Breakout Session # 903 Cherry, Bekaert & Holland, LLP Beverly Arviso, CFCM, CPCM, CPA

2. Proposal Pricing Strategies Breakout Session # 903 Cherry, Bekaert & Holland, LLP Beverly Arviso, CFCM, CPCM, CPA barviso@cbh.com Susan Moser, CVA, CITP, CPA smoser@cbh.com Monday, April 10, 2006 2:45-3:45 pm NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

3. Objectives • Understanding the requirements • Fundamental Cost vs. Pricing Concepts • Direct Labor Rate Development • Indirect Rate Development • Evolution of Indirect Rates • Proposal Pricing Strategies • Common Pitfalls and Helpful Hints NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

4. Understanding the requirements • Read the Solicitation • Determine Contract Type(s) • Section L, Instructions, Conditions, and Notices to Offerors • Section M, Evaluation Factors for Award NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. Fundamental Cost vs. Pricing Concepts • Contract Pricing permitted for: • GSA Schedules (with exceptions) • T&M or FP contracts with adequate price competition • Commercial items or services • Prices set by law or regulation NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. Fundamental Cost vs. Pricing Concepts • Contract Pricing is: • Driven by market forces • Not subject to FAR Cost Principles or CAS • Full of deviations and innovations • Unauditable because…. • Not determined by cost accounting NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. Fundamental Cost vs. Pricing Concepts • Contract Costing required for: • Cost reimbursement contracts (always) • T&M (sometimes) • Fixed Price (occasionally) • Letter Contracts (usually) • Contract Terminations (many, but not all) • Contract Changes (FAR & Supplement, other factors NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. Fundamental Cost vs. Pricing Concepts • Contract Costing is: • Driven by historical and/or projected costs • Constrained by applicable regulations (FAR, CAS, OMB Circular, DFARS, etc.) • Sensitive to unallowable and unbillable costs • Required to be consistent (FAR 31.202 & 203, CAS 401, 402) • Subject to audit NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

9. 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

10. Indirect Labor Rate Development • Creating Your Indirect Cost Structure • Define direct costs • Aggregate indirect costs into logical groupings • Key Terms= Homogenous, Causal/beneficial Relationship • Identify allocation bases (objective & verifiable) • Document system of pools and bases NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Indirect Labor Rate Development • Forward pricing rate agreements (FPRAs) (FAR 15.407-3) are voluntary agreements entered into to facilitate negotiations of contracts and modifications • FPRAs represent reasonable projections of specific costs that are not easily estimated for or identified with a specific contract • FPRAs may include rates for labor, indirect costs, material obsolescence and usage, spare parts provisioning and material handling • FPRAs may cover multiple years • Allocation of pools and bases should be consistent with accounting practices NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. Indirect Labor Rate Development • 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. Evolution of Indirect Rates • Start-up and smaller companies tend to have • Lower fringe benefits rate • Widely varying overhead rate(s) • Medium to high G&A rate • Difficult to predict/manage rates NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. Evolution of Indirect Rates • As companies expand and grow to medium size • Lower fringe benefits typically increase • overhead rate(s) approach industry norm • G&A is unlikely to remain low as infrastructure is developed • Rate stability improves somewhat NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. Evolution of Indirect Rates • As companies become large businesses • Fringe benefits stabilize • Contractor site overhead rates may increase (nicer facilities) • G&A declines as base expands • Rates are stable and predictable • New contracts don’t have as much impact on rate structure NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. Evolution of Indirect Rates • Reasons for the evolution of indirect rate structures • New requirements from current customers • New customers • Competitor’s actions • Need costing flexibility • Organic growth and diversity • acquisitions NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. Proposal Pricing Strategies • Warning: • These strategies have been successfully employed by at least one contractor, but they may not be appropriate or acceptable for your company and your circumstances NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. Proposal Pricing Strategies • Create multiple fringe rates • Define labor classes according to fringe benefits • Customize benefits for employees, especially semi-retired • Benefits packages by division Note: Monitor compliance with DOL and 401(k) Rules NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

19. 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

20. 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

21. Proposal Pricing Strategies • Eliminate/reduce indirect cost applied to pass-throughs • Change G&A base from TCI to value-added • Create material handling pool(s) • Define subcontracts vs. consultants (beware of FAR 44.101) NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

22. 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

23. Proposal Pricing Strategies • Establish Multiple Business Units • Each unit has own G&A rate • Some TCI, some value-added • Create home office expense pool • Manage where B&P/IR&D is incurred and expensed NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

24. Proposal Pricing Strategies • Create service centers • Easier way to account for common indirect costs • Manage costs between indirect pools • Common examples: facilities, IT, Telephone & Communications • Other candidates: accounting, HR, administration NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

25. Proposal Pricing Strategies • Create direct charge service centers • Accumulate labor, fringe, and other costs • Pooled costs may become direct cost on contracts • May also go to other indirect pools • Examples: IT, facilities, PMO NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

26. Proposal Pricing Strategies • Refine allocation bases • Examine relationship between pool and base • Define classes of consultants, and • Overhead applied to consultant company facilities • Which ODCs get G&A vs. MH? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

27. Proposal Pricing Strategies • Refine pool composition • Move cost elements to lower level pools when possible • E.g., bonuses, training in fringe benefits • May or may not change multiplier NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

28. 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 revisions NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

29. Proposal Pricing Strategies • Refine cost escalation techniques • Consider impact of contract type on escalation • Vary escalation by cost element • Escalate (+ or -) indirect rates • Manage promotions vs. raises NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

30. Common Pitfalls and Helpful Hints • 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

31. Common Pitfalls and Helpful Hints • 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 vehicle • 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 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

32. QUESTIONS? NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management