When preparing a GSA Multiple Award Schedule (MAS) offer, many contractors find the pricing section to be the most difficult. There are many different strategies and methods to use when developing government pricing, but choosing the right one can be confusing. One strategy which can be especially helpful for contractors offering services is using indirect pricing. In this blog, we’ll go over what indirect costs are, how they can help with GSA MAS pricing, and who should consider using indirect costs.
What Are Indirect Costs?
In order to understand how indirect costs can help you develop pricing, it’s important to have a clear understanding of what indirect costs are. Business expenses can be divided into direct and indirect costs.
Direct costs are costs tied to a specific product, service, or project, while indirect costs are costs associated with general operations, not tied to a specific product, service, or project. For example, the salary (or direct labor rate) for an employee working on a specific project would be a direct cost, since that cost is tied to a specific service. Insurance and benefits, on the other hand, would be considered indirect costs, since they can’t be tied to a specific service.
If you’re not sure which of your business’s costs are direct or indirect, consult your accountant—your company’s financial statements should include a basic breakdown of direct and indirect costs. Indirect costs are typically divided into various cost pools based on the type of cost. Common categories are:
- Fringe benefits
- Overhead
- General and Administrative expenses (G&A)
How Can Indirect Costs Help Me with GSA Pricing?
At this point, you may be wondering what any of this has to do with GSA MAS pricing. Contractors submitting a GSA MAS proposal are required to propose pricing for their products and services in line with the GSA’s required format, which requires individual line items for each proposed product or service.
For contractors who sell products, this is often easy—you can simply transfer the existing commercial pricelist into the GSA’s format. For contractors who offer services, however, this is where things can get tricky. Some services contractors don’t have existing prices for individual labor categories, or even a list of specific labor categories. It’s common for services contracts to be billed as Firm Fixed Price, where a total price for the project is agreed upon in advance and “lump sum” invoices are used.
While the costs for these projects may be based on labor cost estimates, they don’t always include a breakdown of individual labor rates. This is where indirect costs can come into play. If you don’t have existing individual labor rates, indirect costs can help you create them.
Who Should Use Indirect Costs for GSA Schedule Pricing?
As we just mentioned, indirect costs are helpful for contractors who don’t have existing rates for individual labor categories. However, it can also be helpful for contractors who have rates, but haven’t frequently invoiced their rates or don’t have other forms of pricing support. Even if you have fully developed rates that you’re confident in, using indirect costs can be a helpful way to make sure that your rates align with your actual costs.
How Do I Create Rates Using Indirect Costs?
Using indirect costs to create rates is simple in theory, but can get complicated in practice. The first step to creating any services pricing structure is to identify specific labor categories you intend to offer. One you have your list of labor categories, you’ll do what’s sometimes called a cost build-up to create your rates.
To start, identify the direct labor rates for each labor category—in other words, the salary for that position. The next step is to identify which indirect cost pools your organization uses. While most agencies use the common cost pools of fringe, overhead, and G&A, some companies have additional pools, or multiple types of overhead. For each indirect cost pool, you will need to identify the indirect rate percentage, which can be generated by your accounting system.
The indirect percentage can then be used to determine the indirect rate for each labor category. In addition to your indirect costs, you’ll also need to include profit in your rates. Combine the direct rates, indirect rates, and profit, and you’ll have your fully burdened rates for each labor category.
What are the Risks of Using Indirect Costs?
No pricing method is perfect, and using indirect costs is no exception. One of the biggest risks in using indirect costs is that if you submit your pricing with no other pricing support, the reviewing Contracting Officer (CO) may ask to see your cost build-up in order to evaluate your rates.
This can then lead to the CO asking you to lower your rates if they believe your costs aren’t reasonable (for instance, requesting a lower profit percentage). Another risk of using indirect rates is that they may cause your rates to be out of sync with what’s on the market in that space. If you have significantly higher or lower costs than other companies, your rates may not be competitive in the GSA contracting space.
Finally, your indirect and direct costs now may not align with what they’ll be in the future. If you’re a small business just getting started, you may have low costs. However, as your business grows, your costs may also grow, possibly outpacing your rates. None of these are reasons to discourage you from using indirect costs at all, but they are things to keep in mind as you consider how to structure your GSA MAS pricing.
Want to Know More About Indirect Costs and GSA Pricing?
If you’re still not sure if indirect costs are right for you, or if you want to know more about GSA pricing, reach out to us. One of our expert consultants can help you figure out the best strategy for your pricing.
