Federal Government proposal pricing is just like setting a commercial price, right? Well the answer may be yes in some cases like when there is a lot of competition, or a commercially available commodity. There are lots of other instances in government contracting where this might not be so simple. In all cases, it can be argued that there should be a good basis supporting each price given to the government.
Let’s take a look at the easiest scenario to understand for this rationale, the cost reimbursable contract. In this type of arrangement, the government is going to pay the contractor for all direct work on the contract (work that can only be associated with one contract) plus they will pay a portion of the indirect expenses (overhead, G&A, etc.) that the contractor incurs. It is therefore key to understand not only how the government will calculate their “fair portion” of these indirect expenses but to incorporate this into the proposal to cover expenses that the firm will incur on the contract. Since the direct expenses are reimbursed on a 1-for-1 basis, the amount of money that the contractor can make on the contract is governed by the determination of the indirect billing rates and on the allowable fee (or profit) that the government dictates. Since most of these types of contracts will be negotiated by the government, the number that is put in the proposal will, in all likelihood, go down prior to the final contract being issued. Not knowing the method of calculation or what the basis of this number is in the proposal will put the company in a very high risk category of losing money on the contract. Not to mention, many times the government will require an audit of the cost and pricing data and expenses will be disallowed if they do not follow the government’s regulations and structure. This again puts the company in a position to perhaps win the contract but lose money on its performance.
The SBIR Phase II’s, and other awards, are slightly different in that these awards have a pre-determined limit on the award value. So why would it matter what the indirect rates on such an award? The answer is in determining how much direct time will be available to use on the award. The final objective may not be reached if this is not properly planned out in the proposal stage. Again, the ability to make money on the contract is also in question if the proposal is not priced properly.
What about other types of awards such as Grants, Fixed Price contracts or even Time and Material contracts? A lot of companies don’t spend the time to determine their indirect rates basis in these types of bids. If they don’t begin planning in the proposal stage, there is a risk (the risk grows as the proposal amount grows) that the government may want to see cost and pricing data to validate the award. If this information is not in a format that the government is accustomed to seeing, they can become confused (or worse yet – decline some expenses and lower your price) or even decline the award. This is not to mention the benefit to the contractor of predicting whether or not they will make money on this specific award or not. We have seen too many instances where companies ended up losing money on a fixed price contract and not understanding why. In reality, a fixed price contract with the government gives the contractor the best chance to make a higher profit as the profitability is entirely up to the contractor. If the contractor doesn’t know all the costs (including indirects) and how to allocate them, the chance of profit go down. It makes perfect sense to utilize the government’s cost accounting system to help with the pricing to ensure you maximize your profit opportunity.
Many times competition enters into the situation for pricing strategy as well. Again, not understanding all the costs, and how to allocate them to the project, will result in potentially a losing money situation.