In This Chapter

Your technical volume tells the customer about the products or services you’re offering as a solution to their problems, and your management volume explains how you’re going to make it all happen. So the next question on the customer’s mind is, naturally, “How much is it going to cost us?” That’s where your cost/price volume enters the picture. In this portion of your proposal, you name your price, hoping the government entity will see that they’ll get a good value for their money—better than they’d get from your competition.

So why do you use both the terms “cost” and “price”? How do they differ, and how are they related? And how do we make our pricing both believable and competitive, as well as develop the cost/price volume? These are good questions for you to ask, so let’s give you some good answers.

First, let’s distinguish between cost and price, different but related concepts. The term “cost” is used when applied to contracts based on cost, not price. What this means is that the customer is uncertain about the precise nature of the work to be performed or the product to be delivered, and therefore can’t expect a bidder to take the risk of naming a price that ends up not adequately covering the bidding company’s costs plus some margin. So the customer assumes most of the risk, meaning that the customer goes into the deal without knowing exactly what it’s going to cost them. But in this scenario, the contractor is required to report and justify its costs, according to the fine details of the contract.

We use the term “price” for various forms of fixed-price contracts. That is, the customer believes it has provided sufficiently detailed specifications that the bidders should be able to make offers at a firm price. Therefore, the bidders assume the risk of performance, hence the term fixed price. Whatever you offer and have had accepted, you will have to deliver at that price.

This is only a high-level explanation of cost versus price contracts, because many fine details are within these categories. Typically, such details are contained in the solicitation, and all offerors respond to the same requirements.

In this chapter, for simplicity, we will use “cost,” but be aware that, subject to the previous distinction, you may substitute “price” and the advice will still hold.

Cost has always been important in government procurements. As taxpayers, all citizens appreciate that our public servants in the various government agencies are cost-conscious. This is unassailable. But there are other important factors in choosing between or among offerors. Just because you offer the lowest cost does not mean you’ll be picked as the winner.

The most common process for requests for proposals (RFPs) is to evaluate proposals and make an award on a “best value” basis. You’ll hear some common phrases used in the evaluations. “The government reserves the right to award to other than the lowest bidder.” However, accompanying that statement is something like, “However, as technical solutions become more and more similar, price becomes more important.” Or “The government will not pay substantially more for a small difference in quality.” So if you look closely at the Section M Evaluation Criteria (or other solicitation sections giving “what counts as good,” in the eyes of the customer), you’ll usually see that the government is reluctant to award the contract to any offeror other than the lowest bidder unless they can justify the cost differential. Contracting officers (KOs) often find such justification difficult and will do so only with strong support from the balance of the customer evaluation team and/or the Source Selection Authority (SSA).

So the lesson here is that if you and your company can’t be cost competitive, your chances of winning a contract are not good. This does not mean you must be the low bidder to win, but it does mean that any cost differential must have clear justification. A legitimate question is often asked around this issue: “Is there some way to determine, in an individual case, just how much higher you can be and still win?” How much better must your solution be to justify, say, a 5 percent cost differential? There really is no definitive answer to that question, and the best we can say is that if you’re not the lowest bidder (but also see the discussion on “cost uncertainty”), your technical and management solutions must be significantly better along some evaluation criterion that is important to your customer. Your best clues about what is important to the customer are found in the balance of Section M.

There is a strategy that might enable your company to win with a higher offered cost. Particularly for large and important contracts, the government develops an independent “Should Cost” amount,” basically an estimate of what the project should cost. This estimate is important as it gives the evaluators a benchmark against which to measure the cost of all incoming bids, a way to determine how reasonable they are. Equally important is that it helps ensure that the solicitation will result in solutions with prices that fit into the budget set aside for the program. It would surely make no sense for the government to release a solicitation with a “should cost” of $100 million if the budget for the program is only $75 million.

How is this important to you as a bidder? Well, very. If you can find out—legally and ethically, of course—what the customer has as a “should cost,” you’ll be in a better position to develop your own cost.

Offerors have some latitude in how they present and justify their cost volume figures. The format of the results is set, but there are still opportunities for differences in presentation. These differences in substance and presentation can then be judged by the evaluators as either being reasonable and accurate or not-so-reasonable and not-so-accurate. Those in the second category are then judged to be high in risk because the evaluators estimate that those offerors will ultimately have higher cost to the customer. So for comparison purposes, the evaluators add some amount to the offered cost to cover the additional risk.

When awarding a cost-type contract, the government is very aware that the risk falls largely on its own shoulders. Therefore, any mitigation or elimination of cost risk you can offer is viewed very favorably. If you use the techniques in the following section, you will improve your chances of winning. By providing details about how you arrived at your costs, the evaluators are likely to accept your costs as stated. Correspondingly, if you fail to provide details about how you arrived at your costs, the evaluators will not accept your costs as stated. They will instead add a “fear factor,” or other penalty for lack of believable details, and assign your cost proposal a higher probably cost. This higher cost could make the difference between your bid winning and losing.

Believability is important. The evaluation rules allow the customer to add to your offered cost if your cost proposal is not believable or if it has an unusually large amount of risk. In contrast, if your competition’s cost presentation lacks detail or uses questionable assumptions or logic, the evaluators may well add to those costs, thereby resulting in a higher evaluated cost for those bids.

Providing the required detail is one way to make your cost believable. Here it’s best for you to become a strict constructionist. If the solicitation requires detail down to the fourth level of indention, you must provide it. Three levels will not do. If the solicitation asks for a breakout of your subcontractors’ costs, you must provide it. Doing an incomplete job of responding to the precise instructions for the cost volume has the same effect as for any other volume: you are in danger of being judged noncompliant.

Realism goes hand in hand with believability when it comes to costs. The best way to show that your costs are realistic is to provide increased details about just how you developed the cost estimates. There are two distinct ways of developing cost estimates.

Parametric estimates come from starting with the cost of a similar product and then adding factors based on time, complexity, general cost escalation, and others, depending on the specific situation. For example (a fictitious example), you’re asked to price a left-handed framazoid, which you’ve never built, but you developed a right-handed framazoid last year. To estimate the cost of the left-handed one, you start with your cost of the right-handed one, add a complexity factor for left-handed (everyone knows that left-handers are more complex, so you multiply by 1.125), and add an inflation factor for the year’s difference (multiply by 1.035). So the parametric estimate gives you 1.125×1.035 = 1.164 (rounded) as the factor to use. Last year’s right-handed framazoid cost $125.00, so this year’s left-handed one can be bid at $145.55 (rounded).

Grassroots estimates come from a careful build-up of the pieces that go into a left-handed framazoid. Let’s say you’ve never before built a framazoid, but you know it has seven parts. You develop estimates for each of the seven parts, down to the lowest piece you can find. Let’s say you can buy five of the parts from outside sources, and you have enough independent bids that you know with a high degree of certainty that you can buy those parts, each at a certain known cost. You know you can manufacture the two remaining parts and the cost of each of those. Add the cost of the components, five plus two, and then add assembly and test costs (these are in-house, and you have good estimates on those). So now you have a good grassroots estimate of the cost of the left-handed framazoid.

In the best circumstance, you can develop a cost estimate using both the parametric and grassroots methods. Also in the best circumstance, your two independent estimates turn out to be close to each other. So now you have the ability not only to choose between them but also to report in your cost volume that you’ve developed the estimates in two ways. They are very close, and your offer is a blend or compromise between the two results. This type of presentation is comforting to a customer evaluator and allows that evaluator to accept your offered cost as the evaluated cost.

Let’s carry this a bit further and say that the competition is not nearly so careful and thorough and complies minimally with the solicitation requirements. This may indicate that the competition did not put its own first team on this proposal and therefore has not done a good job. The customer evaluator may conclude that if the competition is not putting its first team onto the proposal, then that company will not put its first team onto the program, either. Good for you, and bad for the competition. So even though your offered cost is higher than the competition, your evaluated cost is lower than the competition, and you have an excellent chance of winning.

Whatever you decide to submit with your proposal as your program cost, the bottom line is that the offered cost must be competitive. It is very unusual for a proposal to be successful at a significantly higher cost than alternative offers. While it is true that the lowest offered cost does not always win, the SSA is hard pressed to award to an offeror at a cost out of line with other, competing offers.

You must use your best efforts to know what the competition is likely to bid for a specific opportunity. Lack of good information about the competitor’s willingness and ability to undercut your own cost is like going to a gunfight with a knife. You are probably not going to win.

Appendix B lists some fee-for-service sources with the ability to offer assistance in what your competition is likely to bid. Among the large systems integrators (SAIC, CSC, Northrop Grumman, Lockheed Martin), bidding habits are especially well known and can be calibrated with a fair degree of certainty. This game is not for amateurs. If you don’t know what you’re doing, engaging an outside, independent competition analysis firm can be very helpful in making cost decisions.

The cost volume must be developed concurrently with the rest of the proposal. The cost volume is an integral part of the proposal, so it is imperative that the individuals for this volume (cost volume manager and contracts manager) be involved as full members of the proposal team. In fact, failure to fully integrate the cost perspectives in the proposal team is an invitation to disaster.

The green team (as described in Chapter 12) looks at a variety of technical and management solutions to the customer’s problem and arrives at a preferred solution, which your proposal team will offer. This is an excellent time and place to engage your cost proposal team members to collaborate with the green team on whether this choice will cause problems for the cost proposal team members.

A major flaw in any proposal process is to leave out the cost considerations until the last minute. You are then at Day 42 in a 45-day proposal effort. The proposal team presents the technical and management solutions to the cost proposal team (the cost manager and staff and your contracts manager and staff) and says, “Here’s our solution. Now go cost it out.” So the cost proposal team dutifully does so, burning the midnight oil and giving back a cost.

But it’s 25 percent too high, higher than the customer’s own “should cost” estimate and higher than anyone had anticipated. What are you to do? Is it possible to get 10 pounds of sand into a five-pound bag? Not likely. So you end up cutting the cost to within view of the should cost, but it’s now no longer consistent with the technical and management volumes. At this late date, to meet the required submission date, you have no choice but to submit what you know is an inconsistent proposal. This is not what your team had counted on and not what you want. But the root cause of the last-minute panic and the inconsistent proposal occurred way back at the beginning when you failed to make the cost proposal team a part of the mainstream proposal team.

Remember, a good proposal is a good plan, and a good plan is a good proposal. There’s a corresponding point about cost volumes. The best cost estimations use the same techniques and same parameters that your accounting system uses for the program execution. Why is that? Well, if you use different models for estimating (which is really “budget formulation”) than you do for accounting for actual costs (which is really “budget execution”), you can never compare the two directly. So if you can’t compare the two directly, how will you ever know when you’re getting better? Or getting worse? The simple and undeniable answer is, “You can’t.” That’s why you must use the same model. Usually, your company is locked into an accounting system that is difficult and expensive to change, so you should adopt your cost estimation processes to match your accounting system.

Here is a short checklist for developing an excellent cost volume.

Do these things right, and you’re on your way to a win!

The Least You Need to Know