Educational Forum: Strategic Cost Estimating –

Understanding Your Costs to be More Realistic and Competitive in Today's Market

Bill Walter, CPAGovernment Contract Consulting Services

Dixon Hughes Goodman, LLPbill.walter@dhgllp.com

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Agenda• Winning Federal Government work is becoming

increasingly more competitive in today's market. • Learn practical applications and options for cost

estimates, cost allocation theories, indirect cost rate structures and how these all impact your company's overall bidding strategies.

• You will gain understanding of when to make modifications, how to analyze the impact and what you need to provide auditors and contracting officers.

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Topics

• Current LPTA Environment – Why do indirect rates matter?• Bidding, Billing and Actual Rates – Oh my!• Bidding to Win vs. Total Cost Absorption• Forecasting and Budgeting – Understanding the dynamics of

cost and the impact on profitability• Impact of labor and volume on indirect rates – strategies for

the future• Key Performance Indicators – Risk awareness and

management

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First – A Story . . .

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Bidding, Billing and Actual Rates

• Rates for all purposes:– Forward pricing rates– Provisional Billing rates– Year end actual rates

• Same cost structure . . . . . . different data set

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Current LPTA Environment

• Why do indirect rates matter?– Impact of competition– FAR Part 15 – Cost or Pricing Data misused

• Which question should I be asking?– Are my rates too high?– Am I loosing work based on price?– Do I have the right rates?– Do my rates reflect my differentiation?– What work am I losing on price?

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Bidding to Win - Total Cost Absorption

• At the end of the day – you need to understand your costs!– Understand investments– Be careful of “bid to win” strategies . . .

. . . understand implications before you bid– Can use “special” rates for “special” contracts . . .

• Example – bidding the “Uber Project”– Lower rates due to higher base– New indirect rate solely for the proposed work

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Forecasting and Budgeting

• Set expectations• Understand cost drivers• Strategy

– Know your customer - market research– Consider multiple pools / bases– Forecast on your strategy– Consider cost and rate drivers– Analyze the impact on profitability

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Cost Allocation Tools

• Multiple indirect cost pools– Function – engineering vs. manufacturing– Location – Client site versus Company Site– Benefits – SCA vs. traditional vs. retiree

• Use of service centers– IT – Communications– Facilities

• G&A Bases• Home office expenses

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Cost/Value Drivers

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Pri

ce

Perceived Value

LPTA

UniqueCommon

Hig

h C

ost

Low

Cost

DIFFERENTIATION

Impact volume on indirect rates

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Indirect Cost Pool

$$$

Indirect Cost Base

$$$

Rate Challenges

Minimal Significant -

0.5

1.0

1.5

2.0

2.5

3.0

SimpleMultiple

Risk of losing work – overstated indirect cost

Risk of winning work – un-derstated indirect cost

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Key Performance Indicators

• Risk awareness and management– Labor utilization– Variance to forecasted rates– Variance to Anticipated Profit– Change in Working Capital

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Next Steps

• Strategy• Understand your costs• Understand you market needs• Set expectations . . .• Execute and monitor

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Recommendations for Success

Be Proactive . . .Not Reactive!

How to Survive

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More Than Just Compliance

• Understand your cost drivers• Don’t be afraid to invest• Tie your rates to your strategy to support how you do

business – not the other way around!• Keep it consistent – Keep it simple• Don’t let desperation take you down

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Questions?

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