This presentation gives an approach to estimating and pricing multi-million dollar Fixed Price proposals.

1. Eric McCamey
CEO, Managing Consultant
Business Insight and
Transformation Group, LLC
© 2015
An Approach for Costing, Pricing,
and Managing Firm Fixed Price
Projects for Profitable Results

2. • To present a framework for managing risk and maximizing returns on
Firm Fixed Price (FFP) projects in client companies.
• To Educate on the risks and potential rewards of FFP
• To present a proposed process for costing and pricing FFP
• To present a proposed process for profitably managing FFP once
awarded
Objectives

3. • Cash and Earnings are paramount to well managed
companies.
• Revenue growth apart from earnings growth has limited
rewards.
• If the current base for a Government contractor consists
primarily Cost-Plus type contracts, there is little potential for
more than 7% return on costs for most projects – only
modestly better for Time & Materials.
• Learning to propose and profitably manage FFP is a key to
meeting earnings goals.
Why Firm Fixed Price?

4. • In Cost Plus type contracts, the customer bears 100% of the risk of cost
growth. The only incentive over contractors is potentially through the
use of award and incentive fees in some cases.
• By definition, an FFP contract has a fixed price associated with a given
scope of work. The contractor must perform to the scope of work
regardless of what it costs once an agreement is reached.
• Many of the services based FFP contracts are priced more like T&M and
carry little risk if the LOE was estimated well.
• FFP contracts that require a more complex technical solution carry
greater risk as the likelihood of underestimating costs, experiencing
unpriced changes, schedule risks, and customer acceptance issues run
high.
The Risks of Firm Fixed Price Contracts

5. • What is the key to FFP profitability beyond the obvious of keeping costs low and sell
prices high?
• The key to FFP profitability is in effectively managing risk.
• Costs required to fulfill the scope of work will occur whether those costs were
factored into the selling price or not. Honestly estimating costs and challenging
estimates minimizes future surprises and profit erosions.
• A less obvious source of profitability is to translate reserves into profit. FFP contracts
should almost always have some level of reserves in the costs. When these risk
reserves are quantified and actively mitigated and managed, the potential for
translating unused reserves into profit increases.
• FLAWLESS EXECUTION = LOW USE OF RESERVES = HIGHER PROFIT MARGINS
The Key to Fixed Price Profits

6. A proposed process
Estimating, Costing, and
Pricing FFP

7. FFP Estimating, Costing, and Pricing Process

8. • Similar to the Technical Red Team, a “Cost/Schedule Red Team” should aim to
ensure that ALL work in the WBS has been estimated.
• This team’s job is NOT to determine the winning sell price, but that the cost of
execution and the schedule for execution is realistic.
• Determining the selling price is a function of management based on desired
profit margins or even willingness to absorb loss if the smaller FFP’s are deemed
to be an investment.
• The Cost/Schedule Red Team should ensure that:
• All WBS elements were costed
• A reasonable Basis of Estimate (BOE) was used
• The schedule has a logical network of tasks
• Resources in the schedule are balanced (not over/underloaded)
• Risks are adequately documented in the Risk Register.
Cost/Schedule Red Team Review

9. • Once it has been determined that an RFP is FFP, the level of execution
risk must be determined.
• Does something have to work at the end?
• Are the requirements well defined or are they vague or ambiguous?
• Are there risks to meeting imposed schedule milestones?
• What re the risks of non-acceptance or expensive rework?
• Determining and baselining the technical solution before estimating is
essential. The risk of over or under costing increases when the technical
solution is changing while estimating and costing is taking place
iteratively.
Identifying Technical/Execution Risk

10. • One way to mitigate risk and baseline the technical approach is to perform a
“Technical Red Team” review.
• The Technical Red Team should be a group of independent SMEs from within
the company or partner teammates that will “beat up” on the solution to
identify weaknesses.
• The goal of this team is not to help the team win, but to identify risk. Other
gate reviews worry about winning. This team is to ensure that management is
aware of risks and that risks are fed into the costing process.
• A formal report should be issued to executive management, the
proposal/project team, and the costing/pricing leads.
Technical Red Team Review

11. • The Work Breakdown Structure (or WBS) is the basis of estimating, scheduling,
and managing project execution.
• It is more than a task listing just to cost in relatively large “buckets” like CLINs or
SLINs imposed by the customer.
• The WBS should be a detailed hierarchical breakdown (usually product oriented)
that decomposes the SOW into elements that will form the basis of estimates,
scheduling of the work, assignment of work once awarded, reporting, and
managing risk.
• Without a solid WBS, the rest of the project is doomed before ever starting. A good
WBS minimizes the “I forgots” which later cost time and money.
Developing the Work Breakdown Structure

12. • A Resource Loaded Schedule is developed by
• Representing the WBS in a tool like MS Project, Primavera, Open Plan, etc.
• Adding hourly labor rates, ODCs, and materials as resources in the tool.
• Assigning these resources and task durations to the lowest level WBS
elements where work is done.
• Scheduling lowest level tasks by establishing a network of logical
dependencies from the start and determining the Critical Path of activities.
• The benefits of using a Resource Loaded Schedule are:
• The ability to test the validity of estimates in the context of a realistic model of
schedule and resource constraints. (i.e. Five key resources are overloaded by
300% in January requiring either extension of the schedule, shifting of work,
or adding of resources …at a cost.)
• A cost profile can be exported showing the expected costs by month. This
allows for better planning of payment milestones and modeling DSO.
Using a Resource Loaded Schedule

13. • Project reserves are used to add additional costs to the bid to prepare for
possible contingencies.
• Reserves are usually documented in a “risk register” that identifies the risk, the
maximum impact in dollars, the probability of occurrence, and likely impact
(prob x max impact).
• Sometimes these matrices identify mitigation actions, the cost of the mitigations, and
the post mitigation impact.
• The first source of risk should be the report issued by the Technical Red Team.
However, risk can come from contractual, schedule, or other programmatic
sources.
• These risks should be translated into dollars regardless of the target price. The
sell price (the FFP paid by the customer) is a management decision. Costing
and estimating should be what it is independent of price. Management has to
determine how much profit (or lack thereof) it is willing to tolerate.
Identifying Risks and Reserves

14. • A cash flow model should forecast when:
• Costs will be incurred (including payments to suppliers)
• When bills will be sent
• When cash (payments) will be received.
• A cash flow model will allow management to see in advance what the Days
Sales Outstanding (DSO) metric is likely to look like.
• If there is a lot of outflow of cash before the payments come in, it will hurt DSO.
• Perhaps there are materials and other expenditures that could adopt a Just-In-Time
approach to improve cash flow and DSO.
• Perhaps the customer is willing to negotiate more favorable billing milestones in
exchange for some other want. (i.e. like a reduced price in exchange for being able to
bill more frequently and sooner based on progress).
Cash Flow Modeling

15. A proposed process
Managing FFP Projects for
High Returns

16. • Elements of successful FFP Project Management include:
• Clearing up any vague or ambiguous requirements before baselining the
project plan.
• A strong change control process. (Avoiding “Requirements Creep”)
• Linking cost expenditures to work accomplishment ( EVM lite or similar)
• Managing project risks through the life of the project.
• An actively statused Resource Loaded Schedule / Basline schedule control
• Executive review by management with defined criteria beyond the normal
PMR process. Should review the items updated above.
Elements of Effective FFP Management
If you think you would like to learn more about this process for
your organization, please send email correspondence to
info@BITGconsulting.com or call us at (301) 658-BITG (2484).

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transformation-group-llc
• Website: www.BITGconsulting.com
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