Pricing & Performance Alignment Background
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Pricing and Performance Alignment
What You Must Know About Pricing
Pricing is the actual dollar amount that the government has agreed to pay a contractor for the work being done. These amounts are usually determined before a contract can be awarded and are included in a company’s bid proposal package.
Federal Government’s Rules Regarding Pricing
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General Pricing Formula:
Cost Estimate + Profit = Price
Cost Estimate:
How much will it cost your company to complete the job. This will often include items such as materials, transportation, employee salaries, production costs, and overhead.
Profit:
An additional percentage that will be added to the expenses to provide a financial gain (benefit) to your business.
Why is Pricing Important?
Pricing is one of the first things a contracting officer will be drawn to when evaluating who to award a contract to. It is regularly the deciding factor when choosing between two bids that are almost identical in technical quality and experience. This is why any aspiring contractor needs to take the time to evaluate their current pricing strategies to determine if they’re being truly competitive in the proposals.
Without a well-researched pricing strategy vendors will not be considered competitive, and their bids will be rejected for more reasonably priced alternatives.
Federal Government’s Rules Regarding Profits
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What you need to do:
You will need to analyze your business’ strengths and weaknesses to determine if Pricing will be a limiting factor in your bids. In the event Pricing is a limiting factor for your organization, either focus on winning contracts that are based solely on past performance and technical capabilities, or approach Primes for subcontracting opportunities.
Contract Pricing Types
Fixed-Price Contracts:
A set price is quoted and agreed to before starting the contract.
Firm-Fixed-Price Contracts
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When to Use:
- When the scope of work is well-defined, and the business can accurately estimate how much the job will cost and stick to it.
- Ideal for commercial products or services where market prices are stable.
Key Benefits:
- Predictable pricing for the government.
- Strong incentives for the contractor to control costs and meet deadlines.
Limitations:
- If your cost estimation for the contract is off, then you cannot renegotiate the pricing later.
Cost-Reimbursement (cost-plus):
A cost estimate/budget is set for the project, and the government pays the contractor for the business’ costs + profits once the work is completed.
Cost-Reimbursement Contracts
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When to Use:
- When the scope of work cannot be clearly defined, such as research and development projects.
- When the contractor’s risk is too high for a fixed-price contract.
Key Benefits:
- Allows for flexibility in managing uncertain or evolving project requirements.
- Reduces the contractor’s risk, which may lead to more competitive bids.
Limitations:
- The government assumes most of the financial risk, and it must closely monitor the contractor’s expenses to prevent cost overruns.
Time-and-Materials:
The contractor is paid based on the real time and materials, plus profit, they put into the project.
Time-and-Materials Contracts
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When to Use:
- When there is a high level of uncertainty about the scope of work.
Key Benefits:
- Allows for greater flexibility and security for the contractor.
Limitations:
- The government takes on the majority of the risk and so must accurately account for all time and materials spent.
General Information on Pricing
This section will cover pricing formulas, limitations on how much one can earn for a single project, and what businesses can expect to profit, on average, from a completed contract.
Product Pricing Formulas
For product-based contracts the pricing formula is as follows
Material cost + labor costs + overhead expenses / # of items produced = Cost per item
Material Cost:
Costs of the raw materials for one item or one pack of items
Labor Costs:
Weekly salary / number of items/batches produced in a week = labor cost per item (pack)
Overhead Expenses:
Monthly costs / number of items (packs) produced in a month = overhead per item (pack)
Service Pricing Formulas
For service-based contracts the pricing formula is as follows
Hourly overhead expense + hourly wage + profit = Total price per hour
Hourly Overhead:
Monthly Operating Costs / Average Monthly Hours Worked
Hourly Wage:
Compare to industry standards and historical data
Profit:
Add a percentage profit based on competition and demand
Limits on Profit
When it comes to deciding your profit margins there are a few rules which must be strictly followed.
Cost-plus contracts
15% maximum for experimental, developmental, or research work
6% maximum for architect-engineering contracts related to public works or utilities
10% maximum for all other cost-plus-fixed-fee contracts
Fixed-price contracts: No set limits.
Established contractors generally aim for 8-12%
Newer contractors who need a competitive edge often aim lower, around 5-10%
The general maximum profit for these contracts is 25%
Average Profits
When it comes to deciding your profit margins there are a few rules which must be strictly followed.
Based on Business Type:
Small Contractors: 8%
Medium Contractors: 20%
Large Contractors: 24%
Based on Contract Type:
Cost-plus contracts: 7-8%
Time-and-materials contracts: 9-10%
Firm-fixed-price contracts: 12-13%
Negotiating Your Pricing
It is important to note that if the contract allows for negotiations competitive contractors should start with their highest prices and be prepared to negotiate down. Establish your maximum and minimum pricing, within reasonable standards, and work within them to secure higher profits.
Important Note: If the contract does not allow for negotiations or is Lowest Price Technically Acceptable (LPTA) then your first offer needs to be your best one.
Additional Tools to Determine Pricing
Wage Determination Sheets:
In-depth lists of hundreds of different positions along with what the government considers to be a fair wage for each one based on the State’s minimum wage and cost of living.
How to Search for Wage Determinations
Click Here to See the Video
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Search For Wage Determination Sheets in Your Industry and State
Click Here to Search
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GSA eLibrary & GSA Advantage:
Streamlined purchasing platforms where government agencies can select from thousands of pre-approved vendors with already agreed prices for most of their product or service needs. This provides aspiring contractors with an excellent reference point when establishing what the government considers to be a fair and reasonable price.
Important Note: GSA is one of the most competitive marketspaces when it comes to pricing. Your prices might not reflect theirs when bidding on non-GSA contracts.
What is Past Performance
Past Performance is the work your business has done before that shows the government you can be trusted to do the job. Each commercial sale, job as a subcontractor, and contract completed counts towards your Past Performance.
Important Note: Past Performance is ranked by the government for most to least desirable in the following order.
Past Performance Ranks:
1. Federal Government
2. State/Local Government
3. Commercial Jobs
4. No Experience
How Do I Include My Past Performance?
You will generally need to list up to 5 past jobs that have been completed by your business in the last 5 years. It is also standard for them to provide you with a form to fill out for Past Performance along with clear instructions for how to fill it out. However, if they don’t give you a form, we can provide you with a table upon request.
Why is Past Performance Important?
Past Performance shows the government that you can finish the job and do it well. Which is why there are many federal contracts that are awarded to whichever vendor has the most experienced and qualified personnel. Without Past Performance potential contractors will either need to focus on solely price-based contracts or work as a subcontractor until they have built up their credibility.
What you need to do:
You will need to analyze your business’ strengths and weaknesses to determine if Past Performance will be a limiting factor in your bids. In the event Past Performance is a limiting factor for your organization, either focus on winning contracts that are based solely on pricing and technical capabilities, or approach Primes for subcontracting opportunities.