When a government contractor presents its competitive strategies to either the Federal Government or the Prime Contractor, they have two main objectives: secure the contract and make money. But these two goals can sometimes operate against each other in today’s environment. To remain competitive to make money will operate against the contractor.
The following pricing approaches can vary depending on the contractual criteria and the form of contract. In fact, vendors cannot use all the methods as stated in the Forward Pricing Agreement.
Fee Structure
Modifying the fee structure is the easiest way to be more competitive in terms of prices while retaining a degree of competitiveness. There are less amount of payments, which makeup to the degree for a reasonable income. In other instances, the premium calls for an incentive charge and a simple fee. The client will opt for a lower base price and a fund to make money from the reward fee. It shows the faith of the client in their ability to perform well enough to increase the reward fee.
Pool Structures
Contractors may want to look at their indirect market structure in order to find ways to be more economical in their prices. This approach is difficult so analyze carefully to ensure that it doesn’t affect other contracts. Such a strategy may include the contracting of particular fringe or overhead pools; and using on-site vs off-site overhead pools and handling the pool. Although changing the indirect rate structure will benefit the contract, it may have a negative impact on other contracts. Also, keep in mind the effect on future work.
Teaming Arrangements
Most businesses are subcontracting some of their jobs to a firm with experience in certain fields. Perhaps companies will try to set up a teaming agreement to compete for a contract. Such agreements for teaming or subcontracting allow businesses to manage rates most competitively.
Bidding At Loss
It seems hard to believe that anyone would bid on a deal thinking they’re going to lose money, but it’s very normal. There are several reasons why a business should offer less prices than bearing loss. Some of the reasons that this may make sense are Past Performance–firms; you get a competitive prices in order to have experience in this area. This could include entering a new sector or business to obtain more expertise.
Creating Relationships–Quite similar to past performance, a contractor can choose same cost or a lower profit to build a customer relationship. This may be the case in a subcontractor partnership where there you can build long-term relationship with future contracts.
Contribution to G&A–G&A expenses are, by definition related to the operation of the business as a whole. For this reason, many of the G&A costs do not fluctuate significantly when contracts are awarded. With that in mind, contractors that tender the contract as a way to cover a portion of the G&A pot, not exactly their fair share. Their thinking process is that it is better to cover some of the G&A expenses than not to cover any of them at all by not being awarded the deal.
Impact on Other Contracts–G&A prices may have been introduced at higher rates for contracts with indirect costs, such as fixed price or time and resources. The implementation of a new contract would most likely lower the G&A cost, potentially offering a higher margin for those contracts. Since the G&A rate may not be open to change, this is a tactic that is often used to help the company rather than a formal deal.
Not all of these techniques work for all vendors; but evaluate your price to see if you can competitive and become successful after the contract.
It’s essential to’ run the numbers’ and make sure that prices do not harm any of your existing contracts. Also think that you should not caught in trap that will damage the value of future contracts.
This blog was written by Linda Rawson, who is the founder of DynaGrace Enterprises (dynagrace.com) and the inventor of WeatherEgg (weatheregg.com). She, along with her daughter, Jennifer Remund make up the mother-daughter duo of 2BizChicks (2Bizchicks.com). For further information, please connect with Linda on LinkedIn, or contact her at (800) 676-0058 ext 101.
Please reach out to us at GovCon-Biz should you have any questions.
