By: Laura Davis, PDS Consulting Solutions, Deltek Partner
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When a government contractor prepares a proposal to either the Federal Government or to a Prime Contractor under a Federal Government proposal, they have two major objectives: to win the contract and to make money. But those two objectives can sometimes work against each other in today’s environment. Staying competitive and making money can work against the contractor.
Competitive Pricing Strategies for Government Contractors
The following pricing techniques may vary based on solicitation requirements and the type of contract. Also, contractors with a Forward Pricing Rate Agreement cannot utilize most of these techniques.
Modifying the fee structure is the simplest way to be more competitive on the pricing while still maintaining a level of profitability. Many times the fee percentage can be reduced to a level that still allows for a modest profit. In other cases, the pricing allows for an award fee and a base fee. The contractor will opt for a lower base fee and bank on making money in the award fee. This shows the contractor’s confidence in their ability to perform well enough to maximize the award fee.
Contractors may want to look at their indirect rate structure to find ways to be more competitive with their pricing. This technique can be tricky and should be analyzed carefully to make sure other contracts are not impacted by these decisions. This technique may involve contract specific fringe or overhead pools, utilizing on-site vs off-site overhead pools, or creating a handling pool. While modifying your indirect rate structure may help the contract being proposed, it could have a negative impact on other contracts. The impact on future work should also be considered.
Many companies subcontract a portion of their work to a company with expertise in certain areas. Or companies will look to create a teaming arrangement in order to bid a contract. These teaming or subcontracting arrangements allow for companies to structure the pricing in the most competitive way.
Bidding at a Loss
It seems hard to believe that anyone would bid on a contract knowing they would lose money, but it is very common. There are several reasons a company would take a risk on proposing a price that is less than fully burdened cost. Some of the reasons that this may make sense are:
- Past Performance – companies will bid at a price that may not be profitable in order to have the experience in that particular area of expertise. This could include getting into a new market or industry to gain that experience.
- Building Relationships – Very similar to past performance, a contractor may take a contract at a loss or lower profit in order to build a relationship with the client. This may be in a subcontractor relationship where there is a significant advantage in building a long-term relationship for future contracts.
- Contribution to G&A – By nature, G&A costs are costs related to running the overall company. For that reason, many of the G&A expenses do not fluctuate drastically as contracts are awarded. With that in mind, contractors may bid the contract as a way to cover a portion of the G&A pool, not necessarily their fair share. Their thought process is that covering some of the G&A cost is better than not covering any at all by not being awarded the contract.
- Impact on Other Contracts – For contracts that have indirect rates set, such as Fixed Price or Time and Materials, the G&A rates may have been proposed at higher rates. The addition of a new contract will most likely lower the G&A rate, thereby, possibly providing a higher margin on those contracts. Since the G&A rate may not be subject to adjustment, this is a strategy often used to help the company rather than a particular contract.
Not all of these strategies work for all contractors, but you should analyze your pricing from various angles to see if there’s a strategy that you can utilize to make you both competitive and profitable when you are awarded the contract. It’s very important to ‘run the numbers’ to make sure that any pricing strategies that you use do not impact any of your existing contracts or lock you into something that will hurt pricing of future contracts.
About the Author
Laura Davis is President of Strategic Consulting Solutions and Founding Member of PDS Consulting Solutions . PDS specializes in GovCon support services for government contractors in the areas of government contract accounting and finance, system implementations specifically Deltek Costpoint, hosting Deltek Costpoint, DCAA compliance and contract administration. Follow PDS Consulting on Twitter at @PDSConsults
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