Small businesses often have simple accounting systems that meet their immediate needs but do not accommodate future proposal needs. For example, if you only perform as a services subcontractor and all your subcontracts are time & material or fixed price labor hour with little or no travel and material content, it may not be important to have separate fringe, overhead and general & administrative (G&A) rate pools. To be competitive on opportunities that have more than just labor, you will want to consider how those indirect burdens will impact your total price. And if you want to grow your business with prime opportunities, consider that you may have significant subcontract content.
Just such a challenge faced a small disadvantaged contractor planning to bid a prime set-aside opportunity which required teaming with other businesses to have the resources and past performance to submit a competitive bid. Unfortunately, their accounting system which had been reviewed and approved by DCAA placed the full overhead/G&A burden (nearly 30%) on all direct cost including subcontracts, travel and ODCs (other direct costs). Pricing in accordance with their established accounting practices resulted in a price that could not be competitive on this proposal with nearly 50% subcontract content and significant travel and ODCs.
The solution seems obvious – develop a burden rate for the non-labor costs which does not include costs that are associated solely with labor. What you can’t do is just pull a number out of the air; you have to be prepared to support that burden rate in the event of an audit. With a limited time to prepare a proposal, the effort associated with restructuring your accounting system, estimating indirect costs that are appropriately applied to non-labor, and evaluating the impacts of these changes on current contracts can be daunting. Any pricing that is not consistent with your standard accounting practices should be disclosed in your bid.
What can you do to prepare for future opportunities that may be a different mix than your current business? First, make sure your accounting structure collects costs in enough detail to separate labor-associated burdens from non-labor burdens. In addition to non-labor costs, opportunities can have differing labor content like contractor site vs. government site, overtime, and overseas work which may require DBA (Defense Base Act) insurance or special pay differentials like hardship pay, danger pay, housing (HOLA) or cost of living (COLA) allowances.
If you are bidding a large contract that significantly alters your direct cost base, you can consider the impact of that additional base in an already established indirect rate whether previously approved by DCAA or not. Any variance between the indirect rates used in your pricing and your established rates should be disclosed in your proposal and is subject to review or audit.
It’s important to be aware of the pricing challenges as you consider whether to bid or not on opportunities that may require changes to your accounting system or established rate structure and to start early to prepare. An accountant familiar with government requirements for what is and isn’t allowable cost should be consulted to assist you in developing a pricing strategy that is compliant, competitive and minimizes your cost risk.