An Overview of Government Contracts
Government contracts are agreements between private sector companies and government entities to provide goods or services. In these agreements, the government details what they require to complete a specific project, and in return, businesses offer to supply those services at agreed prices. Government contracts can take many forms, and there are many subcategories of contracts that frequently take shape depending on the parameters of the project being undertaken.
Government contracts differ from private sector contracts in the fact that they are subject to regulations set out in the Federal Acquisition Regulation ("FAR"). These regulations are designed to make government contracting fair and affordable for everyone .
The exact nature of contracts and how they are written are at the discretion of the government organization involved. Subsequent rules and regulations may also apply to these contracts, and businesses who accept government contracts will require significant expertise in order to understand the various nuances of dealing with government organizations.
Businesses that are awarded government contracts can expect to be subjected to routine audits from federal agencies, so there is a requirement to be much more open and transparent than contracting with private organizations. Government contracts may also be terminated by the government at any time, for any reason.
Role of a Pricing Template
Government contracts are a lot of work, with a lot of components. Without a consistent pricing structure, it is hard to pinpoint any bits that fall through the cracks or give one department the upper hand over another. Pricing templates help with initial simplicity, but they are also essential for transparency and reproducibility in the event of an audit. Configurations, rates, specifications, labor categories, and factors are all essential to your bid documents. If, in the course of your contract, you choose to make a change but have not been upfront about how the calculations are made, you could wind up at the whim of the government contract management officer if there is a problem to be addressed. There are alphanumeric codes for all DOD personnel. The codes refer to a complete set of parameters which include title, responsibilities, and required education and experience. In some cases, you will have to explain why your personnel does not fall into the category to which they are assigned. This could be a big headache for your company’s profitability along the way, but those costs are mitigated by consistently using personnel templates. FAR 15.404-1 requires that rational and negotiable pricing methods be uniform. A pricing template allows them to be uniform, no matter who uses it. It is then easy to show that two quotes are alike, and helps save on both direct and indirect costs throughout your company. A pricing template gives the project a set structure. This makes it easier for you to identify where various contingencies in project scope can affect overhead and indirect labor costs for the project. It keeps the project on focus, helping to create a predictable profit margin.
Parts of a Government Contract Pricing Template
Government contract pricing templates are typically broken down into cost elements, rates, and profit and fee elements. Common Cost Elements Cost elements are organized into five categories: materials, labor, overhead, G&A, and profit. 1 Material costs can include raw materials, parts, supplies, equipment, etc. 2 Depending on whether you are submitting a price for a DoD contract or a non-DoD Government contract, you will use either the Department of Defense Federal Acquisition Regulation Supplement (DFARS) or the Federal Acquisition Regulation (FAR) as your guide for how to structure your material costs.3 Labor costs do not only include direct labor, but also indirect labor costs such as supervision, administrative support, and training. 4 To properly price your labor costs, you should break them down by type of labor. 5 Contracts with the Government generally reimburse indirect labor costs either through a predetermined indirect cost rate or by applying an established labor distribution rate. 6 Overhead costs are a type of indirect cost that are incurred for each contract. 7 G&A costs are also indirect costs, but they apply to the broader organization, and should not be included as costs exclusively for a single contract. 8 Profit on Government contracts is often referred to as fee. Under the FAR, you can either add a percentage of the total cost of the contract or the total labor costs (or another appropriate cost base) to be used as a fee for your company’s profit. The common level for a fixed fee contract is five percent and ten percent for cost-plus-fixed-fee contracts. 9 FAR 15.404-76 requires that you use the appropriate profit and fee percentages for Government work based on the level of risk associated with a particular contract. 10
Creating a Pricing Strategy
A critical component of pricing strategy is knowing the competitive field so that you can price to provide a value proposition to the government. The information you should gather is what have the competitors been awarded in the past, what are their resources (both staffing and facilities) and what are their strengths and weaknesses?
Another aspect of developing a pricing strategy is determining your costs. Unlike commercial customers, pricing to the government is not fixed in nature and instead, can be a variable. The government is not adverse to paying a higher price than the competition if it saves them money. For example, the government will in all likelihood pay significantly more for a contractor who has a proven history and low attrition rate of key personnel than they would for a contractor with a lower price but no proven record of success. That being said, if your cost estimates are not close to competitors’ costs, you can always bid very low in order to win the business but then rely on "enhancements" to income during performance. The former is certainly the more prudent approach.
To develop project cost estimates you can employ several different techniques. This is one of the most important parts of developing a proposal. If you miss the estimate you will be losing money on the contract. The most popular techniques for estimating are:
Depending on the situation you may want to use a combination of the techniques to arrive at a logical answer based on historical information and "rule of thumb" knowledge.
As a final note, whether you are providing an estimate based on a historical bid or a new bid using Ball Park figures, it is important to not only establish the rates for labor, but also charge a markup on indirect costs which include Benefits, G&A and Profit.
Pricing Template Best Practices
When it comes to pricing proposals in the realm of government bidding, a price proposal template is often the go-to tool. These templates have been designed to optimize the process of submitting bids by streamlining the essential information that must be included in a bid and providing a useful structure for ensuring that each component is accounted for. While the idea behind a pricing template is straightforward enough, there are still ways to make its use more effective and efficient.
Even though a pricing template is more or less ready-made for your needs, it’s important to review your document and make sure that the structure of the template is right for the type of project you’re bidding for. For example, if the primary work you will be doing on a project is moving equipment from one location to another, your template should be updated such that it has very specific parts outlining the different costs for each move, rather than simply having a blanket section for all relocation-related costs.
Accuracy is key in providing a price proposal, since giving an inaccurate cost can put you in an extremely unfavorable position for negotiations. Before you begin filling in your pricing template, it’s important to sit down and come up with an accurate estimate that accounts for all labor, fees and equipment involved in the project. After this, maintain the rest of the proposal information in the same manner, using precise numbers and avoiding generalized estimates. Even the smallest mistake could end up costing you when the time comes to negotiate with the prospective client .
Even when you have a priced proposal template that has worked well for you in the past, don’t be afraid to make updates to it. This way, you will be able to apply the improvements to all of your proposals going forward. Either the project requirements will change, or your business model will change: it’s always a good idea to incorporate these changes so that your proposals are as accurate as possible.
When using a price proposal template, there is often a specific order in which information is provided. A typical order is to first provide the entire cost of the project, including labor, fees and equipment, and later provide more information on each individual part of the project. This can help save significant time in developing a proposal, since it allows you to split up the work and cover different parts of the project separately with different people.
Once you have a drafted proposal ready to go, have team members review it carefully before sending it off. Do away with any possible errors, and spelling and grammatical mistakes. A little proofreading can help you avoid embarrassment on the business front and keep you from looking careless to the prospective buyers.
When it comes to government contracts, always keep in mind that you are dealing with regulations that are very specific and cannot be ignored. Make sure to review these rules and requirements to determine what exactly is necessary in your proposal, and ensure you incorporate this information into your templates to make the process easier in the future.
Common Pricing Template Issues and Resolutions
Many businesses find the initial use of a government contract pricing template to be a daunting task. This is not unusual for businesses venturing into something new. The typical challenges in implementing a new government contract pricing template are:
a) Identifying all of the costs that need to be shown on the contract pricing templates.
b) Understanding the government’s expectations regarding the information and how that information should be presented.
c) Determining whether or not the pricing template should be the ONLY document to discuss the proposal pricing.
Each of these challenges can be easily overcome.
With respect to the first challenge, a good contract pricing model provides pre-established categories of costs that need to be accounted for. In other words, the model provides a good starting point for establishing a category for the costs to be included in the proposal. However, the requirements for a government contract will drive the requirements for the proposal, and there will always be costs that fall outside of the fundamental categories of costs. Beating yourself up over what does or does not go onto the government contract pricing template and how to arrange the information is not the best use of your time. Yes, some formatting issues will need to be addressed, but a good model will take care of most of the formatting for you.
During proposal preparation, the best practice is to identify the various costs that will need to be shown separately in the pricing model. Consolidated pricing is one of the biggest hurdles to completing the proposal in the most effective manner. You cannot change a number that is shown in a separate place in the proposal without then having to adjust all of the affected costs that are developing from the adjusted number. This means there is no room for error in calculating out your costs. If you are going to a government audit, a consolidated cost that incorrectly assigns costs to a place that are related directly to another pricing category being audited could open up the possibility for finding errors that affect ALL OF YOUR PROPOSALS.
We all know what "Estimated" or "based on our best calculation" means. However, when dealing with a government agency, if there is a qualification on a cost, it needs to be clear, detailed, and in the right section of the contract pricing template.
The last challenge is very real. While some proposals can be made easier by providing all of the information directly on the pricing template, some proposals that require a level of detail make it prudent to provide a detailed spreadsheet with the line item cost detail. The critical point here, however, is that this "optional step" must be considered BEFORE you send out the first pricing version. It is much easier to account for this additional document if the pricing template is designed as well.
Even after the above challenges have been overcome, problems may still arise in the presentation of the pricing proposal. The following considerations can help eliminate or minimize the problems that arise in presenting the pricing information.
As you can see, there are many challenges that can arise in dealing with a government contract pricing template. However, by applying the suggestions outlined above, you can overcome these hurdles and create a winning pricing proposal for your government contracts.
Please feel free to comment and share your success and/or horror stories regarding the use of government contract pricing templates.
Government Contract Pricing Template Trends
The future of government contract pricing will likely feature substantial growth and more advanced technologies with which contractors can analyze their cost information. For instance, emerging satellite imagery technology can help contractors forecast when demand for their products will fluctuate based on the amount of vehicular traffic to their physical locations. This technology has proven effective even for consumer products, much less for government contractors, whose products and services are more predictable. The benefits of such technology in providing more accurate data for building price proposals have largely bypassed headlines, but these developments continue to occur and will eventually become more mainstream.
Additionally, the increased implementation of data analytics will continue. Contractors that utilize these tools already possess a competitive advantage. In particular, the use of machine learning to assist with cost estimating has gained traction, as these programs allow contractors to process voluminous quantities of contract pricing data and review potential cost factors that must be delivered to the government . This technology has proven useful for other sectors, like medical and financial, and should continue to expand within government contracting.
One specific technological development that is forthcoming is the digital ledger. This technology is being used by certain government contractors to ensure that the estimating data submitted to the government is adequately reliable and meets the government contracting requirements for establishing fair and reasonable prices. Blockchain (a digital ledger of transactions that is maintained across multiple computers) can be applied to create a permanent record and establish transparency in government pricing proposals.
Quantum computing is another technology that appears poised for application in government contracting. This technology would allow contractors to achieve greater efficiency and transparency, both of which are viewed very favorably by the government. However, for contractors, this technology may come at a price. The increased processing power provided by quantum computing may allow the government to more easily review the cost information it receives from contractors when determining what a fair and reasonable price is.