Pricing Service Contracts With Credibility in Small Business Federal Government Contracting

      Image: Resource-connection.com

Introduction

Assuming a proposal to a government agency has an acceptable technical solution and past performance and management factors that convince the customer it is a viable candidate, then pricing may be the winning element in the source selection equation.

The mechanics of government contract pricing have been discussed previously at this site. The discussion relates how pricing should be a natural outgrowth of the organization structure, market strategy, competitive analysis, business system design and long range planning:

Pricing Service Contracts

The above article also explains how long and short term pricing factors should be integrated with the management and technical elements of any given proposal and that a total view of the business is best presented by integrating long-term company strategy with short term proposal objectives. 

The purpose of this article is to augment the above discussion with tips on establishing and maintaining credibility in pricing to a government customer.

Certified Cost or Pricing Data

Certified cost or pricing data under the “Truth in Negotiations Act” (10 U.S.C. § 2306a) or TINA statute is proposal pricing, which for procurements greater than $750,000, is certified by the contractor as accurate, complete and current as of the date of agreement on price. (Section 811 of the fiscal year 2018 NDAA includes a provision that increases the threshold up to $2,000,000). 

The absence of a certificate does not eliminate defective pricing liability.

The statement underlined above is a key principle in relationships with the government and its auditors. TINA influences a government auditor’s thinking and it is in the back of the mind of every contract negotiator. They are taught and learn by experience to look for TINA faults.  

Thus, even if your procurement does not meet the above threshold for TINA certification you should price to establish a similar credibility with your customer, even though you may not have to sign a TINA “Certificate of Current Cost or Pricing”. Doing so is simply good risk management in business.

You may read more about cost and pricing data and the negotiation process at the following link:

Contract Negotiation

Remember Historical Data is Precedent Setting

All auditors, negotiators and pricing analysts are preconditioned to utilize historical data. The last or most favorable price offered a customer for a commercial off-the- shelf product is strong support for what is currently being quoted. This is particularly true of GSA Schedule negotiations, product updates or repetitive buying situations.  If you are a commercial supplier, a quantity factor will also enter into play.  In general, orders of higher quantity than historical pricing quantities undergo downward pricing pressure by the buyer unless some other factor such as a non-recurring tooling charge, learning curve interruption, obsolescent material or other upward factors can be offered as support for a higher unit price on a higher quantity buy.

Educate Your Auditor

An auditor who is familiar with your forward pricing rates, your business system and your product lines will understand your proposal cost and pricing data better than one who has not been briefed on the big picture of your company business operation.  Take the time to conduct briefings at that level and acquaint new government personnel with your operations.  Do not assume he or she has read prior audit reports.  They may have done so but a face to face courtesy briefing is much more effective than reading some other auditors view of a specific proposal. 

This factor can be a double edged sword, however. An auditor who knows the operation extremely well can also spot deviations in cost and pricing data and require explanations for anomalies in pricing based on observed trends.

Develop a Comprehensive Basis of Estimate (BOE)

A good BOE should have the following principal attributes:

* Clear identification of the products, services, skills, materials and performance factors required to complete the contract and material/subcontract quotes, labor categories and skill sets to perform the effort.

* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors that affect the hours or dollars quoted

* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery acceptance so that the cost data has boundaries.

* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor so that escalation and price expiration are established. 

* A precise description of government/customer furnished material or facilities required and when it will be made available to the contractor to bound the expectations of the client with respect to elements your company cannot or will not control. 

Insure Compliance with Cost Accounting Standards (CAS) Requirements

Small businesses are generally required to meet modified CAS coverage for service contracts. This requires consistency in the manner in which a small business quotes a proposal and the manner in which costs and billings are accounted after award.  You can read about these requirements at the following link:

What Small Business Should Know About FAR and CAS

Insure your proposal contains no unallowable costs and that your direct labor as well as your overhead and G&A rates are applied in accordance with your latest forward pricing agreement. If you do not have a forward pricing agreement, explain precisely how your rates were developed from a CAS compliant business system perspective:

FAR And CAS Compliant Business Systems

Utilize Weighted Guidelines as a Check to Prepare Support for the Profit Rate Quoted

Although policy in FAR Part 215-404-4 states that contracting officers ….” do not perform a profit analysis when assessing cost realism in competitive acquisitions”, it is wise to understand the contracting officer and his representatives are indirectly forming opinions of the risk to the contractor and the mix of cost elements in the proposal. That opinion directly effects profit negotiations and judgments.

Contractors should be aware that the Weighted Guidelines Method is mandatory for all negotiated procurements except Cost-Plus Award Fee Contracts and exceptions as approved by a higher authority. Contracting officers are to prepare their position using DD Form 1547 with associated backup and file it at the conclusion of negotiations.

Understanding the weighted guidelines method can assist in achieving a higher profit on a negotiation because a contractor can present a position at the table that logically supports the following elements required by FAR Part 215-404-4:

* Performance risk

* Contract type risk

* Facilities capital employed

Read more regarding the Weighted Guidelines Method at the following link:

Weighted Guidelines

Summary

A reputation for defective pricing leads to accusations of waste fraud and abuse in government contracting and is mostly about what a contractor knew regarding company prices at the time a bid was negotiated and what the contractor did not disclose in the supporting data regarding the likely cost outcome of the contract.  

Actions taken by the government and litigation resulting from defective pricing become part of the contractor past performance record and must be disclosed during competition for other programs. 

Avoid defective pricing accusations by establishing credibility with your customer through consistent, regulatory-compliant, cost and pricing in your proposal submissions and negotiations.

Introducing Federal Government Contracting Into Your Commercial Small Business

The purpose of this article is to compare small business federal government contracting as opposed to selling commercial products and services. The comparison may be useful for those who are considering melding commercial and federal government business or starting an enterprise involving both venues. 

WHAT FEDERAL GOVERNMENT CONTRACTING IS - AND IS NOT

Small business federal government contracting is not rocket science - to succeed you must take what you do well in the commercial market place or what your experience leads you to believe you can plan successfully as a commercial enterprise and then apply it in a slightly different manner from a business perspective to accommodate federal government contracting requirements. Very few companies enter federal government contracting without some commercial experience and success. Very few startups entertain contracting exclusively to the federal government without commercial work to sustain operations while the more lengthy government procurement process is being pursued.

Federal government contracting is controlled by the Federal Acquisition Regulation (FAR). Bid and proposal types are driven by the nature of the supply or service being procured. No one reads the FAR cover to cover - It is a source book for when you need it. The FAR and associated regulations are taught in only a few colleges, such as the Defense Systems Acquisition University at Ft. Belvoir and the George Washington School of Government Contracting. Very few CPA's are familiar with the US Government FAR Cost Accounting Standards (CAS) and I am not aware of any questions regarding CAS on current CPA exams. In general one must grow to understand these requirements and that usually happens by doing business under them.

BUSINESS DRIVER COMPARISONS

The following are some common driving business factors and a commercial versus federal government comparison for each:

PLEASE CLICK ON IMAGE OR DOWNLOAD TO ENLARGE

SUMMARY

The above are not all the driving factors you should consider when weighing the differences between commercial and government work, but they are some of the most significant. Becoming a government supplier may not result in the highest profit-making product/service line in your enterprise but the venue has the potential to pay the bills and be a major platform for stability and long term growth. It should not be your only endeavor but it could be a major element of your total business plan.

Please see the Table of Contents at this site and the free downloads of books and materials for further details.

Seizing the Moment in Small Business Federal Government Contracting

THE MOMENT

Trends on the horizon point to a bright future for small business in federal government contracting.

Federal government agencies have set a record in exceeding the legal requirement for small business contracting goals. 

FY 2022 Small Business Contracting Goals Report

Small business is uniquely qualified for work in the current economy, particularly in the services sector, due to lower overhead and G&A rates, as well as agility in work force development.

New industries in Robotics, 3D Printing, Energy, Environmental Protection, Security and Geo-spatial IT are creating fields for small enterprises to compete against bigger firms or lead teams involving larger businesses on large scale projects. 

Government small business set-aside procurement is on the rise and becoming recognized by many agencies as a way to remove stodgy, entrenched companies when long term contracts come up for renewal.  These agencies look to smaller firms for cost effective, vibrant management, while inheriting an existing, trained, incumbent work force available to the winner. The process can dramatically grow smaller firms. 

Managing Incumbent Work Forces

PREPARATION

A small business anticipating participation in the federal contracting market must make pursuing it part of a long term strategy.  Success in government contracting does not happen overnight. 

Like any other market venue, a niche must be located, market research must confirm the need for products and/or services and the competition; the customer and the potential sales must assessed.  Unlike many other fields, success relies on early requirements identification and strong marketing.

Marketing to Achieve a Small Business Set-aside Contract

5 Factors in Forming a Small Business Contracting Company

The government contracting market allows a small business to pass on the costs of operations at a project level as well as write off company-wide expenses if allocated in a defined manner to single government cost objectives (contracts).  

Small business can also operate in a lower risk environment with contract types suited to the challenges involved.  The trade-offs to these features are requirements for audits and job cost accounting that require verified consistency from cost estimating to billing and contract closeout. This does not occur without preparation. 

Small Business Sytems Development

Entering the market requires carefully sculpting commercial past performance into prospective government contract performance and accumulating strong customer satisfaction ratings.  The feds talk to each other. 

Meeting the Past Performance Challenge

Business Ethics and Past Performance

EXECUTION

With the right combination of planning, preparation and opportunity, a small enterprise can seize the moment with:

Identification of specific opportunities that fit company capabilities

SAM Contract Opportunities Replaces FEDBIZOPPS

Astute bid/no bid decisions

Making an Astute Bid/No Bid Decision

A solid team of resources both internal and external

Vital Tips for Project Management

Managing Industry Teaming Relationships

A Winning proposal, effective project start-up/execution and quality products and services

Government Contract Proposal Preparation

SUMMARY

The small business segment of the huge federal government contacting market is poised to grow exponentially due to advances in technology and the need for flexibility, mobility, agility and economic performance. 

Rule changes are being considered to enhance entrance of commercial enterprises into the government contacting venue. Congress and the federal agencies are looking hard at constructive changes to make the challenges we have discussed here easier to meet for the small enterprise.  But the rules change slowly.  

The Government and Innovative Technology

Seize the small business contracting moment by being diligent in learning about the market and pursuing it. Make your company well equipped to succeed:

• Define your niche
• Learn the rules
• Plan 
• Prepare 
• Execute 

What Is A Small Business Federal Government Contractor?

INTRODUCTION

There is often confusion regarding the definition of the term, “Contractor” in government work. The term is used in a conflicting manner to describe companies, individuals and business relationships. It has different connotations within corporations as opposed to government agencies, and is often confused with terms like “Subcontractor”, “Supplier” or “Vendor”.

This article defines the term, “Contractor” and discusses the regulatory factors and practical considerations related to use of the term from a small business federal government contracting perspective. 

DEFINITIONS

 1. Contractor (As Used In Corporations)
The term “Contractor” in corporations often refers to an individual, performing work for a company while not on the payroll as an employee, having no taxes, benefits or deductions taken from their pay and not covered by any form of insurance. The company issues a purchase order to the individual at an hourly rate and submits a Form 1099 to the US government reporting what the contractor is paid for services. The contractor must self-insure during the contract period and pay taxes on the money earned at the end of the tax year.

The use of individuals as contractors in large government contracting corporations has been limited due to class action law suits brought by contracting individuals who maintained they were utilized as employees without the associated benefits. As a result, in many companies the existing contractor work force was either offered permanent positions or released. Since that time, the use of contractors by large government prime contractors has been principally in specialty roles.

Corporations may also utilize the term “Contractors” when referring to companies in the manner defined by Definition 2, below. It is common for large prime contractors to use the term to describe themselves, their competition or co-equal teaming partners in joint ventures. When this 2nd definition is used it refers to a company, duly registered with the state and the federal government.

2. Contractor (As Used In Government Agencies)
The term “Contractors” in government parlance refers to businesses, not individuals. To become a contractor to a government agency, you must therefore form your own business. Government agencies do not engage individual “Contractors” as defined in 1, above. If they want individuals to perform services they put them on the agency payroll. If they want to acquire specialized outside services they contract with companies. 

3. Subcontractor

A “Subcontractor" is a company that takes on a flow-down of liability from a prime contractor to complete a major portion of a large scale job for the prime contractor's customer. The subcontractor is obligated to the prime contractually in an identical fashion as the prime is obligated to the government agency. The prime contractor issues a subcontract with a statement of work and flow down terms and conditions from the prime contract to the subcontractor. In many instances the government requires review and approval of major subcontractor selections and holds the prime contractor accountable contractually at the prime contract level for the subcontractor(s) efforts.

4. Supplier (or Vendor)
The term, “Supplier” connotes basically commercial relationships with companies that supply off the shelf parts and materials or simple, generic services. The General Services Administration (GSA) and other federal agencies also use the term to describe companies in negotiating supply schedules or in buying items under the commercial sections in the Federal Acquisition Regulation (FAR), such as FAR Part 12. Supplier contracts generally emphasize, price, delivery and matters such as warranty and do not involve -complex terms and conditions or the flow down of liability from the ordering firm prime contract.

REGULATORY FACTORS

The Federal Acquisition Regulation (FAR) clauses governing small business state that a company undertaking a small business set-aside prime contract must be capable of performing 51% of the work scope under the terms of that contract and may not subcontract (as in 3, above) any more than 49% of the effort. These FAR clauses do not limit 1099 contractors (as in 1, above).

Many small enterprises use independent contractors on call to fulfill the manpower requirements of their contracts and specify these personnel in their proposals as qualified individuals. When these clients grow in long term contracts they make such personnel permanent party if the contractors are willing. Often contingent hire agreements are used for that purpose while proposing major programs. You can download a generic agreement from the "References" Box Net cube in the right margin of this site.

Contractors (as in 1 above) may be used to the extent they are necessary to win, but bear in mind the government prefers to see permanent party, since that implies stability (the government is conditioned to the perception that individuals , as contractors come and go).

Small business should propose work scope under set aside programs in teaming agreements so that the prime (small business) is performing at least 60% of the effort with employees or contractors to avoid the appearance of a front by a larger company (even though the statutory requirement is 51%).


In many cases it is preferable for a start-up small business to become a subcontractor, rather than a prime, building past performance associated with government contracting and developing beneficial teaming relationships with experienced government contracting firms.

SUMMARY
It is possible for a small business to perform, in tandem, one or more of the "Contractor" roles discussed in this article. Sometimes multiple roles are established with the same corporation or agency. Please use the search box at this site to view articles for information related to this topic.

It is vital to understand the "Contractor" role definition for each contractual commitment to insure suitable risk analysis, a good past performance record, conflict of interest avoidance and a solid reputation in the industry.

Vital Tips for Project Management in Small Business Federal Government Contracting

Image: Villanova University

Effective small business project management focuses the resources on a plan for contract execution, the schedule, budget and customer requirements baseline and the status of a given effort among other concurrent projects to give visibility into problem solving and management trade offs.

If you are a small enterprise selling off-the-shelf commercial items under FAR Part 12 or marketing commercial products on a GSA schedule, you may be initially challenged by the government contracting venue. With persistence you will establish selling relationships through agencies and prime contractors. Your project management challenge is minimal.

A service contractor faces a far greater challenge in understanding the nature of government contact project management and succeeding at it
.
PLANNING IS KEY

Strategic thinking must be applied to structuring a government service contract project management capability in your company. It must involve long term planning and designing a business system as well as establishing rates and factors to bid new work and control it while interfacing with the customer.

A Framework For Small Business Federal Government Contracting Business Systrems

When one plans in detail to define the product or the service one reduces performance risk

The project management challenge is not to launch significant and costly resources before the specification for the product is sufficiently defined, obviating the need for costly revisions or abandonment, yet knowing when the product definition and plan are suitable for release.
Good project management starts early.

Without a well written Statement of Work (SOW) and associated supplies  and services specifications there is unacceptable risk in the future  contract and is it exceptionally high risk to bid or contract the job. 
Both the contractor and the customer must come to an understanding regarding the scope of effort to be performed. That understanding is conveyed in the Statement of Work (SOW) and confirmed in the specifications referenced therein.  A good SOW should have the following principal attributes:

* Clear identification of the products, services, skills, materials and performance factors required to complete the contract

* A description of the conditions under which the contractor will be required to perform and any related environmental or location factors

* Specific references to product specifications that govern an acceptable product or services performance outcome and delivery  acceptance

* A schedule for the contract that identifies discrete delivery dates for products and specific start and end dates for supporting labor.

* A precise description of customer furnished material or facilities required and when it will be made available to the contractor.

If your customer does not provide the above, offer the document during the comments period, during your proposal or during negotiations that represents a version to which your company will commit. 

Do not let the fact the program is competitive sway you from the facts. Signing off on a poorly written SOW results in a difficult contract to manage, a high probability for disputes during the  contracting period and a poor past performance record you will have to  deal with in the future on other jobs.

PROJECT MANAGEMENT RULES OF THUMB

A secondary and related challenge is managing the baseline for the product or service to avoid scope creep, superfluous bells and whistles and other diversions that risk the basic completion objectives. 

Set a baseline for what can and cannot be achieved for the resources and time that have been committed to the job and present to the client.  Use it as a bench mark for discussion to establish a plan going forward. Then control it using sound baseline management. 

Stay away from "Scope Creep" that can kill a contract, a customer relationship and a past performance record, all of which are important to your business. Stay in front of "Scope Creep" by communicating positively with the customer to control the baseline, keeping cost, schedule and technical performance integrated and synchronous.

Use the below rules of Thumb to control "Scope Creep":

KNOW - The contract value and its ceiling amount

KNOW - The incurred cost to date and commitments

KNOW - The scope of work and whether or not your current efforts are supporting it or some other objectives

KNOW - The estimated cost at completion based on where you are at today

KNOW - Your customer and who among the customer population is prone to direct out of scope effort.

 KNOW - WHEN TO SAY "NO" to "Scope Creep" and say it officially in   writing to the contracting officer specified in your contract.

For baseline management and earned value techniques in achieving the above, please see the articles linked below:

Baseline Management In Small Business Contracting

Earned Value Management Systems

CAREFULLY SELECT YOUR PROJECT MANAGER(S) OR PERFORM THE ROLE YOURSELF

The following are the more esoteric project manager attributes necessary in the government contracting industry:

DEVELOPING the ability to cross organizational lines and make disparate groups or functional organizations work together with only a power of persuasion and a contract.

EVOLVING the art of directing resources without having them as direct reports while keeping home departments and functional bosses happy at the same time.

MANAGING to convince the executives in the company that specific project (s) are the most important in the firm.

LIVING with the prospect that if the project is late, fails or otherwise disappoints the powers that be, replacing the project manager will be the designated corrective action.


GROWING to crave the satisfaction that comes from succeeding at the above challenges and you would not have any other job because no other pursuit makes your day go as fast, grows you skills as sharp and totally occupies your intellect.