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What’s the Trick to Pricing in GovCon?

What’s the Trick to Pricing in GovCon?

Sometimes there’s an opportunity that you really need to go after and win.  How do you come up with the pricing for that “Must Win” contract?  Below is a scenario to help you understand it, where you’ve asked your buddy Mitch for help.  Mitch has been successful in growing his GovCon company to over $20Million!

Mitch invited you to join his team to go after a contract that would set up your company for the next 5 years.  Mitch has whispered to you the range for your billing rates, and you must fit into that pricing.  You’ve done your research on the three labor categories that Mitch plans to give you, but he says you need to bid all 30 lab cats that cover the entire CONUS region.

How do you price for this without it becoming LPTA?   How do you back into the pricing and prove that your indirect rates support your bid?

 

 

Here’s how Mitch explains it in three easy steps:

  1. You determine the average pay rate for each of the three labor categories (remember you may have to back it up with resumes and offer letters.)
  2. You divide the billing rates by the average pay rates – that gives the multiplier.
  3. You use the structure of your Rate and Pricing Model (RPM) to estimate the fringe, overhead and G&A rates that hit that multiplier.

Which leads you to ask Mitch the next question.  How do you come up with your indirect rates, and how often should you be updating them?   Mitch realizes that what you are really asking about is called Rate & Pricing Methodology.  As small business in federal contracting, you realize you’ve been using the same Overhead and G&A Rates for years.  As a matter of fact, it was Mitch that initially gave you these rates. Your company has grown and you think your indirect rates must be more competitive, but you’re not sure.

Mitch has explained indirect rates to you several times, but you don’t want to admit that you don’t quite get it. You’re ready to really understand indirect rates so you make sure all your costs are covered and that you’re not leaving any money on the table.  With this bid, you’ll submit indirect rates history plus forecasts three years out.  It will go sealed bid to the KO, so you can’t just guess this time.

How do you come up with rates for Overhead and G&A and how do you make sure these rates are competitive?  Overhead is the support cost of your technical workforce.  G&A is your corporate expense.  You know that your cost includes the pay for your technical group, which is called Direct Labor, and then you apply percentages for Overhead and G&A and Fee (Profit) to come up with a billing rate.

You should have a Rate & Pricing Model (RPM) to show how your indirect costs are computed based on your Profit and Loss Statement.  With the RPM, you’ll use current actual costs plus budgeted costs to determine where your indirect rates will be by the end of the calendar year.  And for future years, you’ll use that same structure and inclusive growth and some escalation.  You’ll learn how to get better at forecasting your rates, the same way you learned how to do proposal pricing – it just takes lots of PRACTICE!

Contributor: Jenny W Clark – 2019

Where do you fit in the GOVCON Network?

Stage 1: STARTUP.  Getting registered in SAMS, setting up websites, creating marketing materials, deciding strategy and meeting as many people as possible and signing up for EVERY networking event. Learning the ropes.

Stage 2: EARLY GROWTH.  You’re beyond the startup stage, with 10 to 100 employees and $1 Million to $10 Million in Federal Revenue.  You’re a successful subcontractor and want to expand into prime contracting.  You’re starting to kill deals that don’t fit your mission or that don’t have the PWIN or ROI you need.  You’re keeping overhead to a minimum, and using part-time support services and outsourcing to run the company.

Stage 3:  RAPID GROWTH.  You’ve developed a niche and executed it well and you have a reputation as the “go to” team in that space.  With solid relationships, you expand by getting more projects with your core capabilities within your current customer base.  You’re starting to build a corporate back office with systems and you have a line of credit.

Stage 4: PERFORMANCE.  You’re leaning on relationships and past performance to expand your core competencies with new customers.  You’re watching for projects that match your NAICs and PSC codes and creating teams that leverage the contract vehicles and relationships you have.

Stage 5:  SUSTAINABILITY.  You’re stretching to create sustainable revenue that retains your core portfolio while expanding to new capabilities and new customers.  Now it’s really getting expensive and there are trade-offs to make, and not everyone on your team agrees with the direction.

Stage 6: MID-TIER.  You’re outside the small but not ready to compete with the Bigs.  You’re supposed to be Mid-Tier but you don’t have the cash to spend on more business developers.  You have to become more efficient to compete.

Stage 7: LARGE PRIME. ROI drives everything your company does and you don’t get to vote.  Your goal is to keep the pipeline moving and your boss happy.

You know how you’ve won and successfully executed contracts but it takes so much work to get ahead of the opportunities and teaming with a pipeline tracking 12 to 18 months out!

We all know that you need efficient, automated processes from the pipeline to CRM to execution and follow-ons that your team truly understands and buys into.

The problem is you can’t afford to lose the tracking in your spreadsheets while you’re moving to next platform, but you can’t scale your current system.  You dread the process but can’t wait any longer.  You don’t have the cash flow to both upgrades and spend on the critical business development activities.  It’s like building the runway while trying to take off!

Imagine if you could have a business intelligence process that instantly identifies opportunities and teammates to create a sustainable revenue stream, and also shows the performance of your current portfolio and backlog.

Each year during the Florida GovCon Summit, we’re bringing together top industry experts that show you how your entire business development, capture, proposal, and execution processes can come together to grow your revenue faster.

With national, regional and local subject matter experts in federal contracting, Florida GovCon Summit brings you a unique business experience for teaming, tools, process with capability-focused matchmaking sessions led by super-connectors from across the industry.

Take the GOVCON Business Readiness Level Self Evaluation 

  • DCAA Compliance means you could pass a DCAA Pre-Award Survey, form SF1408. Here's the quick fail test - if you can't calculate indirect rates based on your income statement detail, then you'll fail.
  • Can you print reports from your accounting system that show your labor hours and costs broken out by contract, overhead, G&A and leave? How do you show that the overhead and G&A percentages you are using to bid are based on your actuals and projected costs.
  • You've been bidding a wrap rate of 1.7, but could your actual costs be higher? How often do you update your bid rates?
  • If you don't bid, you can't win, but where do you draw the line? Do you set a B&P budget of 2% - 3% of sales? Do you have a pipeline that is realistic about PWIN? Does your comp plan make everyone just chase deals?
  • You know how to find opportunities and respond to proposals. You're a successful subcontractor and want to go after your own prime contracts. You have a pipeline and have planned your track for the next 18-36 months. You've found affordable online tools to find opportunities and teammates faster, and your PWIN continues to improve.
  • You've got a professional looking Capabilities Brochure with your CAGE code, NAICs, D&B, all contact information, and you're using your domain e-mail. You've strong LinkedIn profiles for everyone, and they are all connected to your LinkedIn Company Page and Showcase Pages. Your company Facebook page is all about employees and community service. Your website includes everything on your capability brochure plus more about your products, past performance and clients. It's clear to any Contracting Officer that you are a Federal Contractor. Your GSA schedule and other contract vehicles show up in online searches.
  • Do you have Pricing strategies that show how the direct labor added from a contract win will drive down your overhead rates and make you more competitive? When you complete the spreadsheets for the cost volume, are you sure that the math is right? Do you know what the competitive range is for your fully burdened labor rates? Can you show your projected indirect rates for 5 years with confidence? When you are going after more complex contracts, do you know how to come up with onsite/offsite overhead rates and material/subcontracts handling?
  • Billing would be easy if you didn't have so many charge numbers, billing rates, contract values and end rates to track. Are you able to get billings out within 5 days of the end of the billing period? Are you billing in spreadsheets or do you have an automated process? Can you tie your billings back to your timesheets, payroll and accounting system? Do your billings show the current amount billed and the cumulative? Do you have any Cost Plus contracts and have you prepared an Incurred Cost Submission?
  • Do you have Financial Statement and Project Management reports with reporting available within 7-10 days after the end of the month? Do the hours on timesheets flow into your payroll systems or does someone have to re-key them? Are your program managers keeping their own set of books? Do you understand your Balance Sheet and Profit and Loss well enough to explain to your banker? Do you review budgets vs actually monthly and make sure your indirect rates for fringe, overhead and G&A track to your bid rates?
  • Do you have an Onboarding Process that makes new employees feel like a part of the team and the customer feel like their needs are being met? Is there a hand-off from proposal to Program Manager that ensures you deliver what you stated in the Technical and Management approach?
  • Are you using in-house recruiter or outsourcing? Do you have a flat rate or percentage agreement with a placement firm? Do your primes poach your employees once the clearance comes through? Can you present your candidate faster than your competitors? How are you using LinkedIn and Facebook for recruiting? Have you created an intern program to develop your team and qualify for hubzone, etc.?
  • Are you confident that your handbooks and policies cover all the communications and legal requirements you need? Does your unique company personality show up in all the relationships you have with your team and your community involvement?
  • Do you have professional contract management staff? Do you have sharepoint or other portals for contract documents, scope of work, contract values and funding and modifications. Do you have your own teaming agreements, consulting agreements and subcontracts? Do you have advisors you can turn to about contracting issues before you involve your attorneys?
  • Do you have regular Program Management updates? How do you control employee assignments and availability for your contracts? Do your program managers keep their own set of books? Do your Program Managers receive reports of time at least weekly? Who prepares and send CDRLs and Status Reports. Are there review processes for billings and collections?
  • Do you have written documentation of your DFARs Cyber compliance, a reporting system and testing going on? Do you have Cyber insurance coverage?
  • Do you have a designated FSO that stays current with rules and administrative changes? Are you concerned about passing any audits of your security clearance processes?
  • Are you on any of the Best in Class Contracts or do you need to be? Do you know how to market your GSA schedule? Have you considered what it would cost to get onto one of the larger vehicles, and how your investment would pay off? Do you understand the on-ramp and contract rules?
  • Do you have a Line of Credit or are you still using a factoring company? Have you ever lost a proposal because the KO determined that you didn't have the history to support your indirect rates? If you won an IDIQ but everything is LPTA, how will you make up for the risks on those task orders? Do you understand how risk averse banker can be about financing a company that has no collateral, and a very high Debt to Equity and a pitifully low Current Ratio? How do you explain anomalies like negative Retained Earnings and the low profit margins? Do you know the bankers that truly understand and advocate for federal contractors?
  • Risk Management in federal contracting ranges from compliance risk, insurance coverage and options and legal counsel. Do you work with specialists in the federal market that are proactive in meeting you needs.
  • Are there advanced certifications like CMMI, ISO that you need or have? Do you have technical products in R&D stage and what would it take to hit the Technical Readiness Level that you could use to get into innovation programs or be able to access Other Transaction Authority (OTAs) through one of the OTA Consortia (Like NSXTL, TReX.)

Visit GOVCONCONFERENCE.COM to claim your invitation to the next annual conference.

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FLGOVCON73- Pricing Buildup from Cost

In this episode Jenny Clark talks about Pricing Buildup from Cost.

Building Up Your Cost and Pricing

Making Sure You Make A Profit

What are the Costs you must Cover?

Building a Prototype

  • DIRECT COSTS
  • Design Costs
  • Engineering Hours time Engineering Pay Rate
  • Assembly Costs
  • Assembly Hours times Pay Rate
  • Materials
  • Actual Costs of Materials from Bill of Materials
  • INDIRECT COSTS
  • Tools and Facilities
  • Design Software
  • Business Licenses and Accounting

 

Components of Labor Buildup

  • Direct Labor (Hourly Pay Rate)
  • Fringe Rate (Percentage of Labor)
  • Overhead Rate (Percentage of Labor)
  • G&A Rate (Percentage of all above)
  • Fee (Profit)

 

Let’s Start with Definitions

Direct Labor

  • Your Employees (not subs, not consultants)
  • Direct Labor (Hourly Pay Rate)
  • Annual Salary divided by 2080 Hours
  • Base calculation here should consider productive hours like 1880 hours excluding 200 hours of leave
  • Consider:
    • Specific employees that meet the labor category
    • Estimated salary for new hires
    • Mix of both specific employees and projected new hires

Fringe Benefits

  • When you hire employees, you have costs associated with each payroll plus any benefits
    • Payroll Taxes
    • Leave
    • Group Insurance
    • 401K Matching/Profit Sharing/Safe Harbor
    • Workers Comp

Overhead

  • Support costs for your technical work force
    • Recruiting
    • Training
    • Certifications
    • Tools
    • Facilities cost if they are in your office

General & Administrative (G&A)

  • Corporate Expense
  • Cost of executives, accounting, human resources
  • Bank fees, legal expenses, professional fees
  • Property taxes and state income taxes

Profit or Fee

  • Fee is the same as profit
  • Depending on the contract type and risk
  • Typical federal contractor fee percentage could be 6% to 12%
  • Maybe higher in fixed price because of risk
  • Primes will pressure you to accept lower profit rates
  • Consider only if you are trying to create new relationships or break into new markets – your risk is higher than theirs

To contact Jenny W Clark

CEO, Solvability, Inc

www.solvability.com

Phone 256-882-6276
E-mail jwclark@solvability.com
Linkedin Solvabilityjwc
Twitter Solvabilityjwc

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