Estimating Costs For Proposals
This podcast is all about how to create estimates for cost proposals. We’ll talk about how to guess at your costs for a few different situations from startup, to creating a 5 year forecast, bidding to add 30 people to a ten-person company, then two situations for bidding in new markets.
First scenario: Startup
Diego and Steve started Avalanche Research a few years ago. They work from home and don’t have a benefits program. They have been asked by Raytheon to team on a proposal and Raytheon is asking “what are your rates?”
How do Diego and Steve figure out what is the going rate? First they ask around with other contacts, and they may look at published rates for similar work by searching online. They consider the salary ranges that would be appropriate for the labor categories described in the proposal, and decide to have the billing rate be double the pay rate, a multiplier of 2 times the pay rate.
They have no rate history because they don’t even pay themselves yet. Their real cost would be just their hourly rate plus about 10% to cover payroll taxes and maybe 40% to cover costs and profit, which would be a multiplier of 1.5 times the pay rate. They decide to bid 2 times the pay rate, figuring they can always come down if Raytheon tells them the rate is higher than expected, and with a multiplier of 2, they’d have more room built into their pricing to add health insurance, a 401K plan and start paying for vacation, sick leave and holidays.
Second Scenario: Five Year Budget
Jeff and Mitch’s company, SpaceTronic Technologies, has been in business for 6 years and are bidding on a major effort with Boeing. In the proposal, there is a spreadsheet requiring them to show a 5 year forecast. Jeff and Mitch have no idea where to start on this.
To me, the entire concept is ridiculous for a small company to put together. At a company like Boeing, they have to keep projections and budgets like this all the time, because they are publicly held and they have all kinds of projects that require forecasting and management reviews, plus they have teams of people that maintain the information. For a small business in federal contacting, just forecasting out 6 months is tricky.
All Jeff and Mitch can reasonably do is take a look at their last year history and their current year actuals and budgets initially. For the future years, they can estimate a small growth percentage each year and forecast their indirect rates to stay about the same. It’s uncomfortable to project out the years, and my only recommendation would be to make the indirect rates show to the 2nd decimal point and vary a bit from year to year. So it looks like you spent a lot of analysis time on it.
Third Scenario: Tripling their headcount
Karen and Mark have a 10 person company called Marlin Technologies. They are bidding a project that would add thirty people – the proposal calls it FTEs which are Full Time Equivalent employees. How do they estimate the costs for this proposal plus the support costs and indirect rates?
First, Karen and Mark come up with the list of the labor categories and number of positions, then use Salary.com or other research tools to come up with pay rates. Because some of the positions would be in different locations, they add a factor to adjust for cost of living. As they project out, they include a factor for pay rate increases, based on Bureau of Labor Statistics or other guidance.
The next consideration for Karen and Mark is where these new employees will work. Will they be working out of their homes, working at a Marlin Technologies office, or located at a government site? This question determines if they need to allow for providing for office space, and other support costs that are generally considered Facilities costs.
They need to consider if they’d have to add any administrative support costs, like a recruiter or Facility Security Officer (FSO) that would be an overhead expense, or adding someone full time in accounting for payroll and billing which would be a General and Administrative or G&A cost. Lastly, would they have to upgrade any systems, such as adding seats to their time tracking systems or even upgrading their accounting software to handle more complex reporting and billing? Some of these costs will only occur in the first year of the contract, and others will be recurring costs.
Once they have estimated these costs, they’d need to update their budgets and estimate the impact on indirect rates. The rate for fringe costs will increase because they’d plan to add a 401K program and some health insurance coverage. They determined that their overhead and G&A rates won’t increase at all, and the G&A may even drop a bit because their business base will grow so much.
Fourth Scenario: Entering New Markets
Liz and Al started Stellaration a few years ago with just one contract, that was basically program management supporting a client they had worked with for years. They’ve added more positions to that contract, mostly administrative support and clerical, very low-end jobs. Stellaration is ready to add some high level IT services. So while their existing work force has an average pay rate under $50K per year, they expect the IT services employees to average $150K per year. They also realize that these two groups of employees have different skills, and different work habits. The IT teams work lots of hours and require some flexibility in their schedule, plus putting in ping pong tables, a basketball court and providing a full stocked break room helps with team camaraderie and productivity. So in bidding, Liz and Al aren’t sure if they should have different fringe and overhead rates for these two groups. In order to win the contract, they are thinking that just using their usual fringe and overhead rates would work, but they also realize that using averaged indirect rates may reduce their profit on the work. They realize they’ll need to do some analysis long term, but for now, to win the work, they’ll just use their current fringe and overhead rates.
Fifth Scenario: Onsite versus Offsite Rates
Ron and Valencia started Archibald Scientific to focus on GIS mapping from their offices in Kentucky. They currently employ only cartographers, recruited from specific schools and with advanced software training. Their cartographers work in a secure area, have security clearances, and have workstations with specialized software.
Archibald Scientific has an opportunity to bid on a contract in New Mexico, doing similar work, but in a facility provided by the government customer, where all the equipment and software would be furnished. Valencia wants to bid onsite overhead rates, but Ron doesn’t understand what that means.
Onsite rates and offsite rates are very commonly used terms – and it can be confusing to decide if onsite means work at the company facility or a government facility. I recommend using the terms Company Site and Government Site or Client Site to reduce the confusion. In this case, the employees working in Kentucky will have a higher cost, because Archibald Scientific is providing the office space and the specialized workstations, which means the Company Site rate will be higher than the Client Site Rate. So anytime you are confused over which is which, the higher billing rate means the work is being performed at the Company site.
How should Ron and Valencia bid this Client Site work? The employees working in New Mexico will have the same benefit plan, so their fringe rate will be the same as all other employees. But, the overhead support for these employees will probably only include recruiting, certifications and some support costs expenses. So while the Kentucky employees may have a multiplier of 2.0, twice their pay rate, the New Mexico employees could have a multiplier of 1.5 times their pay rate, since the Archibald Scientific is not paying for the facilities expense.