How to Price Your Product
Tune into this webinar to learn more about pricing your federal product and policies to be aware of!
Stephanie:
All right, we will go ahead and get started in the interest of everybody’s time today, thank you so much for joining. This is part two of our wonderful collaboration between our Hutch Incubator and our friends over at Dcode. So super excited to have everybody here with us today for our pricing webinar because I know that this is oftentimes a topic that a lot of entrepreneurs have questions around, are struggling with, trying to figure out whether they’re doing it correctly or what are the best practices that they should be implementing.
So we have a really wonderful lineup of presenters today and we are recording this presentation. So everybody in attendance will get access to both the recording and also the slide presentation to be able to refer back to. So with that being said, we will go ahead and get started. I will share my screen. And today, we have an awesome lineup, like I mentioned.
I’ll go quickly introduce myself and then you’ll be meeting the rest of our team as we go along today. So my name is Stephanie Chin, she/her pronouns. I’m the Hutch Program Manager over at Hutch, which is a digital services incubator program that’s based out of Baltimore. And our lovely presenters today, we have Jillian Winstanley, who is the Government Program Manager over at Dcode. Matt Renaud, who is the Vice-President of Finance over at Bixal. And Russell Dulany, who’s the Principal GovCon Financial Consultant with CL Financial. So thank you so much for everybody joining us today. And to kind of give you a quick overview of where we’re going over the course of the next hour together because we do have a lot of ground that we want to cover and absolutely want to make sure that you get the most out of this session.
We’re going to do a quick section around basics of cost and how to build out your rate structure. We’ll kick it over to Jillian for a section on contracts and then we’ll have plenty of time for Q&A afterwards. But definitely, if folks have any questions, feel free to go ahead and use the Q&A feature on the webinar and ask your questions as we go and we’ll make sure that our presenters are hitting that as we go today. So again, you can get the most out of the 60 minutes together. To give you a quick overview on who we are at Hutch, for those who haven’t met us quite yet, we’re a two-year incubator program that’s based out of Baltimore where we give entrepreneurs a blueprint for how to build successful, scalable digital services companies.
So we provide the tools, the mentorship, the coaching and peer support that entrepreneurs need in order to really have a lasting impact in this space. And so, we kind of think of our incubator program as being a home base for our entrepreneurs to really get that foundation that they need in order to be able to scale within government contracting without getting lost amongst some of the bigger companies and competition out there. And so, our sweet spot is at the intersection of government, digital services and community. We care really deeply about civic tech and civic impact. And so, that is what we focus on here at Hutch, and I will pass it over to Jillian to introduce herself and Dcode.
Jillian:
Fantastic. Thank you, Stephanie. I’m super thrilled to be here with our partners at Hutch. As Stephanie mentioned, my name’s Jillian Winstanley, I’m a Program Manager here at Dcode. Dcode is focused on better connecting the commercial tech industry with the federal government to improve outcomes for both. We like to say we sit at the nexus of three communities, the emerging tech industry, traditional systems integrators and services and consulting firms as well as our friends and the Federal Government itself.
So we embarked on our mission nearly seven years ago with our tech-facing offering first, which is our tech accelerator program where we scout and vet technologies that match well to government use cases. And then run them through our federal acceleration program, teaching them everything they need to know to do business with the federal government. As we began working with the tech folks, we began to realize the importance of engaging traditional players in the industrial base as an easier button to get these tech companies in the door and intermission more quickly. So we quickly expanded our community to include systems integrators, consulting and services firms as well.
And then finally, we work with government leaders themselves in providing education programs and targeted tech scouting and matchmaking as well as other advisory services to help government leaders be better at engaging with tech and to be more innovative themselves internally. So that’s kind of where we said a lot of this interaction takes place in one central location, which we call Nexus, which is our online community platform for both government and tech to come together in one unified location. So that’s a little bit about Dcode. I’ll now turn it over to Matt, who will get us into the meat of the presentation for today.
Matt:
Great. Thanks, Jillian, and glad to be here. Thank you all for coming. So we’ll start off with basics of cost, and it’s important to understand this is a pricing webinar that when we talk about pricing, we’re not just talking about costs.
The cost of a performing a contract is the cost to the contractor to perform that work. Whereas, the price is what you can sell that work for to the government or commercial if it’s a commercial contract. And so, in this pyramid here, we see the elements of the two main elements of cost, the direct cost, which is the cost for the specific contract, the labor, materials, etc. And then indirect costs, which are buckets and we’ll get to that in the next slide. But buckets of organizational corporate level type of costs that may not be related to the specific contract, but there are still costs you have to incur to perform your work.
And then the last element of price is the profit or fee you’re able to charge and bill your customers for your work on individual contracts. And looking at the cost side now, so as I mentioned, we have direct and indirect costs. And when we think about direct, those costs to perform the specific contract, we need to look at what is the total labor to perform this work. Do we have any subcontractors we need to hire and what is their cost to us to perform the work? Are there other costs, whether those materials or subscriptions or travel or what have you that aren’t labor or subcontractor labor? And I mentioned travel and then travel as well to perform the work. So those are costs related to the specific contract. And then on top of that, you need to be able to load in and bill your other costs of your company.
So these other three buckets are those indirect cost pools. So if we look at fringe, those are the payroll tax, unemployment insurance, leave and holidays and other benefits, 401(k), etc, that you provide to your staff. And so, you pull all of those into what’s called a fringe pool and then you would divide that by your total labor of your company to come up with a fringe rate for the company. You need to make sure you recover that rate.
Overhead, those are the costs that are more directly, that aren’t direct on the contract, but for teams within your company or people that more directly support the program work. So this could be labor for a contract specialist who maybe isn’t assigned to a specific contract but does specific work supporting contracts or someone who’s recruiting individuals on the contract side. And then associated travel, any consultants related to that and other costs and an overhead we apply on the direct labor and the fringe.
And then the final pool is the general and admin, what are called G&A costs, which is largely the back office costs and the C-suite costs. When we talk about back office, things like accounting, human resources and administrative costs. And then we also have here consultants related to those functions, the marketing cost of the company, any related equipment, subscriptions, the rent for your offices. I mentioned general recruiting as opposed to people who are assigned directly to on the program recruiting. Printing, any tech allowance you may offer, parking, snacks, taxes, etc. These are all sort of general and admin costs. And when you pull all those up into a total, that is then divided by your total direct costs.
And so, it has a different function and all of these are applied on labor, but the G&A specifically is applied to all of your costs, which is important because as we see in the first column, again, there are costs other than labor on your contracts and you need to remember that you have to load your G&A or apply your G&A on those to make sure you’re covered that G&A cost for those contracts.
So all of this to say, it’s really important to understand your organizational costs, not just contract specific and to track those so that you can develop rates that you price to make sure you cover your costs. Because if you don’t understand what these costs are, if let’s say you assume you can operate with a G&A rate of 10%, but it really costs you 20%, you will lose money on those contracts where you’ve priced it at 10%. So it’s really important to try to understand what these buckets of costs are and then calculate these different rates.
And so, now that we understand our total cost of the organization, we’ve figured out different rates for fringe and overhead and G&A, now we’re ready to look at a specific solicitation and figure out how to price it. And so, first, is you want to review the requirements and evaluate the scope of the project, make sure you truly understand it, see if there’s any questions. There’s usually a Q&A process and you want to ask any questions you can think of. Sometimes there’s contradictions within the solicitation. Sometimes things just aren’t clear and you need to clarify them. And many of these can impact pricing. So it’s important to review the requirements, ask any questions you have, and then evaluate how you would perform against the scope. And so, that gets you to number two, which is solving the design of how you’ll implement the project.
And so, with that, you’re going to develop a basis of estimate, which is identifying the logic, the data, the methodology, assumptions, any calculations used to estimate what resources do I need, what are the talent sets, the people I need to perform this work, and how many hours of each one do I need? So all that comes through the solutioning.
And the important part of this, I mentioned the assumptions. It’s really important to document your assumptions for the work, your assumptions of what you are required to do, your assumptions of what systems exist and the state of those systems, your assumptions for what your client will be responsible for, and put that in your proposal because I have seen where if that’s not clear, it can cost you way more. There may be way more that the client’s expecting you to do than you had in a vision and you didn’t document that and make that clear. And it makes it very hard later, particularly on a fixed price to come back and request for additional funding to perform that work.
So it’s really important to understand those assumptions and then document them in your proposal so it’s clear. So then once you have your solution, as I mentioned, you’re going to have your resource needs, the types of resources, the hours, and of course, the types will vary. There’s different costs as we all know for different skill sets. And so, you need to understand what the marketplace costs are for different skill sets. Particularly if it’s something you don’t have on your team and you’re going to have to go out and acquire. So you need to understand your particular labor costs there. And then once you have all the labor figured out, you’re going in and accounting for ODCs or other direct costs. Which would be again, travel, special equipment, any computer services, software costs, subscriptions, and also the labor of any subcontractors you’re going to need to partner with to perform the work.
And then finally, you need to calculate on any remaining direct costs as well as the indirect costs that we talked about previously. And then you’ll look at the profit fee that you apply. So on the next slide, we get into that final pricing step of how we build that rate and calculate up our price. So building this labor rate, we talked about our direct labor. So this would be someone’s salary of a position divided by, we usually use 2080 hours, that’s 260 available work days times eight hours a day. So 2080 hours gets you at an hourly rate. And to figure out the fringe load on that, then you multiply that by the fringe rate that we already calculated.
Next step, you’re taking your labor rate plus the fringe part, and you’re multiplying that by your overhead rate. Then we take the sum of all of those and multiply it by your G&A rate. So once you calculate all of that, you get your fully burdened hourly rate before fee. So this is what it will cost you to perform the work for that specific position. You’re going to want to go through and do this for every position that you’re proposing. And then ultimately, you’re going to multiply that by the number of hours once you have the fee to get to your total price. So then the fully burdened rate, if we divide that by our direct labor, that’s commonly known as the multiplier on the hourly labor costs. And we also hear about the wrap rate. And this is used competitively to understand what’s my wrap rate, which is the labor rate plus fringe times the one plus the overhead rate times one plus your G&A rate. So you’re going to calculate all this out.
It’d be great if I could demo this on a spreadsheet, but calculate this out and you get a wrap rate and you often can figure out, look at competitors and understand what’s a competitive wrap rate within an industry, but it’s important to understand what yours is. So how does it vary? Are you running it cheaper? Are you more expensive? And that may give you some ideas for where you can invest more or where you need to reduce costs in the future to become more competitive. And once you have all of that, you’re going to add the fee that you want to apply on this particular work. And that sometimes, you might want to target a specific range, and that will often depend on the contract type, which Jillian will get in later. Different contracts are riskier than others.
But in some cases, you may be willing to charge a lower fee or discount more certain labor costs than others, depending on how confident you are in your numbers and any risk you see with the pricing you’re using in the market race you’re identifying. Some you may not be as confident in and you may want to have a higher fee to give yourself some more cushion to staff that position within the price you developed.
So then finally, this sort of brings all that together. And if we look at an individual pricing sheet for a solicitation, for a proposal, you’ll see the direct labor and then added in, your fringe costs, your overhead, your general and admin costs. You would then also have any other costs, your subcontractor costs, your materials, etc, your G&A on all of your other costs, and then a fee that you’re charging on the total. And then you have your total contract value.
And then on the right, it’s sort of flipped around where it’s looking at the total contract value and then backing out to get to the direct labor, sort of the reverse calculation there. So if we look at our fully burdened labor rate at the bottom there, our labor billing rate where we’re going to bill to the client if we win the work would be our fully burdened labor rate that we talked about before which is all of your costs compiled there, and then times that fee percentage that you priced into the rate for a specific position. And that gives you your labor billing rate that you then bill to the client. And now we turn over to Russ, who will be talking about some of the rest associated with pricing.
Russ:
Yeah, so hi, my name’s Russ Dulany and I’m with CL Financial. So defective pricing is a topic that should be discussed. This is what happens if what Matt talked about is not followed. And basically, any contracting action subject to the Truth and Negotiations Act, also called TNA is subject to these. There are thresholds involved with this, but we don’t need to get into that here. So basically, there are two types of defective pricing that can happen. It can happen before an agreement is actually put in place or actually post-award. So basically, a contracting officer has the ability to review your pricing, either pre-award or post award.
So piggybacking on that, basically, there’s a lot of common mistakes that can happen during your pricing exercises. A lot of these are not calculating your indirect costs correctly. And basically, what that means is you’re not even accounting for them at all. So say a contract has direct costs and you’re omitting your indirect costs and then your pricing is basically your direct costs and that’s it, that’s wrong. You need to make sure that you’re always accounting for your indirect cost and your pricing structure. Not knowing your actual indirect cost or your forward priced cost is also a problem. If your accounting system is not designed to be able to provide this data, it’s a very good idea to get that in order. So getting your pricing done through your correct accounting processes is completely necessary for getting your labor pricing correct. Pricing labor to current payroll and inflationary environment is also very important.
I mean, as we know we’re going through a big inflationary period, you need to make sure that all of your labor escalation rates that you use are justified. Another common mistake is dropping your feet at zero to win. This would be you only including your direct costs and maybe just your G&A, overhead and fringe and then not marking it up anymore. You always want to make sure that you’re targeting the profit that you are entitled to or is competitive with the environment for which you’re bidding your contract with. And also, failing to account for any administrative hours. So in some contracts, you’re able to bill for your functional support and other times you have to include this into your indirect rates and whether that’s in your overhead rate or G&A rate or even a sub-material handling rate, which was not touched on in the previous slides, but that’s also a possibility.
Failing to justify all the costs is really what the next slide’s about. But really, this is subject to cost realism and we’ll get into that next. Okay, so cost realism analysis is basically the independent review of submitted government proposals by a government official. So basically, anything that you put together in a proposal is subject to review by the government, your basis of estimates, your pricing, your builds, the determining whether your estimated proposed cost elements are realistic, determining whether there’s a clear understanding of the requirements, and determining whether the estimated proposed cost elements are consistent with the methods of performance and materials described in the technical proposal. So that your technical proposal and your cost proposal need to marry up. Additionally, basically, any government cost analyst may independently review the proposal you submit to the government. This analysis may be conducted on a prime or a subcontract you’re bidding on.
A cost analysis will review your proposed cost estimate and determine whether your estimated proposed cost elements are realistic for the work you perform. So an example of this would be the government would need to look at, say they dive into your historical rate information that you provide to them. And they want to see that your proposal that you are bidding on includes an accounting of what you’re proposing. So for example, say you’re a startup and you have three employees and you’re bidding on work that requires you to hire 15 more. They want to make sure that your analysis or the rates that you’re proposing and the backup you’re providing includes these additional 15 people and the cost associated with it. So this would be forward pricing. It’s basically a projection of what your pricing will be in the future backed up by your actuals. So it’s very important that you are demonstrating to the government that the proposal that you are submitting is consistent and realistic based on the work that’s to be performed.
Stephanie:
Awesome. Thanks, Russ. Quick question while we have you on cost realism analysis. So over in Q&A, Jeff Coleman is asking how likely is a cost realism analysis?
Russ:
Okay, so cost realism analysis is performed anytime that there’s a sealed bid. So it’s a requirement by the government to look at this, to basically perform the analysis. So how likely? It is 100% likely.
Now whether you’re audited, that’s probably a different question.
Stephanie:
Appreciate it. And then if we go back to defective pricing, how does a contractor address competitive bidding scenarios where the competition is labeled as best value or LPTA, but in fact it is not competed as such?
Yeah, so they’re asking that if the evaluation process is supposed to be around best value, but you actually find that it’s really not being graded as such, then how does defective pricing come into play for that?
Russ:
Okay, so when you are pricing, you should always be using the indirect rates and direct labor substantiation. Direct labor needs to be always substantiated with pay stubs or salary survey data. And then your indirect rates always need to be substantiated either with your actual indirect rates or forward-priced rates. So regardless of whether a procurement is LPTA or best value, defective pricing, again, I’m not sure if I understand the context of the question. You always need to make sure that your pricing is realistic. Now, whether that makes your cost higher in an LPTA environment, that’s possible. You may want to look at your forward pricing. If you’re trying to be the lowest bidder on LPTA procurement, for example, you may disclose to the government that you may need to cut costs that you may have historically incurred.
And then you address it in your narrative describing what you did, which is a deviation from your normal operations that you previously incurred. That would be an example for LPTA. For best value, where pricing is usually… You’re not going to win that one on price necessarily. It’s really what’s the best value the government gets based on your price. I mean, in that situation, you’re going to want to demonstrate that your price fully supports your basis of estimate and that it’s justified. So I’m hoping that answers the question.
And from here, I’d like to kick it off to Jillian again.
Jillian:
Perfect. Let’s tackle everyone’s favorite topic here, different types of contract types, and especially different types of government contracts you may come across. So there are three main types of federal contracts that you’ll see.
The first is cost plus fixed fee, which is a contract where the government pays you for your actual hours worked plus an agreed-upon profit or fee. In my experience, cost plus fixed fee is the least common in what I’ve seen and you’ll generally want to avoid this type.
Second type is time and materials or T&M. At Dcode, we also typically recommend you avoid T&M early on in your federal journey if possible, especially for product companies we work with every day here at Dcode who are just starting in their federal journey. They might not have a fully DCAA-compliant accounting system in place quite yet, in which case T&M is not for you.
So as a general rule of thumb, if your employees are not required to do timesheets, you cannot comply with the requirements of a T&M contract.
And then finally, our firm fixed price contracts, FFP is our favorite over here at Dcode. With FFP, you charge the government a fixed price for a defined scope or set of deliverables. This revenue is the easiest for you to predict as a business because you’ll know well in advance the exact amount your government customer will be paying for your product or services, and it also avoids some of the accounting pitfalls or traps that you’ll get with the other contract types listed here on the slide.
Then on the next piece, again, just really to hammer this point home here, compliance requirements can and will impact your pricing strategy. So T&M and cost plus contracts trigger these additional far provisions such as DCAA compliance that we touched upon. And so, that’s why at Dcode, especially if you’re a product company or early on in your federal life cycle, that’s why we typically recommend FFP contracts in pricing and especially if you’re selling products as opposed to services. There’s a little bit more leeway here, but that one is a little bit easier when it comes to the compliance side of things.
This next table here illustrates in a bit more detail some of the differences between T&M and FFP contracts. You’ll notice things like labor categories are typically set for both kinds of engagements. Your labor rates will be set in advance and shared externally with your government customer for T&M contracts. To Russ’s point earlier about cost realism, your rates are typically something that is disclosed. Whereas with FFP, you don’t always necessarily have to reveal your labor rates to your customer. And so, this is also one of the reasons why Dcode likes FFP contracts because it doesn’t require you to disclose those hourly rates.
Third, from a revenue perspective, your revenue earned on a T&M contract will be your actual hours worked, times your hourly labor rates. With FFP, you’ll get a fixed amount per iteration. So as I mentioned earlier, typically with FFP contracts, you’ll charge the government a fixed price for a defined scope or set of deliverables, which can be multiplied or delivered on several iterations as needed. But ultimately it’s one lump sum, one lump payment that you’ll receive and not dependent on your actual hours worked. Because of this, revenue can be a bit more difficult to predict for T&M contracts as opposed to FFP. So that’s why you’ll see that there is a variable slope with T&M as opposed to fixed or constant slope with FFP contracts. And we’ll take a look at a graph illustrating this in a few slides coming up here.
In terms of profit, your internal profit gained is more fixed with T&M because typically a fixed profit fee or percentage is built into your hourly rates like we described earlier on in the presentation. With FFP, profit can vary internally depending on how much time it actually takes you to complete the work. So for example, say you estimate 100 hours. 100 labor hours will be needed to complete a project and you aim to charge your government customer $10,000 on a firm fixed price contract to complete that work. If the project ends up taking 150 hours instead of 100, you’ll achieve the same revenue, which is 10k, but less profit because it ended up taking you more time than originally anticipated to complete the work.
So because of that, that’s why FFP contracts can sometimes be seen as a bit risky for you because while revenue coming in the door may be consistent, your internal profit may vary dependent on the time it takes to complete the project, tasks or the amount of work, it actually ends up needing to complete the work. So on the next slide, we’ll take a look at some tips to manage a positive margin and mitigate some of these risks and concerns for you all. So here are some tips for managing to a positive margin on your government contracts, which is just fancy finance speak for how can you optimize your profit and keep the most money in the door for your business? And this is particularly important in a period of high inflation and turnover as well. So let’s just list these out here.
First, when hiring new employees, you’ll definitely want to keep your labor and billing rates in mind because it would definitely be silly to hire someone for a higher hourly rate than what you would charge the government for their time. Second, you’ll want to be really smart with how you estimate your hours and time needed, especially for FFP contracts. And if you can, build in a little bit of extra buffer in the price, that will certainly help keep yourselves in control if and when any unanticipated costs may arise. Third, and this is honestly just a tip for project management in general, is that you’ll want to keep a report updated regularly. We like to recommend at least monthly on the financial health and financial status for each of your contracts because good diligence and attention to detail is truly the name of the game here in finance.
Fourth, you’ll want to establish and manage budgets for all your company’s costs internally; similar to how you would create a budget for any costs and types of expenses in your personal life, you’ll want to do the same internally for your business as well. Next, just as you’ll want to track your costs and financial performance for each contract on at least a monthly basis, you’ll also want to keep good track of your indirect rates on the same cadence. Because the more proactive you are at monitoring these things, the few surprises there will end up being for you along the way. And then lastly, definitely be strategic when it comes to staffing. Keep different rates and levels of experience in mind when developing your project teams and building your project teams to make sure that you’ll have a healthy margin on each of your contracts from the get-go.
So these are just some tips for managing to a positive margin. Again, there are pros and cons to all different contract types, but these are some things you can keep in mind to make sure that you are keeping a lot of money and are really profitable on all the work that you do with the government. As I alluded to you before, these graphs illustrate visually the difference in how revenue will be recognized for T&M versus FFP contracts. You’ll notice on the left for T&M, revenue is a little bit less consistent because you’re billing your customer for the actual hours worked and labor incurred. Whereas FFP, the slope’s a little bit more flat, a little bit more fixed, and that’s because revenue is typically more consistent. But you will want to keep in mind the tips we just discussed about managing cash flow and managing a positive margin because just because your revenue coming in the door may be consistent with FFP, that doesn’t guarantee that your costs or profit or earnings internally will also be consistent.
So again, pros and cons to both, but that’s just something you’ll want to keep in mind. And then finally, wanted to wrap things up here with just a random hodgepodge of some tips and tricks to keep in mind when it comes to pricing contracts, especially for a federal audience. These are all skewed towards a government persona. The first is the good old acronym, Keep It Simple Stupid. The government buying persona, especially if you’re selling technology or products, will not always understand the true technology that you have or the value of what it is that you do. So you’ll want to be sure to explain that both your product or service and your pricing in a way that like a five-year old understand. Keep it really simple and easy for the government to understand why you’re pricing your product or service in the way that you are. At Dcode, we like to recommend tiered pricing to start. For example, you could offer a pilot package or offer brown, silver, gold tiers of support to help make it really simple and easy for the government persona to understand.
Next, be sure to do your research and be prepared to explain why your price is different from your competitors. If your price is higher, you’ll want to explain why. What it is that you do better If your price is lower, how can you guarantee the same level of quality to your government customer? This is because there’s a phrase that floats around government contracting. The government contracting space, that’s something along the lines of you’re never going to get fired as a government employee if you hire a Deloitte or use Allan or AWS or insert other large firm name here. So as you go about your pricing conversations with your potential government customers, you’ll want to be sure to explain any variance to your competitor’s pricing and assuage any concerns or risks or apprehensions they may have around using your solution in particular.
Next, the government needs to buy goods and services in advance. So you’ll want to avoid any pricing models that charge the government in areas based upon the amount or usage or consumption of your product or service. There are also certain thresholds like the government purchase card threshold or the simplified acquisition threshold that can help you get to contract more quickly without all the time it takes or all the hoops you’ll need to jump through by going through a traditional far based procurement process. We could honestly do a whole session here at Dcode like hours long on hacking the far and finding creative ways to get onto contract more quickly, and that’s one of our main missions for why we exist. So we’d be happy to answer any questions about that topic specifically later on in the Q&A portion of this workshop if there is any interest there.
But there are some thresholds in mind that you can put your pricing under to make it a little bit more quickly and avoid some of the competition that a traditional RFP or far-based procurement would take. Again, at Dcode, we typically like to recommend sticking to FFP wherever possible, especially if you’re a product company. Again, for services companies, you should probably have a little bit more leeway here when it comes to taking advantage of T&M. And then finally, the government will always ask for the best deal, like we mentioned before with LPTA and some of the best value types of evaluations. Typically, the government’s expectation will be to receive a good deal and to receive a discount from your commercial pricing in particular.
Similarly, because of that, any initial pricing or deals you offer to certain government agencies will affect your future sales with other organizations. They may ask for sample invoices from other customers or government buyers to make sure they’re not getting overcharged, and this is ultimately because it is taxpayer dollars they’re working with at the end of the day. So you’ll want to make sure that if you do offer a special discount or a special rate on some of your sales early on in the federal process, that you’re able to hold to those and keep to those for future deals. Because the government will probably want to keep you to those prices and hold you to these moving forward. So with that, I know we just threw a lot of information at you over the last 40 minutes, so I’m going to pause here; I’ll turn it back over to Stephanie, and then we’ll launch into the Q&A portion for the remainder of our time together.
Stephanie:
Thanks, Jillian. Thanks for breaking that down. I love the Keep It Simple Stupid acronym for sure. We are big believers in that, and instead of the can you explain your product or service to a five-year-old, we like to say, would grandma over Thanksgiving dinner understand what it is that you’re selling, right? So kind of the same gist of it, break it down because your audience isn’t always going to be as technologically savvy as you are or understand all the nuances of the value that you’re delivering. So I love that. Yay.
So as Jillian had mentioned, we are launching into our Q&A portion, so definitely continue to use the Q&A in the webinar to drop any questions that you might have. And I would also love to invite all of our speakers, Russ, Matt, Jillian, to come on camera so that we can get started with some good questions. I know that there was one that was asked earlier that I wanted to go back to because this is a question that we hear oftentimes from entrepreneurs around what is a competitive wrap rate for a federal contractor? So if there was a magic number or a range that folks should be aware of, curious, what would that be from your perspectives?
Russ:
I mean, I can speak to this. I mean, so wrap rates basically, are a culmination of your costs, your fringe, overhead, and G&A, and it’s really predicated around your internal cost structures and what your individual benefit packages are. So I wouldn’t say necessarily that there’s a one size fits all answer to this. It’s really dependent upon how you compensate your employees. For example, say you own a company that does not offer PTO, you are by default going to have a lower wrap rate because you may offer higher direct labor to your employees, thus reducing your fringe rate. Now that being said, at the end of the day, you’re all going to be operating within the same bill rates more or less.
So you just need to make sure that the financial engineering that you do on the back end equates. So really, what it boils down to is making sure that your costs are controlled as much as possible, you’re not overspending or that kind of thing, and being able to offer and retain the talent that you need to perform on these contracts that sometimes with fixed rates. Now, maybe Matt has some insight into this himself, but this is what I see at least with the market that I serve primarily.
Matt:
I mean, I would generally agree with what Russ just said, and it’s also within the federal government, there’s different agencies and different clients and different environments. At Bixal, we work both with domestic agencies and we do USAID, and there’s vastly different wrap rates between the international and USAID and then what we see on the domestic side. And so, it’s a hard balance, and the reason for that is on the international side, it’s common to have program management costs as interact as overhead instead of as a direct cost. Whereas you may be able to build that in of direct costs on the domestic side. So there’s some just different cost treatments between the two. And then another impact is if you did have cost plus contracts and you had a lot of non-labor costs, the G&A part of this becomes way more important than just that wrap rate because the G&A is applied on all the costs. So it’s just also understanding what your work is, what your clients are, and how your internal structures work.
Jillian:
Yeah, the only thing I would add there, and I know we gave you a non-answer of here’s the exact number, but it is just so hard to provide that like Matt and Russ both touched upon. There are people at bigger firms that their entire role is priced to win and they spend 40-plus hours a week doing all of this intel trying to figure out what the perfect wrap rate is for different opportunities and things. So it’s something you can spend a lot of time on and it’s difficult to be like, here’s a good range. But it’s something that it’s just dependent on how you operate internally and the different types of contract opportunities you’re going after. So definitely doing the competitive intel and having the conversations with your clients are worth it to suss out what range you should be in for different types of contracts.
Stephanie:
Yeah, I love that. I always kind of smile when I see questions like that come through because I’m like, you’re not going to love the answer because it’s going to be the lawyer answer of it depends, but it really does depend on your situation, your cost, your competition, your customer, all of that. So it really does depend. So thank you Jillian, Matt and Russ for weighing in on that. Another question around defective pricing. So get ready, Russ. I think that there are still some questions around that. So if you could kind of walk us through defective pricing again, and we’ll kind of back up the slide deck as well, if you don’t mind covering that one more time.
Russ:
Yeah. So defective pricing in a nutshell is when you price something out, not following the correct methodologies in accordance with the type of solicitation that you are bidding on. So for example, if you are bidding on labor services on a T&M contract, you need to make sure that you’re using your correct indirect rates when building the rates. So fringe, overhead, Q&A, and you need to make sure that the price or the indirect rates that you certify via a certified cost or pricing data is actually accurate and current. So as I was trying to say when I was first doing this presentation, there’s actually two types. There’s before the agreement in price, basically get the RFP stage before the contract’s awarded.
You have to certify depending on thresholds for TINA that the pricing that you use or the indirect rates that you use to build your rates are current, accurate, and basically certified. If a contracting officer discovers an error before a bid is actually awarded, you may be granted the opportunity to fix it. Now after award, it can get a little bit more hairy where the contracting officer may deem an action to just reduce or adjust your price because they may find that you bid an indirect rate that’s too high or not justified and they’ll downward adjust your price like unilaterally. Not always the case, but it could happen. Okay, so I see you actually have a question. Okay, how do you estimate how much…
Stephanie:
Yeah, so around for defective pricing, Jeff is wondering, are there any strategies that you can use to combat competitions that aren’t actually true to what they’re stated as being evaluated based on?
Russ:
Okay, so you’re saying that… So an example is that the government releases an RFP that really requires probably some highly technical work and the government releases the contract in an LPTA manner. I’ve seen this happen. I’ve bid on programs like this. All right, in the context of defective pricing, you, you’re going to need to still make sure that you’re bidding, say you’re the incumbent on a program, you need to make sure that you’re still using the labor rates or the base labor rates that are justifiable, meaning you’re using their salary pay stubs or they’re using contingent offer letters. If that person’s going to resign and you have a replacement to backfill, if you’re bidding on something that you’re not incumbent, you need to make sure your direct labor is supported by salary research data or some other forum that’s accepted by the government.
And then you need to use your wrap rate, your internal actual indirect rates. That’s the basis for your pricing on the actual RFP. Now, I mean that’s where you need to determine what that price to win is. And then you need to justify your rates and make sure that what you’re actually bidding at the end of the day is realistic because it will be evaluated by the government. So it may be ambiguous. I mean, that’s pretty much in the context of defective pricing. I mean, it’s all about being accurate and justified. So I’m hoping I’m answering your question.
Stephanie:
Got it. Appreciate it. Well, definitely if folks have additional questions that they would like to address during the Q&A, make sure to drop those over in the chat for sure. Jillian, Matt, Russ, any other pointers that you would give to folks that are especially a little bit earlier on in their government contracting journey? Maybe they’ve been successful in commercial spaces and they’re trying to figure out, it’s not quite a one for one port over hey, the pricing that I’ve done for my commercial customers can be evaluated as best value to government or folks that are trying to figure out what that transition could look like. Any tips or pointers that you would give to folks that are in those boats?
Russ:
So I would highly encourage any entity that is looking to bid on government work to make sure that you get your accounting system designed and stood up in compliance with the DCAA Standard Form 1408 as early as you possibly can. This will allow you to have the chart of accounts you need to group and pool costs to give you historical cost information. This is all the stuff that you’re going to be needing to provide to the government in sealed bidding situations. And even any negotiated procurement, you’re going to have to provide justification. A lot of that requires three years of historical rate information. So the sooner you can have your accounting system designed to be friendly with working with the government, the better. That’s my biggest suggestion, especially any startup. Don’t wait. It can become a much bigger hassle later and trying to fix something that happened in the past versus just standing it up from the onset.
Jillian:
And I would add to that, Russ, my first day at Dcode was the first day we implemented time sheets, which is a big step towards obtaining some of those compliance things that Russ mentioned. And we totally get and understand that early on, it’s hard to be forward-thinking and forward-looking in terms of things like that. So if you’re not in a place right now where your accounting system is ready, don’t feel like you can’t go after federal contracts. Obviously, you want to get that up to speed as quickly as possible, but it’s not a complete deterrent.
And so, my recommendations there, and we advise tech companies on this all the time, is sticking to FFP contracts, using some of the more innovative procurement methods like the SBIR and SCTR programs, looking at CSOs and OTAs pricing under the GBCN SAT thresholds, because that can help you get in with less competition. And as a small startup, you’re probably not going to win an RFP on your own. So leveraging partners as a way to win awards that way. There’s a lot of other ways to get into the market. So I know I just spitballed a lot, but those are some of the tips and tricks that we recommend to folks, especially as they’re early on in their federal pricing and federal journeys.
Matt:
And I would just add on to what both Russ and Jillian are saying, it is developing the accounting system, but not just for compliance purposes, but so you can really track your costs and run reports like Jillian was talking about earlier in her part of the presentation. It’s really essential to know where you stand now financially. You don’t want to be developing pricing based on last year if the first six months of this year, it’s been a complete different picture and you’ve had different cost reality. And so, it’s really important to understand and track your financials at both the company level but then the individual contract levels. And so, saying that those systems now will allow you to do that.
Stephanie:
Excellent. Thanks, you all. I don’t see any other questions in the Q&A, but if folks do have questions that they wanted to reach out with afterwards, or if you think of something that you really wish that we would’ve had time to touch on today, but we just didn’t get to it, then please feel free to reach out to both the Hutch and the Dcode teams. You can find all of our contact information here, and you will be receiving the recording of today’s presentation and the slide deck materials so you can sit with it, digest it a little bit, and come back to us with your questions because we definitely have experts like Jillian, Matt and Russ at the ready to help on both of our teams. So really appreciate everybody’s time today. Hope you enjoy the rest of your Wednesday. Thanks, everyone. Thanks, Jillian. Thanks, Matt. Thanks, Russ.