deltek insight 2012: winning proposals using price to win strategies
TRANSCRIPT
2 ©2012 Deltek, Inc. All Rights Reserved
Introductions
Realities
Best Value Evaluations
Price to Win
Price to Perform
Reality Modeling and Strategic Pricing
Agenda
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About Red Team
About Red Team Consulting
Red Team Consulting is a woman-owned small business providing a wide range of consulting services in support of federal contracting activities.
Red Team’s major areas of support include: Fully outsourced proposal development
and management Strategic capture management and
planning Price strategy and price to win Training and seminars
About Red Team Federal
Red Team Federal, a division of Red Team Consulting, LLC, is an economically disadvantaged woman-owned small business that provides acquisition strategy and planning, federal procurement training and contract management support.
RTF’s major areas of support include: Pre-award/post-award contract
support Acquisition strategy and planning Request for proposal (RFP)
development Cost Estimation
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Jacob George Director of Finance at Red Team Consulting Over 10 Years of financial analytic and price modeling experience Practice lead for all federal pricing and corporate budget engagements Expertise with:
Corporate-wide government cost and pricing engagements Financial planning and analysis (FF&P) Defense Contract Audit Agency
(DCAA )-related projects (Incurred Cost Submission, control system audits) Corporate-wide earned value management (EVM) implementation and
training projects Managed pricing activities for over $35 billion in federal procurements
About the Speaker
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Most companies have challenges when pricing contracts
Most companies don’t actually follow the estimating and purchasing methodologies they write about
Price evaluations are viewed as entirely subjective and the term “best value” is considered very ambiguous by the industry
Large businesses have the capability to beat small businesses on price based on their ability to allocate corporate costs
Companies will find ways to manipulate the pricing model on pricing evaluations
Realities – General Pricing
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Subcontractors will often regurgitate prime contractor templates for cost volumes
Pricing volumes and pricing-related exercises are frequently completed at the last minute. Factor 4 Syndrome (Evaluation criteria proportionality to importance)!
Delays to the RFP release are extremely costly for industry and greatly impact small businesses
Realities – Proposals & Cost Volumes
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Many small companies have never been audited and don’t understand DCAA
Small companies don’t understand how to calculate their cost structures they could either be overcharging or undercharging the government when bidding
Small businesses often unknowingly overcharge or undercharge the government because of challenges calculating their cost structures
Realities – Small Businesses
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The budget is going to become more challenging as growth slows or declines (Considering attending “Planning for Success: The Federal Contracting Outlook for 2013” – Presidential Ballroom D @ 3:15pm)
Competitors are focusing on keeping current contracts to maintain their customer and market position. The assault on cost factors demands realignment (Consolidations, mergers and acquisitions)
Other options to lower cost positions include: Addressing fringe rates (Multiple rates, fewer benefits, a la carte options) Reducing management (Remove layers – BAE, Boeing, DRS) Opening a new division to allocate costs – cyber, intelligence, health care
Realities – The Pricing Environment
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More budget constraints, fewer resources and limiting escalation rates.
The Small Business Administration (SBA) gains muscle to make small business requirements even more important – from 20 percent range to mandatory 40 percent+ (Department of Homeland Security 45 percent total contract value (TCV)
Move from total subcontracted dollars to TCV We have seen small business requirement as evaluation factor in
Intelligence Community proposals
DCAA and Defense Contract Management Agency (DCMA) involvement in procurement cost assessments continue to grow
Best value, realism and reasonableness are becoming real factors
Realities – The Pricing Environment
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Best value evaluations can be ambiguous - important to understand agency or contracting office tendencies
In acquisitions where the requirement is less defined or there is greater performance risk, technical or past performance considerations may play a dominant role in source selection and best value determination
It is not uncommon for the successful offeror to have a price 10-15 percent higher in best value evaluations, but no more. And only if they are clearly the better proposal
Realities – The Pricing Environment
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Best value is a conversation on how we can trade value (capability, schedule) against cost/price
Low price technically acceptable (LPTA) is a conversation on how we bid to meet only the compliance threshold for acceptance at the lowest possible price
Types of Source Selections: High technical, price acceptable (HTPA) – Best value Low price, high technical (LPHT) – Best value Low price, technically acceptable (LPTA) – Low price Low price (LP) – Low price
Best Value Evaluations Versus LPTA
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To develop an effective pricing strategy, consider: Your thorough understanding of the relative importance of price A reasonable definition of “best value” The awarding agency’s history of evaluating and awarding contracts Your vulnerability to (and tolerance for) risk Your competitors’ perceived tolerance for risk Your true strengths and weaknesses for each evaluation factor and
sub-factor Your experience bidding against the presumed competitors
Pricing Strategy Development
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To develop an effective pricing strategy, do not: Presume that the government’s estimated lifecycle contract value,
stated contract ceiling, minimum or maximum order amounts or currently available funding is reflective of an ideal target evaluation price or competitive range
Implement a pricing strategy as a consequence of technical and management strategy
Let pricing be a completion exercise to deliver a cost volume that is compliant
Pricing Strategy Development
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On a per proposal basis, Price To Win (PTW) provides a detailed, results based assessment of the price that your competitor(s) is most likely to bid
The PTW exercise may reveal a competitive price that exceeds your own capabilities
The PTW exercise may show new opportunities on how you can provide a lower price and better value
PTW is your competitors price and is based on their capabilities/cost structure and return on investment goals
Price to Win
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Proper Uses – Decision Support Provides a decision input to management bid strategy and pricing
approach Informs management of the most probable competitive bid price
scenarios Develops competitor views of the opportunity and prices these
approaches
Improper Uses – Becomes the Decision Management abandons decision responsibilities and bids the PTW
Price to Win - Uses
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An opportunity/program has content that is core business to your company strength
“Must win” opportunities (new account penetrations)
Incumbent looking to protect contract from challengers
Competitors look to unseat incumbents
Early in the bid cycle (pre-RFP) to help evaluate teaming options, suppliers and technology partners
Price To Win – When to Initiate
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Questions that need to be asked include: What is your price to perform on the awarded contract? Can I sustain submitted prices with my current indirect rate and
multiplier? How much growth – base and organic - should I consider to be
equitable?
Price to Perform – Setting the Stage
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Develop “if-win” budgets, showing the effect of the new procurement on current rate structure
What impact does this new contract have on: Fringe – New insurance plans, locality influence, outside of the
continental United States Overhead and general and administrative (G&A) expenses – New
management (PMO) positions, additional facility costs, new personnel (HR, IT), capital expenditures, subcontracts
Price to Perform – In Action
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Price to Perform - Example
Total Cost Input: All costs labor, overhead costs, material and other direct costs (ODCs) are included in the base (denominator)Direct labor: $30,000Direct material: $25,000Overhead costs: $35,000ODCs: $10,000Total cost input: $100,000G&A cost: $10,000G&A rate: 10 percent
Value Added: Total cost input minus Materials and subcontractsDirect labor: $30,000Direct material: $25,000Overhead costs: $35,000ODCs: $10,000Value added: $75,000G&A cost: $10,000G&A rate: 13.33 percent
Single Element Method: Only one cost element, not often used Direct labor: $30,000Direct material: $25,000Overhead costs: $35,000ODCs: $10,000Single element: $30,000 (using labor)G&A cost: $10,000G&A rate: 33.33 percent
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In accordance with corporate schedule (i.e. Calendar Year initiatives), plan for changes to rate structure
Proper management and evaluation of indirect rates is key in the financial lifecycle of a contract
Monthly review of indirect rates via reviewing Statement of Indirects
Develop budget to actual reports and period to period reports to monitor rates
Price to Perform - Manage
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Strategies to Explore Material and Handling Pool
Typically consists of administrative costs/expenses necessary for handling of subcontractor and material costs
The base of the pool (denominator) consists of all direct subcontractor and material costs
The base of the pool is excluded from the base of the G&A.
Price to Perform - Strategies
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Strategies to Explore Cont.. Service Centers
Extract certain traditional G&A costs and re-allocate them between G&A pool and overhead pools in a logical and consistent allocation basis
Cross allocations can be complex, so it is imperative that your accounting system be able to accommodate multiple service centers
Typical service centers include: HR (allocation base – headcount), IT (allocation base – units), facilities (allocation base - square footage), security (allocation base – headcount).
Price to Perform – Strategies
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Reality Modeling The intent of reality modeling is to best predict what changes will likely
occur over the life of a contract and bid with those changes in mind. In other words, what is being evaluated and what will actually be purchased, when and with what margin
Gaming The intent of gaming is to notate the inefficiencies and imbalances in a
given solicitation and strategically price accordingly
Modeling and Strategic Pricing
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Typically a bid model begins with a uniform application of margin to all items
Items determined to be over-evaluated, i.e bidder believes it is less likely to be sold – margins are re-allocated to items that are more likely to be sold
Over-evaluated items, i.e. unlikely to be purchased are bid below their actual cost to drive down total evaluated price
The Modeling Process
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Gaming has a negative connotation. However, there are cases where elements other than price or margin are drivers behind gaming an opportunity, these include:
Lower evaluated price Higher profit Inventory maximization (product or labor)
Modeling Outcomes
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