Pricing methods for the Government in Procuring Drone Systems

 

Introduction

            Universal Drones Inc. is a company that manufactures drones for various clients, including the U.S. government. The firm will develop drones that will minimize injury risks to people. The company aims to participate in the growing market for drone manufacturing. The mission for the business is to manufacture drones at affordable prices. The vision is to create drones that suit client needs. The products manufactured will be durable and efficient to suit the various tasks undertaken by its clients. One feature that distinguishes the products from existing competitors in the market is that the drones can climb to high places very quickly. The manuals are also easy to use and come in multiple languages, including Chinese, Spanish, German, Polish, French, English, and Japanese.

Analysis of Universal Drones, Inc.’s Cost Classification

            In determining reasonable, allowable, allocable costs of the company, we look at a number of factors. The indirect overhead expenses comprise of fixed overheads of $150 million and variable costs of $240 million. Hence, the variable overhead is $1.6 for $1 of direct labor. In the first year of operation, the maximum allowable compensation for executives and engineers will be $247,000 reducing to $200,000 in the following year. The allowable and allocable costs in the contract may be $50 million or more, as well $40 million incurred in manufacturing. The scale for evaluating whether a cost is allowable is that it must comply with the requirements of reasonability, allocability, and standards promulgated by the CAS Board. Otherwise, the general rule is conforming with generally accounting standards appropriate to the terms of the contract.  

Analysis of Volume Based Costs

            Direct costs are expenses that can be traced or identifiable specifically to a cost center such as a department, product, or process. They include labor, fuel, and raw materials. They vary with the rate of output, but usually are uniform with every unit. Departmental heads are responsible for controlling the costs. Indirect costs are costs that are not easily attributable to specific cost center. Examples of indirect costs in the new company include depreciation, power, insurance premiums, and wages for supervisors in Universal Drones. Understanding the direct and indirect costs, I can analyze the costs am going to be spending from the bidding price. This will allow me to in-calculate the standard costs for manufacturing into the bidding price.

            Direct and indirect costs are the most important principle because they allow the new company to know the costs of doing business in the contracts to be awarded. The company must break even by the end of the contract to survive cover them in the bidding price. Variable and semi-variable are also important owing to the nature of the business. Producing more increases total cost and if no production occurs then the business only incurs fixed costs. For example, labor costs are semi-variable such that they include the fixed wages part and overtime that is variable.

Pricing Analysis by the Government

            Assuming the firm is awarded a fixed price contract there are number of pricing methods the government can use. First is comparison of proposed prices. In this method, the government will compare the prices offered by the various bidders. In the comparison of market-based prices, the government will consider the going rate of producing the products in the market. Here the government will consider the forces of demand and supply in setting the price. In the comparison of prior proposed prices, the government will consider previous prices offered by the bidding companies. The government will probably use the comparison of proposed prices in awarding the contract. Universal Drones will ensure the prices are reasonable by being efficient in its cost management practices to offer the least prices. Break-even analysis will ensure the company delivers and survives competition from already established companies such as VectorCal.

The company will use the market-based model compared to the cost-plus profit pricing method preferred by the leading competitor VectorCal. Because the company is a monopoly in the market, it uses the cost plus profit to sell to its primary buyer, which is the U.S. government. Universal Drones Inc. will endeavor to conform to the Federal Acquisition Regulation (FAR) that guides many contracts issued by the U.S. military. Explicitly, Part 52 specifies solicitation provisions and clauses (Lorell et al., 2005).

The U.S. government is the primary client for VectorCal and the soon to be launched company Universal Drones. The company will market its products to other governments to see who is willing to pay the highest price. The Prompt Payments Act requires that government agencies pay contractors within 14 days after receiving the progress invoice and the final payment within 30 days. The government prefers market-based pricing over the cost-based pricing currently offered by VectorCal. Because of its high-dollar value, the government often receives preferential treatment from vendors. A company that deploys a market-based model will not provide special concessions to the government because it buys in large quantities.

            The only competitor for Universal Drones Inc. is VectorCal. The new entrant will seek to develop a lightweight navigation system that conforms to the specifications required by the General Atomics Aeronautical Systems and the U.S. military to gain a competitive advantage over the already established competitor. There are several approaches to developing a fair and reasonable price, although the company prefers market-based pricing over the cost-based pricing preferred by VectorCal. By offering an alternative source, Universal Drones will create a marketplace that produces a fair and reasonable price. The government allows VectorCal to use the Cost-plus-profit approach because it is currently providing battle-tested drone navigation systems. 

            Price analysis is a process for determining whether an asking price is reasonable without going into the cost elements or profit included in the price (Coulling, 2013). The government will use price analysis to determine whether the price they will pay for the drone navigation systems is reasonable. The government often contracts based on only getting a price without analyzing how cost and profit form part of the final price, which results in fixed-price type contracts. In setting rates, manufacturers must differentiate their products and follow the prices set by the market leader.

 There are various contracting methods, including sealed bidding and government contract types. In supply to the government, the new company must conform to U.S. government and military regulations. The bid should be sealed through a solicitation process referred to as an invitation for bids. Because of the company's entry into the market, price competition will exist, and the statement of work enabling offers to bid on a fixed-price basis. The second acceptance procedure that the government uses to obtain competitive prices is competitive proposals. The government uses this procedure to make it known its needs by request for proposals.

            VectorCal is already established and has already undertaken several cost-cutting strategies that enable it to offer competitive bids. Hence, the new company will have to be very efficient to compete with VectorCal. The five categories of contract types used by the government include fixed-price, cost-reimbursement, incentive, indefinite-delivery, and time-and-material. In fixed-price contracts, the total cost risk is on the contracting company. That is, the bidding company is endeavoring to deliver the work required at the amount of money offered.

On the other hand, in cost-reimbursement contracts, the government pays the contractor's allowable incurred costs as prescribed in the contract. The contracts establish estimates of total costs for obligating funds and state a celling that the contractor is not to exceed. In this type of contract, the government carries all the cost risk. Identifying the contract type offered by the government will be very important for Universal Drones.

 

            The Simplified Acquisition Procedures apply to order Federal Supply Schedules on delivering orders placed against existing contracts. They emphasize simplicity and minimal administrative costs. Oral solicitations are often used in the process, although straightforward written quotations can serve the purpose (Judge Advocate General's School (the United States. Army), & American Bar Association, 2007). Simplified Acquisition procedures apply to purchases below the small purchase limitation, which is presently one hundred thousand dollars. For Universal Drones Inc. to survive in the market, it must be efficient and conform to standards required by the U.S. government and military.

 

 

 

 

 

 

 

 

 

References

Coulling, A. (2013). A complete guide to volume price analysis: Read the book then read the market.

Judge Advocate General's School (the United States. Army), & American Bar Association. (2007). Government contract law: The deskbook for procurement professionals. Chicago, Ill.: Section of Public Contract Law, American Bar Association.    

Lorell, M. A., Graser, J. C., & Cook, C. R. (2005). Price-based acquisition: Issues and challenges for Defense Department procurement of weapon systems. Santa Monica, CA: RAND.