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