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Michael11

Agency requesting labor cost buildup for T&M proposal

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We're submitting a response to a T&M rfp. The agency has requested that we propose for each labor category a breakdown of the direct labor, OH, fringe, G&A, and profit. They've provided a template that is to be completed for each category. Each of these cost elements are to be expressed in a $ value - so direct labor and all IDC/profit should sum to the proposed hourly rate for each category.

We have several questions about what sort of pricing to provide them. We currently have contracts with this agency and charge a certain set of rates. These rates, and our company's pricing model, do not generally fit well into this cost buildup. We hardly do any cost reimbursement contracting. Senior counsel staff would have enormous rates and jr staff rates would be more paltry than we currently charge them. So we have financial data to do the buildup, but the result is nothing that's really in our best interest to propose.

Nowhere do they state that this should be verifiable cost and pricing or salary data. I don't think the word rate is mentioned anywhere - they want a $ value for each cost driver and a rate for the title, nothing more.

Does anyone have any experience with this? Ideally we'd like to keep our rates close to what we're currently charging. Which is generally administered at a loss for sr staff and a profit at the junior level. Is there any harm in manipulating, say, the estimated salary in our buildup to fit into a pricing model that is attractive to the client? We want to be consistent with the rates and profit were apply to each of our LCATS. So the only other variable we have to work with is the estimated salaries to reach out fully loaded rate.

It's hard to tell what sort of analysis they'll be doing with this pricing. Folks asked questions and their answers were vague and nonconclusive as to what the purpose of this exercise was.

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So you base your rates on the market and your company financial goals, not on cost buildups. Is that correct?

And so you are not sure what information to provide in response to the agency's instructions. is that correct?

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Correct - our rates are based primarily on market and not cost buildups. And correct, we are not sure which information to furnish in response to agency's instruction.

We could come up with financial data to support many of these indirect elements but it's nothing I would consider totally auditable. As far as we're concerned, we'd like to keep the rates we currently charge this client. Which, for some categories, look like a bargain when we actually do a cost buildup.

Is there anything preventing us from backing into these rates? If we apply the same burdens to all of the categories, the only thing left to manipulate is salaries. Which would translate to showing sr staff salaries likely below average and jr staff a bit more than our current average. Is there a better approach than this?

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Yes this is a competitive procurement and they are intending to award one T&M contract. No cost or pricing data is requested or required to be completed. I do believe this is a commercial item RFP. They did indicate this was an exercise in determining cost reasonableness. Other folks asked during the Q&A whether they could just use their GSA rates. the response was basically yes but you still have to complete the format provided i.e. providing a breakdown of your gsa rate

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Michael:

Many government contracting personnel think that all businesses develop their prices, fees, or rates by adding up direct and indirect costs and then adding a profit. They are wrong, but it's what they're taught and it's all they know. They don't understand any other kind of price-setting. I don't know what colleges are teaching undergraduate business students, but it appears that they don't teach pricing.

I would be careful about backing into rates. You simply must communicate your situation to the contracting officer and ask for guidance. If you cannot make the CO understand, and if he or she insists that you must follow the instructions in the RFP, then back into the rates and state in the proposal that the cost breakdown is not how you actually account for costs or develop your rates, but is designed to simulate that process for purposes of complying with the RFP instructions. You must do what you can to not give the government grounds for later saying that you mislead or deceived them.

That's the only advice that I can think to give you.

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Thanks Vern. I'm pretty confident that, considering the language in the RFP, none of this is binding and is for evaluation purposes only. Which makes it that much more an exercise in futility. But that is no doubt our biggest fear - for an element of one of these calculations to be held against us at a later date. Or our approach be found faulty. We want this analysis to be somewhat verifiable - but at the end of the day to make a square peg fit into a round hole we are going to have to cut the edges off something. Whole thing makes me queasy.

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Michael11,

You may be able to enlighten the CO by referencing his/her own Contract Pricing Reference Guides. From I.1.2 of the Guide:

I.1.2 Identify Seller's Approaches To Pricing

Seller's Pricing Approaches. In product pricing, sellers commonly use one of two basic approaches -- cost-based pricing or market-based pricing. The following are common strategies associated with each approach:

Cost-based pricing:

  • Mark-up pricing
  • Margin on direct cost
  • Rate-of-return pricing

Market-based pricing:

  • Profit-maximization pricing
  • Market-share pricing
  • Market skimming
  • Current-revenue pricing
  • Promotional pricing
  • Demand-differential pricing
  • Market-competition pricing

Tell them your pricing is not cost-based, it's market-based.

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I don't have the template in front of me, but is there room to add in a credit value? For example ...

Direct Labor $50,00

Fringes $10.00

Overhead $60.00

G&A $12.00

Subtotal $132.00

Profit $20.00

Less: ($27.00) -- credit for market adjustment

Total $125.00

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Here, I think the OP may be saying that there is the opposite of a credit for many of the rates.

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thanks for the additional feedback. Don I like that approach/guidance but at this point I think to avoid being found non responsive we're going to go along with this. Help that is essentially the format. We'd have to take it upon ourselves to add a place for a discount at the most senior level categories. And to Joel's point, we're still left with a similar disparity for the most junior staff but in the opposite direction. that is if we don't bump their "estimated" salaries a bit higher for them to hit the target.

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Joel,

Yes, I get that. For those rates you have an additional upward adjustment amount for "market adjustment" or whatever Michael11 wants to call it. It's not a cost.

My point is -- and I think Michael11 basically agrees with it -- is that he has to fill in the template and provide the requested information in order to be responsive to the Section L requirements. The information being requested is not certified cost and pricing data and it is unclear how it will be used in a competitive procurement. But it has to be provided.

Nobody said it had to make sense to the CO.

If the information is used (or misused) in a way not specified in Section M then Michael11 may have valid grounds for a protest.

H2H

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This is really interesting. The only real thing they could do a comparative cost analysis, as they state cost reasonableness will be determined, is with the direct rate and maybe profit. There is no value in seeing your buildup of the indirects, from my pricing opinion, in a competitive environment. What would they be comparing these costs to? I certainly hope not to other vendors indirect costs. It seems like a commercial item. That being said I think you can use the "market adjustment" or simply call it a "margin" be it positive or negative. Would love to hear how it shakes out.

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I like the market adjustment too. It is not specific on whether it is a cost adjustment or a price adjustment. Presumably a higher labor salary cost means you are sourcing more valuable labor resources and lower price means you are more competitive. The market adjustment preserves these presumptions.

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To be very clear: the contractor should NOT claim the adjustment is a cost. It is not a cost and cannot be traced to the contractor's cost records. It's not a cost reduction or a cost adder; it's simply what it is -- an adjustment to reach the desired FFP labor rate. It's the kind of adjustment contemplated by FAR 3.501, I think. It's not "buying-in" but it is offering a price that is lower (or higher) than cost plus profit in order to win a price competition.

H2H

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The CO might ask for a description of how the adjustment was developed. What were the "market" factors? What facts were considered? How often is it reviewed and validated? Et cetera.

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Vern,

In all sincerity, if the CO asked one (or more) offerors those questions, would the offeror be required to answer? I ask because the "how" would not seem to be in the Section M evaluation criteria. My position would be I'm offering FFP labor category rates and I'm willing to live with them after award; why would the government care how those rates were developed in a competition?

Maybe I just pulled them out of thin air. In all seriousness, so what? How is my methodology germane to a determination of price reasonableness, which is (presumably) based on price comparison amongst competing bids?

If the CO thinks the offeror's proposed FFP rates are too low, s/he can verify that the offeror fully understands the requirements. I get that from The Contract Pricing Reference Guide (Chapter 8)--though I read it to say that if cost realism analysis is going to be performed, Section M should clearly state that will be the case. I also read it to say that proposed FFP prices should not be adjusted as the result of any price realism analysis performed.

What am I missing?

H2H

H2H

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In Section L, I have asked similar questions to those identified by Vern, especially when my evaluation criteria includes a price realism analysis. The Vendors answers, along with the other than cost data, would demonstrate its understanding of the work. For example, on your contract for catalytic converters, you would probably want your prospective Vendor to identify the price of platinum; aftermarket parts availability, and distribution locations as part of the "market factors" question.

Generally, Vendors must comply with the instructions to offers in order to be eligible for award. Of course, the Vendor could look at the instructions and evaluation factors and decide it is too much of a hassle, and go onto the next opportunity.

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help:

In all sincerity, if the CO asked one (or more) offerors those questions, would the offeror be required to answer?

I don't think an offeror ever has to answer any question from a contracting officer. However, that raises the question as to what would happen if the offeror did not answer.

As to why the CO would care, who knows? In my experience COs have often asked questions that seem irrelevant to their concerns. In this case, the CO wants to know the cost composition of the rates. I don't think that's relevant, but the CO wants to know. We could refuse to answer, or give a flippant answer, but then what? Would we get the job, which is what we want?

I'm just warning that we might want to anticipate those questions and think about what we'll say in response. Remember, the idea is to get the job, not to preserve our self-righteousness.

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If the CO thinks the offeror's proposed FFP rates are too low, s/he can verify that the offeror fully understands the requirements.

I cannot understand why the CO is asking for detailed rate info in a competitive environment. Assuming competition exists, price reasonableness is an easy determination to make. If the CO is concerned about excessively low rates, then different issues arise.

Typically, requests for price breakdowns in competitive procurements are associated with price realism assessments. If price realism is the CO's concern, he or she needs to announce a price realism eval factor. Absent a factor for price realism (i.e. assessment of the correlation between proposed rates/ proposed price and proposed personnel/ materials/ technical approach), the CO's only way to deal with low prices would be a determination of non-responsibility. This can be thwarted by a firm "buying in" or by a small business viewed favorably by the SBA.

Take a look at this recent GAO decision: Lily Timber Services, B-411435.2, August 5, 2015. http://www.gao.gov/products/B-411435.2#mt=e-report.

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napolik,

Yes, exactly. That's where I was coming from. The information provided can be misused in a way that will create grounds for a protest.

In other words, I don't see an upside and only a downside for the CO.

H2H

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I think if the T&M labor categories have named people assigned to them in the offer, such as with key personnel, it is reasonable for the customer to understand the salary of that person as well as the indirect costs and profit associated with that category. The bidder may well have taken some adjustment to the direct salary cost, for example to adjust for labor utilization, UCOT. Or maybe, a project management office or other direct cost is allocated into the direct cost before OH and G&A. If the T&M labor category is for an unidentified yet to be hired future labor resource, the bidder’s estimating system may have flexibility with regards to adjustment in potential salaries based upon certain qualifications, such as education, experience, geography, certifications, clearances, etc.

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