Tactics to Raise Bid Prices
(Editor’s Note. We have occasionally addressed how contractors can lower their cost based prices to be more competitive (e.g. see our article in the 4th Qtr. 2003 Digest issue, “Tactics to Lower Bid Prices” where we presented twelve ideas for lowering bid prices). However, many contractors also want to establish prices that maximize their cost recovery so we tried reversing the ideas in that earlier article and the result appeared reasonable so here it is,)
Some of the tactics we discuss below represent real overall cost increases to contractors while others shift costs away from some contracts to the proposed contract being sought.
- Shift average direct rates to the higher end of the spectrum. Rather than using an average rate for a given labor category (or even the lower end citing the ability to use less years of experience, for example), price rates at the higher end with the intention of using higher paid employees on the contract.
- Don’t use and bid uncompensated overtime. Even if uncompensated overtime is a significant factor for your firm, make sure your proposed hourly rates are not based on uncompensated overtime (i.e. dividing salary by a higher number of hours). For example, you can be sure that employees exempt from FSLA do not work overtime on this contract or pay them for any overtime effort worked to be able to claim uncompensated overtime is not a factor.
- Propose a higher escalation rate. For out years, you often have the ability to propose higher costs on direct costs such as labor, material, subcontracts and travel as well as indirect costs using an escalation factor. The government does commonly recognize escalation factors provided by such firms as Producer Price Index (PPI) but you can increase the factor by computing your firm’s actual historical practices or use other factors supplied by other firms including ones commonly found within your industry. Achieving higher escalation rates might include can be accomplished by assuming higher skilled employees used to work on the contract or not using new, usually lower paid employees in comparable skill categories.
- Don’t use “temporary” or “variable” employees. Increasingly, many companies’ new hires are individuals who are paid only for direct billing time or who do not receive the same types of fringe benefits that current employees receive. These employees should not be used on proposed contracts, citing need for higher seniority employees who happen to be paid higher fringe benefits. If the company computes a company-wide fringe benefit rate that consists of all types of employees, consider establishing a different fringe benefit rate for the class of employees working on this contract or establish a separate fringe benefit rate for the variable employees.
- Reclassify certain indirect functions as direct. Certain functions like contract and subcontract administration, purchasing, materials inspection, etc. can be identifiable with specific contracts rather than included in an indirect cost pool spread over all contracts. You often have the ability to consider these functions as direct. You will, of course, need to justify different treatment of these normally indirect functions as direct by showing they are incurred under “unlike circumstances” where you need to demonstrate consistency with the way you account for costs versus the way you propose them unless they are not similar or circumstances are dissimilar. You will also want to be able to show that allocation of the full overhead rate is justified under this contract where it still receives indirect function support. For example, direct HR efforts incurred for one contract (e.g. hiring a dedicated manager) are different than normal indirect HR services for the company as a whole.
- Change the G&A base. If, for example, government contracts are likely to have a relatively lower subcontract or material component compared to other contracts, you may want to shift from a total cost input base to a value added base (e.g. calculating and applying G&A costs to labor and overhead only). That way, the G&A rate will increase due to the lower G&A base where you can apply this higher rate to direct labor and overhead. Alternatively, you can alter the G&A base by some but not all types of costs that are ordinarily included in the G&A base. For example, we are seeing many examples of contractors excluding certain types of subcontract or material costs from their otherwise total cost base demonstrating that they are simply pass-through costs that do not require indirect support effort arguing their inclusion results in an inequitable cost allocation.
- Increase costs. Ensure that all allowable and allocable costs are included in your indirect cost pools. We commonly find that different types of otherwise allowable costs are excluded because a prior decision was made and the habit of excluding these costs simply continue without being reviewed. The exclusion of these categories of costs may no longer be valid (e.g. FAR changes, court decisions, revised DCAA guidance) or they may not have been valid at the time the decision to exclude them was made. Make sure you re-assess all unallowable costs that are screened to ensure they still should be. We also find that “management concessions” may have been used to lower indirect cost rates in the past where now they should be discontinued or at least discontinued for the new contract being proposed.
- Increase proposed profit/fee. Propose higher fees or increased fees on certain types of costs (e.g. subcontractors) showing that higher risk is involved. Several cases and revised profit guidelines have been issued that may support higher fees.
- Create a new business unit (or avoid it). A separate business unit or joint venture can significantly affect proposed prices where they offer tools to either lower or increase prices, depending on pricing strategies sought. Tools available for either lowering or increasing prices include using different categories of labor, payment of different fringe benefits or providing for a disproportionately lower or higher allocation of home office expenses. Just as the creation of a new segment or joint venture can significantly affect prices, decisions not to create such entities should also be considered for their effect on pricing.
- Aggressively increase indirect cost rates. Though it can be risky, assume a smaller business base (e.g. denominator) to spread indirect costs over. This is particularly effective if business prospects are uncertain. Also, be liberal in assuming increases of certain categories of costs (e.g. increased marketing effort, bonuses, legal/consultant efforts).
- Find outsourcing opportunities. Using outsourcing is more commonly associated with cost savings (e.g. shifting less critical functions to more efficient subcontractors) but it can also be used for higher priced improved quality or faster delivery.
- Revise indirect rate structure. The accounting rules provide great flexibility where you can, for example, create a subcontract and/or material handling rate, change the overhead base or change the composition of the overhead and G&A pools. These changes can significantly increase the amount of indirect costs allocated to your new contracts. For example, creating the subcontract/material handling base results in an increase in G&A and overhead rate so if the new contract has relatively lower amount of subcontract costs and higher amount of direct labor then you would allocate more of those labor oriented indirect costs to your new contract. Or if you keep the total cost G&A base, you very often have the opportunity to shift costs considered to be G&A to overhead (e.g. HR, accounting, legal, contract management, purchasing) that allows for greater allocation of costs to the overhead base costs (e.g. direct labor). (Editor’s Note. For more information on methods of revising your indirect rates, we have written many articles over the last twenty years so use our word search function to find them. Also, feel free to call us since this is one of our consulting specialties.).
- Base pricing on less aggressive performance improvement estimates. Instead of using normal estimates of performance (e.g. history), price the proposal according to less optimistic estimates of improvements being planned. These new estimates should be reflected in project budgets.
Some of these measures will create changes to current accounting practices. If your firm is covered by cost accounting standards some form of cost impact analysis on your other contracts may be required. If not CAS covered, there is considerably more leeway in making these changes. Careful planning and communication with government auditors and your CO will likely avoid problems associated with these accounting and pricing actions.
