Introduction
Assuming a proposal to a government agency has an
acceptable technical solution and past performance and management factors that
convince the customer it is a viable candidate, then pricing may be the winning
element in the source selection equation.
The mechanics of government contract pricing have been
discussed previously at this site. The discussion relates how pricing should be
a natural outgrowth of the organization structure, market strategy, competitive
analysis, business system design and long range planning:
The above article also explains how long and short term pricing factors should be integrated with the management and technical elements of any given proposal and that a total view of the business is best presented by integrating long-term company strategy with short term proposal objectives.
The purpose of this
article is to augment the above discussion with tips on establishing and
maintaining credibility in pricing to a government customer.
Certified Cost or
Pricing Data
Certified cost or
pricing data under the “Truth in Negotiations Act” (10 U.S.C. § 2306a) or TINA
statute is proposal pricing, which for procurements greater than $750,000, is certified by the contractor as accurate, complete
and current as of the date of agreement on
price. (Section 811 of the fiscal year 2018 NDAA includes a provision that increases the threshold up to $2,000,000).
The absence of a
certificate does not eliminate defective pricing liability.
The statement
underlined above is a key principle in relationships with the government and
its auditors. TINA influences a government auditor’s thinking and it is in the
back of the mind of every contract negotiator. They are taught and learn by
experience to look for TINA faults.
Thus, even if your
procurement does not meet the above threshold for TINA certification you should
price to establish a similar credibility with your customer, even though you
may not have to sign a TINA “Certificate of Current Cost or Pricing”. Doing so
is simply good risk management in business.
You may read more
about cost and pricing data and the negotiation process at the
following link:
Remember Historical Data is
Precedent Setting
All auditors,
negotiators and pricing analysts are preconditioned to utilize historical
data. The last or most favorable price offered a customer for a commercial
off-the- shelf product is strong support for what is currently being quoted.
This is particularly true of GSA Schedule negotiations, product updates or
repetitive buying situations. If you are
a commercial supplier, a quantity factor will also enter into play. In general, orders of higher quantity than historical pricing quantities undergo downward pricing pressure by the buyer unless
some other factor such as a non-recurring tooling charge, learning curve
interruption, obsolescent material or other upward factors can be offered as support for a higher unit price on a higher quantity buy.
Educate Your Auditor
An auditor who is
familiar with your forward pricing rates, your business system and your product
lines will understand your proposal cost and pricing data better than one who
has not been briefed on the big picture of your company business
operation. Take the time to conduct
briefings at that level and acquaint new government personnel with your
operations. Do not assume he or she has
read prior audit reports. They may have
done so but a face to face courtesy briefing is much more effective than
reading some other auditors view of a specific proposal.
This factor can be a
double edged sword, however. An auditor who knows the operation extremely well
can also spot deviations in cost and pricing data and require explanations for
anomalies in pricing based on observed trends.
Develop a
Comprehensive Basis of Estimate (BOE)
A good BOE should
have the following principal attributes:
* Clear identification of the products, services, skills, materials and performance factors required to complete the contract and material/subcontract quotes, labor categories and skill sets to perform the effort.
* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors that affect the hours or dollars quoted
* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery acceptance so that the cost data has boundaries.
* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor so that escalation and price expiration are established.
* A precise description of government/customer furnished material or facilities required and when it will be made available to the contractor to bound the expectations of the client with respect to elements your company cannot or will not control.
* Clear identification of the products, services, skills, materials and performance factors required to complete the contract and material/subcontract quotes, labor categories and skill sets to perform the effort.
* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors that affect the hours or dollars quoted
* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery acceptance so that the cost data has boundaries.
* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor so that escalation and price expiration are established.
* A precise description of government/customer furnished material or facilities required and when it will be made available to the contractor to bound the expectations of the client with respect to elements your company cannot or will not control.
Insure Compliance
with Cost Accounting Standards (CAS) Requirements
Small
businesses are generally required to meet modified CAS coverage for service
contracts. This requires consistency in the manner in which a small business
quotes a proposal and the manner in which costs and billings are accounted
after award. You can read about
these requirements at the following link:
Insure your proposal
contains no unallowable costs and that your direct labor as well
as your overhead and G&A rates are applied in accordance with your latest forward pricing agreement. If you do not have a forward pricing agreement, explain precisely how your rates were
developed from a CAS compliant business system perspective:
Utilize Weighted
Guidelines as a Check to Prepare Support for the Profit Rate Quoted
Although policy in
FAR Part 215-404-4 states that contracting officers ….” do not perform a profit
analysis when assessing cost realism in competitive acquisitions”, it is wise
to understand the contracting officer and his representatives are indirectly
forming opinions of the risk to the contractor and the mix of cost elements in
the proposal. That opinion directly effects profit negotiations and judgments.
Contractors should be
aware that the Weighted Guidelines Method is mandatory for all negotiated
procurements except Cost-Plus Award Fee Contracts and exceptions as approved by
a higher authority. Contracting officers are to prepare their position using DD
Form 1547 with associated backup and file it at the conclusion of negotiations.
Understanding the
weighted guidelines method can assist in achieving a higher profit on a
negotiation because a contractor can present a position at the table that
logically supports the following elements required by FAR Part 215-404-4:
* Performance risk
* Contract type risk
* Facilities capital employed
Read more regarding
the Weighted Guidelines Method at the following link:
Summary
A reputation for defective pricing
leads to accusations of waste fraud and abuse in government contracting and is
mostly about what a contractor knew regarding company prices at the time a bid
was negotiated and what the contractor did not disclose in the supporting data
regarding the likely cost outcome of the contract.
Actions taken by the government
and litigation resulting from defective pricing become part of the contractor
past performance record and must be disclosed during competition for other
programs.
Avoid defective pricing accusations by establishing credibility with your customer through consistent, regulatory-compliant, cost and pricing in your proposal submissions and negotiations.
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