Government Contracts Pricing Strategy – Ten Dynamic and Synergistic Pricing Practices

By Michael Gallo and Marsha Lindquist

If you accept that money touches everything in your business and your Government contracts bids, you would be right. The proposal price is important enough to get much of the attention of most company leadership teams. Does your company place emphasis only on finishing the pricing or do you elevate the pricing team involvement and importance? Being vibrant and a front-runner about pricing is more than just slogging through the Government tables. A collaborative Government contracts pricing team has the strong encouragement of company and proposal team leadership as well as solid practices, particularly to get going earlier in the process than most of their competitors. Ten of the most dynamic and synergistic pricing practices are right here.

Share your proposal pipeline with the pricing team. As part of a well-functioning business development system and a well-respected pricing strategy practice, keep your pricing team apprised of upcoming bids. When the pricing team knows what is in the pipeline, especially re-compete opportunities, it helps them identify overlapping pricing requirements which can then be addressed once and reused across multiple bids. Regrettably, many companies do not have a concrete proposal pipeline and bid on an ad-hoc basis. What do you do then? Document, assess, and streamline your pricing processes and pricing artifacts as you go along. As bids are completed, identify common pricing requirements and artifacts that can be reused on upcoming proposals. The more the pricing staff understands the composition of the pipeline, the more they can save time, and money and prepare quicker responsive bids by utilizing familiar elements across many bids.

Harvest cost/pricing data. It is time to break open the accounting system and harvest past performance cost and pricing data. Why? This data is a key enabler to credible bases of estimates and proof of cost reasonableness. The data helps the pricing team to answer basic pricing questions such as: How many hours does it take? What is the overall average labor rate? What was the actual labor mix? Once harvested, analyzed, and stored, this data can be reused to inform pricing on future proposals. It also serves as important sanity checks during pricing and cost estimate reviews. Furthermore, this data becomes the starter seeds needed to grow a credible estimating system and defend the historical data to auditors and evaluators when questions arise. Combine this information with the past performance meta-data tracked across your business capture, contracts, and projects organizations to gain powerful insights into your value proposition.

Measure pricing competitiveness. If you do not harvest, analyze, and understand why you have won and lost bids, then how will you improve on future bids? Review the past 2-3 years’ pricing submissions. Tabulate wins/losses, and summarize winning, losing, and other competitor prices. Analyze any government comments/feedback. This simple top-level data can be grown into a useful pricing intelligence database that supports future price-to-win decisions.

Conduct pricing deep-dive postmortems. Whether you win or lose, it is critical to know why, and to what extent price drove the award. This is especially important if your company suffered recent proposal losses or lost a key bid. An “outside-in” deep-dive review, using an external consultant, can help your Company obtain an objective and unvarnished truth. Key questions should address how well the pricing submissions complied with the RFP, what kinds of pricing questions or evaluation notices (ENs) the Government evaluators asked, and what feedback the proposal team and subcontractors have on what can be improved. With a deep-dive review, the outside information can be invaluable to see the true price picture. The consultant can perform a gap analysis and help your company develop a plan to close gaps and apply lessons learned to future pricing submissions.

Make Early Subcontractor Pricing Data Calls a Priority. Subcontractor data calls present challenges and opportunities. The best opportunities come from early pricing strategy homework that includes subcontractor inputs. Early subcontractor inputs facilitate good make vs. buy decisions and, ideally, foster competition among the team to compete for more work share. The challenge lies in the fact that most subcontractors resist the prime’s requests for pricing inputs until the RFP hits the street. By taking early charge of issuing subcontractor pricing data calls, managing their data, and providing timely feedback, pricing leads can shape the price direction for the team. This information is vital in the pre-RFP stage for timely information to your leadership team on the pricing direction, the technical team for feedback on their solutioning price tag, and to your subcontractors, as you shape the top-down target prices.

A good prime pricing lead will want to engage with the subcontractors as soon as possible and make timely pricing meetings and preliminary data calls before the RFP is a reality. The best pricing results come from early and frequent cooperative subcontractor data exchanges.

Standardize pricing tools and templates. Agencies may use common cookie-cutter pricing templates and common documentation requirements, especially when issuing a large volume of task order requests from the same IDIQ vehicle. Why reinvent the wheel? Either develop a standard pricing model or adapt an already existing one that will address these common pricing requirements. The standard model can address pricing structure, internal WBS, standardized labor categories, standard factors (such as escalation), and standardized subcontractor pricing inputs. Take the time to also develop the associated standardized cost/pricing narrative template too!

Standardize the Pricing Narrative. Much of what goes into the pricing narrative is information that is repetitive from one Government contract cost volume to the next. The basics of a pricing narrative can and should be constructed with uniformity in mind for those items that are always requested. The types of pricing information that are routinely requested include the following subjects.

Indirect rate development and/or forward pricing rates

Historical indirect rates and support

Actual indirect rates

Direct labor rate substantiation

Productive direct labor calculations

Estimating labor hours

Uncompensated overtime

Escalation

Work breakdown structure

Pricing and estimating system summary

Basis of estimates (BOEs)

Other direct cost development – travel and materials

Make vs. buy

Fee

Cognizant audit agency

Approved accounting system

Business systems adequacy/status

CAS Disclosure Statement

Small Business Subcontracting Plan

Subcontractor draft agreement terms & conditions

Subcontractor cost/price analysis

Total compensation plan

Statement of the offeror’s financial capability

Develop a uniform set of pricing narratives for these subjects. Write it, wring everything out of it, wrap it, and keep the information in a database or document library. Plan to review and update the pieces a couple of times a year. The data changes as time progresses, each bid is different, and so does your experience and sophistication with writing about them. As you develop the standard content, you will uncover both good and bad examples of sterling and not-so-sterling prose. Retain both example types to demonstrate how you want to shape the narrative that conveys the basics.

Develop & Update the Indirect Rate Model. Regardless of contract type, indirect rate development forms a large part of every pricing strategy situation. Provisional billing rates are only the starting point. The Government contracts indirect rate model can form the basis for any analysis you need for each bid. More importantly, the development of such a model, and the updates, can be accomplished before the RFP becomes a reality.

Once built, you can use rough order of magnitude (ROM) business base numbers (because your company knows the magnitude of the bid before you begin pursuing it,) to rapidly perform top-level indirect rate scenario analyses. You can quickly explore variables such items as prime/subcontractor labor mix, changes to indirect expenses, and changes to indirect bases such as major other direct cost expenditures. Finally, the analysis can explore any new indirect pools that you might need to establish.

With the ROM indirect rate models established, you can use those rates to preview your preliminary pricing models. Imagine giving your management leadership team an early view of the pricing before the RFP is ever released! Why would you want to do that? Because some of the opportunities you may be pursuing may be less profitable than your company executives desire or the results of your preliminary scenarios can help shape the decisions your team needs to make. More importantly, you have a head start on pricing sooner than traditionally you may have done in the past. That all spells valuable information for your early gate reviews where pricing information sooner in the bid process can translate to a higher win rate.

Invigorate Professional Development. The subject of pricing team professional development is a highly overlooked topic. Give it center stage. Too often, contractors are so busy pumping out proposal pricing that they pay short attention to developing their very specialized staff. And that training does not have to cost a great deal of money or time. If you want to invest in your pricing team to pay you great dividends, this is an important expenditure of company training.

Pricing team professional development can include something so simple as cross-training where each pricing team member takes a job rotation into a new area – sometimes for a year or more. For example, a pricing lead may also take a turn in finance assessing indirect rate impacts. Other choices include courses from industry or institutional leaders in Government contracts pricing and estimating such as Defense Acquisition University (DAU). Simple one-day or three-day courses are also important to consider since they are readily available both virtually and in-person from Federal Publications Seminars (FPS). Important conference breakout sessions such as the Government Contract Pricing Summit offer attendees vital information and ideas on the specific subject matter. Consider individual training or customized corporate training that targets your pricing team’s specific needs can be invaluable for any upcoming pricing needs. Spend the money developing your pricing team to make them more valuable and responsible for your company’s growth.

What can they get? A deeper knowledge of the regulations, practical applications of pricing software, necessary elements of estimating techniques, dynamics of powerful internal modeling, and information about tradeoff analysis. The best time to make the training investment is while your pricing team has fewer competing demands.

Standardize Escalation Sources, Methods, and Documentation. Escalation assessment can be a routine analysis that you evaluate and gauge regularly. The best way to make it customary for your company is to evaluate and establish your primary escalation basis. Those would be to:

Analyze your company’s historical and current salary change data,

Research data sources such as BLS ECI for historical salary data changes and escalation factors,

Seek our third-party forecasting services (IHSMarkit) which sometimes may require a fee.

Once you determine your escalation process databases and patterns, write a descriptive document that portrays your process which includes your company’s standard approach to pricing escalation, a description of your catalog of stored data, and include the justification in your audit files for each proposal pricing that documents your methodology. Remember to write a brief explanatory narrative to include in your cost narrative database or library!

Final RFP syndrome paralyzes companies from taking early, synergistic, and strategic pricing® actions and turns pricing into a haphazard, strenuous, and wasteful sprint. Let us cure this affliction! By adopting these synergistic pricing strategy practices earlier in the capture stage, savvy executives can engage the pricing organization strategically, leverage the company’s B&P investments more efficiently across multiple bids, and apply lessons learned to sharpen price competitiveness.

For more on this subject see https://www.federalpricinggroup.com/

Mike Gallo is Partner and Principal Consultant at Federal Pricing Group, a consulting firm focused on providing federal contracts pricing support to small and mid-sized federal government contractors and cost-related acquisition support services to federal agencies. Learn more at https://www.federalpricinggroup.com/