Inflation is at its highest level since 1982 and every industry is feeling the impact. For government contractors, this environment requires a shift in bidding behavior due to changes in the cost and risk models for both government contractors and customers. Citrin Cooperman’s clients look to us for help navigating this uncertainty, especially in competitive bids.
Defeating an incumbent on labor-based services contracts used to involve bidding much lower on direct labor rates and lowering headcount to entice the government to make a change. This does not remain true today, as labor inflation is at or near an all-time high. Bidding direct labor rates below realistic market rates requires the government to take a big risk, especially on a cost reimbursable contract.
Here are some steps that can be taken to remain competitive:
- Shape the deal by working with the government to ensure a best value competition – not a low price shoot-out.
- Work with the government to ensure bidders are allowed to propose their best labor basis of estimate (BOE) rather than a government prescribed BOE. This allows you to drop the headcount, but your proposal must be very compelling. It is the bidder’s responsibility to convince the government that your lower headcount proposal is the best value. You must show your ingenuity and bring value to the government in your offer and de-risk the lower headcount. If you truly have an excellent lower-priced approach that you are confident in, consider asking the government to make it a firm-fixed-price (FFP). This takes the risk off them but will put it on you if you win.
- Know your competitors’ wraps. Ensure your wrap rates are very competitive or even consider building a specialized cost center (SCC) to bid the lowest indirect rates possible.
- Keep your margin low. You will need to pull out all the stops to win in the current market.
- Finally, if the government will not allow any flexibility and prescribes their own level of effort (LOE), locking the labor where it is with the incumbent contractor, consider saving your bid and proposal (B&P) and look for a better opportunity.
The Government Contracting Specialty Advisory Practice at Citrin Cooperman will continue to assess the implications of inflation and other economic drivers and how they affect our clients’ business environment. The Government Contracting Practice has a team of consultants, audit, and tax professionals with in-depth industry knowledge that can help you in many facets of your business. Please contact us to learn about how we are approaching these issues and more as we help our clients win more government contracts.
Partner & Government Contracting Specialty Advisory Practice Leader
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