Pricing to Win Federal
Government Contracts
February 7, 2013
MOSS ADAMS LLP
The material appearing in this presentation is for informational purposes
only and is not legal or accounting advice. Communication of this
information is not intended to create, and receipt does not constitute, a
legal relationship, including, but not limited to, an accountant-client
relationship. Although these materials may have been prepared by
professionals, they should not be used as a substitute for professional
services. If legal, accounting, or other professional advice is required, the
services of a professional should be sought.
MOSS ADAMS LLP
Presenter
Jeff Witt - CPA, CIA, CFE, MCSE
Manager
Jeff Witt is a manager in Moss Adams’ Federal Contracting Risk
Management practice. He brings over 17 years of relevant experience.
Prior to his current employment with Moss Adams, Jeff was a Controller
for a government contractor for two years where he led the
implementation and control of compliant systems for government
contracting. Jeff also served as a government auditor for the Defense
Contract Audit Agency for 10 years. During his time with DCAA, Jeff was
stationed at a variety of defense, high tech and university contractors,
including Lockheed Martin, Boeing, LSI Logic, SRI International and
Stanford University. Jeff served as Lead DCAA Auditor on a variety of
engagements including incurred cost, forward pricing, defective pricing,
equitable adjustment and delay claim audits.
Since joining Moss Adams, Jeff has led numerous government compliance
consulting and attestation engagements. Attestation engagements
included auditing or reviewing submitted indirect rates for compliance
with applicable regulations and evaluation of internal controls for
compliance with specific criteria.
MOSS ADAMS LLP
Presenter
Curtis Matthews - CPA, CPE, CISA, CITP, CGMA
Managing Partner
Curtis leads Moss Adams’ Federal Contracting Risk and Compliance group.
He brings over 28 years of federal and state program controls and audit
experience. Curtis provided internal control and compliance services for
PricewaterhouseCoopers LLP’s government clients, monitored Intel’s
Federal Programs Office compliance, prepared submissions and negotiated
Federal contracts for a large aerospace and defense contractor. Curtis has
served as a full charge Defense Contract Audit Agency (DCAA) auditor and
has helped federal contractors comply with Federal Acquisition
Regulations (FAR), Federal and State Department Requirements, and
Federal Cost Accounting Standards (CAS).
Curtis has performed over 100 government compliance audits and has
negotiated over 200 federal contracts. He has helped companies implement
federal contracting compliance programs and successfully respond to and
address DCAA audits. Curtis has helped his clients improve government
compliance controls in a wide variety of contracting environments,
including firm fixed price and cost reimbursable federal contracts.
MOSS ADAMS LLP
Agenda
• Overview of the need for a well defined and controlled
pricing function
• The Government’s preference for commercial pricing
• Systems requirements for non-commercial pricing
• Summary of pricing risks by type of contract
• Common misunderstandings of Government contracting
process
• Pitfalls and opportunities associated with pricing
philosophies
• Resources available for competitor pricing information
• Recommendations for establishing a well defined and
controlled pricing function
MOSS ADAMS LLP
Overview of the need for a well defined and
controlled pricing function
• How important is understanding the nuances of pricing?
o For many government contractors, it is very important
o Unless you provide a unique product, and the Government is
willing to pay regardless of price, then pricing correctly is critical
o Pricing correctly = pricing to win while achieving or exceeding
company profitability goals
o Pricing correctly also means understanding the Government
regulations that pertain to the type of contract you will be
awarded
MOSS ADAMS LLP
Overview of the need for a well defined and
controlled pricing function (cont.)
• How important are well defined processes and controls
to pricing?
o For many government contractors, where price is a significant
factor in the award process, having well defined pricing
processes and controls is key.
o Companies often have good controls around their financial
systems but lack controls around the pricing function.
o For some companies, the pricing function may be performed by
those without all of the financial acumen needed.
o When understanding cost is important to pricing, company
financial personnel may need to have a role in establishing
processes and controls for pricing.
MOSS ADAMS LLP
The Government’s Preference for Sealed
Bid/Commercial Pricing
• The Government has moved to an approach that prefers
sealed bid or commercial pricing data rather than
contracting by negotiation.
• This means that whenever possible contracting officers
will not require certified cost or pricing data.
• In some cases, certified cost or pricing data is still
required.
MOSS ADAMS LLP
The Government’s Preference for Sealed
Bid/Commercial Pricing (cont.)
FAR 6.401:
“…award will be made on
the basis of price…it is
not necessary to conduct
discussions…”
FAR Part 14 applies –
Generally not subject
to defective pricing,
commercial pricing or
contracting by
negotiation
requirements
Yes
Sealed Bid?
No
FAR Part 12 or Part
15 applies - Must
then determine if
subject to
commercial pricing or
contracting by
negotiation
MOSS ADAMS LLP
The Government’s Preference for Sealed
Bid/Commercial Pricing (cont.)
FAR 2.101:
“…of a type customarily
used by the general
public…”
FAR Part 12 applies (Acquisition of
Commercial items)
Yes
Commercial
Item?
No
FAR Part 15 applies (Contracting by
Negotiations)
MOSS ADAMS LLP
Systems Requirements for
Non-Commercial Pricing
Non-Commercial Pricing Regulations (FAR Part 15.403)
• In those instances when FAR Part 15 applies (noncommercial item) and the procurement will be over
$700,000, certified cost or pricing data will be required.
• In this scenario, the company will be required to have
compliant estimating, accounting and billing systems.
• This is a high hurdle and many companies find that
their systems are deemed to be noncompliant by the
government.
MOSS ADAMS LLP
Systems Requirements for
Non-Commercial Pricing (cont.)
15.407-1 Defective cost or pricing data (FAR 15.407-1)
• “(a) If, before agreement on price, the contracting officer learns that any
cost or pricing data submitted are inaccurate, incomplete, or noncurrent...”
• “(b)(1) If, after award, cost or pricing data are found to be inaccurate,
incomplete, or noncurrent as of the date of final agreement on price or an
earlier date agreed upon by the parties given on the contractor’s or
subcontractor’s Certificate of Current Cost or Pricing Data, the Government
is entitled to a price adjustment…”
• This entitlement is ensured by including in the contract one of the clauses
prescribed in 15.408(b) and (c) and is set forth in the clauses at 52.215-10,
Price Reduction for Defective Cost or Pricing Data, and 52.215-11, Price
Reduction for Defective Cost or Pricing Data—Modifications.
MOSS ADAMS LLP
Common Mistakes Related to Government
Contract Pricing
• Misunderstanding government regulations related to pricing:
o Applying the wrong set of regulations to the proposed procurement
o Mis-pricing so as to comply with misunderstood “cost realism”
requirements
• Not fully understanding the companies indirect cost structure
in the areas of:
o Fixed versus variable cost
o The impact of contract volume on indirect rates
o The impact to company bottom line instead of contract bottom line
Note: The above represent real examples of contractors that we
have worked with.
MOSS ADAMS LLP
Common Mistakes Related to Government
Contract Pricing (cont.)
Type of Contract
Sealed Bid
Under Pricing Risk
Impact to company
profitability
Commercial Item
N/A - must use commercial
price
Non Commercial Item - FFP
Impact to company
profitability
Non Commercial Item - T&M
Impact to company
profitability
Non Commercial Item - Cost Type Subject to "cost realism"
determination
Over Pricing Risk
Loss of contract award
N/A - must use commercial price
Defective pricing risk and potential loss
of contract award
Defective pricing risk and potential loss
of contract award
Defective pricing risk (profit only) and
potential loss of contract award
MOSS ADAMS LLP
Common Mistakes Related to Government
Contract Pricing (cont.)
Possible Mistake: Not accumulating fixed and variable costs
Cost Element
Labor
Benefits
Materials
Subcontracts
Bldg Depreciation/Rent
Equipment
Utilities
Other costs
Variable Cost Examples
Direct labor, Supervisors of direct
personnel
Benefits associated with personnel
classified as variable labor
Any direct materials
Any direct subcontracts
Generally not variable
Rented equipment
Utilities billed based on consumption
Fixed Cost Examples
Company Executives, Accounting, IT,
IR&D, B&P, Selling & Marketing
Benefits associated with personnel
classified as fixed labor
N/A
N/A
Generally fixed
Owned equipment
Basic utilities for home office
Avoidable costs within company
"relevant range"
Non-avoidable costs within company
"relevant range"
•
Depending on company indirect cost structure, it may be important to be able to
differentiate fixed from variable costs, since this can significantly impact pricing
decisions. Some companies are unable to do this with their present accounting structure.
•
The definition of fixed depends on the companies proclivity for reducing or increasing a
cost as volume changes. The definition is different for every company.
MOSS ADAMS LLP
Pitfalls and Opportunities
• Pitfall – Not complying with government regulations
when pricing:
o Defective pricing risk
o Loss of potential award
o Loss of ability to win future work
• Pitfall – Not pricing with an understanding of the
competitive environment (i.e., assuming that pricing at
cost plus 10 percent will be successful in every case):
o Loss of potential award
o Loss of qualifications that could lead to future work
MOSS ADAMS LLP
Pitfalls and Opportunities (cont.)
Example: Pricing using a “silo” approach
Description
Net Revenue
Direct Labor
Matls/Subs/ODC
Gross Margin
Overhead 1
Overhead 2
SG&A
Net Income
Indirect
Amount
Rate Fixed/Variable
$ 100,000,000
Variable
22,000,000
Variable
20,000,000
Variable
$ 58,000,000
15,000,000 68% Variable
22,000,000 100% Fixed
16,000,000 73% Fixed
$ 5,000,000
Note: This slide
represents a
contractor’s budget for
2013 prior to
consideration of an
opportunity
MOSS ADAMS LLP
Pitfalls and Opportunities (cont.)
Description
Net Revenue
Direct Labor
Matls/Subs/ODC
Gross Margin
Overhead 1
Overhead 2
SG&A
Net Income
Opportunity Indirect
Amount
Rate Fixed/Variable
$ 20,000,000
Variable
8,000,000
Variable
2,000,000
Variable
$ 10,000,000
5,454,545
68% Variable
5,866,667
73% Fixed
4,266,667
53% Fixed
$ (5,587,879)
Note: This slide represents
the FFP opportunity that the
contractor is considering.
They believe if they price at
this level, they will win, but
if they increase the price,
they will likely lose.
Question: Assuming they have capacity to do the work, and they don’t
have a better opportunity, should they submit a proposal using the
price and cost structure shown above?
MOSS ADAMS LLP
Pitfalls and Opportunities (cont.)
Description
Net Revenue
Direct Labor
Matls/Subs/ODC
Gross Margin
Overhead 1
Overhead 2
SG&A
Net Income
Original
Amount
$ 100,000,000
22,000,000
20,000,000
$ 58,000,000
15,000,000
22,000,000
16,000,000
$ 5,000,000
Add:
Opportunity
$ 20,000,000
8,000,000
2,000,000
$ 10,000,000
5,454,545
$ 4,545,455
Including Indirect
Opportunity Rate Fixed/Variable
$ 120,000,000
Variable
30,000,000
Variable
22,000,000
Variable
$ 68,000,000
20,454,545 68% Variable
22,000,000 73% Fixed
16,000,000 53% Fixed
$ 9,545,455
Answer: The answer may be Yes!
MOSS ADAMS LLP
Pitfalls and Opportunities (cont.)
Lessons learned by the contractor:
o This company, like many other companies, did not have just one
product line and thus should not have one way of pricing.
o Each product line needed to be evaluated in terms of market
competition and cost structure to determine the optimal price
for that product.
o It was important that the actual indirect costs for the product
line were known in order to correctly evaluate the cost structure
for the product line. This requires systems capable of
accumulating indirect costs by product line.
o It was also important that fixed indirect costs were determinable
so that the analysis could be performed.
MOSS ADAMS LLP
Pitfalls and Opportunities (cont.)
• The example shows that:
o Those responsible for pricing can reach erroneous
decisions if they are pricing in a vacuum without
adequate consideration for the impacts of:
 Fixed and variable costs
 Changes to allocation bases and therefore to rates
 The impact of an opportunity on company bottom
line instead of opportunity bottom line
MOSS ADAMS LLP
Competitor Pricing Information
• Good competitor pricing information is extremely hard
to come by
• It is not found in 10Ks or other publicly available
information for most companies
• In many cases, when you lose because of price, you can’t
obtain visibility to the details behind the winning price
• Even if you cannot obtain the details on the winning bid,
it is worth obtaining the total contract value that was
awarded. This can be found on https://www.fbo.gov
MOSS ADAMS LLP
Resources Available for Competitor
Pricing Information
• One good source is the General Services
Administration’s (GSA) Schedule. You may be able to find
fully loaded Time & Materials (T&M) rates for many of
your competitors.
• www.GSAAdvantage.gov provides a way to quickly and
easily obtain competitor fully loaded rates
• These rates represent the lowest rates these companies
charge for the listed services. This provides a good
benchmark for how low your competitor may be willing
to go to win.
MOSS ADAMS LLP
Recommendations for a Robust
Pricing Function
• Recommendations for development of a robust pricing
function:
o Ensure your company understands government procurement
rules and how they impact your options during pricing
o Consider using competitor GSA rate data as a factor in
establishing the “floor” for pricing.
o Develop a robust market intelligence capability within your
organization that helps inform regarding when an opportunity
will require “floor” pricing and when you can price higher than
the floor and still win the work.
o Develop clear understanding of the competitive advantages that
your company has. Consider these advantages in establishing a
pricing structure.
MOSS ADAMS LLP
Recommendations for a Robust
Pricing Function (cont.)
• Recommendations for pricing controls:
o Establish policies and procedures that consider the relevant
government regulations to ensure compliance when pricing.
o Establish clear policies and procedures that assign roles and
responsibilities for pricing.
o Do not place all the burden on the Sales and Marketing function
to establish controls over financial aspects of pricing.
o Involve financial personnel in control activities for pricing to
ensure pricing rates are kept up to date and align with the
company’s strategy and structure.
MOSS ADAMS LLP
Recommendations for a Robust
Pricing Function (cont.)
• Recommendations for pricing controls:
o Implement controls that ensure that each significant opportunity
is priced with consideration for factors such as:
 Applicable government regulations
 Absorption of indirect costs
 Competitive advantages
 Degree to which price will be a factor in the award
 Competition
The objective should be to give the company the best opportunity to
win while pricing in ways that are compliant with regulations and
enable the company to meet or exceed profitability goals.
MOSS ADAMS LLP
Thank you for attending
Curtis Matthews
curtis.matthews@mossadams.com
(503) 704-6943
Jeff Witt
jeff.witt@mossadams.com
(503) 478-2282
MOSS ADAMS LLP