Negotiations with the Federal Government can be very different than with customers in private industry. When negotiating with other private firms, cost of product or service is important but the ability to make trade-offs in other areas are factors for many firms. Customer loyalty and level of service can be of real importance to private industry.
For federal contracting officers (CO) what they are motivated by is best described in FAR 15.405(b) which states: “The contracting officer’s primary concern is the overall price the Government will actually pay. The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance.” Almost every contracting officer will be focused on price. I’m going to focus on those situations where the acquisition is not competitive and not commercial.
The CO in reviewing any sole source proposal will focus on the elements of cost and the relationship to the effort being procured. In hardware acquisition the main focus will be production hours and material cost. In its simplest form production of any item can be broken into material/material overhead, labor/labor overhead, General and Administrative overhead costs, and profit. The complexity of that data depends on your accounting system. Service efforts will focus on everything listed above except material.
The CO will use his technical team and other support agencies (such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA) in the Department of Defense (DoD)) to breakdown the cost proposal to determine what the government’s position will be for negotiations. In “breaking down” the cost proposal, the CO (or his Price Analyst) reviews each element of cost detailed in the proposed Basis of Estimate (BOE) to determine whether it accurately portrays the costs that will be incurred by the contractor in performing the effort, and includes a reasonable profit for the contractor. Other elements that might be evaluated by the CO are the number of hours that the contractor estimates it will take to perform each step of the effort, and the labor categories that the offeror has indicated that it will require. This position becomes a pre-negotiation document that, depending on dollar value, has been approved by the CO and/or their supervisory chain.
So after the government spends weeks breaking down your proposal, you find yourself sitting across the “table” from the government contracting team. Some rules to remember, first the CO has the final say on everything. No matter what the government technical team or the customer want the CO has final say on resolving any issue on the table. Second rule is all dollars are the CO’s final call, no one else’s.
There are two approaches at the start of negotiations that most COs use based on the training they receive in the government. Some will look to open with simple issues to try and get agreement on all the little issue, driving towards a point where the remaining tough issues are settled easier cause “we are so close to agreement can’t let this issue stop us.” Others will take the approach of tackling the big issues and work to resolve those “elephants in the room” before finalizing the details.
That pre-negotiation position is what the CO is working to achieve. You won’t know those targets but reading the direction of the negotiations will give you good clues on what areas of cost are being questioned. There may be detailed questions on both material and labor cost and you will be asked to justify your positions on all these matters or to adjust your price accordingly. In today’s environment labor and overhead rates have become a bigger factor and providing information on how overheads are calculated (i.e. business base estimates, fixed cost) may be required. Be prepared to explain those rates.
Usually the last thing negotiated is profit/fee. Most Department of Defense CO’s will use the Weighted Guidelines Form DD 1547. Become familiar with that form and in calculating your profit/fee for your proposal use that form. That will help you to understand the CO’s position on profit/fee. In my experience that form will usually result in profits not exceeding 15% (for fixed price efforts) and fees not exceeding 10% on cost reimbursable efforts. When negotiating the profit/fee the CO will look at the “risks” taken by the government and the contractor in performing the effort. If they have allowed higher labor, material, or rate cost than they had targeted in that pre-negotiation document, the CO’s position will be that risk has shifted to the government and profit/fee should be lower.
Negotiations can be fluid and the CO will be making trade-offs during negotiations but bottom line is the CO wants a fair and reasonable price that meets the pre-negotiation position.
NOTE: If you want to leave a reply to this post, use the comment box below. If you have additional questions/comments on this topic, please post them in the Ask a CO Forum.