Pricing your bid correctly directly affects two fundamentally important areas of your business: whether you win or lose the bid, and whether you gain profit or suffer loss on the contract. Is there anything more important in proposal preparation than pricing? Probably not. So how do you price correctly?
Pricing to Win
First, in pricing to win, you’ve got to gather pricing intelligence. You goal is to predict what government buyers expect to pay, and what competitors are likely to offer as their prices, for the product or service. You’re looking for the range between too low (which raises red flags with buyers) and too high (the price above which you have no chance of winning).
In gathering pricing intelligence, you’re focusing on “same” or “similar.” You want to look at same or similar products or services, agencies, buyers, end-users, etc. You also want to look at contracts that are fairly recent. The process is loosely analogous to an attorney gathering case law to support his legal arguments or predict for his client how a court will decide a dispute. He’s looking for similar fact patterns in cases handed down from authoritative courts within the particular jurisdiction. If he can’t find something similar, he’ll look beyond that jurisdiction to other cases. He starts close, sees what he can find and expands out from there if necessary.
In pricing contracts, start with the existing buyers and end-users. Have they bought the same or similar products or services recently? A few years ago? How about others within the agency? Within the department? In short, start close and expand as required.
Remember, as we’ve said before: unlike the commercial sector, government agencies must generally divulge what they have paid for the same product or service in the past. Remember too: buyers are more willing to talk if you meet with them before the procurement is published. After publication, your questions to buyers have to be answered in writing and sent to the other bidders.
The Internet is another source for pricing information. For example, the Defense Logistics Agency publishes on the Web price history data by National Stock Number (NSN). DLA price histories show past purchases of an NSN item and the price paid for each purchase.
Similar information can be shown at state and local purchasing sites. Information on competitors’ prices also can be obtained by accessing government e-marketplaces that are based on multiple award schedule contracts. Product and service catalog pricing is publicly available at these marketplaces, but remember that the prices shown may higher than the prices that the competitor would bid on a public procurement.
Pricing to Profit
Second, in pricing to make a profit, you’ve got to take a hard look at your own expected costs in performing under the contract. In estimating costs, a firm new to federal contracting should consider using a Certified Public Accountant (CPA) experienced in federal contracting, and involve the most experienced members of its financial team.
If a bid price that falls within the range of what’s expected (based on your intelligence gathering) leaves your company with no profit, then there’s probably only one conclusion to reach: don’t submit the bid. (A few companies are willing to suffer a loss on a contract hoping to make it up on others — the “foot in the door” theory. For most companies, this is a risky strategy.)
Pricing IFBs and RFQs
In fixed price bidding, losing a profitable bid is not as serious as winning an unprofitable bid because most items are purchased frequently and the cost of preparing a bid is relatively low. It is a valid strategy to begin with higher prices on initial bids for frequently purchased items. Since the winning price is public information, you can use that information in setting lower prices for later bids.
Determining the bid price is the single most important aspect in winning fixed price bids because price is the major (and, in many cases, the only) factor in determining the winner, assuming the bidder is responsive and responsible.
Do not submit a bid unless you know exactly what you will be delivering and that you can make a reasonable profit at the bid price. Ambiguities and uncertainties usually result in trouble. Pay particular attention to the bid instruction conditions of purchase, delivery and payment. When determining the amount of the offer, be careful to include all costs of material, labor, overhead, packaging, and transportation.
Pricing Negotiated Procurements
Bidders should submit their best cost and price when preparing a cost proposal for a negotiated procurement. Keep in mind, however, that the negotiated purchase procedure is more flexible than the sealed bid procedure: there is greater opportunity to seek modification of specifications, conditions of purchase, or delivery and payment. Remember too that buyers may invoke a complete cost analysis. Therefore, be prepared to support the bottom line dollar figure with facts and figures.
Although RFPs usually involve some negotiation, it does not occur in all instances. The contracting officer can accept a proposal without any negotiation, so again, careful attention to detail is critical. Don’t get stuck with a price that’s too low.
Bid pricing procedures vary considerably depending on the type of product or service being purchased under a negotiated procurement. A negotiated price is usually determined in four steps.
- Develop a plan of work.
- Estimate direct labor and other direct costs using the plan of work.
- Develop indirect costs using an indirect cost rate.
- Determine fee or profit.
Development of a plan of work and direct costs are technical functions best performed by direct line management and technical staff members (those responsible for contract performance), with oversight by company management. Collectively, this group should determine how to perform the contract effectively at the lowest possible cost.
Development of indirect costs is usually the responsibility of the firm’s financial department with CPA assistance as needed.
Model Price Proposal
To put all this in perspective, it’s helpful to see a model price proposal. There is one available on the Web at http://www.fedmarket.com/mpp.rtf (in MS Word). The model proposal is for a hypothetical research and development firm. It shows the major aspects of cost and price development, including calculation of multiple indirect cost rates.
Indirect cost estimating
Indirect costs include all costs that cannot be directly attributed to a project, product, or contract. These include such items as fringe benefits, overhead expenses, and general and administrative expenses. Costs that are considered unallowable by the federal government must be subtracted from overall indirect costs in calculating indirect cost rates. These indirect cost rates are then applied to direct costs in determining total costs. An example of indirect cost rate calculations is shown in the model price proposal.
Factors affecting indirect costs
On the surface, the example of indirect cost rate calculations shown in the model price proposal appears straightforward. In practice, the subject of indirect costs and their impact on bidding the lowest possible costs can be very complex. The following are just a few of the issues concerning indirect costs:
- Should different labor types be segregated in separate divisions to lower overhead rates and fringe benefits?
- Which labor categories are subject to fringe benefit scales?
- Should you use independent contractors or temporary labor to lower costs, and is this allowed under the federal regulations?
- What is the impact of seniority on your labor costs?
- How can fringe benefit costs be kept down and employee morale up at the same time?