, 401Ks, etc.)
based on market data.
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Any potential problem of seniority - Consider
former feds/public sector retirees as they have
many benefits covered.
•
Service Employees - SCA requires payment of
benefits in cash or in kind. Benefit plans will often
lower overall cost.
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Elements to Consider to
Enhance Strategic Prices
4. Other Direct Costs.
•
•
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How is travel priced? How is travel labor
allocated?
Treatment of local travel and mileage?
What indirects, if any, get applied?
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Elements to Consider to
Enhance Strategic Prices
5.
•
•
•
•
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Indirect Costs
One indirect cost pool vs. multiple?
G&A: TCI vs. Value Added?
On-site vs. Off-site Rates?
Availability of Forward Pricing Rates
Monitor and adjust over time
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It’s Always About Price –
The Role of Strategic
Pricing In Effective Capture
Strategy
Questions?
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It’s Always About Price –
The Role of Strategic
Pricing In Effective Capture
Strategy
Thank you!
James (Jim) Phillips
jphillips@centreconsult.com
(703)288-2800