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:
- 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.)
- You divide the billing rates by the average pay rates – that gives the multiplier.
- 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
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.
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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
- 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
- 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
- Specific employees that meet the labor category
- Estimated salary for new hires
- Mix of both specific employees and projected new hires
- When you hire employees, you have costs associated with each payroll plus any benefits
- Payroll Taxes
- Group Insurance
- 401K Matching/Profit Sharing/Safe Harbor
- Workers Comp
- Support costs for your technical work force
- 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
- Self Study
- Hand to Hold
- Prime Focus