It’s a heated debate that shows no signs of cooling—do the lowest price technically acceptable (LPTA) contracts encourage reasonable pricing or drive down quality?
There are valid points on both sides. But, the most crucial factor is whether an LPTA award boosts or jeopardizes your firm’s profitability.
As the name suggests, the federal government’s LPTA contract process prioritizes price over non-cost factors. LPTA was instituted in the early 2000s in reaction to federal budget restrictions. These procurements require source selection officials to choose the lowest-priced bid from those that meet or exceed the minimum technical specifications of the project.
5 Lessons Learned from the LPTA Front Lines
LPTA contracts can play a positive role in your company’s federal strategy…as long as you heed the lessons learned by those who have preceded you in the market:
LPTA source selection does not always give the best return to government agencies.
Agencies typically use LPTA source selection to procure straightforward items such as office supplies or routine, low-tech maintenance. The issue enters a gray area when agencies use LPTA to procure products or services where quality impacts safety, security, or efficiency. The LPTA process limits agencies’ ability to negotiate and balance performance and price to get the best value.
For this reason, Congress enacted legislation to limit LPTA use in military procurements. In 2018, the National Defense Authorization Act (NDAA) was passed to expand restrictions on LPTA use to civilian agencies. On October 2, 2019, DoD issued a final rule to amend the DFARS limiting the use of LPTA to situations where eight specific criteria are present. In addition, contracting officers should “avoid, to the maximum extent practicable” the use of LPTA in certain acquisition categories including information technology services, cybersecurity services, systems engineering and technical assistance services to mention a few.
Contractors mistakenly think they can get a foot in the door with an LPTA contract, then win a re-compete and increase pricing.
Relying on a re-bid or price increase for follow-on work is a shaky strategy at best. If subsequent contracts are also based on LPTA, the lowest price possible will always be in play. We listen to companies expressing a strategy that they will bid low to get in the door and when the customer sees their value, they can increase subsequent pricing. Results often do not work out the way they expect. Even if the next procurement is not LPTA, most government customers who buy low continue that pattern.
Product/service quality is sacrificed for price.
Granted, this is not always the case. And not all procurements require the highest quality product or service. Before you cut quality to win an LPTA contract, however, consider #4 below.
Optimize your price strategy for bidding holistically.
Go beyond merely lowering profit and all your rates across the board. Here are a few ideas for a more holistic approach:
- Review your budget and target rates to see where you may be able to make rate concessions.
- Conduct a rate impact assessment on the contract you are bidding to see the potential impact on current rates. Rates may drop naturally with the increased volume.
- Consider the impact of adding other new revenue to your existing contracts.
- Review areas for cost savings within your existing rate structure.
- Search for functions in your company that can be outsourced to make your back office leaner.
Don’t skimp on developing a pricing strategy.
If you are going to bid well on LPTA contracts, spend time developing competitive pricing strategies. Consider the following input:
- Understand the customer’s needs, funding availability, and constraints.
- Inquire if there is an independent government cost estimate or other should-cost assessment.
- Research similar recent procurements done on an LPTA basis. Make sure you consider the history of the specific customer, as well as a comparison of comparable scope.
- Know your competition and research publicly available contract and task order history.
- If applicable, research incumbent award experience and changes to the contract over the period of performance.
As government agencies have found that LPTA contracts have not always served their best interest, some have adopted LCTA (Low-Cost Technically Acceptable) contracts. Awards are made on the basis of the Lowest Price, determined by computing the Probable Cost. There is a focus on and evaluation of cost realism against the Government’s evaluated probable cost position. The intent is to develop cost realism by considering the combination of resource realism and rate realism.
There is a profit to be made on LPTA contracts. The key is to determine if low-price bidding makes sense in your company’s business model. Reach out to the govcon accounting experts at CAVU for guidance on a thorough assessment of whether LPTA is a good fit for your firm.