Student Guide CON 170. Fundamentals of Cost and Price Analysis. Unit 1, Lesson 1 Contracting with the Government

Transcription

1 Student Guide CON 170 Fundamentals of Cost and Price Analysis Unit 1, Lesson 1 Contracting with the Government March 2013

2 Note Page 2 CON 170, Unit 1, Lesson 1, Contracting with the Government

3 Lesson 1 Contracting with the Government OVERVIEW In this lesson, the student will be presented with discussion of the DoD Contracting Environment. As pre-course work, students are required to read the article by Heberling & Kinsella at Attachment 1, and answer questions 1 through 5 in the Student Guide. The rest of the lesson, including a review of the Lamm & Vose article and the Exercises, will be done in class. LESSON DETAILS Lesson Title Terminal Learning Objective Enabling Learning Objectives Contracting with the Government 1.1 Given an acquisition situation, successfully distinguish various seller pricing strategies Explain the unique aspects of Government contracting compared to commercial contracting Explain the different market structures Differentiate between seller pricing strategies Time Required Method of Instruction 1 hour Pre-coursework reading, completion of discussion questions 1 through 3. Instructor-facilitated discussion (Power Point slides for this lesson are available on Blackboard, but are optional.) Lesson Schedule Instructor-facilitated Discussion (including summary) 1 hour References, Supplemental Readings 2 Articles, included in Appendix Evaluation Method Student performance will be informally evaluated during class discussions, and formally evaluated on Exam 1. CON 170, Unit 1, Lesson 1, Contracting with the Government 3

4 Lesson Presentation As pre-course work, read the article by Heberling & Kinsella at Attachment 1, and answer questions 1 through 5 in the Student Guide. The rest of the lesson, including a review of the Lamm & Vose article and the Exercises, will be done in class. Terminal Learning Objective 1.1 Given an acquisition situation, successfully distinguish various seller pricing strategies Enabling Learning Objectives Explain the unique aspects of Government contracting compared to commercial contracting Explain the different market structures Differentiate between seller pricing strategies Read Remaining Issues in Adopting Commercial Practices in Defense Acquisition, by Dr. Michael Heberling and Mary E. Kinsella, and answer questions 1 through What are a few of the unique systemic and cultural differences of contracting with the Government compared to the commercial sector? Why do these differences exist? 2. With respect to Market Forces, explain Heberling & Kinsella s metaphor indicating TINA and CAS are surrogate market forces for the defense sector. 4 CON 170, Unit 1, Lesson 1, Contracting with the Government

5 3. What are a few common differences in products sold to DoD compared to the commercial market? 4. At a recent job fair, a hiring authority from a local contractor commented, Many people with Government acquisition experience have a difficult time adjusting to the commercial environment. How does this comment align with Heberling & Kinsella s observations? 5. From The Need for Change section to the end of the article, what are two ways Heberling & Kinsella recommend the government improve its acquisition process? To conclude the review of the Heberling and Kinsella article, it is important to recognize there are unique aspects of contracting with the Government. In developing our pricing skills, we must recognize these differences, and learn as much as possible about both Government and commercial practices through market research. CON 170, Unit 1, Lesson 1, Contracting with the Government 5

6 With some familiarity on the uniqueness of contracting with the Government, we will now examine a range of different market structures which contractors operate in when pursuing Government contracts. The following graph illustrates the general range of competition in markets for goods and services. This graph provides insight to the market pressures contractors are facing, which will influence their proposal pricing strategy. Different Market Structures There is a range of market structures: Perfect Competition Monopoly Monopolistic& Oligopolistic Competition Effective Competition Effective Competition Oligopsonistic Competition Monopsony Few Sellers Few Buyers Market structures influence seller pricing strategies The left side of this graph: - There may be several buyers on the left side of the graph, but there are only a few sellers. - Those few sellers may not control the market, but exert disproportionate influence on the market. The right side of the graph: - There may be several sellers engaged in the market, but there are only a few buyers - Those few buyers exert disproportionate influence on the market. The center of the graph indicates there are enough buyers and sellers to have competition without a dominant influence by a single buyer or seller, or group of buyers and sellers. Discussion: For non-contingency, operational contracting requirements within the United States, where would you expect the level of competition to be on this bow-tie graph? 6 CON 170, Unit 1, Lesson 1, Contracting with the Government

7 For production of a new missile air defense system, where would you expect the level of competition to be? For modification to the missile air defense system 3 years after award, where would you expect the level of competition to be? Read Seller Pricing Strategies: A Buyer s Perspective, by David V. Lamm and Lawrence C. Vose and answer question 6 through How do Lamm & Vose describe the importance of understanding seller strategies? First paragraph, Understanding pricing strategies used by the seller is extremely important to a successful buyer. Regardless of the difficulty, effective buyers must be aware of the types of pricing strategies sellers are likely to employ, the conditions under which these strategies generally surface, and the significance of this knowledge in the buying process. Students have the following slides in the Student Guide to use as a note taker through the Pricing Strategies section of the article. The students do not get the article to read before class; therefore, the answers are provided in the slides. Instructors should lead discussions of through each strategy so students have enough understanding to complete the Assess the Strategy exercise at the end of the lesson. According to Lamm & Vose, there are several different seller pricing strategies, each with challenges to the government buyer. CON 170, Unit 1, Lesson 1, Contracting with the Government 7

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10 The Lamm & Vose article explains that contractors, in selecting a pricing strategy, will consider both external and internal factors. Recognizing these factors is important to Government buyers, particularly during the market research and proposal evaluation phases. 7. According to Lamm & Vose, is there a relationship between a contract type and their pricing strategy? 10 CON 170, Unit 1, Lesson 1, Contracting with the Government

11 8. Lamm & Vose make a claim: If a selling firm believes that a buyer may not be aware of competing products or substitutes, it may be included to increase the profit margin. - Could this really happen in the commercial world? - Explain the term caveat emptor (let the buyer beware): CON 170, Unit 1, Lesson 1, Contracting with the Government 11

12 EXERCISE: Assess the Seller s Strategy Student Instructions: Based on the readings for this lesson, name the Lamm & Vose s seller strategies will the seller likely employ? Be prepared to defend your answers. 1. Over the summer, a self-employed craftsman started his own business, and hired 5 students. He was aware of the general pricing practices of other painting firms, Cost of Labor and Material, plus 50% to cover bonding, insurance, transportation and profit. As a new company, he priced bids as labor and material plus 45%. What strategy? 2. A software corporation introduced a smart-phone to the market at a time when its capability was essentially unmatched. Because of their significant investment, and the ability for other businesses to enter the market with a reasonable substitute, their initial selling price was significantly higher than other phones entering the market. Their earnings skyrocketed in the short term. What strategy? 3. As airline security and fuel costs continued a rapid climb, the major airlines introduced new fees and raised airfares. Soon after, the smaller airlines did the same. What strategy? 4. A home computer printer manufacturer is practically giving away printers with an impressively low market price. After capturing market share, the company should have the opportunity to earn additional profits through additional cost reductions, and follow-on support purchases such as toner cartridges. What strategy is this closest to? 5. Emily submitted a bid for entymology services at less than 30% of her competitor s bids. Her company was new in the area, and had just received a small business grant which covered most of her fixed costs. Which strategy is she employing? Is it rational? 6. Lamm and Vose indicate buyers will face challenges in obtaining data which would help minimize risks associated with seller strategies. How will you face this challenge? 12 CON 170, Unit 1, Lesson 1, Contracting with the Government

13 LESSON SUMMARY Explain the unique aspects of Government contracting compared to commercial contracting Explain the different market structures Differentiate between seller pricing strategies CON 170, Unit 1, Lesson 1, Contracting with the Government 13

14 Unit 1 Lesson 1 Attachment 1 14 CON 170, Unit 1, Lesson 1, Contracting with the Government

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20 Unit 1 Lesson 1 Attachment 2 SELLER PRICING STRATEGIES: A BUYER S PERSPECTIVE By David V. Lamm and Lawrence C. Vose Copyright does not allow for electronic distribution. A paper copy of the article must be provided to students in class. 20 CON 170, Unit 1, Lesson 1, Contracting with the Government

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