For government contractors your indirect rate structure is critical to your competitiveness, perhaps more so than any other element of the proposal. In today’s LPTA environment, most offerors are going to be very similar when it comes to technical capabilities and past performance, so almost always award decisions come down to cost. For the select few companies that have a technical edge or a differentiator in the way of performance that outweighs the cost to your government customer you can stop reading now. The vast majority of companies working with the federal government don’t have this luxury, so what are they doing to set themselves apart when it comes to developing their indirect rates and overall wrap rates (wrap rates are a function of total direct and indirect costs for a labor hour divided by the direct labor hourly rate); hence, a lower wrap rate is perceived to be a more competitive overall cost structure)?
1. Small business has an advantage.
Large businesses might have economies of scale that allow them to achieve lower wrap rates, but small businesses can be far more agile in pricing exercises. As a small-business contractor not covered by Cost Accounting Standards (CAS) the ability to change your indirect rate structure is much more flexible. Contractors who are full CAS-covered are required to go through a formal cost impact calculation and seek approval of the government prior to implementing a change in cost accounting practice. This process does not happen overnight (or even within a matter of years it seems of late). Accordingly, small businesses can be much more agile in developing an indirect rate structure in anticipation of a major contract award, but there are some fundamental considerations to take into account such as impact to legacy contracts, prohibition on unnecessary fragmentation of bases (FAR 31.203(d)). Careful consideration must come into play when considering a restructure for a specific contract opportunity.
2. Timing is everything.
For the vast majority of proposals the anticipated start date is some time well into the future, often at least one fiscal year. A lot can happen in a years’ time and the government’s ability to refute your assumptions for growth as long as they are realistic is difficult. In addition to factoring in the value of the proposed work and its impact to your indirect rates in those future years, contractors should also carefully consider the probability of win (P-win) of other bids outstanding to see if it makes sense to include those costs as well. Indirect rates are fractions at the end of the day, and the larger the denominator (business base) the lower the rate. Again, careful consideration must be employed in the use of this strategy, because if the projected work does not materialize you will wind up with an understated wrap rate, which will negatively impact profitability assuming award of the contract.
3. A friend in need is a friend indeed.
In the event you’ve done your bid/no bid analysis and determined that you are not price competitive the next logical step is to seek to partner with other companies who provide synergy under the work and may be able to offer lower costs in other areas. A piece of something is always better than nothing, and particularly with the case of teaming with a small business contractor may provide advantages outside of cost. Another option in this area is the formation of a joint-venture which depending on structure may allow for the creation of an entirely new rate structure specifically devoted to the work being proposed. Many factors come into play in the area of teaming arrangements and formation of joint venture both at the outset, and during operation and we have assisted companies all over the world with unraveling these complexities.
4. Expansion and Contraction is a repetitive cycle.
Over the past decade that I have assisted contractors working with the U.S. Government I’ve noticed that everything seems to be repetitive. Whether it is the new IR&D reporting requirements, which are eerily similar to the pre-1997 requirements, the resistance to the use of commercial items of late in contradiction to the FASA and other efforts in the mid-90s, or the way that wrap rates and company structures are changing now. It is clear that history repeats itself with the government contracting industry. For many years the norm was for contractors to expand overhead structures outward. That is, it was simply easier to create multiple overhead pools targeted to specific lines of business or even contracts. Contractors running multiple pools beyond the normal onsite/offsite structure was exceedingly common. Additionally, the creation of service centers to allocate back office support costs like HR to overheads and G&A rather than simply charging all the cost to G&A was the norm because wrap rates were acceptable. Now, however, with the ongoing cost pressures of sequestration, increasingly companies are seeing the advantages of consolidating overheads for similar areas, because the end result is a larger base that is easier to manage in today’s volatile market. Likewise, many of the functions that were traditionally service centers actively populated by contractor employees are now being outsourced in areas like accounting, HR, IT, Contract Management and other shared-service areas. This provides two benefits; first the cost is generally easier to budget, and second it frequently provides access to better talent than the contractor could retain on their own. With an outsourced model there is no hiring, transition, training, fringe benefits, IT, facilities or other costs which can be variable utilizing in-house staff, so pricing can be much more level over each fiscal period. We have found that the cost of outsourced functions are less, because clients are paying for only those services that they actually need as they arise. This ultimately results in lower costs primarily in the G&A area and is a compelling discussion point in the cost volume when describing the steps the company has taken to ensure the best price for their government customer. We are currently performing these functions for both contractors, subcontractors and joint ventures, and are increasingly seeing more interest in these types of outsourced services which confirms that outsourcing should at least be a consideration for companies working with the U.S. Government.
5. Understand B&P cost accounting.
Bid and proposal costs are those costs incurred in preparing, submitting and supporting bids and proposals. For government contractors there is a specific process for accounting for these costs that involves inclusion of the B&P labor in the base of overhead and the end result is the total cost (B&P Labor + OH and other allocable costs) are transferred to the G&A pool and recovered over the G&A base. What many contractors don’t understand is there is a difference between B&P labor and proposal support. Proposal support are functions typically performed by G&A staff related to the proposal process. This is not B&P labor and should not be charged to B&P labor. Why? When a typically G&A person charges to a B&P labor cost objective we are in effect stating that their labor is benefited by the components of the OH pool (remember B&P labor sits in the base of OH). In most cases, for a G&A employee this is not the case, so by having them charge a B&P code not only are we inequitably assigning overhead to their labor, but we’re also increasing the G&A rate. B&P labor is labor provided by typically direct employees; hence, included in the OH base as if working on a contract. Their support costs do reside within the overhead pool, so when we pull in a (typically direct) PM or other technical person to assist with the technical and management volume or pricing discussions they have to charge B&P so that their labor is fully burdened prior to the transfer to the G&A pool. G&A is the most frequently scrutinized area of proposals, and having clear charge codes and explaining the differences to your proposal team is key to ensuring you’re not overstating your B&P costs within the G&A pool.
Help is available to stay competitive
We are constantly assisting clients with proposal pricing and cost volume projects, and one key point is that the proposal process starts long before the RFP is issued. We provide assistance to clients in structuring their rates in advance of a known RFP-release to ensure they are in a position to be as competitive as possible. Over the years, we have helped many clients across a variety industries working with every agency of the federal government, which is coupled with many of our employees former senior DCAA careers to provide an objective view of proposal strategies. That experience provides us with a unique insight into the pricing discussion and decisions. We provide assistance not only with cost volume strategy and narrative generation, but also with color team reviews to provide a fresh, outside perspective on proposals.