Jump to content

Paying for Proposals


Corduroy Frog

Recommended Posts

It is (apparently) not the intent of the government to pay for rfp bid & proposal costs.  Many rfp's state so.

At issue is a small $28K bid.  The "margin", including Fee and overstated OH and G&A, amounts to some $7000.  Since the anticipated OH and G&A are nebulous and not as "free" as often purported, we think the absolute most the company can realize out of this small bid is only $7000.

As you must realize, the size of this effort is tiny in the spectrum of contracts.  However, meeting the requirements of the rfp requires much intensive effort, likely to be $8,000.  It is obvious to us that the rfp was not written for this small effort, but is probably the result of some overdeveloped government boilerplate.  The scope of work (PWS) is only four pages long, and is the only thing which matches the small effort.  The remainder of the rfp is some 59 pages long, and contains trivial detailed instructions causing the production of the response to be unduly expensive.  And of course, the government doesn't want to pay for any of this.

We have a five-year forwarding averaging plan on file with DCAA, but this effort doesn't go beyond year 1.  One idea I had was to increase the annualized G&A by an estimated $8000 in B&P cost, thus spreading the cost over several bids, or better yet, focusing to this one bid by adding a few percentage points to our bid G&A rate. 

Great numbers in the idea, but does this not effectively cause the government to pay extra because of an inflated G&A rate?  The contract will be fixed-price, so the G&A/OH rates are static and not reimbursable once established.

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

 

 

 

 

 

Link to comment
Share on other sites

5 hours ago, Corduroy Frog said:

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

Either absorb the cost, or refuse to submit a quote/ proposal. Or, call the contracting officer, explain your concerns and hope for an amendment to the solicitation that reduces your burdens.

Link to comment
Share on other sites

Isn’t b&p part of a cost pool for G&A or overhead?  B&P costs seem to me to be a general cost of seeking business. If the firm thinks that the cost to prepare the competitive proposal isn’t worth the return, then it doesn’t have to participate.  

I do agree that the government often doesn’t realize or consider the cost from industry perspective to compete for government contracts. How much information or effort should the government require for a $28k contract?   Holy cow, already! 

Link to comment
Share on other sites

Guest Vern Edwards
6 hours ago, Corduroy Frog said:

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

Well, you obviously think that the situation is so stark that to bid and win would be to work for nothing. 

As to whether you have an alternative to bidding and winning and working for nothing, the answer is: Yes. An alternative is to make a no bid decision and walk away.

I would not waste even five minutes trying to talk the government into changing its RFP.

Link to comment
Share on other sites

23 minutes ago, Vern Edwards said:

I would not waste even five minutes trying to talk the government into changing its RFP.

I agree. 

Its like spitting into the wind, anyway. 

Link to comment
Share on other sites

7 hours ago, Corduroy Frog said:

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

Brush up on the Paperwork Reduction Act (implemented at 5 CFR 1320).

Link to comment
Share on other sites

11 hours ago, Corduroy Frog said:

It is (apparently) not the intent of the government to pay for rfp bid & proposal costs.  Many rfp's state so.

At issue is a small $28K bid.  The "margin", including Fee and overstated OH and G&A, amounts to some $7000.  Since the anticipated OH and G&A are nebulous and not as "free" as often purported, we think the absolute most the company can realize out of this small bid is only $7000.

As you must realize, the size of this effort is tiny in the spectrum of contracts.  However, meeting the requirements of the rfp requires much intensive effort, likely to be $8,000.  It is obvious to us that the rfp was not written for this small effort, but is probably the result of some overdeveloped government boilerplate.  The scope of work (PWS) is only four pages long, and is the only thing which matches the small effort.  The remainder of the rfp is some 59 pages long, and contains trivial detailed instructions causing the production of the response to be unduly expensive.  And of course, the government doesn't want to pay for any of this.

We have a five-year forwarding averaging plan on file with DCAA, but this effort doesn't go beyond year 1.  One idea I had was to increase the annualized G&A by an estimated $8000 in B&P cost, thus spreading the cost over several bids, or better yet, focusing to this one bid by adding a few percentage points to our bid G&A rate. 

Great numbers in the idea, but does this not effectively cause the government to pay extra because of an inflated G&A rate?  The contract will be fixed-price, so the G&A/OH rates are static and not reimbursable once established.

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

 

You are missing the point on many levels. Let me try to help you understand where you are going wrong.

1. The RFP instructions that state the government will not pay for proposal prep costs are there to tell bidders not to include proposal prep costs as estimated direct costs in their cost proposals. There is absolutely no prohibition on including proposal prep costs in a B&P pool allocated on the same base as is used for G&A expense allocations. (Ref. FAR 31.205-18.) One reason you don't include your proposal prep costs as estimated direct costs in your cost proposal is that you might not win. And then you have to absorb those costs out of profit. But if you include them in your B&P pool then you recover them along with your G&A expenses, against active contracts.

2. "Overstated OH and G&A" is a strange phrase to use. Please stop using it. The cost pools and associated indirect cost rates are not overstated if they are based on budgetary estimates (or actual costs). Do you mean forward-priced, estimated, OH and G&A indirect cost rates? You said "we have a five-year forwarding averaging plan on file with DCAA" which is another unclear phrase. Do you mean you have submitted a Forward Pricing Rate Proposal (FPRP) that has become an Forward Pricing Rate Agreement (FPRA)? Most small companies don't do that, so I'm not sure where you are at with DCAA. Regardless you should use the indirect cost rates in your proposal that are the most accurate estimates of the indirect rates you expect to incur. To me, that would mean (at a minimum) including the proposal prep costs in the appropriate indirect cost pool and including the contract award in your business base that is used for cost allocation. You don't "overstate" your indirect costs, you estimate them as accurately as you can.

3. If you add your proposal prep costs to your G&A expense pool, you do not "spread that cost over several bids." Instead, you will allocate your B&P expenses plus your G&A expenses to all active contracts you have during the year. To be clear: B&P and G&A expenses are period expenses, meaning you can only allocate the costs you incur during your fiscal year to contracts that are active in that same fiscal year. You can increase your out-years' estimated indirect rates based on budgeted (future) spending, but you can only recover actual spending against the actual contracts on which you are performing.

4. To answer your question: NO. The company does not "absorb" the proposal prep costs because it allocates the costs to its active contracts. If you have only FFP contracts and the actual G&A expense rate is higher than you bid, so sorry. You should have budgeted better and forecasted an increase in proposal prep costs.

4.a Also, you forgot the profit component you get to add to your cost estimate, which is not nothing. Further, you forgot the possibility that you might underrun your FFP contract, which has been known to happen from time to time, especially at contractors whose business base is growing. When the large defense contractors laid off thousands in the mid-nineties, their top-line revenue dropped but their bottom line profits shot up because their indirect costs dropped suddenly, and those costs were allocated to FFP contracts.

5. From a financial statement perspective the contract's margin, if it is awarded, is the difference between costs incurred and costs billed. By "costs incurred" I mean costs before G&A is allocated, because (as noted above) G&A is a below-the-line period expense for financial statement purposes; it is not included in Cost of Sales. So if you do a good job forecasting your expenses (including indirect expenses) then the margin equals G&A expense plus profit (it excludes OH because OH is part of Cost of Sales on financial statements). If you underrun, you make more margin; if you overrun, then so sorry.

6. It is a rational approach to add the costs of preparing a proposal, supporting fact-finding and audit, and negotiating with the government and then compare that number to the expected margin that will be earned if the contract is awarded. If the math indicates that the cost is more than the expected margin, then you should not bid. That's the business decision that needs to be made.

 

Hope this helps.

Link to comment
Share on other sites

12 hours ago, here_2_help said:

You are missing the point on many levels. Let me try to help you understand where you are going wrong.

1. The RFP instructions that state the government will not pay for proposal prep costs are there to tell bidders not to include proposal prep costs as estimated direct costs in their cost proposals. There is absolutely no prohibition on including proposal prep costs in a B&P pool allocated on the same base as is used for G&A expense allocations. (Ref. FAR 31.205-18.) One reason you don't include your proposal prep costs as estimated direct costs in your cost proposal is that you might not win. And then you have to absorb those costs out of profit. But if you include them in your B&P pool then you recover them along with your G&A expenses, against active contracts.

2. "Overstated OH and G&A" is a strange phrase to use. Please stop using it. I understand why you say this.  OH and GA are real costs of doing business, however, bid strategies do not believe the entire cost will be spent in the event of a win.  Real as they may be, a significant portion of OH and GA are fixed costs and are not variable.  That's why many bidders are willing to put a ceiling on G&A.  The cost pools and associated indirect cost rates are not overstated if they are based on budgetary estimates (or actual costs). Do you mean forward-priced, estimated, OH and G&A indirect cost rates? You said "we have a five-year forwarding averaging plan on file with DCAA" which is another unclear phrase. Do you mean you have submitted a Forward Pricing Rate Proposal (FPRP) that has become an Forward Pricing Rate Agreement (FPRA)? Most small companies don't do that, so I'm not sure where you are at with DCAA. Regardless you should use the indirect cost rates in your proposal that are the most accurate estimates of the indirect rates you expect to incur. To me, that would mean (at a minimum) including the proposal prep costs in the appropriate indirect cost pool and including the contract award in your business base that is used for cost allocation. You don't "overstate" your indirect costs, you estimate them as accurately as you can.

3. If you add your proposal prep costs to your G&A expense pool, you do not "spread that cost over several bids." Instead, you will allocate your B&P expenses plus your G&A expenses to all active contracts you have during the year. To be clear: B&P and G&A expenses are period expenses, meaning you can only allocate the costs you incur during your fiscal year to contracts that are active in that same fiscal year. You can increase your out-years' estimated indirect rates based on budgeted (future) spending, but you can only recover actual spending against the actual contracts on which you are performing.

4. To answer your question: NO. The company does not "absorb" the proposal prep costs because it allocates the costs to its active contracts. If you have only FFP contracts and the actual G&A expense rate is higher than you bid, so sorry. You should have budgeted better and forecasted an increase in proposal prep costs.

4.a Also, you forgot the profit component No.  You can only get away with so much Fee.  If you raise your Fee from 8 to 12 per cent on a contract this small  you scarcely make a dent in recovering the aforementioned B&P costs.  This contract is small enough that it could be subject to reveal cost and pricing data, and we certainly don't want to put a glaring Fee in the pricing.  you get to add to your cost estimate, which is not nothing. Further, you forgot the possibility that you might underrun your FFP contract, which has been known to happen from time to time, especially at contractors whose business base is growing. When the large defense contractors laid off thousands in the mid-nineties, their top-line revenue dropped but their bottom line profits shot up because their indirect costs dropped suddenly, and those costs were allocated to FFP contracts.

5. From a financial statement perspective the contract's margin, if it is awarded, is the difference between costs incurred and costs billed. By "costs incurred" I mean costs before G&A is allocated, because (as noted above) G&A is a below-the-line period expense for financial statement purposes; it is not included in Cost of Sales. So if you do a good job forecasting your expenses (including indirect expenses) then the margin equals G&A expense plus profit (it excludes OH because OH is part of Cost of Sales on financial statements). If you underrun, you make more margin; if you overrun, then so sorry.  I believe you are making reference to the GAAP format for financial statement presentation, which prefers that administrative costs be shown below the gross profit line.  I believe you to be quite correct, but not necessarily relevant for this discussion.

6. It is a rational approach to add the costs of preparing a proposal, supporting fact-finding and audit, and negotiating with the government and then compare that number to the expected margin that will be earned if the contract is awarded. If the math indicates that the cost is more than the expected margin, then you should not bid. That's the business decision that needs to be made.  Yes, that appears to be the obvious dilemma.  Contractor wants to "buy in" (if you will) to this small bid in order to attract more business in the future.  Sometimes this works, sometimes it backfires.

 

Hope this helps.  Yes, you are quite helpful.  I appreciate your expertise and willingness to add clarity to many of my recent posts.  Thank you.

 

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...