Price will ALWAYS be a factor.

For those who follow our blog, you may remember the post about the 80/20 Rule. (https://skywayacquisition.com/sales-relationships-8020-rule/) As a recap, the 80/20 Rule in government contracting helps companies understand that in the private sector, the buyer’s decision is often 80% relationship and 20% process. In the government market, it is the opposite: 80% process and 20% relationship.

The easiest way to illustrate the impact of the 80/20 rule is through the comparison of price. For example, when I when looking to hire an accounting firm, I talked to firms who charged as little as $75/hour and as much as $360/hour for their tax planning and financial strategy services. That’s a big gap. As I refined my requirement, I found that the range for the expertise we needed was above $125/hour but less than the $360/hour rate.

NOTE: For the accountants out there, I have to say that I found the $360/rate a bit ridiculous. We have a team of contracting officers with an average of 21 years specialized experience competing actual contracts worth well north of $5 Billion in source selections in our careers. In other words, we’re pretty unique. No offense to accountants, but they are not as unique as we are - and our rates are nowhere near $360/hour. I’m not sure who’s paying that rate…but it’s definitely not our customer base. Ok, rant over. Back to the point.

In the private sector, price is always going to come into the discussion, as the 20%. Regardless of how strong your relationship is with your customer, there is an amount above which he/she is not willing to pay more for your service. No matter now much I like my new accountant, and no matter how much great advice they give, if I find that most accountants charge less than $250/hour and he’s charging me $360, I’m going to start looking for a new accountant. There is a limit to what I will pay for the relationship.

Now compare this to the government market. The 80% process and 20% relationship makes price that much more important, right? Well, not necessarily. It depends on a lot of variables, such as: Acquisition Strategy and Competition.

For example, if the acquisition strategy is Lowest Price Technically Acceptable (LPTA), then yes – price is going to drive the winner. You are going to need to beat your competitor to the bottom. You are competing on price. The good news is that this LPTA approach is clearly detailed in the RFP so you knew you were competing on price. (Note: If it wasn’t clear, read the blog post about the importance of understanding Section M.)

Under a Trade Off process, price is part of the award decision but it is not the ONLY part of the decision. The Trade Off can be between several factors, but it’s normally between Technical, Past Performance, and Price. Here’s a catch though: even if your solution and past performance are outstanding, those strengths will only get you so far because, are you ahead of me?, once the evaluation shows your skills are equal to other offerors, you're competing on price. Price will always be a factor. It’s required by regulation. The real issue for you to see is not whether price is a factor so much as to what degree will price will be a factor for you to win.

For example, as a CO, I ran a source selection for what we’ll call "safety equipment". This was a small business set aside competition for a 5-year contract worth about $10 million. We used a tradeoff source selection with technical capability being more important than past performance…and technical and past performance combined being significantly more important than price. The message? Price was NOT the most important. However, as you will see, it still mattered.

We had six offerors who provided samples and written technical (suitability over usability), past performance and pricing volumes. The past performance for all offerors was reasonable and equivalent. A few of the offerors’ products failed during the user test with the users, but most of the products passed the “suitability” test. This was an objective test to determine whether the product worked. However, two of the products really excelled in the “usability” test as well. This "usability test" was a subjective test by the end users who physically tested the equipment in simulated environments to see, well, how much it met their preference as a user.

In the end it came down to two offerors whose products were much better than the others. I selected these two to continue on to the competitive range. Let’s call them Offeror A and Offerors B. Offerors A’s product was actually rated far and away the best by the evaluators in the subjective, “usability” test. However, their price was 50% higher than Offeror B’s product. Offeror B’s product was good. Offeror A’s product was great. In the competitive range letter I informed Offeror A that their price was ‘significantly higher’ relative to other offerors. Source selection rules did not allow me to reveal the 50% difference in price. The advisory language of “significantly higher relative to” is allowed however.

It should come as no surprise that my customer really wanted Offeror A’s product. It really was a superior product. However, I could not justify the 50% higher price in my Source Selection Decision Document (SSDD). After all, we were talking about $3 million more over 5 years. I needed to balance the better product vs. serving the interest of us tax payers by not simply overpaying for a product that was much better product than our actual, documented requirement.

In response to the Competitive Range letter, Offeror A only lowered their price 5%. And get this. Offerors B lowered their price another 10% (I didn’t even mention their price in the Competitive Range letter). So now I had more than a 50% gap between the two offers.

I awarded the contract to Offeror B.

The lesson: price may not always be the most important, but it is always a factor. Price matters. Always.

For more stories like these, check out our blog at https://skywayacquisition.com/blog