Do your pricing strategies align with your growth strategy?

At a glance:

• Main takeaway: Planning for the future is just as important, if not more so, than analyzing past performance. Now is a good time to analyze costs, considering all direct and indirect costs associated with your product or service both short-term and long-term.
• Impact on your business: Projected indirect rates are used in cost proposals and contract negotiations with government agencies. Update rates and cost pools to reflect business goals.
• Next steps: Cash planning is crucial to ensure you’re generating sufficient cash flow to support growth initiatives and meet financial obligations.

Contact Aprio’s Government Contracting Advisory Services team to help support your strategic objectives.

The full story

As you head into budget season, creating pricing strategies for your government contracts that align with your growth strategy is key.

Do your pricing strategies align with your growth strategy?

In the dynamic business landscape, planning for the future is just as crucial as evaluating past performance. As you gear up for budget season, it’s imperative to craft pricing strategies that harmonize with your growth strategy.

This synergy is vital for ensuring sustainable expansion and profitability. As you align your pricing strategies with your growth objectives, keep three considerations in mind.

1 – Complete a comprehensive cost analysis

Conducting a comprehensive cost analysis is one of the foundational steps in aligning your pricing strategies with your growth strategy. Now is a good time to analyze vendor spending for direct and indirect costs.

This involves evaluating all costs associated with your product or service. You should consider direct expenses, fringe, overhead, indirect costs, and other expenses that contribute to delivering value to your customer.

When conducting a cost analysis, you should consider several key factors to ensure that you have a comprehensive understanding of the financial implications of a particular decision or project. Consider fixed and variable costs to determine your break-even point and profitability.

Determine the timeframe for your cost analysis; short-term and long-term costs can vary significantly. Contemplate how costs may change over time and impact your decisions.  Assess the risks associated with your costs.

Consider using a sensitivity analysis to account for uncertainty in your cost estimates.  Be aware of external factors that can affect your costs, such as rising labor costs, regulation changes, market conditions or technology advancements.

2 – Develop projected rates for government contractors

Accurately projecting rates is crucial for businesses engaged in government contracting. These rates form the basis for cost proposals and contract negotiations with government agencies, which are critical in ensuring the contractor can cover their costs while providing the required services or products to the government.

Projected rates are predetermined costs that you estimate and allocate to various projects. Start by analyzing historical financial data. This data can serve as a baseline for estimating future costs. Consider the impact of rising fringe and labor costs.

Do you intend to hire a new Business Development person?

What about necessary professional fees to support CMMC compliance?

How will these additional expenses impact your G&A rates?

You may want to consider new cost pools to best allocate resources and support your pricing proposals. For example, if you are bidding on a contract requiring a substantial allocation of subcontractors rather than direct labor, a subcontractor handling cost pool may be necessary to remain competitive. 

Define and document the purpose and nature of each cost pool. Compare your rates against industry benchmarks. This can help you identify areas where you can improve efficiency or reduce costs. Review and update your rates periodically to reflect changing circumstances, market conditions, and business goals.

3 – Engage in cash planning for sustainable growth

Pricing proposals and growth strategies are critical in cash planning for a business.  The alignment is crucial to ensure your company generates sufficient cash flow to support its growth initiatives and meet its financial obligations.

Cash planning involves detailed cash flow projections to anticipate the timing of cash inflows and outflows. Accurate revenue forecasting is essential for cash planning, as it provides insight into how much money the business can expect to generate in the future.  Consider anticipated wins such as the new Oasis+ contract. 

Growth strategies often involve increased expenses such as hiring or expanded operations. The business plan may require capital investments such as technology solutions to improve business operations or allocating funds for research and development to create new products or improve existing ones.

You may also need to account for additional resources to support new government regulations such as ESG. You must account for variable and fixed costs to ensure your business can maintain profitability and cash flow while pursuing growth.   

Whether you’re expanding capacity, entering new markets, or developing new products, your cash planning activity must consider these investment needs. Effective cash planning is an ongoing process that requires careful monitoring and adjustment as your financial situation evolves.

A final word

Aligning your pricing strategies with your growth strategy is paramount for sustainable and profitable expansion. By conducting a thorough cost analysis, projecting rates accurately for government contracts, and implementing effective cash planning, you position your business for success.

Remember, the future of your business depends on the decisions you make today.

As you navigate this process, Aprio’s Government Contracting Advisory Services team is here to help you achieve your strategic objectives.

Connect with an Aprio team member today.

Additional Resources

Accelerate Your Month-End Close Process for Better Data and Results

Cost Account Standards Decoded: A Contractor’s Guide to CAS Compliance

A Contractor’s Guide to Incurred Cost Submissions & Audits