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Cost-Cutting Strategies for Government Contractors

Both emerging and experienced players in the government contract arena know one thing for certain: current government contracting is focused primarily on cost savings and efficiency.  

In other words, how successful your firm is in winning business with government customers will depend primarily on your ability to provide goods and services at a lower cost than your competitors. “Who can provide the lowest price” has always been the yardstick against which competitors for LPTA contracts have been judged, but cost is fast becoming the main criteria in Best Value contract awards as well. 

So what can you do to remain competitive in the current government contracting environment?

The most effective cost reduction strategies start with a careful evaluation of your direct and indirect costs. A thorough assessment will almost definitely reveal areas where you can make changes. It is then critically important to be willing to make those changes, knowing that those adjustments will either help you win the contract you are currently bidding on or will go a long way toward increasing your chances of scoring the win in the future.

In short, there is no room for a “but that’s the way we’ve always done it” mindset in today’s government contracting arena. Every aspect of how you do business needs to be looked at carefully and re-engineered if called for to give your company the strongest competitive advantage.

Historically, contractors have used the same formulas to allocate direct and indirect costs. However, today’s government contracting environment demands a thorough review of all the practices and components you have in place. This evaluation will give you valuable information about how your wrap rate compares with your competitors and show you where variables can be adjusted to give your company the strongest competitive advantage.  

Start by determining where you can streamline your business. Is there training you can provide that will help your people be more efficient? Can you automate things that you currently have staff doing? Examine your Human Resources function. With the availability of online modules to process employees’ tax documents, choice of benefits, and other administrative information, you may not need as many certified HR specialists on your team. Revisit the rates you are using. Are they standard or alternate? And finally, take a close look at the rest of your accounting system and look for ways to allocate costs in ways that place your firm in a more competitive position.

One of the most common ways of bringing costs on a project down is reducing salaries. However, cutting your existing team’s salaries, or replacing your workforce with younger staff who will work for less money, may be an option, but it should never be your first choice. Not only does the practice erode your team’s loyalty and confidence, but it is also more costly than you might think to replace workers. Recruiting and training new employees is expensive, and productivity inevitably suffers due to a steeper learning curve. A long-term, broad-based study by the American Center for Progress* indicates that businesses spend approximately one-fifth of an employee’s annual salary to replace them with another worker– a significant expense that needs to be considered carefully when contemplating replacing workers or teams.

A thorough assessment of how you are handling your direct and indirect costs frequently yields information that will lead you to important cost-reduction strategies. Whether it’s developing a new office model, rearranging your overhead structure, or creating a new material handling pool, a detailed assessment of everything you are doing as a company has enormous potential to reveal many things you can do to lower your final bid price.

* https://www.americanprogress.org/issues/economy/reports/2012/11/16/44464/there-are-significant-business-costs-to-replacing-employees/

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Should You Compete in a Price War with an Incumbent?

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Can you win a government contract when you are bidding against an incumbent that has been entrenched with an agency for many years?

The answer is a qualified yes. It is possible to unseat an incumbent in the federal marketplace if you submit the right type of proposal. The bottom line is you will need to present the agency with a solution that is innovative, creative, and viable, and that represents a better value than the current provider.

That said, be keenly aware of the fact that discretion is often the better part of valor. Winning the bid and executing the work are two different things. Proceed cautiously and thoroughly to determine if bidding against an entrenched incumbent is worth your while. Is capturing this work likely to build your business, or is the risk too great? 

The honest answer to this question determines what you do next.

If you feel the RFP represents a good opportunity for your firm, the next step is to determine what the government agency wants as reflected on paper. Read the Request for Proposal carefully. Determine precisely what the agency is requesting. Identify and list these requirements and prioritize them. Rank what you determine to be the customer’s key requirements from least to most important.

Now figure out what skills, equipment and materials each item will require, and assess your capability. Identify the incumbent’s strengths and weaknesses against your own.  Pay particular attention to equipment. Is it GSE or CSE? If the incumbent already owns specialty equipment to do the job, competitors will almost always come in higher on price. Factor that into your decision whether or not to move forward.

Read any Statements of Need and draft RFPs, but don’t forget to reach out to the customer directly. You may often be able to get access to the chief engineer (when appropriate), the government program manager, technical staff leads or even the agency’s contracting officer. If so, establishing relationships through meaningful discussions over a long period of time is important. Focus continually on what the customer is actually telling you and not what you or your team thinks is important. 

It is important to remember, however, especially when talking directly to a customer, that it’s not unusual for an agency to overstate their dissatisfaction with an incumbent to stimulate more competition. Make no assumptions and take nothing for granted with regard to how likely a customer is to continue with an incumbent.

After you have done your due diligence and gathered all the information you can, revisit your initial decision about whether or not to bid. Can you do the work for the price at which you will need to come in to win? If you still feel that the benefit of bidding/winning this job exceeds the risk, develop a bid strategy that includes clear, innovative details on your: 

  • Approach. What will you do to implement your strategy and deliver the goods or services requested?
  • Benefit to the Customer: What is the value of your approach to the customer both qualitatively and quantitatively?
  • Substantiation. Provide evidence that will prove to the customer that you have the bandwidth to fulfill their requirements in a way that surpasses the incumbent.
  • Cost. Review the RFP to be sure you fully understand how cost will be evaluated. 

Your best bet for unseating an incumbent without engaging in a price war is to provide the government customer with a compelling approach to change. Do that by focusing on the RFP’s written requirements, and differentiating yourself from the incumbent by proposing strengths and strategies that will benefit the customer in new and progressive ways.

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Recency and Relevancy: Gaining a Window Into a Competitor’s Past Performance

Earlier this month, we discussed the federal source selection process, including how proposals are reviewed, evaluated, selected, and ultimately awarded.

To recap, we talked about how government officials use multiple sources of information when making award decisions. In this blog, we’d like to address one of the most common factors: Past Performance. Simply put, Past Performance is an assessment of a bidder’s likelihood to successfully perform the contract, based on its history with similar contracts. This is important not just for your own bid, but also for understanding how your competitors will likely score on their past performance, and how you can better counter that with your own approach.

In evaluating a bidder’s past performance, government officials use the Contractor Performance Assessment Reporting System (CPARS). Exclusively available to the government, CPARS includes detailed information on how the bidder has delivered on their previous contracts with the government. This includes their record of meeting requirements and conforming to standards of good workmanship, forecasting and controlling costs, and adhering to schedules. CPARS also evaluates what FAR part 42.1501 refers to as a contractor’s “commitment to reasonable and cooperative behavior and customer satisfaction” on previous government contracts.

Federal decision-makers evaluate contractors’ past performance based on two standards: recency and relevancy. “Recency” refers to how long ago the work was performed, and “relevancy” has to do with how similar this work is to what the current RFP is asking for.

Because FAR 42.1503(4)(d) deems all past performance data as Source Selection Sensitive; information contained in CPARS is not releasable (unless expressly directed by the agency who submitted the data). However, contractors can gather a surprising amount of information on their likely competitors just by leveraging various open-source tools and their industry contacts.

Evaluating Recency and Relevancy

Requests for Proposals typically give specifications for what they deem to be a valid past performance reference. Typically, a good past performance reference is similar in size and scope as the contract you’re pursuing and within a 3–5 year window. Section M of the RFP discloses how these references will be evaluated.

Your analysis of the relevancy of a competitor’s past performance starts with determining which category it is in. For example, is this a product-based contract that involves the development of an item or low to full-rate production? Or is the opportunity calling for a service-based solution such as mission-based support or systems integration and engineering? Especially when the solicitation is looking for a service to be performed, be sure to get a good handle on the contract requirements by breaking them down into simplest terms. For an IT contract, for example: is the agency looking for cloud-based services support? Help desk support? Cybersecurity? The same applies to any product-based procurement.

Good sources of information for competitor past performance analysis include databases like GovWin, DACIS, GovTribe, and BGOV. These databases should be augmented by searching press releases and other news articles for announcement of awards that may not have been captured (or easily found) in one of the above databases. GlassDoor and other social media platforms can be excellent sources of data for contractors that are performing poorly, but a good analyst will always guard against potential bias by taking negative press with a grain of salt.

Finally, as you examine your competitors’ past performance, there are a few questions that are good to consider:

  • Are the contract requirements well within their capabilities, or does their contract record suggest they have “gaps” in their ability that they must fill via teaming?
  • Do they have sufficient experience in designing and manufacturing the product in focus?
  • Have they recently won a large number of programs, and might struggle with bandwidth for the upcoming bid? Will they need to expand their manufacturing capabilities because they are currently performing at max capacity? Or will they need to go on a hiring spree to fill the required positions because this is a new contract type?

All this information is geared toward a single goal—providing your capture team with information that will inform strategy. It gives you the best possible chance to prepare for – and hopefully outmaneuver—your competitors and enhance your win probability.

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Understanding the Federal Source Selection Process

When the federal government issues an RFP asking companies to submit proposals to manufacture goods or supply services on a contract basis, the application process is complex and highly detailed. Likewise, there is an equally specific way through which the winning bid is selected. This selection process is defined by the Federal Acquisition Regulations (FAR) system, a group of uniform policies and procedures that guide the acquisition of goods and/or services by all executive agencies. 

Found in Title 48 of the Code of Federal Regulations, FAR consists of 37 chapters, each hundreds, if not thousands, of pages long. (Chapter 1, which applies to all government agencies and covers cost accounting standards, is more than 2,000 pages long.) Fortunately, familiarity with the entire document is rarely necessary. Part 15 of FAR that deals with the selection process, although other sections do come into play in rare circumstances.

Why is understanding the selection process important? Simply put, knowing what steps the agency will take in making a decision will help you organize and write your proposal. Most would-be contractors know that considering “What does the buyer want?”, “What are their critical needs”” and “How does this potential customer define value?” will benefit them, but understanding the steps through which their proposal will be vetted before a final decision is made is equally important. 

After the government receives the proposals and the deadline passes, pricing is stripped from each submission. The bids are then processed through three distinct steps as outlined in FAR:

  1. The agency convenes a Source Selection Evaluation Board (SSEB). Typically, the SSEB is made up of a small group or team of individuals, but it may also be a single person depending on the size and circumstances of the agency. The SSEB evaluates each proposal (again, without pricing information) separately. Each submission is evaluated for general strengths and weaknesses; any pluses or minuses that are particularly significant are identified and highlighted. 
  2. A Source Selection Advisory Council (SSAC) is chosen. Its function is to take the information the SSEB has given them, bring in the pricing information, and provide the ultimate decision maker, the Source Selection Authority (SSA), with a recommendation as to which contractor to choose.
  3. An SSA’s sole responsibility is to select the winning bid. While the SSAC’s recommendation is carefully considered, the SSA is not required to go with its recommendation.

Most often, however, the SSA will agree with the SSAC’s recommendation and make the award in that applicant’s favor. Occasionally, however, the SSA will either send the SSAC back to the table to provide more justification and back-up information on their choice or opt to go in an entirely different direction—in which case, they take full responsibility for the decision.

When an SSA deviates from the typical federal source selection process, there are inherent risks. This is why it will be important for the ultimate decision maker to be able to clearly articulate their reasoning for going against the advice of the SSAC. For example, if there is a protest over the award, the SSA will need to justify and explain its actions thoroughly. If they can show that their decision clearly provides the government with added value, as long as it doesn’t contradict the rationale given in the RFP, the GAO will side with the SSA. 

In addition to understanding the source selection process, it’s also important for would-be contractors to know who is likely to be involved in the information-gathering, evaluation and decision-making process. Very rarely, the customer will disclose who these people will be, but far more likely, it is up to those submitting to try to discern the likely players. Look for contractors who have had a close working relationship with the agency in the past. Examine the historical patterns in previous procurements. See if you can determine which agency position has typically been the SSA in the process. Along with your primary research, this sort of information can guide your assumptions and help you write your proposal more effectively.

Our best advice is to understand the process, know your customer, and write your proposal accordingly. Having as much information as possible on the decision-making process will be an important factor in winning the award.

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Richter & Company Announces New Additions to Competitive Intelligence & Price-to-Win Team

We’re excited to announce two new additions to our team!

Adam Stormer has joined Richter’s Competitive Intelligence team as a Research Analyst. Mr. Stormer began his career in Cyber Forensics and Information Security before earning a Master of Science degree in Applied Intelligence from Mercyhurst University. At Mercyhurst, Mr. Stormer was a team lead for the Beehive Project, a technical collective designed to provide support to emerging businesses and entrepreneurs. In this role, he interacted with clients, program directors, and a team of analysts to create actionable intelligence products to assist in the creation of products and services.

Joining the Richter Price-to-Win team as an Executive Consultant is Fernanda Demas. According to Richter & Company’s PTW Director Gene Metcalf, prior to joining, Ms. Demas provided capture support to federal contractors including cost estimation, training in the development of Basis of Estimates, the facilitation of pricing strategies, and solution development to the firm’s clients. In several previous positions as a project accountant, Ms. Demas developed a comprehensive knowledge of financial management, planning, reporting, and compiling competitive, compliant final submission packages.

Both Mr. Stormer and Ms. Demas say they were drawn to Richter & Company because of its solid reputation in the industry, best-in-class methodology, comprehensive proprietary tools, and the team-oriented work environment the firm’s leadership has created.

“Both Adam and Fernanda bring an excellent combination of industry knowledge, communication skills, and leadership ability to our team,” said Chris Richter “We have every confidence that both Adam and Fernanda have what it takes to provide top-notch support to our customers and increase their win probability in the federal marketplace.”

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When It’s Time to Rebid a Contract: Avoiding Incumbentitis

avoiding contract rebid incumbentitis graphic

Where and when is a little knowledge a dangerous thing?

Sometimes, when it’s time to rebid a government contract in the federal marketplace, knowing more than your competitors do can be the beginning of the end.

In other words, when you are the incumbent—that is, the company that currently owns the contract and who has been working on it for years, it’s critical that you realize that the historical knowledge you have accumulated in that time is a double-edged sword. 

There’s a good chance that the price you come up with will be among the higher bids submitted unless you keep some important considerations in mind. Here are three symptoms of incumbentitis that can be your undoing if you’re not careful:

Not Pricing Precisely to the Requirements

When the company posts an RFP, incumbents often have difficulty pricing to the exact requirements, especially when their experience indicates that these requirements don’t reflect what the potential client will actually need. If an RFP specifies 80 units, and the incumbent has been producing 100+ units for the past five years, it’s hard to resist the temptation to reflect that in their pricing. Instead of showing the incumbent’s superior insight and experience, including the pricing for what they think they know versus what the RFP actually calls for, only results in a higher bottom line that frequently costs them the contract.

Giving Staff Jobs’ Protection Top Priority

The incumbent also needs to stay focused on the goal of winning the job again. That means they need to emphasize the creation of a PTW strategy instead of focusing on protecting the jobs of the people who are currently working the job being re-bid. For better or worse, the workforce that has been on the contract from the beginning is more experienced and likely more expensive now than an entry-level staff is going to be. Despite the intuitive benefits of keeping a more experienced workforce on the contract, the incumbent’s estimators must still keep the final cost of the proposal in mind as it will likely compare to their competitors’ pricing when rebidding a job.

Overestimating History and Experience

Another just as insidious miscalculation that an incumbent can make is jumping to the conclusion that their history with the company issuing the RFP will count for more than it actually does. “What have you done for me lately?” is still the mindset at the majority of agencies, making securing services at the lowest cost the priority.

If you’re an incumbent who wants to win a rebid, you need to be both literal and humble. Pay careful attention to what the RFP is actually calling for, and resist the temptation to fill in what you think you know. Focus on PTW instead of job protection, and be humble enough to understand that your previous relationship with the company or agency that has filed the RFP is not necessary a big plus—in fact, if you’re not careful, it can actually prove to be a hindrance to you actually getting the contract again on rebid.

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PTW (Price to Win) G&A vs. Overhead in Developing Aggressive Costs

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Developing Aggressive Pricing: Overhead vs. G&A

The government contracting arena is filled with words, phrases, and acronyms that can be difficult for the less experienced to define, let alone distinguish subtle differences between. G&A (General and Administrative) costs and OH (Overhead) costs are two good examples. What do they mean and, more importantly, what are the differences between the two?

What is Overhead?  

Overhead costs support the revenue-generating projects of the company. If a company had no projects, it would have no overhead expenses.   

What is G&A?  

General & Administrative support the overall management and operation of the business. Even if a company had no billable projects, it would still have G&A expenses. Think executive staff and leadership team.

Does My Company Need Separate Cost Centers for G&A and OH?

Early in a company’s evolution, it may not make sense to differentiate between OH and G&A expenses into a single cost pool. As the business grows, and you have more costs than base labor, breaking out OH from G&A may allow you to recoup some of the costs associated with processing those direct costs to which G&A can be applied.

Just to clarify, if an employee works on direct labor projects, any indirect labor or expenses that the employee incurs would be charged to an Overhead account. Similarly, if an employee does not work on direct labor projects, their time would be considered G&A and should be charged, along with any expenses incurred, accordingly.

How Flexible are the Classifications?

Many people believe they know which items go into each cost center, but every company is different. The process of classifying costs as G&A or OH is not as static as may first appear.  

When a new RFP comes in, you can define how your company is structured so you can spread the cost of the people involved in servicing the contract across a wider swath of employees, thus containing costs and keeping your pricing aggressive. 

Too many people in OH drives costs up, possibly making your bid non-competitive. Keep OH basic and contract-specific; classify company-specific costs under G&A. This isn’t always possible, but there is flexibility and in many cases, you can use both OH and G&A to arrive at pricing that is most aggressive and competitive. 

A lot of factors must combine to win a government contract, but learning how to get the most benefit out of OH vs. G&A costing is an important component in developing an effective Price to Win strategy.

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SWOT—So What?

SWOT analyses have been around a long time, and continue to be popular in the business development community. Unfortunately, the vast majority of SWOT analyses are essentially useless—not because the tool is broken, but because its not being used properly. The ultimate goal of a SWOT analysis is to produce actionable intelligence—and yet that is precisely the step that is most often neglected.

For the uninitiated, a SWOT analysis is a simple four-quadrant assessment of a competitors Strengths, Weaknesses, Opportunities, and Threats (SWOT) in the context of a specific opportunity. It is a simple, easy-to-understand tool that helps identify the internal and external factors that either help or hinder a companys probability of winning.

Despite popular belief and practice, a SWOT analysis is not complete when the quadrants are filled.  When the strengths, weaknesses, opportunities, and threats have been identified, and documented in the four quadrants, this is merely the first step. The final step requires moving from observation to analysis. Observation provides the what,” while analysis provides the so what.” This requires developing key strategic implications from the SWOT factors. To put it another way, the next step” is to use the completed SWOT chart to predict likely actions the competitor will take.

Competitive analysis of any company must include a predictive element, which attempts to answer the question What is the company most likely to do next?” The four elements of a SWOT chart, if accurate, can be extremely useful in developing these predictions—but they do not explicitly provide the answers in and of themselves.

So how does one take this next step? There are several ways of deriving implications from a traditional SWOT chart—one of the more effective methods involves examining the intersections of the various factors two by two, in an attempt to discern the most likely action on the part of the company. For example: if the company has [Strength #1] and [Opportunity #1], therefore they would most likely do [Implication #1]; if the company has [Weakness #1] and [Opportunity #1], therefore they would most likely do [Implication #2], etc.

This may seem daunting, but the payoff is great! The result of this step is a list of likely competitor actions that are both rational and defensible. Can you see the value of providing such a list to decision-makers? It enables informed decision-making in a way that a SWOT chart simply cannot do. Yes, its more time-consuming, and prediction is inherently risky, but taking this step is the only way to get true value out of a SWOT analysis.

For more information on Competitive Intelligence or Price to Win Analysis, please contact Richter & Company.

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Barriers to New Market Entry: Sunk v. Relevant Costs

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The way you handle sunk costs when attempting to break into a new market in the federal contracting arena can be the difference between success and failure. Deciding how best to treat these costs depends on how well you understand the difference between a “sunk cost” and a “relevant (or future)” cost, so let’s start there.

A sunk cost is a cost that has already been incurred and cannot be recovered. On the other hand, a relevant cost, sometimes called a future or prospective cost, is a cost that may be avoided if certain actions are taken. 

Because they have already been incurred and are unrecoverable, sunk costs are typically not considered when making future decisions.They are excluded because their cost will remain the same regardless of the outcome of a decision. The relevant costs, however, are contrasted with the potential revenue of one choice compared to another. In other words, in order to make an informed decision, an organization should only consider the costs and revenue that will change as a result of the decision at hand.

Think of it this way: a manufacturing firm has various sunk costs. These include their monthly lease of the factory and the cost of the equipment they have purchased. If the company pays $10,000 per month to lease its factory and has purchased equipment outright for $50,000, those sums are considered their “sunk costs.” 

When the manufacturing company expands into new markets, these sunk costs are typically not recouped. When bidding against another contractor who already has the infrastructure in place, trying to recover the cost of elements purchased is going to quickly drive your price into non-competitive territory. 

How do you know if the competitor has the infrastructure in place? This is where ethically sourced, accurate Competitive Intelligence (CI) can provide the information you need to create your bid in a way that has a good chance of success.

More often than not, it’s expensive to get into a new market. There are always barriers to entry that are cost-related. Although there can be acceptable ways to go about recouping sunk costs throughout the course of a contract, attempting to do so may create an insurmountable, cost-related barrier to successful entry into a new market. Sometimes, these costs just need to be absorbed as the “cost of doing business” that you will choose not to charge back.

Sometimes, the way into a new area within the federal market space is to invest in the infrastructure you will need to complete the deliverables, view those as sunk costs, and proceed accordingly.

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Gathering Competitive Intelligence Ethically

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A common misperception is that “competitive intelligence” is synonymous with “corporate espionage.”  

Nothing could be further from the truth.  

Corporate espionage is an illegal activity where companies steal valuable information from their competitors in order to gain a competitive advantage.  It may involve tactics such as wiretapping or hacking into proprietary systems to gain unauthorized access to private information. In contrast, competitive intelligence is a legal and ethical activity that uses publicly available information to gain insight into a company’s capabilities, strengths and weaknesses, performance, and general approach, which can then be used to develop likely competitor strategies in a given competition. Competitive intelligence is a widely-used and valuable business practice that leads to developing customer-focused and competitor-countering strategies that improve a company’s probability of a win.  

With that said, it is important to understand the legal and ethical boundaries of competitive intelligence, so that your company will remain above reproach in all of its competitive intelligence efforts.  Following are a few best practices to keep in mind when gathering competitive intelligence:

Define Ethical for Yourself & Your Company

Ethical boundaries are ultimately determined by the customer. For example, in the federal contracting space, the customer is the US government. Because the US government is funded by the American taxpayer and is therefore accountable to them, federal agencies are obligated to ensure that the way they use their allocated dollars is completely fair and free of any fraud, waste, or abuse. This results in a very high standard for what is ethical. Other industries and other countries, however, may have different ethical standards. That’s why it’s so important for you to determine what your company’s definition of ethical is and direct everyone at all levels of the organization to follow those standards. 

Develop a Culture of Ethics and Integrity

Be careful to avoid any ethical gray areas so that you can avoid being removed from a competition because of a real or perceived breach of ethical boundaries. As you collect competitive data, make notes about where you found it. It could be important in the future in case you need to prove that it did not come from a protected source. Talk frequently and openly inside your company about the safe sources to tap for information-gathering and ways to steer clear of any ethical danger zones.