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Options and Strategies For Cost Or Price Proposals
I posed the question to my 2,900 direct contacts on LinkedIn in hopes that there were real, innovative ideas for cost/price reduction. Unfortunately the majority of answers support techniques that are unacceptable to most contractors. I don’t believe it’s in the best interest of the employees for the good business or customers, which in the end, is detrimental to everyone.
Most of the strategies available for cost/price reduction focus not on price reduction but on the appearance of price reduction but on hiding/obfuscating cost elements. Some, such as uncompensated overtime, are clearly corrupt while others such as bidding-throw labor categories are simply unethical or straddle the line between good and unsavory business practices. Of course companies that pride themselves on recruiting, hiring and retaining people who are at the top of their field are at a disadvantage in the typical proposal evaluation process when faced with these competitors. Furthermore, bidder price evaluators are not privy to any technical advantage that accompanies higher prices, and those in a position to evaluate technical content cannot use pricing deltas to judge the overall value of technical points.
There was an interesting and remarkable response to a question asked in my LinkedIn network. Theresa Wilt from Cubic said what has worked for them is cultivating employees through a strong co-op and internship program. “These employees started very low on the pay scale and have no experience; however, once they graduate they will typically accept an entry level salary, even though they may have 2-3 years of experience. You have those 2-3 years too. Sell the customer on their value. and facilitate the relationship-building process. It’s a win-win for you, your customers and your new hires.” You can see where this deserves consideration but this is a long term solution. Other long-term solutions (Competitive Strategy, Competitive Advantage, and the Competitive Advantage of Nations, Michael Porter, 1980) include:
A focusing strategy (also called a niche or segmentation strategy) involves focusing on a particular customer, product line, geographic region, channel of distribution, step in the production process, or market place. The underlying idea is that a focused company can serve a limited segment more efficiently and at a lower cost than competitors can serve a wider range of customers. Firms may be able to differentiate themselves based on meeting customer needs, or they may be able to achieve lower costs in limited markets. Focus strategies are most effective when customers have specific preferences or specific needs.
Second, differentiation requires a firm to create something about its product or service that is perceived as unique throughout the industry. Whether the features are real or only in the customer’s mind, customers must perceive the product as having desirable features found in competing products.
Additional above-board strategies may include locating employees closer to the customer when the customer’s locations offer the opportunity to reduce your overhead through legitimately low facility and labor costs. Actually coordinating with customers allows you to develop on and off site labor rates. Those on customer facilities will be bid and billed at a lower rate because you are not absorbing all the overhead costs.
Contractors themselves are contributing to their weak price position in several ways. Often the price offer is viewed as a repository for B schedules and other dry contract related information rather than an additional opportunity to sell. Furthermore, many contractors consider sacrosanct the prohibition to include cost and pricing data in amounts other than price proposals. The groundless fear of immediate elimination, therefore, eliminates the opportunity to explain the high value; A comparative explanation rather than a hard dollar count.
It is responsible for justifying your pricing and exposing the true cost to the higher priced contractor. Employees are forced to give up benefits, exist in a bullpen and the impact of lower wage costs is passed on to your customers through lower productivity and increased turnover. Although these costs are difficult to quantify, there is enough anecdotal evidence to mount a convincing argument in favor of a seller with a higher price. Using that argument elsewhere in an executive summary or technical proposal does not and does not violate the “no cost to tech volume” rule.
Shipley Associates (Shipley Associates Proposal Guide for Business and Technical Professionals, 3rd Edition, age 169) lists six points for presenting cost and pricing data. All of them help entice the customer to do a cost benefit analysis. Shipley has six points:
- Include value in the executive summary unless prohibited.
- Explain and quantify your added value components whenever possible, rather than claiming to offer added value.
- Present cost and price data graphically to engage senior management, promote quick understanding and establish perspective.
- Determine cost or value with past performance data.
- Present relative cost comparisons in a technical proposal when actual cost data is not permitted.
- Prepare a cost quantity summary for cost prohibitive markets in a technical proposal.
What Shipp doesn’t mention is a direct comparison with the competition based on known, public data. For example, XYZ Company has underrun and overrun their last four or five contracts, or that they are suffering from a turnover rate that is significantly higher than the industry average. Opinions vary on if and how to present this information and it may be offensive to many people but there is a preference for doing so. Consider the recent battle between Boeing and Northrop Grumman over the flying tanker and the McDonald’s/Burger King Grill vs. the flame broiled hamburger.
Of course, a proposal isn’t the first place your customer should learn about your pricing issues or strategy. The program manager or account representative should take every opportunity to illustrate the value of your approach between bids. Point out your ability to quickly fill open positions with well-qualified people and what that means in terms of value and overall contract performance. Similarly, it is not the right time to start trying to find the release of a request:
- What your client believes the job will cost
- What budget has been allocated for the work?
- Who is your competition, how have they priced in the past and how are they likely to bid the contract in question
- What will it actually cost you?
Finally, constantly verify your cost/price data. Never discount the possibility that you may be wrong about whether benefits are industry standard or what a competitive salary is. You can be the employer of choice for all the competitively wrong reasons. There are entire industries built on answering these questions, you can get help.
The bottom line is that your burdensome cost is the price you expect the government to pay for your services. Hiding costs or cheating by reducing employee living standards only delays payment and gives contractors a very bad rap in certain government circles.
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