Price To Perform
Pricing your contracts to win is only half of the battle. Pricing them
for long term success benefits the Government client and your
company.
Breakout Session F12
Name: Jacob George
Date: Tuesday, July 31, 2012
Time: 4:00 pm-5:15 pm
1
Agenda

Introductions

Realities

Best Value Evaluations

Price to Win

Price to Perform

Reality Modeling and Gaming
2
About Red Team
About Red Team Consulting
About Red Team Federal
Red Team Consulting is a woman-owned
small business providing a wide range of
consulting services in support of federal
contracting activities.
Red Team Federal, a division of Red
Team Consulting, LLC, is an economically
disadvantaged woman-owned small
business that provides acquisition
strategy and planning, federal
procurement training and contract
management support.
Red Team’s major areas of support include:
 Fully outsourced proposal development
and management
 Strategic capture management and
planning
 Price strategy and Price to Win
 Training and seminars
RTF’s major areas of support include:
 Pre-Award/Post-Award Contract
Support
 Acquisition Strategy and Planning
 RFP Development
 Cost Estimation
3
About the Speaker

Jacob George
 Director of Finance at Red Team Consulting
 Over 10 Years of Financial Analytic and Price Modeling Experience
 Practice lead for all Federal Pricing and Corporate Budget
engagements at Red Team Consulting
 Expertise with:
 Corporate-wide Government Cost and Pricing engagements
 FP&A DCAA related projects(ICS, Control System Audits)
 Corporate-wide EVM implementation and training projects.
 Managed pricing activities for over $35 Billion in Federal procurements
4
Realities – General Pricing





Most companies have challenges when pricing contracts.
Most companies don’t actually follow the estimating and purchasing
methodologies they write about.
Price Evaluations are viewed as entirely subjective and the term “best
value” is considered very ambiguous by the industry
Large businesses have the capability to beat small businesses on
price based on their ability to allocate corporate costs
On pricing evaluations, companies will find ways to manipulate the
pricing model.
5
Realities – Proposals and Cost Volumes



For Cost volumes, often Subcontractors will regurgitate Prime
contractor templates
Pricing volumes and pricing related exercises are frequently completed
last minute. Factor 4 Syndrome!
Delays to the RFP release are extremely costly for industry and greatly
impact small businesses
6
Realities – Small Businesses



Many small companies have never been audited and don’t understand
DCAA.
They don’t understand how to calculate their cost structures so when
they bid they could either be overcharging or undercharging the
government.
Small businesses often have challenges calculating their cost
structures resulting in them unknowingly overcharging or
undercharging the government.
7
Realities – The Pricing Environment



Understand that budget is going to become more challenging as
growth slows or declines.
Competitors are focusing on keeping current contracts – this is key to
maintain customer and market position. The assault on cost factors
demands realignment (Consolidations, M&As)
Other options to lower cost positions include:
 Addressing Fringe Rates (Multiple Rates, fewer benefits, al la cart
options)
 Reduce management (remove layers – BAE, Boeing, DRS)
 Open new division to allocate costs – cyber, Intel, healthcare
8
Realities – The Pricing Environment



Government has fewer resources and budget constraints – effect on
limited escalation rates SBA gains muscle to make small business
requirements even more important – from 20% ranges to mandatory
40%+ (DHS 45% TCV)
 Move from total subcontracted dollars to TCV
 We have seen SB% requirement as evaluation factor in IC
proposals.
DCAA and DCMA involvement in procurement cost assessments
continue to grow.
Best Value, Realism and Reasonableness are becoming real factors.
9
Best Value Evaluations



Best Value evaluations can be ambiguous - important to understand
agency or contracting office tendencies
In acquisitions where the requirement is less defined or there is greater
performance risk, technical or past performance considerations may
play a dominant role in source selection and best value determination.
It is not uncommon for the successful offeror to have a price 10-15%
higher in best value evaluations, but no more. And only if they are
clearly the better proposal.
10
Best Value Evaluations Versus LPTA



Best Value is a conversation on how we can trade value (capability,
schedule) against cost/price
Low Price Technically Acceptable (LPTA) is a conversation how we bid
to meet only the compliance threshold for acceptance, at the lowest
possible price.
Types of Source Selections:

High Technical, Price Acceptable (HTPA) – Best Value

Low Price, High Technical (LPHT) – Best Value

Low Price, Technically Acceptable (LPTA) – Low Price

Low Price (LP) – Low Price.
11
Pricing Strategy Development

To develop an effective pricing strategy, minimally consider:
 Your thorough understanding of the relative importance of price
 A reasonable definition of “best value”
 The awarding agency’s history of evaluating and awarding contracts
 Your vulnerability to (and tolerance for) risk
 Your competitors’ perceived tolerance for risk
 Your true strengths and weaknesses for each evaluation factor and
sub factor
 Your experience bidding against the presumed competitors
12
Pricing Strategy Development (Continued)

To develop an effective pricing strategy, do not:
 Presume that the Government’s estimated life-cycle contract value,
stated contract ceiling, minimum or maximum order amounts or
currently available funding is reflective of an ideal target evaluation
price or competitive range.
 Implement a pricing strategy as a consequence of technical and
management strategy.
 Let pricing be a completion exercise to deliver a cost volume that is
compliant.
13
Price to Win




On a per proposal basis, Price to Win (PTW) provides a detailed,
results based assessment of the price that your competitor(s) is most
likely to bid
The PTW exercise may reveal a competitive price that exceeds your
own capabilities.
The PTW exercise may show new opportunities on how you can
provide better lower price, better value
PTW is your competitors price and is based on their capabilities/cost
structure and ROI goals.
14
Price to Win - Uses

Proper Uses – Decision Support
 PTW should be a decision input to management bid strategy and
pricing approach
 Informs management of the most probable competitive bid price
scenarios
 Develops competitor views of the opportunity and prices these
approaches.

Improper Uses – Becomes the Decision.
 Management abandons decision responsibilities and bids the PTW.
15
Price To Win – When to Initiate





When an opportunity/program content that is core business to your
company strength
“Must Win” opportunities (new account penetrations)
Incumbent looking to protect contract from challengers
Competitors looks to unseat incumbents.
It is important to engage PTW team early in the bid cycle (Pre-RFP)
to help evaluate teaming options, suppliers and technology partners
16
Price to Perform – Setting the Stage

Questions that need to be asked include:
 What is your Price to Perform on the awarded contract?
 Can I sustain submitted prices with my current indirect rate and
multiplier?
 How much growth – base and organic - should I consider to be
equitable?
17
Price to Perform – In Action


Develop “If-Win” budgets, showing the effect of the new procurement
on current rate structure.
What impact does this new contract have on:
 Fringe – New Insurance plans, Locality influence, OCONUS
 Overhead and G&A – New management (PMO) positions,
additional facility costs, new personnel (HR, IT), capital
expenditures, subcontracts.
18
Price to Perform - Example

Price to Perform – Example of Allocation Basis (G&A)
Total Cost Input: All Costs Labor, OH, Material and ODCs are included in the base (denominator)
Direct Labor: $30,000
Direct Material: $25,000
Overhead Costs: $35,000
ODCs: $10,000
Total Cost Input: $100,000
G&A Cost: $10,000
G&A Rate: 10%
Value Added: Total Cost Input less Materials &
subcontracts
Direct Labor: $30,000
Direct Material: $25,000
Overhead Costs: $35,000
ODCs: $10,000
Value Added: $75,000
G&A Cost: $10,000
G&A Rate: 13.33%
Single Element Method: Only one cost element, not
often used.
Direct Labor: $30,000
Direct Material: $25,000
Overhead Costs: $35,000
ODCs: $10,000
Single Element: $30,000 (using Labor)
G&A Cost: $10,000
G&A Rate: 33.33%
19
Price to Perform - Manage




IAW corporate schedule, plan for changes to rate structure.
Proper management and evaluation of indirect rates is key in financial
life-cycle of a contract.
Monthly review of indirect rates via reviewing Statement of Indirects.
Develop Budget to Actual reports and Period to Period reports to
monitor rates.
20
Price to Perform - Strategies

Strategies to Explore
 Material and Handling Pool
 Typically consists of administrative costs/expenses necessary for
handling of subcontractor and material costs.
 The Base of this pool (Denominator) consists of all direct
subcontractor and material costs.
 The Base of this pool are excluded from the base of the G&A.
21
Price to Perform – Strategies Continued

Strategies to Explore Cont..
 Service Centers
 Extract certain traditional G&A costs and re-allocate them
between G&A pool and OH pools in a logical and consistent
allocation basis.
 Cross allocations can be complex, so it is imperative that your
Accounting System be able to accommodate multiple Service
Centers.
 Typical Service Centers Include: HR (Allocation Base –
Headcount), IT (Allocation Base – Units), Facilities (Allocation
Base - Square Footage), Security (Allocation Base – Headcount).
22
Modeling and Gaming

Reality Modeling
 The intent of Reality Modeling is to best predict what changes will
likely occur over the life of a contract and bid with those changes in
mind. In other words, what is being evaluated and what will actually be
purchased, when and with what margin.

Gaming
 The intent of Gaming is to exploit the inefficiencies and imbalances in
a given solicitation.
23
The Modeling and Gaming Process



Typically a bid model begins with a uniform application of margin to
all items.
Items determined to be over-evaluated, i.e bidder believes it is less
likely to be sold – margins are re-allocated to items that are more
likely to be sold.
Over-evaluated items, i.e. unlikely to be purchases are bid below
their actual cost to drive down total evaluated price.
24
Modeling and Gaming Outcomes

Gaming has a negative connotation. However, there are cases where
elements other than price or margin are drivers behind gaming an
opportunity, these include:
 Lower Evaluated price
 Higher profit
 Inventory maximization (product or labor)
25
Modeling and Gaming Example
26
Modeling and Gaming Example in Action:
27