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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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Parametric Price to Win (PTW) Analysis: When & How to Use It to Win More Work

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When you’re looking for a ballpark estimate, an analogous (AKA “back of the envelope”) calculation may be all you need. After a quick look at the budget over the last five years, you can do a quick run rate, determine trends in play, and extrapolate those numbers into a rough estimate. Ultimately, this technique is based on assumptions and arbitrary percentages of planned growth, so the margin for error is significant. That said, it’s an approach that can still have value, especially in the absence of a lot of information; in fact, it may be the best you can do. 

A Parametric PTW strategy, however, is a quantitative approach that determines the expected cost of a project depending on market or historic information. Using the statistical relationship between past information and specific other variables, a parametric model looks at every requirement listed and applies costs to each. Far more granular than other estimating techniques, a parametric approach will yield more accurate information when the ingredients to perform one are there.  

Doing a Parametric PTW analysis is most accurate when you’re looking at building a project from the ground up. Below is a simple example to illustrate the concept. Keep in mind that, in reality, there are many other things that must be factored in, making the parametric model far more complex.

Example: A project team has been asked to estimate the cost of a new hotel, similar to facilities their company has built over the past five years. Using a Parametric PTW strategy, the team can use the company’s in-house database to track the costs, schedules, and other specifics of the previous projects. 

For an initial evaluation, the team will use the cost per square foot as the appropriate input parameter, extrapolating the future building’s cost per square foot using the rule of three. For exact types of buildings, the cost had amounted to $200 for every square ft in the past—the cost for every parameter unit. The current building is intended to occupy a space of 3,000 square feet—the parameter value for the new project. The calculation of the construction using parametric using the rule of three will be as follows.

Estimated construction cost (ECC) = $200×3,000 square foot = $600,000.

The parametric values, of course, can be reduced and adjusted as the needs of the project get more specific and requirements change.

When using a parametric PTW strategy, it is critical to understand the requirements the RFP is asking for. Look at minimum requirements and work to fulfill those. Create the cost to build the customer what they are asking for, not what you want to build or have built in the past.

When companies lose work, one of the reasons is frequently that they did not build what the customer was asking for. It’s important not to add unwanted bells and whistles to the client’s product.

Because obtaining historical information requires a lot of resources and effort, using a Parametric PTW technique can be expensive and time-consuming. However, when sufficient historical information is available, a Parametric PTW strategy is one of the best approaches for estimating resource requirements, duration, and cost.

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Price-to-Win: The Trade-off Between Capabilities & Price

Competitive analysts studying

A big part of winning a deal in the federal marketplace depends on how effective your PTW (Price-to-Win) strategy, or position, is. Keep in mind that a winning PTW position starts with a bottom-up analysis based on the requirements spelled out in the solicitation documents, but it doesn’t stop there. In order to arrive at an effective PTW strategy, you also need to consider open-source data and a set of defensible assumptions…

…which brings me to the most important thing about Price-to-Win. PTW isn’t a number. It’s not the amount you need to bid to win the deal. Think of PTW as a strategy or a position that represents the trade-off between the capabilities you offer within the context of your understanding of the customer’s requirements, and the cost, price, and strategy they will use to evaluate proposals. (Also keep in mind that what is used in government contracting is an artificial construct meant to create an “apple to apples” comparison.)

It’s important to keep in mind that we bid on work for different reasons, and the price we submit reflects those motivations. If our objective is to win the deal at all costs, we will offer to perform the contract’s requirements at a price that’s well below what we expect everyone else to offer. I’ve heard of federal contractors positioning themselves to win jobs at all costs to inflate the company’s value in light of a near term sale. Companies who are entering a new marketplace who want to take the field by storm may be willing to offer an extremely low price in order to make a splash, get their foot in the door, and earn a little brand recognition. And in those cases when we are asked to bid by a customer who is concerned about the level of competition, our courtesy bid is likely to be too high to win.

Depending on your motives, you can throw something over the transom that’s either artificially high or low to protect yourself against the win or to maximize your chances of being awarded the contract.

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Winning in the Federal Marketplace: Does the Incumbent Still Have the Advantage?

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Time was when incumbents nearly always won the day in the federal marketplace. Typically, service contracts repeat themselves at the end of a 3–5 year contract period, and, despite the incumbent’s inherent advantage, federal agencies allow these contractors to bid on the repeat contract. I can’t give you the exact statistic, but I have been paying attention, and I estimate that it used to be that over 90 percent of incumbent contractors were successful in winning the contract again… and again.

It used to be that unless your Competitive Analysis (CA) was indicating that the incumbent was underperforming or had fallen out of favor for some other reason, submitting a bid was close to an exercise in futility. Government agencies used to view the transition from one contractor to another as costly and full of risk; therefore, come rebid time, the incumbent was more than likely to capture — again. Unfair? Maybe. But when you play in the government’s sandbox, they make the rules. You can take your pail and shovel and go home, or stick around and learn how to play the game when you are not the incumbent.

Today, incumbents have a very large target on their backs. Where at one time their past history with the federal agency was nothing but an advantage, in many ways, that’s changed. For one thing, incumbents have established price and performance expectations with the customer that may not be viable anymore. The incumbent’s numbers may have changed, yet the customer nevertheless expects the same pricing structure. Regardless, incumbents are often stuck with the structure and approach they’ve always used and may be penalized when they try to convert it to one that is more efficient and cost-effective now.

Another disadvantage the incumbent may have is that, at the end of the day, they know too much. You’ve probably heard the adage “A little knowledge is a dangerous thing.” If you believe that, you’ll understand when I mean when I tell you that, in the federal marketplace, a lot of knowledge is an even more dangerous thing.

Translation?

Anyone who’s been around the block even once in the federal contracting world knows that nothing is more important than 1. understanding what a solicitation’s requirements actually are, and 2. addressing them in meticulous detail. However, when an incumbent reads a new proposal from a contractor for whom they have worked — especially on the same contract — they often “read between the lines” rather than focus on what the solicitation is actually asking for. And that’s a big mistake.

Certainly, leveraging CA and your own intuition about the customer and their solicitation makes sense, but only up to a point. When you have knowledge about a customer that you have gained from experience, even if it’s not germane to the solicitation at hand, it can be difficult NOT to think you know more than the customer does about what they want. Thinking you understand what the customer really, really, REALLY wants more than they do is the beginning of the end.

Bottom line? If you’re a non-incumbent, you have a better shot at winning than you used to… especially if you follow a few basic rules that will amplify your advantages:

  1. Understand in detail what the solicitation requirements are. Whether you’re the incumbent or not, you need to understand what represents the most value to the customer. That said, as a non-incumbent, you have the advantage of viewing a solicitation with fresh eyes, making you more likely to focus on what’s actually being requested, and that’s a big plus. 
  2. Understand how the evaluation process will be performed. Do your homework so you can understand the process the decision-makers are likely to use as well as any bias that the people doing the evaluation may have. Address these, but make absolutely certain your response sticks to the requirements as written and that you adhere scrupulously to the eval process.
  3. Create a solution. Your solution needs to be minimally compliant with the requirements defined at a price point that is competitive with where you believe the incumbent will be in the competition. This is no time to show off. Don’t provide too much value. You don’t want to be kicked to the curb because your solution is either too expensive or not achievable.

Finally, capture strategies are very much based on “What have you done for me lately?” Incumbents tend to think that the customer is more invested in their future working relationship with them than they probably are. It’s a mistake to think that a customer you’re currently working with really, really, REALLY wants to keep you and will do so at all costs. After 30 years in the federal marketplace, I can tell you that if someone else builds a better mousetrap and/or at a lower price point, most customers are all over it, which is good news for the non-incumbent.

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Price To Win: Know When to Hold ‘em and When to Fold ‘em

In today’s federal marketplace, anyone can compete for business.

And anyone can win—at least some of the time. It’s the possible losses, however, that can provide more than experience to learn from—they can, at times, be ruinous.

Therein lies the rub.

Because opportunity incurs costs—in resources, bid and proposal feeds, and your staff’s time, smart would-be government contractors know that Price To Win (PTW) strategies are a key part of capture. Smart government contractors can tell you that identifying your Price To Win position is more than a number; a true PTW strategy reflects the complex relationship between your customer needs, their allocated budget, and their spending patterns.

Industry expert Randy Richter, Chairman and Price To Win Director at Richter & Company will tell you that even smarter contractors take the definition of PTW a bit further. These competitors know that determining their PTW position for a given opportunity not only involves factoring in the impact of their customers’ needs, budgets, and spending patterns, but also analyzes their competitors’ solutions, strategies, tactics and degree of aggressiveness throughout the bid cycle.

But only the smartest contractors, says Richter, understand when the PTW process should actually begin. “Some will say that the process should begin early in the life cycle of the bidding process, but in reality, the smartest competitors begin crafting their PTW strategies well before a draft RFP is in place,” he says. “The wisest decision a contractor can make is not to try to decide how to win a bid, but whether to compete at all. Sometimes, the better part of valor in government contracting is to step back from a given opportunity so you can live to fight another day.”

Richter says his firm’s PTW support is provided by experienced analysts who understand the government process, know how to price, and can think outside of the box. “We train our team to ethically gather information, analyze it to create actionable intelligence, and develop solid assumptions,” said Richter. “We then customize our proven processes and tools that we’ve developed to each potential competitor’s situation to produce accurate, defensible results.”

There are two ways to build a PTW strategy:

  • The Top Down process uses historical data, including information on bids previously awarded and budget information to identify the parties’ “comfort zones.” In other words, a Top Down determines in what range customers tend to award bids, and where competitors tend to receive them. The Top Down approach is best used in early gate reviews to help firms decide whether to compete at all, and/or to develop proactive solutions using “design to cost” approaches. Effective Top Down efforts can be pursued easily and affordably as ongoing projects because very little data is required.
  • A Bottom Up PTW analysis is best performed as soon as customer requirements and evaluation processes are known, typically once the DRFP is released. Based on identifying targeted competitors’ solutions, building up their costs, and identifying how these costs will be prices using their strategies, is the foundation of Bottom Up PTW reviews. Results are updated as new solicitation documents become available, with work continuing to cover amendments, ENs, FPRs, and negotiations.

Once you have your PTW position, what needs to happen next? To compete, or not to compete. To engage in the game and work to win the hand, or—like The Gambler—know when to walk away and when to run? Hold ‘em or fold ‘em?

Richter says this is one of the most important moments in the entire process—where a business decision must be made that only the potential federal contractor can make. “Our job is to show our client the position they need to achieve to beat their competitors, but whether they should attempt to move their company into that ‘win zone’ is entirely up to the firm’s leadership.

If you need more information to decide about whether to engage, my best advice is to ask questions,” said Richter. “I always told my kids that the only dumb question is the one you don’t ask, and I extend that advice to our clients today. Unless the project is classified, of course, why not take a chance? Ask the question. You just might get the answer you need to make an informed decision.”

Richter & Company’s consistent process, innovative tools and experienced staff have helped customers win over $30 billion since 2006.

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Competitive Analysis Leads to a More Successful Price to Win

Businessmen discussing an analysis

“It is wiser to find out than to suppose”. – Mark Twain

Many organizations and capture leaders understand and appreciate the value of Price to Win analysis in enhancing Pwin. Unfortunately, some view Price to Win as a standalone activity that does not require Competitive Analysis to support it. For those who are not familiar with Price to Win, it is more than a number; it reflects the complex relationship between customer needs and budgets and bidder solutions and strategies. It represents a tradeoff between price and capability that forms the foundation for successful bid strategies.

Therefore, Price to Win is based on data and assumptions about the customer and the competitors. So where does that data come from if not from Competitive Analysis? Oftentimes, capture teams believe they already have all the answers thanks to their years of experience in a given market– but this often leads to a rude awakening when they lose to a surprise competitor or an unexpected strategy. There are questions that must be answered– questions as simple as:

  • Who is the customer (decision-makers AND influencers), and what are their hot buttons?
  • Who are the competitors?
  • What are the competitors’ capabilities? solutions? strategies? discriminators? strengths and weaknesses?

There are also more complex questions that are more specific to a Price to Win– questions such as:

  • How will the customer calculate the total evaluated price?
  • What are the competitors’ cost structures?
  • How do competitors plan to bid in terms of teammates, locations, and aggressiveness?
  • What component pricing data is publicly available to help develop the bottom-up cost estimate?

These are all questions that Competitive Analysis can help answer, and as Mark Twain said, “It is wiser to find out than to suppose.” Early engagement in the procurement process allows more time to gather competitive intelligence and identify additional questions that can further increase win probability.

Competitive Analysis allows an understanding of customer requirements and the ability to craft solutions that beat the competition. This allows for an independent assessment of the competitors’ capabilities, strategies, and potential solutions.

As organizations approach Price to Win, it is important to remember that price is NOT simply cost + profit, as most tend to think of it. More accurately, price = cost + strategy. This makes Competitive Analysis the other strategic half of a successful Price to Win process. It is nearly impossible to develop the optimum strategy to position your solution without both.

For more information about Competitive Analysis or Price to Win, contact Richter & Company, and we’ll be happy to help you take the guesswork out of a potentially winning solution.

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Success Means Knowing When to Fold

Texas Hold ’em is a game of skill.  Over the years, successful players like David Sklansky, have developed complex algorithms to guide their decision making when a particular hand is dealt.  This mathematical approach helps improve their win probability – but it’s not the total answer.  What does the raise from the player past the big blind position mean?  Why did the person across from me scratch her head before bumping the bet again?  What do I do now?

Winning players understand that “bankroll management” is every bit as important as being able to remember the cards that have been dealt.  No player enters a game with unlimited funds, and once the once you have are gone, it’s “game over”.  Successful players understand that folding a hand is not a sign of weakness; it merely reflects your understanding that your hand is not as strong as your opponent’s. There is no stigma attached to folding if this act lets you conserve your money for a better future hand.

It’s the same in our world – or at least it should be.  Bid and proposal funds are never unlimited, and misuse of these scarce resources offer a quick path to the unemployment line.  But capture managers HATE walking away from deals.  They believe this will be seen as a sign of weakness – and this unhelpful approach is reinforced by way too many corporate executives who don’t understand the difference between a full pipeline, and a productive pipeline.

We have two clients that compete in the same general market.  One is extremely satisfied with its 35% win rate; the other is horrified that it only wins 90% of the time.  The first company approach to bid submittal is “if his has a pulse, bid it!”.  Their capture process is undisciplined; gate reviews are opportunities to display pretty PowerPoint slides to an audience that always says “Yes!”. The second has a more organized, more disciplined approach.  The criteria for passing a gate review are clearly defined, and lack of preparedness – lack of needed information for effective decision making – guarantees that a pursuit will be ended on the spot.  Guess which organization spends less B&P dollars overall?  Guess which organization is always looking for “successful” capture managers?

Conserve your resources.  Effective Price To Win helps you identify opportunities that meet your business objectives that you truly can win.  As for the rest? Well, poker legend Stu Unger puts it this way: “Fold and live to fold again.”

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Great ‘Que Takes Planning

In barbecue contests, timing is everything. Each of your four entries (chicken, ribs, pork and brisket) have to be turned in within 5 minutes of a precisely defined time; late entries are disqualified.  To meet this schedule – and to make sure the meat you offer the judges is at its tender, juicy, and flavorful best – requires careful planning and flawless execution at the contest itself.  But it’s the preparatory work done before the contest that separates winners from losers.

Losers buy their meats the day before they travel; winners order meat ahead of time so it can be properly aged (30 days or more for brisket!) and prepped. Losers wait until they arrive in the competition’s town and pick up consumer-grade charcoal from a big box store; winners buy specialized charcoal and wood to match their team’s desired flavor profile.  Losers work without a plan; winners develop and test complex checklists, schedules, and procedures so that their work onsite is efficient.  To put it simply, winning takes time, and teams that start too late are not likely to hear their name called during the awards ceremony.

Effective competitive analysis and Price To Win efforts start early – well before formal solicitation requirements are known. They follow consistent processes for gathering and analyzing competitive information.  They rely on proven models for projecting solution costs and prices.  They provide actionable intelligence that you can use to shape the opportunity, moving the competition away from lowest cost.

Start early, keep working until the final turn-in.

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You Can’t Enter Every Contest

From an economic standpoint, competitive barbecue makes no sense. In a Kansas City Barbecue Society event, teams turn in six individual portions of four meats: 6 (chicken, ribs, pork, and brisket).  A typical entry fee is $300; travel and transportation costs for pulling your big rig total $200 or more; charcoal, wood, ice, rubs, sauces, and incidentals add another $200.

And meat – oh, the cost of meat: most teams cook 36 to 50 pounds of incredibly-expensive Wagyu brisket to turn in six perfect slices.  Meat costs can easily top $500.  When all is said and done, the cost of a typical contest easily tops $1,000.  And sad to say, prize money when (if!) you win may not cover those costs.  And we haven’t even talked about the costs of beer and other “adult beverages”…

As a result, pitmasters limit the competitions they enter to those which will help them achieve their goals. In my case, I focus on competitions within driving distance of my home which have (a) decent prize money, (b) a relatively small number of competitors, (c) a high proportion of certified (vs amateur) judges, and (d) good public attendance (i.e., good marketing) potential.  I’d love to compete in a contest near my daughter’s home in Nebraska, but that wouldn’t help me increase my catering business’ name recognition in the central Maryland area I can reasonably serve.

In the business world, similar constraints apply.  Winning companies pursue opportunities that will help them achieve business goals.  Notice I did not say “perform profitably.”  In today’s hyper-competitive world, businesses commonly pursue money-losing efforts because they achieve longer term objectives like improving name recognition or supporting growth into adjacent markets.  They ruthlessly discard pursuits where they have limited customer intimacy, poor knowledge of potential competitors and solutions, or have no discriminating solution.

Like winning pitmasters, they pick and choose their competitions – and believe that they will win every bid they submit.

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Backyard Chefs Like to Cook; Pitmasters Like to Win

Amateur chefs tend to have a pretty short attention span.  They watch Bobby Flay toss something on a grill, say to themselves “Man, I could do that!”, then run to the store, assemble ingredients, light a fire, and make up a mess of something good.  Their goal is to recreate a recipe; their objective is to make it edible. Their measure of success is, well, nobody barfs when they taste it. Backyard chefs like to cook.

Pitmasters, on the other hand, have a much longer view of their world. They have more at stake; they compete against well-prepared competitors for significant prize money, or against restaurants (and other barbecue teams) for lucrative catering gigs.

As a result, winning pitmasters set larger goals (“cook an award-winning whole hog”) and develop objectives to measure their path toward achieving those goals (for example, “Buy a big pit.”  “Learn how to control temperature across the entire cooking surface.”  “Find a reliable source of high quality butchered hogs.”  “Learn how to dress and prep a raw hog.”  “Build a winning rub and injection.”).  Their measure of success is tangible: awards, prize money, and – thanks to the exposure barbecue enjoys on TV – lucrative deals for packing and selling their “secret” rubs and sauces.

Pitmasters like to win.

In the business world, far too many companies rely on the “mushroom theory of management.”  They perform minimal planning; they operate in an ad-hoc environment that results in scarce resources being spread across many unsuccessful pursuits.  Like backyard chefs, they are happy with a win, but shrug off losses, figuring “oh, better luck next time.”

Winning companies take the time to develop corporate goals and objectives.  They develop high-level strategies for achieving their goals within a defined window of time. They communicate these items across the company, so that business units – and business developers – can help the company win by putting together – and executing – their own sub-goals, objectives, strategies, tactics, and plans. They are ruthless in rejecting pursuits of opportunities that do not support corporate goals, reserving finite resources and funds for those which do.

Like pitmasters, they love to win – and burn with the white-hot fires of hate when they lose.  In business, be the Pitmaster.