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Government Contracting - Commercial Pricing
By Willard W. Lindquist
We were in the office of a client recently who lamented the fact that he was limited to earning 6% on his work for the Government. When asked how that happened, he said “Well, when I take my salary numbers, add overhead and G&A and then add fee to that, the contracting officers always say they limit fee to about 6%”. What is wrong with this story?
The most important thing wrong with his statement is that he even revealed his cost basis to his customer. All of his contracts with the government had been on a fixed rate per hour or firm fixed price basis. That smells distinctly of “Commercial Rates”.
So what is this thing called commercial rates? Why would you want to use them? Commercial rates are what you charge for your product, labor hour or widget, that you believe is competitive with the other entrants into the market. It has no cost base. It’s just your “Commercial Price”.
Some of this is old news, but we run into so many people who need clarifications that it’s still a relevant question. Commercial rates have been around forever. They were what the pharaohs were charged for each of the blocks of granite used to build the pyramids. Most of the contractors who do business with the U. S. Government are accustomed to justifying their prices by showing the breakdown of costs that comprise what they charge – detailed justification for that price. For labor hours it’s usually direct labor plus overhead, G&A, and a reasonable profit. For a resale product it might be product cost plus shipping, marketing, warehousing, G&A and profit. In any case, there’s a perceived burden on the seller to prove that his rates are reasonable. That’s what it costs them to deliver the product or labor hour. The problems with this are twofold. If you reveal what your costs are, someone can question both your costs and the amount of profit you would like to earn. If you aren’t in the cost reimbursement business it might require you to keep records that you would not have otherwise kept.
Commercial pricing is different. With commercial pricing you simply bid the prices you normally charge for those services or products. You may be asked to define what costs are included in your pricing. If that happens, you must respond that those are your commercial prices. Forcing you to develop some fictitious breakdown of costs is immaterial, particularly if your practice is to charge commercial prices. Hopefully commercial prices will cover all your costs, but that isn’t material to the prices. They are simply what you charge for an hour or labor or a quart of milk. If they’re competitive you get work, if not, you don’t.
It’s not that you can’t justify the prices. You simply do it a different way. If you’re talking to XYZ Agency you just need to tell XYZ Agency that you sold your stuff to KLM Department and ABC Company at the same rates you are quoting them. That’s justification. Trying to provide comparables from competing companies is usually not a good choice because it’s really hard to prove they are actually comparable.
A related question that often comes up when bidding to the Government: What if you have some historic prices that you would like to bid because they were profitable and some that you wouldn’t like to bid because they are too low? If the circumstances involved in the work are different, you can just point out the differences. Maybe you performed in a customer-provided facility, or there was a substantial amount of overtime, or you had a long-term dependable contract that helped maintain your business base. Most contracting officers (GSA and others) will also accept the fact that your business decisions are not always perfect. If you just plain bid too cheap and the job is not representative of your normal work or prices, say so and eliminate that contract from the justification.
So, what are “Commercial Rates”? They’re just what you charge. After all, KLM Department and ABC Company bought your services or products at those prices.
About the Author
Will Lindquist, President of The Management Link Incorporated, is a sought-after expert in the field of business management. He has a broad background and experience in business strategy, finance, and operations with both large and small corporations such as L-3 Communications, Orbimage, and Fleishman-Hillard. Will approaches every problem with an appreciation for the bottom line and how to grow his clients’ businesses. He brings both strategic and tactical know-how, focusing on financial considerations, business development, and operational excellence. His solutions are practical as well as innovative. Contact him by email Will@TheManagementLink.com You can find out more about The Management Link by visiting their website at www.TheManagementLink.com
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