Educational Forum: Strategic Cost Estimating – Understanding Your Costs to be More Realistic and Competitive in Today's Market Bill Walter, CPA Government Contract Consulting Services Dixon Hughes Goodman, LLP 1

Agenda Winning Federal Government work is becoming increasingly more competitive in today's market. Learn practical applications and options for cost estimates, cost allocation theories, indirect cost rate structures and how these all impact your company's overall bidding strategies. You will gain understanding of when to make modifications, how to analyze the impact and what you need to provide auditors and contracting officers. 2

Topics Current LPTA Environment – Why do indirect rates matter? Bidding, Billing and Actual Rates – Oh my! Bidding to Win vs. Total Cost Absorption Forecasting and Budgeting – Understanding the dynamics of cost and the impact on profitability Impact of labor and volume on indirect rates – strategies for the future Key Performance Indicators – Risk awareness and management 3

First – A Story... 4

Bidding, Billing and Actual Rates Rates for all purposes: – Forward pricing rates – Provisional Billing rates – Year end actual rates Same cost structure different data set 5

Current LPTA Environment Why do indirect rates matter? – Impact of competition – FAR Part 15 – Cost or Pricing Data misused Which question should I be asking? – Are my rates too high? – Am I loosing work based on price? – Do I have the right rates? – Do my rates reflect my differentiation? – What work am I losing on price? 6

Bidding to Win - Total Cost Absorption At the end of the day – you need to understand your costs! – Understand investments – Be careful of “bid to win” strategies understand implications before you bid – Can use “special” rates for “special” contracts... Example – bidding the “Uber Project” – Lower rates due to higher base – New indirect rate solely for the proposed work 7

Forecasting and Budgeting Set expectations Understand cost drivers Strategy – Know your customer - market research – Consider multiple pools / bases – Forecast on your strategy – Consider cost and rate drivers – Analyze the impact on profitability 8

Cost Allocation Tools Multiple indirect cost pools – Function – engineering vs. manufacturing – Location – Client site versus Company Site – Benefits – SCA vs. traditional vs. retiree Use of service centers – IT – Communications – Facilities G&A Bases Home office expenses 9

Cost/Value Drivers 10 Price Perceived Value LPTA UniqueCommon High Cost Low Cost DIFFERENTIATION

Impact volume on indirect rates 11 Indirect Cost Pool $$$ Indirect Cost Base $$$

Rate Challenges 12

Key Performance Indicators Risk awareness and management – Labor utilization – Variance to forecasted rates – Variance to Anticipated Profit – Change in Working Capital 13

Next Steps Strategy Understand your costs Understand you market needs Set expectations... Execute and monitor 14

Recommendations for Success Be Proactive... Not Reactive!

How to Survive 16

More Than Just Compliance Understand your cost drivers Don’t be afraid to invest Tie your rates to your strategy to support how you do business – not the other way around! Keep it consistent – Keep it simple Don’t let desperation take you down 17

Questions? 18