2. 2 Ron Smith Contracts Director EADS-NA Tankers Date: Tuesday 5 August 2008 Time:1:50 PM to 2:50 PM Pricing Commercial Items

3. 3 Overview Pricing Risk: Science vs Art Pricing Strategies –Commercial-to-Government –Commercial-to-Commercial –Balancing risk in pricing decisions Proposal Pricing Tactics –Cost-based Strategies –Market-based Strategies –Assessing proposal risk Summary

4. 4 Pricing Risk: Science vs Art

5. 5 Risk and the Project Life Cycle Time Amount at Stake Project Risk ConceptualDevelopingTestingDeploymentClosure

6. 6 6 Source: Risk Management Guide for DoD Acquisition August 2006 Department of Defense Risk Matrix

7. 7 Pricing Strategies

8. 8 Commercial to Government –Contracts with Commercial Organizations FAR 31.201 Full and Open Competition drives price –Cost and pricing rules control marketplace Commercial to Commercial –Market Competition drives price –Flexibility to adjust pricing quickly to remain competitive with the market place. –Multiple opportunities to take a bite out of the apple –Pricing strategy driven by market; not the opportunity

9. 9 Market Pricing Model Cost of Goods Sold List Price Web Price/Sticker Price Manufacturer’s Suggested Retail Price (MSRP) Marginal Pricing Corporate ROI Target Quantity Price Mark-up Discount Special Pricing

10. 10 Pricing Strategies Commercial entities pricing for government buyers –One shot at award so pricing needs to be right –Risk of technical leveling to remove competitive non-price advantages –Lack of follow on contract to help absorb initial costs

11. 11 Cost is always the driving factor with profit being subject to the degree of risk. Contract type dictates the risk. –In Government, Government dictates the contract type, –In Commercial Vendor has more control over contract type Target Price Development

12. 12 Market Share Profitability Marginal Pricing Strategic Factors

13. 13 Market Pricing Model Cost of Goods Sold List Price Web Price/Sticker Price Manufacturer’s Suggested Retail Price (MSRP) Marginal Pricing Corporate ROI Target Quantity Price Mark-up Discount Special Pricing Quantity Discounts Government - Pre-negotiated Step or Tiered pricing locked at award Commercial- More Flexibility take advantage of economies of scale and adjust pricing on the fly based on market share for new business as well as existing business

14. 14 Buyers: Price Evaluation/Price Analysis Reasonableness - Eye of the beholder. Allocability Terms of the contract Market research/Market knowledge

15. 15 Sellers: Pricing Metrics Forecasts Success ratio Percentage of total business Market Share

16. 16 Proposal Pricing Tactics

17. 17 Pricing the Opportunity Read the Solicitation –Determine Contract Type(s) –Supplies or Services and Prices/Cost –Statement of Work –Instructions, Conditions, and Notices to Offerors –Evaluation Factors for Award Perform pricing Risk Analysis Price according to Risks and Rewards

18. 18 Source: Risk Management Guide for DoD Acquisition August 2006 Department of Defense Pricing Risk

19. 19 Pricing Techniques Historic costs, processes, practices are not set in stone; not all costs are sunk costs Direct pricing strategies –Scrub overly-conservative assumptions –Require Risk Management versus Risk Dollars –Map the Risk profile: disband the Standing Army –Map the Risk profile: manage the Roll-on/Roll-off Not all risks are “High and Right” in the Risk Cube

20. 20 Pre-Bid Process: Buyer Market Research –Understand market norms and practices –Anticipate pricing –Calculate leverage –Develop gameplan Solicitation/Negotiation –T&C: Effective? Enforceable? –Competition: Right players? Right game? –Sprint to the Finish

21. 21 Pre-Bid Process: Seller Bid/No Bid Decision Teaming Relationships –Prime or Sub? –Importance of Teaming Agreements and Non-Disclosure Agreements –Gathering data from teammates Virtually identical in Government and Commercial opportunities

22. 22 Market Pricing Model Cost of Goods Sold List Price Web Price/Sticker Price Manufacturer’s Suggested Retail Price (MSRP) Marginal Pricing Corporate ROI Target Quantity Price Mark-up Discount Special Pricing

23. 23 Words to Live By “Revenue solves everything” –Computer Industry Sales Executive “You can’t manage your way out of a Bad Contract” –Aerospace Contracts VP Good Luck

24. 24 QUESTIONS?