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Part 3 - Building Competitive Indirect Rates
In Part 1 - A Framework for Success, we described a framework for successfully exiting the SBA 8(a) program. In Part 2 - Building Capabilities Required for Success, we focused on building the capabilities required to implement a successful exit strategy. In Part 3 the final installment of this blog series, we focus on the role competitive indirect rates will have on your ability to bid and win more. While building capability, a critical objective is to leverage technology to reduce the reliance on manual processes. Doing this well will have a significant impact on creating competitive indirect rates. This will be a key factor for successfully competing in full and open competitions.
Why Competitive Indirect Rates Matter
Let's assume you've done well in the SBA 8(a) program; your firm has developed a great capability and it has great past performance. Before graduation, you should ask how you can improve your ability to win full and open competitions. The table below provides significant insight that should shape your strategy. The bottom line, you'll need to make some hard decisions focused on creating competitive indirect rates. In full and open competitions, you'll be competing with larger firms that will have much lower indirect rates.
|Rates by annual revenue
|Indirect Rate Type||Average||$0 - <10M||$10M - <25M||$25M - <50M||$50M+|
|Overhead Rate for Contractor Sites||25%||18%||30%||37%||20%|
|Overhead Rate for Customer Sites||17%||13%||21%||21%||16%|
|Material/Subcontractor Handling Rate||4%||5%||3%||3%||3%|
|General and Administrative Rate||19%||21%||22%||20%||11%|
|Wrap Rate Without Fee||1.81||1.74||1.93||1.93||1.65|
Contractors with more than $50 million in revenue enjoy distinct advantages regarding their indirect rates. If your indirect rates aren't comparable, winning full and open competitions will be difficult. This is a leading cause of why many organizations fail to graduate out of the 8(a) program.
How have your competitors accomplished this?
- They have fully implemented integrated ERP
- They have larger bases to absorb their indirect costs
- They have fully implemented cost segregation and analysis
- They have developed formal budgeting and forecasting processes
- They have eliminated manual processes that underpin their operations
- They have data-driven processes that leverage their ERP to support bidding, winning, and executing their contracts:
- Project and Contract Management
Competing in an LPTA Environment
In today's government contracting market, many of the full and open competitions will be decided based on lower cost technically acceptable (LPTA) criterion. To fully understand why managing indirect rates play such an important role in winning competitive bids, we'll examine two important contracting trends: competition and the bidding processes:
The use of GWACs has created more commoditization of competitors i.e., you're competing with many firms with comparable capabilities.
The evaluation factors for a typical government contract full and open competition usually consist of three factors:
- Management Approach
- And Cost
Many RFPs are done in two stages: (1) the government selects a list of potential vendors using their past performance and creates a down-select list, then (2) they conduct a competition between the selected vendors that usually involves submitting a management/tech and cost proposal. If vendors don't provide adequate past performance, they won't make the down-select list. Here's the catch! Often the management/tech proposal doesn't require enough detail for vendor organization to describe all the great things their organization can deliver. This makes it very difficult for the selection to be made solely on management and technical factors.
In most full and open competitions, the cost has become the dominant factor in award decisions, considering:
- Most set-asides are competed using an LPTA selection process
- All fixed-price awards are based on the lowest cost
- 40% of awarded contracts are cost-reimbursable and the award is based on the lowest reasonable cost
Here's an additional catch! Direct costs, such as the salaries paid or the materials bidders need to buy, are determined by the market, whereas indirect costs are controlled by each bidder's organization. Therefore, an important question you need to be constantly asking yourself is, what's the plan for focusing on your organization's indirect rates? Competitive indirect rates are the KEY factor in your pricing strategy!
Indirect Rate Management
Here is a short list of things you need to focus on that will help you better manage your indirect rates. You'll need to fine-tune your processes and systems to help you implement a plan for each of these factors.
- Establish indirect rate targets ... what are competitive Indirects for your market
- Analyze budgeted indirect cost to ensure it can be absorbed by your direct labor base
- Accounting system selection matters. You must understand:
- Why spreadsheets are not the answer
- Why QuickBooks is hurting your ability to compete
- Why you need a system built for GovCon accounting & reporting
- Follow the guidelines in SF-1408 to set up an appropriate accounting system
- Establish COA that separates direct, indirect and unallowable expenses
- Establish annual budgets and develop target indirect rates
- Establish a project accounting system and regularly monitor job costs
- Implement tools for tracking time & expense
- Monitor your indirect expenses and indirect rates closely
- What fringe benefits can the organization afford to offer
- Understand the consequence of losing contracts on your indirect rates
- Analyze the components of your (Fringe, Overhead, and G&A) indirect cost constantly
Teaming with Prime Contractors
Prime contractors are required to utilize small businesses ... on some contracts as much as 40% of the work must be allocated to small businesses.
Primes are looking for:
- Relevant Past Performance
- Customer knowledge and insight
- Unique SME and technical capabilities
- Key Personnel ... known by the customer
- Ability to handle cost-reimbursable contracts... lots of flow-down clauses
- DCAA & DCMA approved systems for Accounting, Estimating, Purchasing, and Property Mgt.
- Help Primes achieve lower bid rates (ie your rates plus theirs combined are lower blended rates)
As you build your organization's corporate past performance be thoughtful in how you grow all these factors. They will be critical to successfully teaming up with Primes.
While all the factors listed are important, if your indirect rates are too high it can be a deal killer.
Key Tips & Takeaways
Here are a few tips that you want to keep in mind as you are developing your 8(a) exit strategy.
- Carefully managing your indirect rates can provide a competitive advantage
- Becoming more difficult to differentiate between capabilities and management alone
- Award decisions on many contracts come down to the lowest price
- Make timely and strategic investments in your "back-office" infrastructure
- Don't buy more than you need ... increases indirect expenses
- Know your indirect rates and whether they are competitive
- Invest early in a DCAA-compliant project accounting system
- Establish a discipline of monitoring indirect expenses regularly
- Leverage fractional resources or managed outsourced services and take full advantage of your efficient infrastructure to minimize "back-office" costs
- Prime contractors are more willing to team with you if your bid rates can help them deliver a more competitive price ... remember you are competing with them for the same project resources ... your indirect rates can provide an advantage
Overall, the process can seem daunting, but with the right team, and an early start (5 years or more 'til graduation), your organization can mitigate or eliminate most of the risks and set you up for long-term success.
AtWork Systems specializes in supporting you the government contractor and carries decades of experience which is transferred into the products we develop specifically for the industry. Step into the journey and transform your business into a thriving growing pillar of success that is resilient to the ever-changing and highly regulated GovCon industry.
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