By Marsha Lindquist on January 22, 2021
Contractors often claim they did everything they could to get to the right price. Then they lose that important contract award. Most of them are surprised by the winning price. It was much lower than they expected. More importantly, they didn’t know the seven and a half biggest pricing mistakes Government contractors make.
Mistake #1: You do not know your target price range.
Many contractors make an emotional, rather than an informed decision about the target price they are aiming to achieve on their bid. Getting a true price to win analysis accomplished is critical to know if your bid price is in line. After all, how do you know if you have achieved the price you want if you don’t know what you are aiming for? Typically the target price is a range of prices depending upon the range of features and benefits you are offering the customer. The value you offer is not just a price, but rather a price plus the unique worthiness of the benefits your team is bringing too. You must know the target price.
Mistake #2: You keep your G&A indirect rate static.
So many contractors think that using existing or historical indirect rates is all it takes to put together a price and then add some profit to the result. While that is one way, it is not a winning way. While your other indirect rates may not change as you add new business, your General and Administrative (G&A) rate does as you add more business. If you only use the existing G&A rate you have been using over and over again and not winning, perhaps examining the composition of your G&A rate will yield you different results. When you add new business and do not add any, or very little, new expenses, your G&A should decline. Do the homework to know how much G&A reduction you can logically take.
Mistake #3: You arbitrarily lower your wrap rates or your supplier prices.
Contractors face tremendous pressure by the Government, teammates, and competitors to lower their wrap rates and their supplier prices. By doing so without examining if this is attainable or the right move for your business is not only foolhardy but is a prescription for losing money if it is not advantageous and achievable, for you. Your wrap rates are representative of your business, not anyone else’s, and must be indicative of what it takes to run your company wisely. Reducing supplier prices that are not supportable by agreement by those vendors to the reductions will ultimately prove to be losing money for you that you cannot recover, will not keep you in good standing with your suppliers, and will not be something the Government can reimburse you for.
Mistake #4: High pricing – you propose overqualified/expensive personnel.
How often do you say, “but the customer wants Joe and Mary?” It also happens that Joe and Mary are over the qualified requirements in the specifications. That translates to higher prices for that labor and those inflate the bid price unless you balance that out with other staff that just meet the minimum requirements. When you bid overqualified people without regard to the resulting price impact, you very likely are putting yourself beyond the winning price. If bidding specific people is important to your win, and the customer loves those people, then you must find a way to offset that higher price.
Mistake #5: You allow subcontractors to jack up the price of the bid.
Your teammates’ pricing has such a huge impact on your ultimate bid, you want to put as much emphasis on their pricing as your own. Of course, it matters how much of the pie your teammates contribute to the overall price. The more they share in the weighting of your price, the greater the potential for them to either back the winning price or wreck it. The best way to get teammates to the winning pricing strategy is to have honest and open conversations about the overall price objectives. That typically means several discussions that get your team to the target price.
Mistake #6: You shortchange the basis of estimate & documentation pricing.
I just cannot say enough about using a basis of estimate even when it is not required. Our survey results show that over 77% of respondents prepare a basis of estimate for every bid, without regard to it is requested. Only 14% say they prepare a basis of estimate sometime when they need the data for pricing accurately. I submit that the documentation that goes into and behind the basis of estimate and a good solid price is the baseline for every bid. The basis of estimate forms the very foundation for operating the project when you win it plus putting good effort into the documentation gives you the substance you need to answer auditor requests or evaluators questions.
Mistake #7: Your price/profit tradeoff was outside your strategic business plan.
It is important to set your corporate strategic business profit goals and delineate what your organization needs to support all of these factors:
- Corporate growth
- Potential erosion of business
- Escalation risks
- Market salary resistance to attract and retain talented staff
- Risks associated with fixed price work
- Capital generation
- Unallowable expenses
- Maintaining a broadly-experienced and knowledgeable labor workforce
- Supplier performance probabilities
When you tradeoff any or all of these factors to bid the profit down on any project without considering them seriously, you compromise your organization’s strategic business plan. That concession can be the slippery slope to your demise. If you choose to vary from your profit objectives, do so within the range you establish.
The Last Half of Pricing: Your pricing was accomplished too close to the due date.
While this a half, it is the greatest mistake companies make in pricing. Most companies who are successful in winning awards follow a well-documented and proven process to that award. That just about always means they get pricing involved early in the process. They don’t throw the pricing team the technical proposal and expect them to “price it” to win. It is a well-planned approach that involves significant thoughts about the strategy they need to achieve a win. Pricing is involved in every step of the capture process and is a strong member of the leadership team. Rather than an afterthought, pricing is integral to the technical development. Winners plan and work their strategy to a win, rather than take a chance that it might just happen. While this pricing mistake is last and I have given it the half designation, it is the most important. That is why it is last. I saved it for last because I want to leave you with the most important mistake to change. Remember to engage in pricing strategically early. That is if you want to win.
Looking for more insight? Keep an eye out for Marsha Lindquist’s appearance on our New Normal in Government Contracting miniseries with our President & CEO, Courtney Fairchild!
About the Author:
Granite Leadership Strategies are THE Government contracts strategy experts. In our role as consultants, we have served as key business advisors with over 100 collective years of experience working specifically with Government contracts. We have facilitated our clients’ wins through effective Government contracts pricing strategies resulting in over $30 billion in new Government contracts. Marsha Lindquist, CP APMP, APMP Fellow, NCMA Fellow, leads Granite Leadership Strategies and is an inspiring strategist changing the way her clients view their business. Whatever the issues are relating to creating a profitable business and winning competitive Government procurements, Marsha finds creative ways to bring out the best and make a significant difference to the organizations she works with. Marsha can be reached at firstname.lastname@example.org.