Pricing strategy for a federal government contract should be more insightful than simply trying to guess your competitors’ price points. Over the years, proposal professionals have evolved formal processes for performing robust competitive analysis. Failure to include this crucial step in your bid development can mean, in effect, that you’ve lost the bid before it’s even submitted.
Additionally, the analysis might warn you that winning with your intentionally low labor rates would lock you into a losing proposition!
We don’t have space to treat the subject comprehensively here, but we’ll outline core elements – and perhaps help you appreciate why you might want to consider our competitive analysis course.
Identify Your Competitors
You almost certainly know which firms compete with yours in your industry and areas of specialization. But it can be more difficult to discern which ones will be going against you on a particular opportunity. You should start by studying the respondents to any prior RFI and attendees to relevant industry days. Those public listings can also point to candidates for teaming.
Of course, not choosing to be listed can be a strategic decision. If you don’t find any of the expected company names on the list, you have to wonder why they don’t want to advertise their interest, or consider why they might not think the bid is worth pursuing.
In other words, what might they know that you don’t?
(We can also give you tips and tricks on data-drilling in readily available online sources, including beta.sam.gov (formerly fbo.gov), rfp.bidnet.com, and federalnewsnetwork.com.)
Research the Competition’s Offerings and Unique Selling Proposition
Once you’ve identified the strongest competitors, start asking the following questions for your competitive research:
- What are the gaps in your own offerings? Which competitors can bring those resources? Also, how much will it cost you to acquire those missing elements? The magnitude of this expense will impact your pricing strategy.
- Why did the incumbent win the prior award? Are there specialized performers on their team with skills that are difficult to replicate, train on, or recruit for? Or, does the government think this product or service is a commodity? If so, the winner could have been a lowest-priced bid disguised as a best-value tradeoff.
- If you learn of or suspect a new teaming arrangement is being negotiated, what gaps in the prime’s offerings are each potential teammate’s capabilities intended to fill?
Here’s where informal discussions between your BD team, the customer, and professional colleagues can make a huge difference. But you’ll need to start early and keep the effort ongoing.
You must also be aware of the ethics of competitive intelligence and the information you must not touch. (After the RFP drops, the customer will be prohibited from favoring any bidders with information that is not disclosed to all.)
If you are bidding against an incumbent, gaining some insight into the customer’s current assessment of the prime’s performance will be essential. Unseating an incumbent not only means nailing the cost numbers but also demonstrating to the customer that you can hit hot buttons and resolve pain points. Doing so successfully will almost certainly have cost impacts.
Conduct a Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis
Self-assessment tools and metrics can inform your gap analysis, or SWOT assessment. Ultimately, you’ll apply SWOT to highlight how your company’s offerings map to specific requirements and deliverables in the RFP. This analysis includes what resources and solutions you’ll need to acquire or develop to fill the gaps in your offerings.
Build Competitive Analysis Teams and Processes
As in other aspects of the capture process, you can never start early enough. And you’ll need to involve key personnel besides those responsible for your cost volume. At an early date, you should recruit the technicians and managers who understand the cost components of specialized resources, including staff and technology needed to deliver the winning solution.
Those resources could include specialty goods or services provided by subcontractors or teammates, and their quotations must be incorporated in your pricing.
Perform Black Hat Reviews
During the competitive analysis phase of capture, involve objective, third-party reviewers who have a background and deep understanding of the competitor’s business and capabilities. You may need to recruit those reviewers from retired colleagues or former employees of the competitor. Or they may have served as government personnel in the target subject area or purchasing function.
Professional proposal consulting firms can assist you in these reach-back efforts. The bottom line, these people are available. You just have to be creative in finding them.
Black Hat reviews typically invite reviewers onsite and segregate them for a day or more, tasking them with reading the draft proposal, making notes and comments, and filling out evaluation forms that apply numeric scoring to key differentiators. The goal is for each team to represent a competitor company and develop a solution that each team thinks their company will bid.
Preparation and research are the keys to successfully running a useful Black Hat review. The old mantra holds true for Black Hats, “Garbage in – garbage out.” If the research and data that go to each team provide only generalities, then the outputs of their analysis will be general and not very useful. However, a great Black Hat can uncover weaknesses, opportunities, and threats that you didn’t even know existed and give you a competitive edge.
Understand Elements of Price to Win (PtW)
Cost elements in a federal proposal are typically calculated in one of three ways:
- Durations and labor rates for comparable work done by your firm and drawn from past performance
- Estimates of time and materials (T&M) based on engineering expertise
- Quotes from subcontractors
These cost elements take on a competitive dimension when you consider whether your competitor might have already created or achieved something your firm doesn’t have.
For example, the competitor might have conducted directly relevant R&D that can be leveraged in their pricing, especially if they’ve already taken write-offs in prior years.
A primary determinant of cost is a bidder’s wrap rate – that is, the combination of the cost of employee benefits, overhead costs, and corporate General & Administrative (G&A) expenses. You should add these to direct labor rates.
You must be able to correctly calculate your own wrap rate and anticipate what factors in your competitor’s situation might make its wrap rate lower or higher than yours. For example, company size has a direct bearing on a firm’s ability to negotiate richer employee benefits from insurers.
Assigning and applying labor categories in federal contracts can be especially tricky. For example, should you classify a desired employee as an Engineer Level IV or a Scientist Level III? Ideally, you’ll want intelligence on the categories in use by current performers in the customer’s programs.
You should also anticipate and include career development plans for your employees in any annual adjustments and in your price. Companies often price a contract anticipating that a person will only spend 2-3 years in a position before being replaced with a new person.
The Size, Scale, and Scope
The size, scale, and scope of the contracted program will have major impacts on cost. You should also consider the corresponding factors for your company and teammates. For example, the customer will require small-business primes to perform the majority of workshare, but teaming with larger firms may be necessary to satisfy all requirements and win.
These larger firms will expect their shares to be substantial – unless they are deriving other benefits by mentoring your firm or acquiring your innovative R&D.
Compliance and Continuity
You must be compliant and establish continuity with the customer’s ongoing operations. This need to conform to the performance environment on Day One can create other significant pricing considerations. These factors affect not only what the customer requires, but also their expectations.
If there is an entrenched incumbent, bidding can be especially sharp. Recruiting incumbent staff might be essential, especially in specialized areas. Labor rates from the prior award were likely competitive. So, can you offer better benefits? Career development? Continuing education? All these inducements are cost factors.
Win the Award but Don’t Lose Money
You don’t want to bid so low that the contract won’t be profitable. Remember that the government’s primary criterion for cost is likely to be reasonableness.
- Are the proposed labor rates and materials costs in alignment with prevailing market prices?
- An exceptionally low bid might suggest sacrifices in value, or even mistakes in estimation or calculation. Are your quoted labor rates sufficient to motivate quality work?
- A low bid might signal a bidder’s financial weakness as they seek short-term cash inflows in favor of sustainable growth throughout the period of performance and beyond. The government wants contractors that can go the distance.
- Does the customer expect you to ensure employee retention and continuity of service? (One approach we explain in our training is using GSA rates as data points to perform reality checks on the rates in your bid.)
Understand that cost reasonableness doesn’t necessarily prevent low-balling. You may have to educate your customers during capture so they understand the risks associated with low bids. Additionally, to ghost lower bidders, your cost proposals should explain why doing things for less than you have offered would be risky.
Train your PtW team!
Your competitive analysis team isn’t necessarily composed of the same group you’ll task with writing the proposal. But besides the pricers and managers who are responsible for the cost volume itself, you’ll also need the knowledge base of your BD sales and management group, along with the expertise of your engineers and the past-performance wisdom of your program managers and corporate executives.
Contact us to learn more.