Find Your Way Through a Foggy Market: Forecast Forward-Pricing Indirect Rates

New year, new budget. That goes without saying for a well-run business.

Starting the year off with so many what-ifs and uncertainty from a worldwide pandemic and power shift in Washington can leave your GovCon firm questioning how to navigate 2021. If you’re going to thrive, you’ll have to do so without a clear market view. That is the backdrop for the question at hand:

Does my firm really need to forecast forward-pricing indirect rates for upcoming proposals?
The bottom line is…YES! It’s always wise to look into the future beyond your immediate expectations, especially when that future has way too many unknowns

First Things First: Lay the Foundation with a Baseline Budget

Before taking on advanced forecasting, establish a baseline budget. Take a conservative approach and be sure to include:

  • Existing business.
  • New business to be awarded in the coming year for which you have a minimum certainty level of 75%-80%.
  • Desired operating expenses that are in line with both your expectations and your lines of business.

Chart the Potential for the Good, Bad, and Ugly

A key element in budgeting for uncertainty is an upside/downside chart that will help you identify potential growth or shortfalls.

  • The middle of the chart should reflect your baseline budget.
  • The upside should include every opportunity you will be pursuing in the coming year that represents a potential award.
  • The downside should include the loss of any current work being done by your firm that has the potential to fall off.

Remain Nimble—Run Scenarios

Scenario planning helps you remain flexible in a shifting federal marketplace.

Do you see the potential for a game-changing project or material growth opportunity to appear on the horizon? If so, you’ll want to avoid overstating your budget and indirect rates.

Are you concerned that your current bid position may not be competitive? Use scenario planning after establishing your budget to see how it affects your bid strategy and overall rate structure.

Best Case/Worst Case
Let’s say a major opportunity (upside) presents itself that would have a material effect on your business structure and warrant a change in your bid strategy to be more competitive:

  • Highlight the potential project in the upside of your chart and run a scenario budget that includes this opportunity.
  • Make sure you include not only the potential revenue and cost of goods sold, but also the categories needed to sustain the new opportunity, such as infrastructure spending (facilities), administration, labor, and recruiting.
  • If you run the numbers and this opportunity—along with all supporting expenses—substantially improves your PWin (Probability of Win), use the accompanying indirect rates in your proposal. Include a caveat that these indirect rates/pools will be effective only after award.

You can also use scenario planning to look at the worst case. What if the upside growth in your budget fails to come to fruition? Run the downside scenario to understand the rate impact.

Forecasting Makes Flexibility Your Super Power

Scenario planning is a tool with almost unlimited flexibility, but be strategic in your approach. Do not create unrealistic scenarios just to check the box on planning diligence. Ensure your input is meaningful to your business and supported by real-life facts and figures. This is particularly important if you are required to submit rates to the Defense Contract Audit Agency (DCAA) for approved Provisionals. You will need to provide backup calculations and commentary to this effect within your proposal.

Our final answer on the necessity of forecasting forward-pricing indirect rates? Yes, it is absolutely necessary! There may be a few instances where “it depends” applies, but “no” should never be part of your market equation.

CAVU’s experienced GovCon market financial experts can help you generate forecasting scenarios, so you’re ready to pivot and find the most profitable path through whatever lies ahead in these extraordinary times. Reach out today.