Pricing Proposal Software Licenses

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					Proposal Pricing Strategies

Breakout Session # 503
Beverly Arviso, CPA, Fellow, CPCM, CFCM
Arviso, Inc.
Tuesday, July 20, 2010
2:00 pm – 3:15 pm

•   Proposal Strategy
•   Understanding the requirements
•   Price Analysis vs. Cost Analysis
•   Direct Labor Rate Development
•   Indirect Rate Development
•   Proposal Pricing Strategies
•   Common Pitfalls and Helpful Hints
    Proposal Strategy
•   Determining what opportunities to pursue
•   Who is included on the proposal team?
•   When does proposal activity start?
•   Bid/No Bid Decision
•   Teaming Relationships
     – Prime or Sub?
     – Importance of Teaming Agreements and Non-
       Disclosure Agreements
     – Gathering data from teammates
Understanding the
 • Read the Solicitation
   – Determine Contract Type(s)
   – Section B, Supplies or Services and Prices/Cost
   – Section C, Statement of Work
   – Section L, Instructions, Conditions, and Notices to
   – Section M, Evaluation Factors for Award
 Price Analysis vs. Cost
• What is the difference between cost
  and pricing?
  Price Analysis
• The government is able to determine
  the price to be fair and reasonable
  without evaluating the separate cost
  elements and proposed profit
• Competition in the market determines
  the price
  Price Analysis
• Price Analysis Techniques
   – Competitive price proposals
   – Comparison of previously proposed prices for the
     same or similar items or service
   – Commercial items or services
   – Prices set by law or regulation
   – Catalog prices
• Price Analysis alone may not be sufficient for:
   – Sole source FFP and T&M procurements
   – Modification or changes to existing FFP or T&M
  Cost Analysis
• Analyzing the various cost elements that make up the
  price, e.g., labor, materials, overhead, and profit, in
  order to determine if the price proposed is fair and
  reasonable to the Government
• Price analysis must still be performed
• Each element of cost must be verifiable
   – Direct Labor
   – Materials
   – Travel
   – Subcontract costs
    Direct Labor Rate Development

•   Actual direct labor rates
•   Labor category rates
•   Blended rates (covers several categories)
•   Weighted average category rates
•   Category rates when using prime and
    subcontractor labor
   Indirect Rate Development
• Define direct costs
• Define indirect costs
   – Costs that can’t be directly assigned to the contract
   – Consist of cost pools and allocation bases
       • Pools are defined by placing costs in logical groupings,
         e.g., fringe costs, overhead costs, G&A costs,
         unallowable, etc.
       • The allocation base is defined as some measure of cost
         that can be used to allocate the pool cost, e.g., direct
         labor hours, direct labor dollars, machine hours, etc.
   – Indirect rate = cost pools/allocation base
• Document indirect rates
 Indirect Rate Development
• Indirect Rates
   – vary from company to company
   – are valid for the course of 1 fiscal year
   – determine the “multiplier” for the company
• Are used for:
   – Budgeting
   – Billing
   – Proposals
   – Forward pricing rate agreements (FPRAs) (FAR
  Indirect Rate Development
   – Are voluntary agreements entered into to facilitate
     negotiations of contracts and modifications
   – Represent reasonable projections of specific costs that are
     not easily estimated for or identified with a specific contract
   – May include rates for labor, indirect costs, material
     obsolescence and usage, spare parts provisioning and
     material handling
   – may cover multiple years
   – Allocation of pools and bases should be consistent with
     accounting practices
 Indirect Rate Calculation
• Review Indirect Rate Sample 1
• Review Indirect Rate Sample 2
• Review Impact of Change
  – 40% Increase to Direct Labor and Fringe
  – 10% Increase to Subcontractor Costs
  – Fringe increased
  – Overhead decreased
  – G&A decreased
  – Multiplier decreased
  Indirect Labor Rate
• Changing your indirect rates for bidding
   – Consider new rates for changing conditions, esp. large bids
   – Calculate and document new rate projections
   – Bid revised rates now!, then….
   – Submit revised Forward Pricing Proposal
   – Provide narrative explaining how rates are applied, e.g.,
     overhead is applied to the sum of direct labor
   – For CAS covered contractors, MUST be consistent with
     disclosure statement
  Proposal Pricing Strategies

• Create multiple fringe rates
  – Define labor classes according to fringe
  – Customize benefits for employees, especially
  – Benefits packages by division

  Note: Monitor compliance with DOL and 401(k)
  Proposal Pricing Strategies

• Diversify overhead rate(s) to reflect
  – Customer site vs. contractor site
  – Government vs. commercial
  – Geographic distinctions
  – Product/service lines
  – Long term vs. short term projects
  Proposal Pricing Strategies

• Create project-specific overhead rate
  – A dedicated effort within a business unit
  – Employees dedicated to project
  – One rate for “on-site” (contractor) and “off-
    site” (customer) employees
  – Indirect costs may be direct
 Proposal Pricing Strategies

• Eliminate/reduce indirect cost applied
  to pass-throughs
  – Change G&A base from TCI to value-
  – Create material handling pool(s)
  – Define subcontracts vs. consultants
  Proposal Pricing Strategies

• Separate materials from subcontracts
  – Create materials acquisition pool (drop-
    ship equipment, software, purchased
    maintenance, licenses)
  – Create separate subcontracts
    management pool
  – Strategically different rates
 Proposal Pricing Strategies

• Revise direct vs. indirect criteria
  – Does it support contract’s SOW activities?
  – Does it support contract deliverables?
  – Job titles and descriptions may need
 Proposal Pricing Strategies

• Refine cost escalation techniques
  – Consider impact of contract type on
  – Vary escalation by cost element
  – Escalate (+ or -) indirect rates
 Common Pitfalls and Helpful
• Review solicitation web site often for changes
• Prepare, update, and deliver your proposal using a
  compliance matrix that is updated as changes to
  the solicitation are noted
• Reduce math errors or inconsistencies in the
  price/cost proposal by:
   – Use rounding
   – Have independent party verify cost proposal on
     a calculator
• Certified Cost or Pricing Data
  Common Pitfalls and Helpful
• Negotiation of subcontract type
• What should you do when your customer only has
  x dollars and you know it will cost more to perform
  the work?
• may want to consider offering discounts to GSA
  rates and materials when using a GSA contract
• Promise something in technical, but failed to
  account for the cost in the cost proposal
• Cost proposal not prepared consistent with
  accounting practices can create problems

Beverly Arviso, CPA, Fellow, CPCM, CFCM
           Founder, Arviso, Inc.


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