Price to Perform: Winning the Battle of Business in an Austere Environment

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1 Title

2 Price to Perform: Winning the Battle of Business in an Austere Environment Breakout Session B04 Jacob George Director of Finance Red Team Consulting November 18, :15pm 3:30pm 1

3 Agenda Introductions Realities Best Value Evaluations Price to Win Price to Perform Reality Modeling and Gaming 2

4 About Red Team About Red Team Consulting Red Team Consulting is a womanowned small business providing a wide range of consulting services in support of federal contracting activities. 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 About Red Team Federal 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. RTF s major areas of support include: Pre-Award/Post-Award Contract Support Acquisition Strategy and Planning RFP Development Cost Estimation 3

5 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

6 Realities General Pricing Most companies have challenges when pricing contracts. Most companies don t actually follow the estimating and purchasing methodologies they write about in their Cost proposals. 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

7 Realities Proposals and Cost Volumes For Cost volumes, often Subcontractors will regurgitate Prime contractor templates or verbiage used in prior proposals. 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

8 Realities Small Businesses Many small companies have never been audited and don t understand the role of DCAA. Small businesses often have challenges calculating their cost structures resulting in them unknowingly overcharging or undercharging the government. The ability to conduct a valuable competitive analysis is not feasible. 7

9 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, SCA, CONUS/OCONUS) Reduce management (remove layers BAE, Boeing, DRS) Open new division to allocate costs cyber, Intel, healthcare 8

10 Realities The Pricing Environment (continued ) 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 SB% requirement as evaluation factor. DCAA and DCMA involvement in procurement cost assessments continue to grow. Best Value, Realism and Reasonableness are becoming real factors. 9

11 Best Value Evaluations Best Value evaluations can be ambiguous - important to understand agency or contracting office tendencies Some agencies publish internal guidelines regarding 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

12 The Trade-Off Process The Government uses a trade off process when it is in their best interest to award to other than the lowest priced offer, or other than the highest technically rated offer. Non-Price Factors are weighted relative to price. Per FAR : The solicitation shall state whether all evaluation factors other than cost or price, when combined, are significantly more important than, approximately equal to, or significantly less important than cost or price. 11

13 Lowest Priced Technically Acceptable (LPTA) Requirements are clearly definable. All evaluation factors and significant sub factors that set the basis for acceptability should be stated in the solicitation. Non-Price Factors are Pass/Fail. Per the FAR : The solicitation should state that the award will be made based on the lowest evaluated price of proposals that Pass or Fail the non-price factors. 12

14 Trade-Off versus LPTA Process Trade-Off process is a conversation on how we can trade value against cost/price. Value in this case refers to schedule, efficiency, minimum requirements, etc. Low Price Technically Acceptable (LPTA) is a conversation how we bid to meet only the compliance threshold for acceptance, at the lowest possible price. Summary: Trade-Off and LPTA are the two approaches per FAR Best Value is not a process, but the result of the process. 13

15 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 14

16 Pricing Strategy Development (continued ) To develop an effective pricing strategy, do not: Presume that the Government s estimated lifecycle 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. 15

17 Price to Win On a per opportunity 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. 16

18 Price to Win Do s & Don t! 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 17

19 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 18

20 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? 19

21 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. 20

22 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. 21

23 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. 22

24 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). 23

25 Common RFP Pricing Language These instructions are to assist you in submitting cost or pricing and related data that is required to evaluate the reasonableness and realism of your proposed cost/price Offers should sufficiently detailed to demonstrate their reasonableness. The burden of proof for credibility of proposed costs/prices rests with the offeror. In accordance with FAR (b), data other than certified cost or pricing data is required to support cost realism. 24

26 Reasonableness Versus Realism Reasonableness (FAR (a)) - Should answer the question: Is the Government paying too much? So our justification for how we came up with the rates should be clearly outlined. Realism (FAR (d)(3)) - Shows the Government that you clearly understand the solicitation requirements and have mapped the labor categories appropriately to the hours. 25

27 Reality Modeling and Game Theory 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. Typically a bid model begins with a uniform application of margin to all items. Flavor 1: Over-evaluated items, i.e. bidder believes it is less likely to be sold margins are re-allocated to items that are more likely to be sold. Flavor 2: Over-evaluated items, i.e. unlikely to be purchased are bid below their actual cost to drive down total evaluated price. 26

28 Modeling and Gaming Outcomes Gaming and Game-theory 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) 27

29 Modeling and Gaming Example 28

30 Modeling and Gaming Example 29

31 Modeling and Gaming Example (1) 30

32 Modeling and Gaming Example(2) 31

33 Questions? Jacob George Director of Finance Red Team Consulting Sunrise Valley Drive, Suite 100 Reston, VA (o) x 206 (c)