Hoping that there were real, innovative ideas for reducing cost/price, I asked the question to my 2,900 direct connections on LinkedIn. Unfortunately, most responses endorsed techniques that are unacceptable to many contractors. I don’t think it’s good business or in the best interest of clients to employ bogus techniques that are ultimately detrimental to everyone.
Most of the available cost/price reduction strategies focus not so much on reducing the price as on appearing to reduce the price but only hiding/obfuscating the cost elements. Some, like uncompensated overtime, are explicitly discouraged, while others, like bidding to drop job categories, are simply unethical or straddle the line between good and bad business practice. Companies that pride themselves on recruiting, hiring, and retaining people who are clearly at the top of their field are at a disadvantage in the typical proposal evaluation process when up against these competitors. In addition, bidders’ price assessors are unaware of any technical advantage accompanying a higher price, and those in a position to assess the technical content cannot use price deltas to judge the full value of technical points.
There was an interesting and noteworthy response to the question posed to my LinkedIn network. Cubic’s Theresa Wilt said that what worked for them was cultivating staff through a strong co-op and internship program. “These employees started very low on the salary scale and with no experience, however by the time they graduate they will generally accept entry level salaries even though they have 2-3 years of experience. You also have those 2-3 years to sell your value to the customer and facilitate the relationship-building process. It’s beneficial to you, your customer and your new hires.” You can see where this warrants consideration, but it’s a long-term solution. Other long-term solutions (Competitive Strategy, Competitive Advantage, and Competitive Advantage of Nations, Michael Porter, 1980) include:
- Focus
- differentiation
A focus strategy (also known as a niche or segmentation strategy) involves concentrating on a particular customer, product line, geographic area, distribution channel, stage of the production process, or niche market. The underlying idea is that a focused company can better serve a narrow segment more efficiently and at lower cost than competitors who can serve a broader range of customers. Firms can differentiate based on meeting customer needs, or they can achieve lower costs within limited markets. Focusing strategies are most effective when customers have distinctive preferences or specialized needs.
The second, differentiating, requires a company to create something about its product or service that is perceived as unique across the industry. Whether the features are real or simply in the customer’s mind, customers must perceive the product as having desirable features not commonly found in competing products.
Other past strategies may include locating employees close to the customer when customer locations would provide the opportunity to reduce their overhead through lower legitimate facilities and labor costs. In reality, co-location with customers allows you to develop on-site and off-site labor rates. Those at the customer premises would be offered and billed at a lower rate because you are not absorbing all overhead costs.
The contractors themselves are contributing to their poor price positioning in several ways. Too often, the price proposal is seen simply as a repository of the B tables and other dry contractual information, rather than an additional opportunity to sell. In addition, many contractors find the prohibition on including cost and price data in volumes other than the price proposal sacrosanct. The unfounded fear of instant deletion therefore takes away the opportunity to explain a higher price; a comparative explanation rather than a hard dollar calculation.
It is up to the contractor with the highest price to justify their pricing and state the true cost. Employees forced to forgo benefits, exist on a pin and suffer the effects of low wages costing their client through lower productivity and higher turnover. While these costs are difficult to quantify, there is more than enough anecdotal evidence to make a compelling case for the highest priced provider. Use of that argument in the executive summary or elsewhere in the technical proposal will not and does not violate the “no cost in volume technology” rule.
Shipley Associates (Shipley Associates Proposal Guide for Business and Technical Professionals, 3rd Edition, age 169) lists six points for presenting cost and pricing data. They all help entice the customer to do a cost-benefit analysis. Shipley’s six points are:
- Include prices in the executive summary unless prohibited.
- Explain and quantify, where possible, your value-added components rather than simply claiming to offer added value.
- Present cost and pricing data graphically to engage senior management, promote quick understanding, and establish perspective.
- Justify cost or pricing with past performance data.
- Present relative cost comparisons in the technical proposal when actual cost data is not permitted.
- Prepare a cost volume summary for markets where costs are prohibited in the technical proposal.
What Shipley doesn’t mention is a direct comparison with the competition based on known public data. For example, claiming that Company XYZ has underbid and overbid its last four or five contracts or that it suffers from a significantly higher turnover rate than the industry average. Opinions on whether and how to present this information vary and may be disconcerting to many, but there are precedents for doing so. Consider the recent battle between Boeing and Northrop Grumman over the in-flight refueling tanker and grilled burgers versus McDonald’s/Burger King grilled burgers.
Certainly, a proposal is not the first place your customer should learn about your problems or pricing strategy. The program manager or account representative should take every opportunity to illustrate the value of their approach between offers. Point out your ability to quickly fill open positions with well-qualified people and what that means in terms of value and overall contract performance. Similarly, posting a request is not the right time to start trying to find out:
- What your client thinks the job will cost
- What has been budgeted for the work.
- Who is your competition, how have they priced in the past, and how are they likely to bid on the contract in question?
- How much will it really cost you?
Finally, constantly validate your cost/price data. Never discount the possibility that you might be wrong about what benefits are industry standard or what constitutes a competitive salary. You may be the employer of choice for all the competitively wrong reasons. There are entire industries based on answering these questions, you can get help.
The bottom line is that your taxed cost is the price you expect the government to pay for your services. Hiding costs by reducing living conditions for employees or cheating only delays payment and validates much of the bad reputation contractors have in certain government circles.