Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
 
Breakout Session #  903 Cherry, Bekaert & Holland, LLP Beverly Arviso, CFCM, CPCM, CPA [email_address] Susan Moser, CVA, C...
Objectives <ul><li>Understanding the requirements </li></ul><ul><li>Fundamental Cost vs. Pricing Concepts </li></ul><ul><l...
Understanding the requirements <ul><li>Read the Solicitation </li></ul><ul><ul><li>Determine Contract Type(s)‏ </li></ul><...
Fundamental Cost vs. Pricing Concepts <ul><li>Contract Pricing permitted for: </li></ul><ul><ul><li>GSA Schedules (with ex...
Fundamental Cost vs. Pricing Concepts <ul><li>Contract Pricing is: </li></ul><ul><ul><li>Driven by market forces </li></ul...
Fundamental Cost vs. Pricing Concepts <ul><li>Contract Costing required for: </li></ul><ul><ul><li>Cost reimbursement cont...
Fundamental Cost vs. Pricing Concepts <ul><li>Contract Costing is: </li></ul><ul><ul><li>Driven by historical and/or proje...
Direct Labor Rate Development <ul><li>Actual direct labor rates </li></ul><ul><li>Labor category rates </li></ul><ul><li>B...
Indirect Labor Rate Development <ul><li>Creating Your Indirect Cost Structure </li></ul><ul><li>Define direct costs </li><...
Indirect Labor Rate Development <ul><li>Forward pricing rate agreements (FPRAs) (FAR 15.407-3) are voluntary agreements en...
Indirect Labor Rate Development <ul><li>Changing your indirect rates for bidding </li></ul><ul><ul><li>Consider new rates ...
Evolution of Indirect Rates <ul><li>Start-up and smaller companies tend to have </li></ul><ul><ul><li>Lower fringe benefit...
Evolution of Indirect Rates <ul><li>As companies expand and grow to medium size </li></ul><ul><ul><li>Lower fringe benefit...
Evolution of Indirect Rates <ul><li>As companies become large businesses </li></ul><ul><ul><li>Fringe benefits stabilize <...
Evolution of Indirect Rates <ul><li>Reasons for the evolution of indirect rate structures </li></ul><ul><ul><li>New requir...
Proposal Pricing Strategies <ul><li>Warning: </li></ul><ul><ul><li>These strategies have been successfully employed by at ...
Proposal Pricing Strategies <ul><li>Create multiple fringe rates </li></ul><ul><ul><li>Define labor classes according to f...
Proposal Pricing Strategies <ul><li>Diversify overhead rate(s) to reflect </li></ul><ul><ul><li>Customer site vs. contract...
Proposal Pricing Strategies <ul><li>Create project-specific overhead rate </li></ul><ul><ul><li>A dedicated effort within ...
Proposal Pricing Strategies <ul><li>Eliminate/reduce indirect cost applied to pass-throughs </li></ul><ul><ul><li>Change G...
Proposal Pricing Strategies <ul><li>Separate materials from subcontracts </li></ul><ul><ul><li>Create materials acquisitio...
Proposal Pricing Strategies <ul><li>Establish Multiple Business Units </li></ul><ul><ul><li>Each unit has own G&A rate </l...
Proposal Pricing Strategies <ul><li>Create service centers </li></ul><ul><ul><li>Easier way to account for common indirect...
Proposal Pricing Strategies <ul><li>Create direct charge service centers </li></ul><ul><ul><li>Accumulate labor, fringe, a...
Proposal Pricing Strategies <ul><li>Refine allocation bases </li></ul><ul><ul><li>Examine relationship between pool and ba...
Proposal Pricing Strategies <ul><li>Refine pool composition </li></ul><ul><ul><li>Move cost elements to lower level pools ...
Proposal Pricing Strategies <ul><li>Revise direct vs. indirect criteria </li></ul><ul><ul><li>Does it support contract’s S...
Proposal Pricing Strategies <ul><li>Refine cost escalation techniques </li></ul><ul><ul><li>Consider impact of contract ty...
Common Pitfalls and Helpful Hints <ul><li>Review solicitation web site often for changes  </li></ul><ul><li>Prepare, updat...
Common Pitfalls and Helpful Hints <ul><li>Negotiation of subcontract type </li></ul><ul><li>What should you do when your c...
<ul><li>QUESTIONS? </li></ul>
Upcoming SlideShare
Loading in …5
×

Pricing Strategies

2,623 views

Published on

Published in: Business, Technology
  • Be the first to comment

Pricing Strategies

  1. 2. Breakout Session # 903 Cherry, Bekaert & Holland, LLP Beverly Arviso, CFCM, CPCM, CPA [email_address] Susan Moser, CVA, CITP, CPA [email_address] Monday, April 10, 2006 2:45-3:45 pm Proposal Pricing Strategies
  2. 3. Objectives <ul><li>Understanding the requirements </li></ul><ul><li>Fundamental Cost vs. Pricing Concepts </li></ul><ul><li>Direct Labor Rate Development </li></ul><ul><li>Indirect Rate Development </li></ul><ul><li>Evolution of Indirect Rates </li></ul><ul><li>Proposal Pricing Strategies </li></ul><ul><li>Common Pitfalls and Helpful Hints </li></ul>
  3. 4. Understanding the requirements <ul><li>Read the Solicitation </li></ul><ul><ul><li>Determine Contract Type(s)‏ </li></ul></ul><ul><ul><li>Section L, Instructions, Conditions, and Notices to Offerors </li></ul></ul><ul><ul><li>Section M, Evaluation Factors for Award </li></ul></ul>
  4. 5. Fundamental Cost vs. Pricing Concepts <ul><li>Contract Pricing permitted for: </li></ul><ul><ul><li>GSA Schedules (with exceptions)‏ </li></ul></ul><ul><ul><li>T&M or FP contracts with adequate price competition </li></ul></ul><ul><ul><li>Commercial items or services </li></ul></ul><ul><ul><li>Prices set by law or regulation </li></ul></ul>
  5. 6. Fundamental Cost vs. Pricing Concepts <ul><li>Contract Pricing is: </li></ul><ul><ul><li>Driven by market forces </li></ul></ul><ul><ul><li>Not subject to FAR Cost Principles or CAS </li></ul></ul><ul><ul><li>Full of deviations and innovations </li></ul></ul><ul><ul><li>Unauditable because…. </li></ul></ul><ul><ul><ul><li>Not determined by cost accounting </li></ul></ul></ul>
  6. 7. Fundamental Cost vs. Pricing Concepts <ul><li>Contract Costing required for: </li></ul><ul><ul><li>Cost reimbursement contracts (always)‏ </li></ul></ul><ul><ul><li>T&M (sometimes)‏ </li></ul></ul><ul><ul><li>Fixed Price (occasionally)‏ </li></ul></ul><ul><ul><li>Letter Contracts (usually)‏ </li></ul></ul><ul><ul><li>Contract Terminations (many, but not all)‏ </li></ul></ul><ul><ul><li>Contract Changes (FAR & Supplement, other factors </li></ul></ul>
  7. 8. Fundamental Cost vs. Pricing Concepts <ul><li>Contract Costing is: </li></ul><ul><ul><li>Driven by historical and/or projected costs </li></ul></ul><ul><ul><li>Constrained by applicable regulations (FAR, CAS, OMB Circular, DFARS, etc.)‏ </li></ul></ul><ul><ul><li>Sensitive to unallowable and unbillable costs </li></ul></ul><ul><ul><li>Required to be consistent (FAR 31.202 & 203, CAS 401, 402)‏ </li></ul></ul><ul><ul><li>Subject to audit </li></ul></ul>
  8. 9. Direct Labor Rate Development <ul><li>Actual direct labor rates </li></ul><ul><li>Labor category rates </li></ul><ul><li>Blended rates (covers several categories)‏ </li></ul><ul><li>Weighted average category rates </li></ul><ul><li>Category rates when using prime and subcontractor labor </li></ul>
  9. 10. Indirect Labor Rate Development <ul><li>Creating Your Indirect Cost Structure </li></ul><ul><li>Define direct costs </li></ul><ul><li>Aggregate indirect costs into logical groupings </li></ul><ul><ul><li>Key Terms= Homogenous, Causal/beneficial Relationship </li></ul></ul><ul><li>Identify allocation bases (objective & verifiable)‏ </li></ul><ul><li>Document system of pools and bases </li></ul>
  10. 11. Indirect Labor Rate Development <ul><li>Forward pricing rate agreements (FPRAs) (FAR 15.407-3) are voluntary agreements entered into to facilitate negotiations of contracts and modifications </li></ul><ul><li>FPRAs represent reasonable projections of specific costs that are not easily estimated for or identified with a specific contract </li></ul><ul><li>FPRAs may include rates for labor, indirect costs, material obsolescence and usage, spare parts provisioning and material handling </li></ul><ul><li>FPRAs may cover multiple years </li></ul><ul><li>Allocation of pools and bases should be consistent with accounting practices </li></ul>
  11. 12. Indirect Labor Rate Development <ul><li>Changing your indirect rates for bidding </li></ul><ul><ul><li>Consider new rates for changing conditions, esp. large bids </li></ul></ul><ul><ul><li>Calculate and document new rate projections </li></ul></ul><ul><ul><li>Bid revised rates now!, then…. </li></ul></ul><ul><ul><li>Submit revised Forward Pricing Proposal </li></ul></ul><ul><ul><li>Provide narrative explaining how rates are applied, e.g., overhead is applied to the sum of direct labor </li></ul></ul><ul><ul><li>For CAS covered contractors, MUST be consistent with disclosure statement </li></ul></ul>
  12. 13. Evolution of Indirect Rates <ul><li>Start-up and smaller companies tend to have </li></ul><ul><ul><li>Lower fringe benefits rate </li></ul></ul><ul><ul><li>Widely varying overhead rate(s)‏ </li></ul></ul><ul><ul><li>Medium to high G&A rate </li></ul></ul><ul><ul><li>Difficult to predict/manage rates </li></ul></ul>
  13. 14. Evolution of Indirect Rates <ul><li>As companies expand and grow to medium size </li></ul><ul><ul><li>Lower fringe benefits typically increase </li></ul></ul><ul><ul><li>overhead rate(s) approach industry norm </li></ul></ul><ul><ul><li>G&A is unlikely to remain low as infrastructure is developed </li></ul></ul><ul><ul><li>Rate stability improves somewhat </li></ul></ul>
  14. 15. Evolution of Indirect Rates <ul><li>As companies become large businesses </li></ul><ul><ul><li>Fringe benefits stabilize </li></ul></ul><ul><ul><li>Contractor site overhead rates may increase (nicer facilities)‏ </li></ul></ul><ul><ul><li>G&A declines as base expands </li></ul></ul><ul><ul><li>Rates are stable and predictable </li></ul></ul><ul><ul><li>New contracts don’t have as much impact on rate structure </li></ul></ul>
  15. 16. Evolution of Indirect Rates <ul><li>Reasons for the evolution of indirect rate structures </li></ul><ul><ul><li>New requirements from current customers </li></ul></ul><ul><ul><li>New customers </li></ul></ul><ul><ul><li>Competitor’s actions </li></ul></ul><ul><ul><li>Need costing flexibility </li></ul></ul><ul><ul><li>Organic growth and diversity </li></ul></ul><ul><ul><li>acquisitions </li></ul></ul>
  16. 17. Proposal Pricing Strategies <ul><li>Warning: </li></ul><ul><ul><li>These strategies have been successfully employed by at least one contractor, but they may not be appropriate or acceptable for your company and your circumstances </li></ul></ul>
  17. 18. Proposal Pricing Strategies <ul><li>Create multiple fringe rates </li></ul><ul><ul><li>Define labor classes according to fringe benefits </li></ul></ul><ul><ul><li>Customize benefits for employees, especially semi-retired </li></ul></ul><ul><ul><li>Benefits packages by division </li></ul></ul><ul><ul><li>Note: Monitor compliance with DOL and 401(k) Rules </li></ul></ul>
  18. 19. Proposal Pricing Strategies <ul><li>Diversify overhead rate(s) to reflect </li></ul><ul><ul><li>Customer site vs. contractor site </li></ul></ul><ul><ul><li>Government vs. commercial </li></ul></ul><ul><ul><li>Geographic distinctions </li></ul></ul><ul><ul><li>Product/service lines </li></ul></ul><ul><ul><li>Long term vs. short term projects </li></ul></ul>
  19. 20. Proposal Pricing Strategies <ul><li>Create project-specific overhead rate </li></ul><ul><ul><li>A dedicated effort within a business unit </li></ul></ul><ul><ul><li>Employees dedicated to project </li></ul></ul><ul><ul><li>One rate for “on-site” (contractor) and “off-site” (customer) employees </li></ul></ul><ul><ul><li>Indirect costs may be direct </li></ul></ul>
  20. 21. Proposal Pricing Strategies <ul><li>Eliminate/reduce indirect cost applied to pass-throughs </li></ul><ul><ul><li>Change G&A base from TCI to value-added </li></ul></ul><ul><ul><li>Create material handling pool(s)‏ </li></ul></ul><ul><ul><li>Define subcontracts vs. consultants (beware of FAR 44.101)‏ </li></ul></ul>
  21. 22. Proposal Pricing Strategies <ul><li>Separate materials from subcontracts </li></ul><ul><ul><li>Create materials acquisition pool (drop-ship equipment, software, purchased maintenance, licenses)‏ </li></ul></ul><ul><ul><li>Create separate subcontracts management pool </li></ul></ul><ul><ul><li>Strategically different rates </li></ul></ul>
  22. 23. Proposal Pricing Strategies <ul><li>Establish Multiple Business Units </li></ul><ul><ul><li>Each unit has own G&A rate </li></ul></ul><ul><ul><li>Some TCI, some value-added </li></ul></ul><ul><ul><li>Create home office expense pool </li></ul></ul><ul><ul><li>Manage where B&P/IR&D is incurred and expensed </li></ul></ul>
  23. 24. Proposal Pricing Strategies <ul><li>Create service centers </li></ul><ul><ul><li>Easier way to account for common indirect costs </li></ul></ul><ul><ul><li>Manage costs between indirect pools </li></ul></ul><ul><ul><ul><li>Common examples: facilities, IT, Telephone & Communications </li></ul></ul></ul><ul><ul><ul><li>Other candidates: accounting, HR, administration </li></ul></ul></ul>
  24. 25. Proposal Pricing Strategies <ul><li>Create direct charge service centers </li></ul><ul><ul><li>Accumulate labor, fringe, and other costs </li></ul></ul><ul><ul><li>Pooled costs may become direct cost on contracts </li></ul></ul><ul><ul><li>May also go to other indirect pools </li></ul></ul><ul><ul><ul><li>Examples: IT, facilities, PMO </li></ul></ul></ul>
  25. 26. Proposal Pricing Strategies <ul><li>Refine allocation bases </li></ul><ul><ul><li>Examine relationship between pool and base </li></ul></ul><ul><ul><ul><li>Define classes of consultants, and </li></ul></ul></ul><ul><ul><ul><li>Overhead applied to consultant company facilities </li></ul></ul></ul><ul><ul><ul><li>Which ODCs get G&A vs. MH? </li></ul></ul></ul>
  26. 27. Proposal Pricing Strategies <ul><li>Refine pool composition </li></ul><ul><ul><li>Move cost elements to lower level pools when possible </li></ul></ul><ul><ul><ul><li>E.g., bonuses, training in fringe benefits </li></ul></ul></ul><ul><ul><li>May or may not change multiplier </li></ul></ul>
  27. 28. Proposal Pricing Strategies <ul><li>Revise direct vs. indirect criteria </li></ul><ul><ul><li>Does it support contract’s SOW activities? </li></ul></ul><ul><ul><li>Does it support contract deliverables? </li></ul></ul><ul><ul><li>Job titles and descriptions may need revisions </li></ul></ul>
  28. 29. Proposal Pricing Strategies <ul><li>Refine cost escalation techniques </li></ul><ul><ul><li>Consider impact of contract type on escalation </li></ul></ul><ul><ul><li>Vary escalation by cost element </li></ul></ul><ul><ul><li>Escalate (+ or -) indirect rates </li></ul></ul><ul><ul><li>Manage promotions vs. raises </li></ul></ul>
  29. 30. Common Pitfalls and Helpful Hints <ul><li>Review solicitation web site often for changes </li></ul><ul><li>Prepare, update, and deliver your proposal using a compliance matrix that is updated as changes to the solicitation are noted </li></ul><ul><li>Reduce math errors or inconsistencies in the price/cost proposal by: </li></ul><ul><ul><li>Use rounding </li></ul></ul><ul><ul><li>Have independent party verify cost proposal on a calculator </li></ul></ul>
  30. 31. Common Pitfalls and Helpful Hints <ul><li>Negotiation of subcontract type </li></ul><ul><li>What should you do when your customer only has x dollars and you know it will cost more to perform the work? </li></ul><ul><li>may want to consider offering discounts to GSA rates and materials when using a GSA contract vehicle </li></ul><ul><li>Promise something in technical, but failed to account for the cost in the cost proposal </li></ul><ul><li>Cost proposal not prepared consistent with accounting practices can create problems </li></ul>
  31. 32. <ul><li>QUESTIONS? </li></ul>

×