Proposal Pricing Strategies
Breakout Session # 503
Beverly Arviso, CPA, Fellow, CPCM, CFCM
Arviso, Inc.
Tuesday, July 20, 2010
2:00 pm – 3:15 pm
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Objectives
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Proposal Strategy
Understanding the requirements
Price Analysis vs. Cost Analysis
Direct Labor Rate Development
Indirect Rate Development
Proposal Pricing Strategies
Common Pitfalls and Helpful Hints
Proposal Strategy
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Determining what opportunities to pursue
Who is included on the proposal team?
When does proposal activity start?
Bid/No Bid Decision
Teaming Relationships
– Prime or Sub?
– Importance of Teaming Agreements and NonDisclosure Agreements
– Gathering data from teammates
Understanding the
requirements
• Read the Solicitation
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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
Price Analysis vs. Cost
Analysis
• What is the difference between cost
and pricing?
Price Analysis
• The government is able to determine
the price to be fair and reasonable
without evaluating the separate cost
elements and proposed profit
• Competition in the market determines
the price
Price Analysis
• Price Analysis Techniques
– Competitive price proposals
– Comparison of previously proposed prices for the
same or similar items or service
– Commercial items or services
– Prices set by law or regulation
– Catalog prices
• Price Analysis alone may not be sufficient for:
– Sole source FFP and T&M procurements
– Modification or changes to existing FFP or T&M
Contracts
Cost Analysis
• Analyzing the various cost elements that make up the
price, e.g., labor, materials, overhead, and profit, in
order to determine if the price proposed is fair and
reasonable to the Government
• Price analysis must still be performed
• Each element of cost must be verifiable
– Direct Labor
– Materials
– Travel
– Subcontract costs
Direct Labor Rate Development
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Actual direct labor rates
Labor category rates
Blended rates (covers several categories)
Weighted average category rates
Category rates when using prime and
subcontractor labor
Indirect Rate Development
• Define direct costs
• Define indirect costs
– Costs that can’t be directly assigned to the contract
– Consist of cost pools and allocation bases
• Pools are defined by placing costs in logical groupings,
e.g., fringe costs, overhead costs, G&A costs,
unallowable, etc.
• The allocation base is defined as some measure of cost
that can be used to allocate the pool cost, e.g., direct
labor hours, direct labor dollars, machine hours, etc.
– Indirect rate = cost pools/allocation base
• Document indirect rates
Indirect Rate Development
• Indirect Rates
– vary from company to company
– are valid for the course of 1 fiscal year
– determine the “multiplier” for the company
• Are used for:
– Budgeting
– Billing
– Proposals
– Forward pricing rate agreements (FPRAs) (FAR
15.407-3)
Indirect Rate Development
• FPRAs
– Are voluntary agreements entered into to facilitate
negotiations of contracts and modifications
– Represent reasonable projections of specific costs that are
not easily estimated for or identified with a specific contract
– May include rates for labor, indirect costs, material
obsolescence and usage, spare parts provisioning and
material handling
– may cover multiple years
– Allocation of pools and bases should be consistent with
accounting practices
Indirect Rate Calculation
• Review Indirect Rate Sample 1
• Review Indirect Rate Sample 2
• Review Impact of Change
– 40% Increase to Direct Labor and Fringe
– 10% Increase to Subcontractor Costs
– Fringe increased
– Overhead decreased
– G&A decreased
– Multiplier decreased
Indirect Labor Rate
Development
• Changing your indirect rates for bidding
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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
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
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
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 “offsite” (customer) employees
– Indirect costs may be direct
Proposal Pricing Strategies
• Eliminate/reduce indirect cost applied
to pass-throughs
– Change G&A base from TCI to valueadded
– Create material handling pool(s)
– Define subcontracts vs. consultants
Proposal Pricing Strategies
• Separate materials from subcontracts
– Create materials acquisition pool (dropship equipment, software, purchased
maintenance, licenses)
– Create separate subcontracts
management pool
– Strategically different rates
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
Proposal Pricing Strategies
• Refine cost escalation techniques
– Consider impact of contract type on
escalation
– Vary escalation by cost element
– Escalate (+ or -) indirect rates
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
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
Questions
Beverly Arviso, CPA, Fellow, CPCM, CFCM
Founder, Arviso, Inc.
beverly@arvisoinc.com
757-373-9536