FEDERAL SECTOR REPORT

This discussion addresses a few of the issues involved in pricing strategy as a tool in winning proposal competitions, and perhaps we should begin by stating that we will not cover the pricing requirements of the Federal Acquisition Regulation or the advice that a competent CPA firm can provide. We will simply assume that you are familiar with the FAR and have access to sound financial counsel.

We are familiar with various tactics used in pricing proposals, such as eliminating annual escalations to labor costs, uncompensated overtime (which has fallen into ill repute), use of temporary personnel with reduced fringe benefits, and independent determinations of whether certain labor categories fall under the Service Contract Act. We are also familiar with mystical "projected" indirect cost rates, as well as low-priced base-year bids combined with higher pricing for option years. We have chosen not to address these here because (1) some of these practices border on irresponsibility and (2) those which occasionally merit application can only be applied on a case-by-case basis.

FEDERAL ACQUISITION REFORM will be affecting your cost proposals and pricing strategy. The new regulations have more of a "Fortune 500" mentality, and that means more of an emphasis on the bottom line--the cost competitiveness of your proposal. This is partly a matter of lean-and-mean pricing, but it is also a matter of value, or giving the customer "more bang for the buck."

For many procurements, lean-and-mean pricing is not always a matter of offering the lowest bid. Given the new emphasis on past performance, a history of buying into contracts with unrealistically low bids (in hopes of gradually negotiating up prices and/or renegotiating the scope of work) may often be considered highly negative and could cause the government to question the realism of you pricing. A past performance history of contract overruns is a disadvantage!

Certainly commodity bids may be awarded to the lowest responsible bidder, but the evaluation criteria for the proposal will so state. For most requests for proposals, the wording will be otherwise--stating various criteria such as best value, or a combination of past performance and technical responsiveness will be more important than cost.

NEW LIFE FOR ALTERNATIVE PROPOSALS? Acquisition reform may give new life to alternative proposals. Buried in many RFPs, usually the section dealing with proposal instructions (traditionally Section L, but that seems to be changing), is a clause about alternative proposals. The offeror must submit a primary proposal that is fully responsive to the requirements of the RFP as stated, but the offeror may also submit additional, alternative proposals which would only require the sections of the proposal that have changed. This is perfect for an alternative cost proposal, and here are some examples:

• A firm-fixed price for completing a project, when the government's RFP has specified either a cost-plus or time-and-materials contract
  
• A cost proposal which deviates from the labor categories and/or labor hours specified by the RFP
  
• Pricing which assumes an alternative schedule (seven months instead of the RFP's stated nine months, for example).
  

The above examples might require very limited modifications to the technical proposal--perhaps none in the case of the alternative fixed-price bid. The pricing for the alternative proposal, however, could have a major impact on cost competitiveness. Completing a project in seven months rather than nine might shave over 10% from the cost proposal--and provide the customer with contract deliverables faster.

The same is also true of the alternative labor categories. How many times have you responded to the RFPs staffing requirements when you already know of a better way to get the job done?

Our own preference is to boost the profit margin in such an alternative proposal. If you show the government how to save 10 percent or more, you should be seeking a 9 percent profit. Justify it on the basis of increased risk. If you really have chutzpah, ask for a percentage of the cost savings, and you might walk off with an even more substantial profit!

BUSINESS PROCESS RE-ENGINEERING (BPR). Some RFPs are "retreads"--solicitations for contracts that have come up for recompetition, and the scope of work of many of these documents are virtually the same as they were five or even 10 years ago. This is particularly true for facilities management and ADP facility contracts.

In many cases, the government's staffing plans are archaic, such as one of our old favorites, which was a computer facility staffed primarily by tape changers, input/output technicians, and entry-level computer operators. Re-engineering the work and acknowledging changes in equipment could have reduced staffing by 50% and labor costs by 25% (the remaining, smaller staff would have been more highly skilled and had higher average hourly rates).

BPR is a great tool for evaluating the labor efficiency of very large projects, and software to help is available for under $2,000. The application of BPR is not limited to modernizing government operations--contractors may find that the way they staff projects and manage work flow is inefficient also.

Squeezing greater efficiency and effectiveness out of the project staffing organization is a way to deliver increased value and reduce the bottom-line bid price. A good place to begin demanding more value is with the project flow charts and project management software, which in the wrong hands can lead to inflated pricing. That's because flow diagrams give the illusion of efficiency when actually they merely represent the assumptions and conventions of the engineers/technicians who developed them.

Most flow charters pride themselves with the intricacies of their diagrams, and many compete to see how many feet (meters?) of chart they can generate to paper their workrooms. Complexity is good. Complexity is impressive. Complexity is expensive and leads to inflated pricing.

Many flow diagrams need to be redesigned radically on the basis of BRE techniques. Redesigning and simplifying procedures in the work flow can reduce required resources -- often leading to new project flow charts that save time and money.

INCREASED VALUE. Delivering value often requires original thinking, and Jim Kendrick is reminded of the time (10 years ago) when an agency asked him to estimate the cost of training 6,000 employees about how to enter data into a user-hostile computer system designed in the 1970s -- back when the hundreds of data fields were identified by cryptic (nonsensical) codes like ARG4407. After figuring that the cost would be several millions of dollars and the outcome questionable, a brash computer nerd on his staff suggested that the whole project was stupid --- and readily solved by creating PC-based "front ends" which would provide user-friendly forms and then translate the entries into 1970s-style gibberish for the host mainframe computer. No training would be needed--just good front ends. The idea produced a real solution and helped to win the government customer a $10,000 bonus.

The above anecdote perhaps represents a technical solution, but it has a profound impact on pricing. Virtually every RFP presents at least small ways to increase the value of a contract, so that the government customer either gains more value for the same amount of dollars or spends less.

THE PRO FORMA BUDGET. Early in the proposal process and possibly before a decision to bid the RFP, it is important to develop a cost model. Technical and marketing people need to establish a target bid price--the bottom line number that you believe you must offer the government to win the contract. This target bid price will depend on a variety of factors including your market position at the customer agency, your reputation and past performance, the government's budget for the procurement (if known), the award price of any incumbent contractor, and your best guesses of pricing levels that the competition will bid.

Developing the cost model is a matter of financial "reverse engineering" in which you work backwards from the bottom line number. What you can pay for labor, subcontractors, materials, and project operating costs will be driven by "the number" you establish for your target price. Your technical proposal, subcontracting plan, equipment/material (if an integration contract), etc. will be driven in part by your pro forma budget.

A pro forma budget is a wonderful discipline throughout the proposal development process. It toughens up negotiations with subcontractors and suppliers. In the technical proposal, it keeps blue-sky technoids thinking about how to identify efficient solutions as well as stupendous ones.

Of course, "the number" is not sacred. Over the course of the proposal development activity you may change it, but you had better have good reason to do it and still make a convincing argument about being able to win the contract.

If "the number" does become unrealistic, you may need to change your strategy, consider alternative pricing, or possibly even decide not to bid.

GOODIES FOR THE CUSTOMER (SHORT LIST). When attempting to develop the neatest technical proposal and thereby win 100% of the points in the technical rating, there is a temptation to promise every neat idea, innovation, and enhancement you can identify. But discipline yields good results: Out of the entire wish list of discretionary enhancements, identify those few goodies that the customer wants the most--especially those that will make a big difference in the proposal evaluation. Focus on these, and do not budget for the others. Except, however, you can keep any other goodies that are negligible in cost.

HARD BALL WITH THE SUBCONTRACTORS. This is where you need a diplomat who can both motivate and get results. If your proposal will rely on a significant percentage of subcontracting, the procurement may be won or lost by the subcontractor's pricing.

Prima donna subcontractors--those who think they have a special relationship with the federal agency sponsoring the procurement--can be a pain in the behind, because they feel that they are needed even if they insist on plump pricing. Here are some tactics for negotiations:

• Offer them a bigger subcontract if they play ball on lean pricing
• Offer them a subcontract on one of your existing projects--ideally an agency where they would love to have exposure
• Agree to a very small subcontract if they insist on a high price
  
• Have your firm's president offer the subcontractor firm's president a free trip and a consulting fee to the next business/professional conference in Geneva or Tokyo or Rio in exchange for a commitment to competitive prices
  
• Find an alternative subcontractor and tell the smarties to kiss off
  

SUPPLIERS. If you must furnish or integrate equipment under the proposed contract, the deals you work out with suppliers will have a big impact on cost. We don't have any advice for the huge integrators, such as EDS and Lockheed--they generally have better connections with suppliers/manufacturers than we can even imagine. But for mid-sized and small contractors, there are some tricks that we have learned:

• For small quantity orders (under $2 million), distributors will often quote better prices than the manufacturers. This is because manufacturers provide resellers with discounts based on the volume of product that they move. The manufacturer may offer you a 35% discount but a high-volume distributor may receive a discount of 50%. That distributor can give you a 42% discount and still make money.
  
• Manufacturers who want to gain market share or boost production levels may be willing to make a deal. If you can get Novell upset enough about Microsoft (replace with the names of any two suppliers), you may be able to obtain aggressive pricing just so the supplier has the pleasure of beating the competitor in the government marketplace. Usually, you need to be talking with a vice president who has the authority to apply pricing flexibly. Of course, you will have to sell the official on the benefits to his/her company.
  
• Find a supplier who wants to introduce a new product with a big splash in the government market. Sell the supplier on the notion that your contract is the right place to make the splash, and your team has a good chance of winning.
  

CREATIVE COST STRATEGIES. There are many ways to provide a quality solution while cutting costs in your proposal. Here are a few we have used over the years:

• Consider universities as alternatives to the "prestigious professional firms." Price Waterhouse and Booz Allen may have big names, but they often carry heavy freight in terms of pricing. Many universities have prestigious faculty members who can provide similar services. While the best faculty are not inexpensive by any means, they are often available with lower overhead loads, and graduate assistants continue to work for modest sums.
  
• Negotiate with community colleges as the facility for computer training or seminars. They are eager for the income and a lot less expensive than most commercial facilities.
  
• Find an institution with excess computer resources for large-scale processing requirements. We have found universities and large non-profits to be good sources, and they can often provide operations personnel at very competitive rates.
  
• Identify service companies to do odd-ball tasks like scanning survey research questionnaires--the price will be far lower than what you can duplicate in-house.
  
• Consider creating a corporate joint venture--a new entity consisting of your organization and your teaming partners. Subcontracts to your organization and to your teaming partners would have no G&A or fee applied by the joint venture entity. This approach eliminates G&A burdens on subcontracts--which may reduce your bottom-line price by two to eight percent, depending on G&A rates and percentage of subcontracting.
  
• Let talented technical staff members work at home and telecommute. Many already have their own computer equipment, and they may be willing to work for a little less money than if you insist on dragging them into the office every day.
  
• Establish an internship program for entry-level and junior positions. We are impressed with the energy and productivity of high-achieving college graduates (i.e., those with a strong record of academic performance and leadership activities), and under the guidance of your more experienced staff may help you reduce your average labor costs.
  

TAKE A LOOK AT YOUR PERSONNEL POLICIES. Acquisition reform rewards performance, value and cost competitiveness. If your personnel policies are not rewarding employees who achieve these results, you need to overhaul your personnel policies.

A few years ago, most contractors had personnel policies that rewarded plodders--individuals who would faithfully log in approximately 1,900 hours of billings a year. Results and value didn't matter a whole lot, because most companies were making a profit from selling hours rather than results or deliverables.

The new expectations of government place a greater emphasis on performance. Plodders will not get you there. Neither will personnel policies oriented to plodders.

CONSULTING SERVICES

Today, years after the above article was written, the P2C2 Group has evolved into an independent consulting firm that provides enterprise-level services to federal agencies and the contractors who support them. Our areas of specialization are Capital Planning and Investment Control, Enterprise Architecture, strategic planning, performance evaluation, and acquisition support including work statements. Our consulting specialty includes experience in many related areas such as CIO program support, earned value management, risk management, the C&A process for security, and customer satisfaction surveys.

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