Educational Forum:
Strategic Cost Estimating –
Understanding Your Costs to be More Realistic
and Competitive in Today's Market
Bill Walter, CPA
Government Contract Consulting Services
Dixon Hughes Goodman, LLP
[email protected]
1
Agenda
• Winning Federal Government work is becoming
increasingly more competitive in today's market.
• Learn practical applications and options for cost
estimates, cost allocation theories, indirect cost rate
structures and how these all impact your company's
overall bidding strategies.
• You will gain understanding of when to make
modifications, how to analyze the impact and what
you need to provide auditors and contracting
officers.
2
Topics
•
•
•
•
Current LPTA Environment – Why do indirect rates matter?
Bidding, Billing and Actual Rates – Oh my!
Bidding to Win vs. Total Cost Absorption
Forecasting and Budgeting – Understanding the dynamics of
cost and the impact on profitability
• Impact of labor and volume on indirect rates – strategies for
the future
• Key Performance Indicators – Risk awareness and
management
3
First – A Story . . .
4
Bidding, Billing and Actual Rates
• Rates for all purposes:
– Forward pricing rates
– Provisional Billing rates
– Year end actual rates
• Same cost structure . . .
. . . different data set
5
Current LPTA Environment
• Why do indirect rates matter?
– Impact of competition
– FAR Part 15 – Cost or Pricing Data misused
• Which question should I be asking?
– Are my rates too high?
– Am I loosing work based on price?
– Do I have the right rates?
– Do my rates reflect my differentiation?
– What work am I losing on price?
6
Bidding to Win - Total Cost Absorption
• At the end of the day – you need to
understand your costs!
– Understand investments
– Be careful of “bid to win” strategies . . .
. . . understand implications before you bid
– Can use “special” rates for “special” contracts . . .
• Example – bidding the “Uber Project”
– Lower rates due to higher base
– New indirect rate solely for the proposed work
7
Forecasting and Budgeting
• Set expectations
• Understand cost drivers
• Strategy
– Know your customer - market research
– Consider multiple pools / bases
– Forecast on your strategy
– Consider cost and rate drivers
– Analyze the impact on profitability
8
Cost Allocation Tools
• Multiple indirect cost pools
– Function – engineering vs. manufacturing
– Location – Client site versus Company Site
– Benefits – SCA vs. traditional vs. retiree
• Use of service centers
– IT
– Communications
– Facilities
• G&A Bases
• Home office expenses
9
Cost/Value Drivers
Unique
Low Cost
Price
High Cost
Common
LPTA
Perceived Value
10
Impact volume on indirect rates
Indirect
Cost Pool
$$$
Indirect
Cost Base
$$$
11
Rate Challenges
3.0
2.5
Risk of winning work –
understated indirect cost
2.0
Simple
1.5
Multiple
1.0
Risk of losing work –
overstated indirect cost
0.5
-
Minimal
Significant
12
Key Performance Indicators
• Risk awareness and management
– Labor utilization
– Variance to forecasted rates
– Variance to Anticipated Profit
– Change in Working Capital
13
Next Steps
•
•
•
•
•
Strategy
Understand your costs
Understand you market needs
Set expectations . . .
Execute and monitor
14
Recommendations for Success
Be Proactive . . .
Not Reactive!
How to Survive
16
More Than Just Compliance
• Understand your cost drivers
• Don’t be afraid to invest
• Tie your rates to your strategy to support how you do
business – not the other way around!
• Keep it consistent – Keep it simple
• Don’t let desperation take you down
17
Questions?
18