Idiotic Price To Win (PTW) Approaches: #1 Buying Labor Wrap Rates (11-22-18)

Some time ago CAI/SISCo was engaged to provide Price To Win (PTW) training seminars and help design and implement a common PTW approach for a major government contractor and its operating units. Their focus on PTW was the result of a spate of price-based incumbency losses.

A dry run of our training revealed that, for targeted competitors, the client had a unique view of how Direct Labor costs should be transformed into competitive bid Labor Rates. PTW practitioners usually begin a study by identifying the competing prime bidders and their bid team composition. Then, for the opportunity's provided or developed suite of labor categories (LCATs):

• decide how each competitive bid team member is likely to participate, on an LCAT-by-LCAT basis; and
• develop, update, leverage and apply labor fringe and overhead element build-ups before adding in G&A and Fee.

Our customer disagreed. They advocated a simple, elegant and wrong approach to the development of competitive labor rates for PTW purposes - buying historical corporate wrap rates and using them to turn targeted competitor team member Direct Labor costs into billable Labor Rates.

My objection to teaching this approach was that it short circuited the development of key competitive pricing information which should have no place in professional PTW practice. Here are three reasons why this is the case.

First, it is a rare prime bidder that proposes to provide more than ~60% of the labor itself. The PTW practitioner that plans to use a bought Wrap Rate would need to:

• apply the prime's bought Wrap Rate to all labor; or
• buy a Wrap Rate for each (major?) subcontractor and apply it to only those LCATs that that subcontractors with Wrap Rates are likely to be providing.

Second, a Wrap Rate for a project is an output not an input. A project Wrap Rate is the result of deep analysis of a competitive bid team that builds-up a discrete set of LCATs that can get the job at hand done. Do the math and you will find that LCATs with higher Direct Labor costs have lower Wrap Rates than LCATs with lower levels of Direct Labor cost. For example, an opportunity that calls for 50 Rocket Scientists will have a vastly different Wrap Rate (probably lower) than one that seeks 50 Food Service Workers.

Third, PTW professionals know that competitive bid teams don't always play by Marquess of Queensberry Rules. PTW must mirror likely competitive strategies and tactics, including:

• the use of uncompensated overtime (more billable hours for the same pay);
• benefits avoidance (e.g., use of retirees); and
• the use of 1099s.

I could go on (e.g., what about multiple work locations, etc., etc.). The bottomline is this: if you want professionally developed PTW results, or if you want to be a PTW professional, study the competitors yourself and build and maintain a database of your competitors and the key elements of their "Corporate Personality." And, stay away from Wrap Rate development Voodoo provided by sources that never compete with anyone for anything.

BTW, before I forget, the customer cited above is the only customer I have ever had occasion to fire!

Good luck and happy hunting.

If your firm is grappling with how to develop an effective PTW capability please call me at (301) 807 8171. I am always happy to discuss how CAI/SISCo can help improve your firm's processes and win rates.