Evaluating the Downside of Bidding on Sample Labor Categories

 Government contracting officers will often require industry to bid on representative labor categories (LCATs). They do this because they believe that by limiting the labor categories for pricing they both limit the complexity of the pricing solution and level the playing field for all bidders.

Is this the case?

There are pitfalls in bidding for sample LCATs especially on recompeted contracts, for performance-based contracts and in full and open competitions. Why?

  • Sample LCATs comprise only a portion of the LCATs that will be required for execution of the contact. It’s like bidding on only a part of the Statement of Work and leaving the rest of the work requirements to be revealed later.
  • It means that the field is uneven because incumbents and insiders have a much clearer view of the full scope of work and the necessary LCATs for project execution. While incumbents and insiders will always be in an advantageous position, sample LCAT bidding enhances their advantages at the expense of non-incumbent bidders.
  • Performance based contracting (Performance Work Statements and Statements of Objectives) leave the solution to the bidder and add complexity to the pricing and risk calculations. As with all performance contract bids, it is wise to remember that the mental construct in the mind of the customer is always the status quo. Any deviations from the current solution beg for a justification even if you are not aware you have diverged in some identifiable way. Sample LCATs tend to mask customer expectations, particularly for performance-based contracts, and make industry solutions and pricing more prone to miscalculation.

For a multiple award IDIQ with full and open competition there are four potential types of bidders:

  1. Large Business Incumbent
  2. Large Business Non-Incumbent
  3. Small Business Incumbent
  4. Small Business Non-Incumbent

This range of possible bidders suggests four different strategies for establishing a price to win based on company size and incumbency.

  1. The Large Business Incumbent – This bidder is in an informed position to bid speculatively and substantially low because they assume they know the full range and quantity of LCATs that will be required for actual contract execution. If they have a good estimate of the required LCATs above and beyond the sample LCATs and know the number of positions required based on current requirements, they can make a very precise judgement regarding how low their bid price can go on the sample LCATs with a view to making up any losses on the remainder of the work. A large business incumbent may also have the depth of personnel and resources to absorb a loss on the entire contract. They might consider this if re-winning the work is valuable enough to them with regard to maintaining their position with the customer or in the development of additional work. The large business incumbent will tend to bid exceptionally low on the sample LCATs.
  2. The Large Business Non-Incumbent – This bidder may not have the same insight into the current requirement to evaluate the risk associated with low bidding the sample LCATs as does the large business Incumbent, but they do have the depth of resources to absorb the risk. This bidder may elect to bid speculatively low to win a position on the IDIQ and then later selectively bid on Task Orders (TO) avoiding the sample LCATs when they appear. Or they may believe they can absorb losses on sample LCATs by compensating with profitable bids on TOs requiring non-sample LCATs.
  3. The small business incumbent shares insights into the range of non-sample LCATs that will be required like their large business incumbent counterpart. However, they will have to be somewhat more sensitive to risk since they do not typically have the depth of resources to absorb loss like a large business. Regardless, they are in an improved position over non-incumbents in identifying the risk of low bidding sample LCATs.
  4. The small business non-incumbent is in the weakest position to low bid sample LCATs. They typically have neither the risk tolerance for low bidding the sample LCATs nor the insights to help them determine the level of risk they are assuming if they attempt to do so. Misjudgment can mean financial ruin.

The table below summarizes the four business types and their related possible pricing strategies for bidding sample LCATs.

Four Bidding Strategies
Large Business (LB) Incumbent

·Bid very low on sample LCATs

·Mitigate risk through understanding of the total requirement for LCATs & number of positions beyond the sample

·Absorb any losses with financial depth of the company

·Renegotiate with customer from a position of LB incumbency after award

·Balance risk of loss on the sample LCATs with strategic advantages gained with the customer for business development

Large Business (LB) Non-Incumbent

·Bid modest rates on sample LCATs

·Assume the risk of not having a clear picture of the total LCAT and position numbers

·Absorb any losses with financial depth of the company

·Renegotiate with customer from a position of a LB after award

·Balance risk of loss on the sample LCATs with strategic advantages gained with the customer for business development

Small Business (SB) Incumbent

·Bid low on sample LCATs

·Mitigate risk through understanding of the total requirement for LCATs & number of positions beyond the sample

·Assume risk of miscalculation given SB limited resources

·Renegotiate with customer from a position of SB incumbency

·Balance risk of loss on the sample LCATs with strategic advantages gained with the customer for business development to the degree limited by SB resources

Small Business (SB) Non-Incumbent

·Bid modest rates on sample LCATs

·Assume some risk of not having a clear picture of the total LCAT and position numbers

·Assume risk of miscalculation given SB limited resources

·Renegotiate with customer

·Balance risk of loss on the sample LCATs with strategic advantages gained with the customer for business development to the degree limited by SB resources

Why does it matter?

Effect for the Government:

  • Sample LCATs for bidding purposes tends to limit the field of responsible bidders.
  • Unrealistic low bids are likely to result for the sample LCATs.
  • Non-incumbent small businesses are the least likely to bid or be successful in project execution if they win unprofitable contracts.
  • Significant advantages accrue to incumbent and insider bidders.
  • Risk in execution is increased.

Effect for industry:

  • Non-incumbent/insiders are at a significant pricing disadvantage if they attempt to bid.
  • Everyone is under pressure to bid artificially low on the sample LCATs.
  • Risk in execution is increased.

The sample LCAT approach promotes unrealistically low bid prices, increases project risk and unfairly enhances the advantages of incumbents and insiders.