The federal government evaluates costs for goods and services using the Federal Acquisition Regulations (FAR) as it governs what is allowable to be included your cost of goods or services. As a small business you may produce a produce or a service your costs will consist of the following items:
Goods i.e. fabricated parts or constructed buildings:
· Direct Materials i.e. metal used to make the part or concrete for the building foundation
· Direct Labor i.e. drill operator or brick layer who worked to produce the good
· Overhead those items used to directly support production i.e. supervisor or oil for the drill or fuel for the concrete mixing equipment
· General & Administrative (G&A) expense—corporate costs for accounting, human resources and owner’s salaries, etc.
· Profit—your fee that you seek to earn after all of the above costs are incurred
The total of these costs are generally expressed in some unit of measure i.e. per part for a fabricated item or per building for a constructed unit. FAR defines for each category what is acceptable i.e. your G&A can not include an exotic annual trip for the owners’ family but it can include training and development on the latest practices for your craft.
Services Delivered on or off a government facility:
· Direct Labor-the base labor rate what you actually pay the employee
· Fringe—the cost of medical coverage, holidays, vacation, 401k and to other benefits
· Overhead—this can be on or offsite as a category of what it takes to support the contract i.e. employee recognition programs, bonuses, training not reimbursable by the government but required to remain current and competent, etc.
· G&A—your corporate costs as noted above
· Profit—your desired fee
The total costs are summarized in cost pools which are expressed as a percentage of the your direct labor rate pool to develop a Fully Burdened Rate (FBR) which in essence is your base labor rate i.e. $10 along with the hourly expression of the above cost categories as a percent of the base labor rate. Your wrap rate or multiplier is in effect the FBR divided by the labor rate. This tells you your markup percentage per each dollar incurred in direct labor. For example once you calculate your wrap rate it could be 1.65 so you would bill the government $16.50 per hour which includes the cost of labor, fringe benefits, overhead, G&A and your fee all expressed in a per hour unit of measure.
It is important to know your cost structure as each opportunity listed by the government will require the submission of very detailed costs to support your bid and these costs can be audited prior to the contract award or during the period of performance depending on the type of contract by the Defense Contract Auditing Agency (DCAA) which is a part of the Department of Defense but has authority to be discharged to review cost submissions for any federal agency.
If this appears complicated, it is as there are cost specialists in federal cost pricing who know FAR and also the strategy for pricing. The government operates for both goods and services on the Best Value to the Government concept which theoretically states it will not have to be the lowest costs but the best price that offers the highest quality and lowest risk. I will give you some advice, offer the most quality, have the best track record and seek to deliver your goods or services at the most competitive price you can while making a profit as several of us have been ranked number one for our technical cost proposal meaning the quality of what we were offering and our great past performance but loss due to cost.
I highly recommend that you find a firm that specializes in federal cost pricing when you first begin unless you have a business degree and have some accounting knowledge then you can take free courses offered by the SBA but as you grow you should hire a cost specialist or use a firm as you will at some point have to be audited by the DCAA and they expect your processes will be in compliance with FAR which is a job itself versus you focusing on business development for your goods or services.
We have introduced some new terms please see Fed-ology under the forum “Ask Dr. G” for more details:
- Business Development
- Cost pools
- Wrap rate or multiplier
- Fully Burdened Rate