We have all seen what has been occurring with many government procurements, contracts that were previously being awarded based on best value are now being awarded on LPTA (Lowest Price Technically Acceptable.) Tight government budgets, sequestration, program and project cuts and budget uncertainty have forced contractors to alter their strategies in bidding as well as running their business. This article will delve into some of these strategies.

When bidding on a LPTA contract, think of the “Technically Acceptable” part as being a pass/fail situation. All bidders whose technical approach is deemed to be acceptable (those that passed) will be grouped together; award will be made to the lowest price within that group. There are specific strategies that a contractor should consider when pursuing such a procurement.

1. Do not bid additional technical capabilities if it is going to increase the price.

This is where LPTA procurements differ from best value. Under best value, the contractor had an incentive to bid additional capabilities or provide unique solutions as a means of distinguishing itself, even if this increased the overall price. From the buyer’s perspective, these additional capabilities may have been the deciding factor in the award. However, under LPTA, you do not receive any additional points for such items. And if they increase your overall price at all, you might just be pricing yourself out of contention. The takeaway here – bid only to the capabilities specified in the procurement and not more.

2. Do not fall prey to “incumbent disadvantage”.

There actually can be a disadvantage to being an incumbent on a particular procurement. The incumbent contractor has more than likely strived to minimize personnel turnover; however, this leads to increasing personnel costs for each year of performance. It is quite difficult to get existing personnel to agree to pay cuts; however, the non-incumbent contractors are going to be bidding labor rates as low as possible, irrespective of the current wages being paid.

You need to bid your incumbent contract as if this were the first time you were pursuing this effort. Personnel turnover should be expected in this effort to reduce personnel costs.

3. Price to win.

Identify the pricing variables in each of the procurements and what can be done to minimize the pricing. If labor hours are not specified, are there techniques or strategies to reduce the required hours? Have your recruiting department identify the market wages for the various labor categories and bid to the lower end of the spectrum (while still meeting technical acceptability.) Bring competition to your selection of subcontractors and materials vendors. Competition should always bring about lower prices.

A company’s indirect rates can be a major pricing variable between various contractors. Consider the effect this procurement may have on your indirect rate structure. If large enough, you may be in a position to lower your rates being bid.

Finally, consider lowering the profit percentage you are working into your bids. In this current environment, it is better to have lower profit work that covers critical indirect costs than to have none at all.

4. Hold the Government accountable.

Once the contract is won, it is very important for the contractor to hold the government accountable for any changes in the contract scope or anything else that would increase the internal cost over and above what was specified in the original procurement. Remember, you have already bid the contract very tightly from a pricing perspective. Any unpaid changes or scope-creep that occurs could eat into these already thin margins, if not put the overall job into a loss position.

5. Lower actual costs.

From a corporate standpoint, I am often asked about setting up new indirect rates or restructuring current ones. When analyzing this strategy, I like to use an analogy of an elongated balloon. Setting up a new rate may lower the rates being bid for this procurement being pursued (squeezing the air in one end of the balloon) but it increases the rates for the other work currently being performed by the company (the air moving to the other side of the balloon). The overall costs of the company have not been reduced at all--the allocation of those costs has merely changed (the balloon holds the same volume of air). If you want to actually lower your indirect rates, the best strategy is to reduce your costs!

This is not the first time we have experienced a contracting environment similar to LPTA. Back in the 1990s, contracts were being awarded to the lowest bidders. The result was poor contract performance and many programs not being successfully completed. This eventually led to the government awarding contracts based on best value. LPTA is a short-term budgetary solution that can lead to longer-term problems for the government (i.e. poor contract performance). It may take a little while but the government eventually will realize this. The successful companies will adapt until this change occurs.

Michael Smigocki, CPA, CVA is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached via email at MikeS@FedStrat.com.