Contract Types, Cost, and Pricing
Austin W. Boyd, CEO Whitespace Innovations, Inc.
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Overview
• Definitions (IDIQ, MATOC, TO)
• Contract types
– Fixed Price
•
Fixed Price Level of Effort (FP-LOE), Firm Fixed Price
– Reimbursable
•
Cost Plus Fixed Fee (CPFF), Cost Plus Award Fee (CPAF)
– Incentive
•
Cost Plus Incentive Fee
– Time and Materials (T&M)
• Cost
– Best Value. Lowest Price Technically Acceptable (LPTA)
• Pricing
– Competitive intelligence
– Cost models and pricing methods
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Definitions
• Indefinite Delivery Indefinite Quantity (IDIQ)
– Multiple jobs gathered under one omnibus contract
– Single or multiple prime contractors
• Multiple Award Task Order Contract (MATOC)
– Same as an IDIQ. Typically the task orders are easier to bid
– Used at Army Corps of Engineers
• Task Order (TO)
– Individual contractual activity on an IDIQ contract or MATOC
• Prime Contractor
– The company that leads the contractual effort
• Subcontractor
– Supports the prime contractor, usually paying a small handling fee
• Vendor
– Sells to the prime but not always part of the team
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Contracts Overview
• Consult FAR part 16
– https://www.acquisition.gov/sites/default/files/current/far/html/FART
OCP16.html
– http://iq.govwin.com/corp/downloads/GW-Types-Govt-Contracts2012.pdf
• Types of contracts
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Fixed-price contracts:
Cost-reimbursement contracts
Incentive Contracts
Indefinite - Delivery Contracts
Time - And-Materials Contracts
Labor - Hour Contracts
Sealed Bidding
Negotiation
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Fixed Price Contracts
• Firm-Fixed-Price (FFP) Level-Of-Effort (LOE) Term Contract
– Devote specified level of effort over specified time in specific area
• FFP Materials Reimbursement Type Contract
– Used in purchase of repair and overhaul services
• FFP Contract With Economic Price Adjustment
– Used when doubt exists in stability of prices over life of contract
• Fixed-Price Contracts
– Fixed expense, at the risk of the contractor to manage profit
• Fixed-Price Incentive Contracts
– Fixed price with incentive to adjust profitability
• Fixed-Price Redetermination
– Fixed price with option to adjust price up or down during the term of
the contract
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Cost Reimbursement Contracts
• Cost-Reimbursement Type Contract
– Provide for the payment to the contractor of allowable costs
incurred in the performance of the contract to the extent prescribed
in the contract.
• Cost-Plus-Fixed-Fee (CPFF) Contract
– Contractor's costs responsibility is minimized, Government's cost
responsibility is maximized. The contractor is reimbursed for
allowable, allocable costs. Contractor's profit is fixed.
• Cost-Plus-Award-Fee (CPAF) Contract
– Cost reimbursement type contract with special fee provisions. The
fee is in two parts: a fixed amount unrelated to performance, and an
award amount related to a subjective judgment of the quality of the
contractor's performance.
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Incentive Contracts
• Appropriate when a firm-fixed-price contract is not appropriate
and the required supplies or services can be acquired at lower
costs with improved delivery or technical performance, by
relating the fee payable under the contract to the contractor's
performance.
– Establish reasonable and attainable targets that are clearly
communicated to the contractor
– Include appropriate incentive arrangements designed to motivate
contractor efforts that might not otherwise be emphasized
– Discourage contractor inefficiency and waste
• Cost-Plus-Incentive-Fee (CPIF) Contract
– A cost-reimbursement type contract with provision for a fee that is
adjusted by formula in accordance with the relationship which total
allowable costs bear to target cost.
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Indefinite Delivery Contracts
• Indefinite - Delivery Type Contract
– There are several types designed for use when the exact time of
delivery is not known. Includes Multiple Award Task Order Contract
(MATOC)
• Indefinite - Quantity Contract
– Provides for furnishing of an indefinite quantity, within stated limits, of
specified supplies or services, during a specified contract period,
with deliveries to be scheduled by the timely placement of orders
upon the contractor.
• Requirements Contract
– An indefinite-delivery type contract that provides for filling all actual
purchase requirements of specific supplies or services of designated
activities during a specified contract period with deliveries to be
scheduled by the timely placement of orders upon the contractor.
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Time and Materials Contracts
• Time-and-materials contract may be used only when it is not
possible at the time of placing the contract to estimate
accurately the extent or duration of the work or to anticipate
costs with any reasonable degree of confidence.
• This type of contract provides no positive profit incentive to the
contractor for the cost control or labor efficiency.
– Government surveillance of contractor performance is required to
give reasonable assurance that efficient methods and effective cost
controls are being used.
• Labor Hour Contracts
– A variation of the time-and-materials contract, differing only in that
materials are not supplied by the contractor.
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Other Contracts Issues
• Sole Source
– Normally awarded without a procurement solicitation
– ED/WOSB, 8(a), and sometimes SDVOSB are eligible
– Some sole source awards possible below certain dollar limits
• Broad Area Announcement (BAA)
– Submit a short white paper. If requested to submit a follow-on
proposal, this award is made as essentially a “Sole Source”
• Small Business Innovative Research (SBIR)
– Three “gates” per year with DoD agencies and services, DOE, NSF,
NIH, and others for advanced R&D work
• Small Business Technology Transfer (STTR)
– Small businesses bid with universities for advanced R&D work
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Cost Issues
• Best value
– Best value: Competitive, negotiated procurements in which the
Government reserves the right to select the most advantageous
offer to the Government by evaluating and comparing factors in
addition to cost or price.
– A Best Value procurement enables the Government to purchase
technical superiority even if it means paying a premium price. A
“premium” is the difference between the price of the lowest priced
proposal and the one which the Government believes offers the best
value.
• Lowest Price Technically Acceptable (LPTA)
– The lowest price technically acceptable source selection process is
appropriate when best value is expected to result from selection of
the technically acceptable proposal with the lowest evaluated
price.
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The LPTA Dilemma
• In competitive procurement, federal agencies can evaluate
offerors’ proposals using different approaches. The most popular
approach (before budget cuts and sequestration) used to be
Best Value; it allowed agencies to balance the tradeoff
between quality (technical competency or past performance)
and price/cost. The government could award a contract to a
company who did not offer the lowest price if the higher-priced
proposal provided a greater benefit and that benefit was worth
paying the extra price differential.
• Today, in a world of ever painful defense cuts, the lowest price
technically acceptable (“LPTA”) approach has surpassed Best
Value. LPTA is easy to understand; the award goes to the lowest
priced offeror who submitted a technically acceptable
proposal. There is no trade off; no judgment involved, once an
offeror’s proposal is found to be “acceptable.”
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More About LPTA
• LPTA does not permit trade-offs between price/cost and
technical factors.
• Determining best value using the LPTA method is appropriate
when the requirement is not complex and the technical and
performance risks are minimal.
• LPTA is suitable for acquisitions where service, supply, or
equipment requirements are well defined and there is little
difference among competing products or services.
• If factors such as labor mix and level of effort are important
evaluation factors, the RFP must require that these areas be
clearly quantified and addressed in the proposal.
• LPTA is not appropriate for cost type contracts.
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Pricing
• What is the customer asking for?
– Lowest price (not LPTA) is often disguised as “Best Value”
•
Example: Army TACOM notes that most of Best Value awards go to the
lowest bidder
– What does the budget support?
•
Have you evaluated the customer’s budget? Have you engaged with the
customer to determine the price and cost sensitivities?
• Have you checked previous spending on this contract?
– Have you reviewed GovWin or USASpending.gov?
•
You can pull the total contract expenditures for all previous years
• What do you know about the competitors’ pricing?
– You can’t ask the competitor outright, but one of your teammates
may have bid against them in the past.
– You can request information from previous wins using Freedom of
Information Act (FOIA) processes
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Cost Models
• First… you need a very accurate view of your expenses
– General and Administrative (G&A) expenses. Many contractors are
15-18%. Different contractors figure G&A in different ways.
•
Establish your process and stick with it. Track your G&A expense
– Overhead (O/H). This covers a variety of expenses and the
assignment of costs depends on your processes.
•
Establish your process and stick with it. Track your overhead expense
– Fee. Your profit. The era of double-digit profit is nearly over. So get
over it.
– Fringe. This is the cost buildup for all of the benefits. The more you do
for your employees the higher your cost. Be sure to track your fringe
costs.
• Second… you need a very accurate idea of your labor rates
– You often have to map your salaries and your job descriptions to the
customer’s job descriptions… and justify those mappings
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Cost Models (continued)
• Third… you need an idea of the labor hours required for each
category
– You have to justify the hours per category based on the Request for
Proposal (RFP), the Performance Work Statement (PWS), or historic
data received from the customer (such as in the Question and
Answer (Q&A) process)
• Fourth… you need to build up the total cost using labor rates,
hours, and expenses (fee, fringe, overhead, G&A)
– Once you have completed your Excel model, look at the total labor
cost. Does it make sense compared with your competitive
intelligence?
– Calculate your wrap rate before and after fee
(Total “wrapped up” labor rate per hour) / (salary labor rate per hour)
• Competitive technical services “wrap rates” are around 1.6 – 1.8
• LPTA “wrap rates” are winning around 1.4 – 1.6
• Large businesses “wrap rate” >1.8
•
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Cost Models (continued some more)
• Fifth… you need to calculate your Other Direct Costs (ODC)
– Travel
– Purchases of materials
– Business related expenses that you have decided to allocate to the
customer
– And for all of these… you need to know if the customer pays
overhead, G&A, and/or fee on the ODCs
– It’s not uncommon for customer to deny O/H, G&A or fee on ODCs.
• Sixth… you need to determine what the Materials and
Subcontracting (M&S) Handling Fee will be for your subs
– Typically, your expense to handle subcontractor invoices and
payments is handled with an M&S handling fee
– It is not uncommon for customers to define the maximum fee that is
allowable
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Cost Models (it never ends…)
• Seventh… you need to identify what escalation rate you will use
for your costing, over the outyears of the contract
– It is common when working with Service Contract Act (SCA)
employees to not bid escalation. The government sets the new SCA
rates and you will be allowed to increase costs to account for that
change
• Eighth… you need to adapt to your customer’s format for the
cost model
– Many customer require a complete Basis of Estimate (BOE) for every
ODC. You will need to define how you built up the cost, with quotes
or references to every expense
– The customer may have a presentation format required for the cost
buildup.
• Ninth… you need to write a prose introduction to your cost
model and highlight key discriminators
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Cost Models (the end)
• Tenth… you bring it all together in one document
– It will likely be the longest document in your proposal
• Summary concerns
– The potential for disaster is greater in your Cost Volume than in any
other volume of your proposal. One bad formula or a misplaced sum
can cause you to lose. Don’t ever let just one person build this model
– You should have a “Price To Win” meeting early in your proposal build
up to determine how you will handle all nine steps. You may discover
that you cannot afford to bid this job. Don’t waste your time.
– If you decide to proceed with the bid, host an early “Green Team” to
review the progress on pricing. Put a major focus on getting labor
rates from your subs, determining work share percentages, and
establishing M&S fees. If you wait until the last minute, you lose.
– Determine early on what your maximum wrap rate can be, and
where you fall. Determine early on what fee, G&A, O/H and fringe
you will bid. You have a choice here.
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Wrap Up
• You cannot overstate how complex the cost volume and its
process will be. You cannot start working this too early.
• You cannot allow this work to be the domain of just one pricing
person, and fail to review the model and the results from top to
bottom. Assume it’s wrong and prove that the model is right.
• You CAN make money on LPTA
– It’s too difficult to explain in 30 minutes, but we can show you how.
• You CAN make a profit if you bid with no fee
– It’s counterintuitive, but true… as you add to the employee “base”
you get more people paying for your O/H and G&A expenses. More
employees spreads the costs across a larger “base” and helps you
make a profit even though you bid “no fee.”
– Again, too complex for 30 minutes. See us for explanation.
• Bottom line: Sharpen your pencils.
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