Feel free to debate this in the comments section, but it is my opinion that small businesses should be required to create a basis of estimate (BoE) more often, particularly in TACFI/STRATFI proposal submissions (and arguably some Phase II SBIRs).
What is a BoE? The BoE is what connects your technical volume to your cost volume. It is the explanation of why you believe a specific product or service will cost a certain amount. The technical volume portion of your proposal explains “what” you intend to provide and your cost volume explains how much it will cost you to accomplish the work in your proposal. But the real exercise is in developing WHY you think the work will cost what you propose.
While there can be several required areas of information in formal BoE’s, the two main components of a BoE are task description and justification. Task description is just as it sounds. It’s a description of the tasks you will be accomplishing by contract line-item number (CLIN), work breakdown structure (WBS) task, and labor category. The justification is also just as it sounds. It’s a justification of how you came to your estimated material cost or labor hours. The numbers you provide in your cost volume came from somewhere and the BoE is where you show that math.
To better explain this, I’ll use an example of a contractor building a deck. You’ve requested a quote from a contractor to build a deck at your house. You have given them the specifications and requirements and you’d like them to provide a cost estimate. The contractor comes back with a cost estimate of $10,000, with $6,000 in labor and $4,000 in materials. There is no additional justification or explanation for these numbers. Wouldn’t you have some questions?
That situation is the equivalent of providing a technical volume and cost proposal with no basis of estimate. There is an explanation of what is going to be accomplished and there is a cost provided but there is no explanation for how that cost was estimated. In the contractor example, you would want more specific information before you’d be willing to commit to paying for the job. For example, a good cost justification would include something along the lines of this information: the labor rate is $75 an hour and they believe the job will take roughly 80 hours (based on their expert opinion or past experience with similar houses like yours, etc.), to include trips to and from the hardware store. Additionally, material will include concrete, wood, and nails. Based on current industry material rates, the estimate for material is about $6,000. Now you, as the potential customer, understand that the cost estimate was made based on industry standard labor rate, estimated number of labor hours to accomplish the task compared to historical data, and current industry material rates. With this information, you have a complete picture. You understand what the contractor intends to do, how much that work is estimated to cost, and have an explanation of how the task, materials, and costs are all related.
What you learn by breaking down a cost estimate is INVALUABLE for a company starting off in any space but specifically in the government space. How can you justify your product or service if you aren’t even sure yourself what it takes to operate and produce?
Being able to substantiate your proposal will become a requirement for most businesses upon transition. It will be a non-negotiable requirement that often results in higher cost proposal preparation due to a lack of understanding from companies on what it takes to provide their product or service. This learning curve exists simply because most companies on government SBIR contracts have never been asked to explain their estimates in such a manner. By requiring companies to provide a top-level BoE for TACFI and STRATFI proposals, the government is better preparing those companies for transition to larger non-SBIR contracts. The level of effort in creating a BoE should not be any harder than what companies SHOULD already be doing. Again, you came up with a number for your cost proposal somehow. You should be able to show that math. Evaluating operating costs, labor hours, and material costs are part of everyday operations and how rough cost estimates are already made. By making it a requirement to add a few additional steps explaining task description and cost justification by labor category, companies will be much more prepared for transition than they presently are without that exercise.
Let us know what you think! Please leave a comment below with your take on BoEs.
Keep moving forward,
