“What Indirect Rates Should I Bid?”
“What indirect rates should I bid?” This is one of the most common questions I hear from small to mid-sized government contractors. It is an understandable question. Indirect rates are a difficult concept to fully grasp when you are new to the government contracting world. They are also very significant when it comes time to price your proposal. If you are too high with the rates you bid, your total cost might be too expensive for the government customer. If you are too low, you could get cornered into an unprofitable job. Bidding rates that are too low can also signal to the government customer that you do not have a competitive fringe benefit package that will attract and retain top talent. While pricing is a very complicated topic that encompasses many quantitative and qualitative variables, here are a few items that you should always consider when establishing the indirect rates that you will bid on a proposal.
What are my current indirect rates?
While this question sounds very straight forward, there can be a lot more that goes into this analysis. What are your current rates? Do you have a good handle on these numbers? Do you understand what your G&A rate is and what that means? Do you understand what drives this cost pool and what costs are in the pool base? These are very important questions to consider. If you do not have a clear answer to these questions, call your advisor and/or CPA and have them go over your current financials and indirect rates. The more you understand your indirect rates and indirect rate structure, the easier it will be to forecast your rates.
Should I add a new pool?
Often, government contracts ask at what point they should add a new indirect expense pool. There is no hard rule on this point. Having a larger number of cost pools can give you the flexibility to bid work more competitively; however, adding a new indirect expense pool creates more complexity and added cost in your accounting process. You must weigh those costs before initiating this change. I will not go into too much detail here, as this topic would require its own article. But, if you think that your company would benefit from changing its indirect rate structure, talk to your advisors and have them run scenarios to help you make the decision.
Will my indirect rates change in the future?
You want to bid your indirect rates consistently with your forecasted rates during the period of performance of the proposed effort. However, determining these forecasted rates is the difficult part. While no one can accurately forecast costs down to the penny, there are methods and tools that can be used to get a good idea of what costs will be in the short-term future. You can also plan contingencies in your forecast to help manage to the budget. Certain questions to keep in mind when developing a cost forecast:
- If I win this effort, how much added direct and indirect cost will I incur?
- Do I expect to gain or lose any other work during the proposed effort’s period of performance?
- Do I plan on hiring any additional indirect employees in the future?
- Do I plan on expanding into a new facility in the future?
- Do I plan on changing the benefits in my fringe benefit package in the future?
All the variables above can cause significant changes to the indirect rates of a small company. It is important to work with your advisor and CPA to make sure you have a solid forecast that considers your future cost scenarios. Understanding your indirect rates, and what you think they will be in the future, is the first step to a profitable bid.
Are my rates competitive?
If your indirect rates are too high, your bid price may not be competitive. Knowledge of your industry, customer, competition, and competitive advantage will help you understand what a competitive number should be. Also, have discussions with your advisor or CPA. They likely have exposure to a multitude of businesses in your industry and can help you understand the competitive landscape.
If you think that your indirect rates are consistently too high, you need to have a plan reduce them. Obviously, you can easily bid lower rates on a proposal, but that does not help you manage those rates when it is time to execute. Having a good understanding of your indirect rates will help you set a budget and adhere to it. For example, increasing your direct labor is often a quicker way to lower your G&A rate than reducing G&A expenses. Talk with your advisor and create a budget to get your company where you want it to be.
If you think that your indirect rates are consistently too low, you need to question why they are too low. Having lower rates can make your bid lower than your competitors, but there is often a reason why your competitors cannot match a low bid. There may be hidden costs in growth that you are not considering. How much is the rent in my area for an office space? What is the going rate for a part-time HR position? Will I have to work non-billable time to manage my company as it grows? These are all important questions to consider if you are a growing business with lower than average indirect rates. Consider these items in your forecasts and make sure you do not limit your company’s growth by bidding indirect rates that are too low.
Who can help me with this bid?
Luckily, this is an easy question to answer! We, at BMSS, have a depth of knowledge and experience in the government contracting industry. We have helped numerous clients of all sizes with proposal and pricing efforts. If you have any questions or need any support, please contact us by calling (833) CPA-BMSS or visit our website at www.bmss.com.
Written by Government Consulting Supervisor Taylor Bailey.