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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/