Learning to PIVOT
An innovative pricing and source selection methodology called Prices Include Variation Over Time (PIVOT) can help share market risk.
By David M. Curry, PMP
Warrior philosopher Sun Tzu famously stated, “In the midst of chaos, there is also opportunity,” a particularly relevant insight today, especially in the context of government contracting. (1)
As the defense sector struggles to adjust, it is clear that post-pandemic ripples endure, impacting the full spectrum of procurement, from simple commodities to highly skilled labor. In this new normal, acquisition professionals face unprecedented supply chain constraints, market pricing risk, and seemingly unabated price escalation. Flattening these curves while preserving competition demands a pivot to new pre-award strategies for managing the risks of runaway markets.
In contracting we invest a great deal of time discussing acquisition risk, but almost the entire focus is on post-award. What about risk on the front end? How much time lapses between a contractor’s initial decision to pursue a contract to the day of contract award? And can we partner with industry to hedge that risk?
In the federal sector, high dollar contracts – whether for weapon systems or complex construction – often take one year or more to award. In the fixed-price world, that delay equates to risk. Unfortunately, the Federal Acquisition Regulation (FAR) and its supplements offer no specific tool or mechanism to hedge pre-award price exposure and volatility.
Although FAR 52.216-4 “Economic Price Adjustment-Labor and Material” offers a helpful tool to address supply prices, this clause is a post-award tool with zero impact prior to contract award. Typically, the effects of pre-award delays are minimal, something simply priced in by offerors. However, the global pandemic changed our calculus, with damning effects on market supplies and prices. This gap left price fluctuations virtually unchecked, exposing those in the Defense Industrial Base (DIB) to untenable risk.
Unforeseen Consequences
With every solicitation, the buyer indicates to the seller the proposal acceptance period – the length of time that pricing remains valid. With large construction projects using formal source-selection procedures, the time from proposal submission to contract award often exceeds six months. That “holding period” places tremendous risk on offerors as they must honor proposed prices, regardless of how the market moves.
This exposure can be greater for small businesses as their risk sensitivity is more pronounced than large businesses or government. If a small business gets it wrong, they may be in jeopardy of going out of business. Therefore, price risk premiums must be steep enough to significantly reduce the probability of mistakes.
At a recent national meeting of the Association of General Contractors (AGC), one company president expressed frustration that a government agency asked him to hold his prices for six months, yet his concrete supplier would only honor quotes for 24 hours. The frustration is understandable, especially with firm-fixed-price (FFP) acquisitions, where price risk is borne almost entirely by industry. To survive, offerors have little alternative than to include a hefty risk premium, and in turn government agencies have little alternative than to pay those premiums to deliver the mission.
A Tipping Point
In 2021, the U.S. Army Corps of Engineers (USACE) began to feel the effects of increasing inflation and its impact on industry. Some companies chose to exit the federal sector, shifting to state, municipal and commercial projects. (2) Those who remained adjusted pursuit strategies, selecting opportunities with lower exposure to market volatility. Unfortunately, these changing dynamics had a significant impact on the DIB, a chilling effect on competition that continues to negatively impact agencies at the point of need. (3)
From May 2020 to May 2021, average monthly inflation increased from 0.1% to 5%. (4) Over the same period, the market experienced massive increases in spot price and lead times for key commodities such as steel. (5)
The resulting impact was a shock to the supplier base, resulting in a sharp decline in offerors per project, exacerbated by a similar drop in the period of time offerors were willing to hold proposal prices. This decreased competition, coupled with the hefty risk premium added to offers, became a tipping point for the agency, one that drove innovation and served as catalyst for a new pricing strategy called Prices Include Variation Over Time (PIVOT).
Government Challenges
In the federal sector, the Current Working Estimate (CWE) or Programmed Amount (PA) is the money set aside to fund an authorized construction project. Unfortunately, the length of the budget process means that by the time the procuring activity receives funds and is ready to solicit, the amount of money on hand often falls well below market, and that was before the pandemic.
By design, the federal budget process is intentionally cautious and detailed. (6) And although the lengthy process protects taxpayers, it can result in funding shortfalls at the point of execution, often taking three years or more from the initial PA to the start of the acquisition lifecycle. This is the enduring challenge, a gap that is hard to close under normal circumstances, and even more challenging during periods of high inflation, challenges that are not confined to industry.
Government acquisition teams also struggle with a range of issues tied to market volatility. Chief among them is a widening gap between Independent Government Cost Estimates (IGCE) and proposed prices, making it difficult for contracting professionals to deem prices fair and reasonable.
Even on that rare occasion when proposals align with the IGCE, the acquisition team often lacks the economic expertise to explain how a 500% spike in commodity spot prices should be considered reasonable given market conditions. With challenges mounting and economic forecasts predicting further instability, USACE turned to PIVOT.
A Potential Solution
In traditional negotiated procurements, offerors submit one price by the proposal due date and those prices must remain valid through the date indicated in the solicitation. At times, as agencies such as USACE scramble to find additional funding, offerors may be asked to hold proposed prices longer –another month, six months, or even one year. Offerors loathe being asked to hold prices, and for good reason.
Proposal estimating is often a highly sophisticated process, requiring significant investment for a successful pursuit. The last thing offerors want is a government phone call asking them to push it out even further, increasing risk with no way to price it in. Offerors tie up bonding capacity for months on end and invest hundreds of thousands of dollars for a win, so it is very difficult to walk away.
As we conducted the PIVOT roadshow, contractors across the United States expressed frustration with this uncomfortable dynamic; government asks them to hold prices with no remuneration, a move that not only damages trust, but strains an already tenuous relationship between government and industry.
In a fixed-price environment, suppliers often feel the government holds the cards, pushing all risk onto industry, with no sense of urgency to award. PIVOT cuts to the very heart of these issues, by offering a better approach whereby government partners with industry to share market risk. Instead of asking offerors to submit one price that is good for one period, PIVOT allows firms to submit multiple prices over multiple periods, leading up to contract award.
What PIVOT Is and Is Not
It is important to note that PIVOT does not solve the underlying CWE/PA budget problem. Instead, PIVOT treats the symptoms of this problem, with a goal of maximizing competition by keeping offerors at the table and increasing their willingness to hold prices.
When USACE first implemented PIVOT, one colleague whose portfolio was plagued by projects with no bidders asked if we could use the tool for all solicitations. PIVOT can be quite helpful in certain acquisitions, but it is not appropriate for every action.
In fact, PIVOT is exactly the wrong solution if you anticipate a quick award, a competitive market, and/or the scope lacks items prone to price volatility. The tool is also inappropriate for anything other than a Best Value Trade Off (BVTO) source selection, as you may or may not award to the lowest offeror, depending on the period.
The PIVOT Process
Perhaps the most crucial input to any PIVOT procurement is detailed acquisition planning. By understanding the requirements and related market conditions, the acquisition team can employ PIVOT to its greatest effect. For example, it is imperative to identify what elements of the scope are particularly vulnerable to market volatility. This context can change daily, so it is critical to perform detailed market research on key supply items, inputs to production, and even certain skilled labor.
Supply chain capacity and pricing are not the only issues, especially in remote locations. USACE has also seen significant swings in wage rates for certain highly skilled trades. Challenges include a shrinking labor pool and limited supplier capacity, resulting in fierce competition for subcontractor resources. By understanding these dynamics, contracting professionals can better structure Contract Line Item Numbers (CLINs) to take advantage of PIVOT’s flexibilities. After understanding the competitive landscape, the government team can tailor periods, weights, and scaling methodology, the three key elements of any PIVOT solicitation.
Step 1: Define the Periods
The number and length of each period flows from the unique characteristics of the acquisition. The “clock” starts on all periods the day the solicitation closes. When few external factors impact the acquisition, it may make sense to establish periods of equal length. In contrast, an acquisition team may choose to vary the length of different periods to accommodate unique factors impacting the procurement, such as project funding.
On some military construction projects, for example, USACE knows from the very beginning that the appropriated funds are insufficient to award. In these situations, we must secure additional funding from the customer, a process that can take four months or more. On these PIVOT projects, the acquisition team sets the length of the first period to four months, with additional shorter periods should the funding process run long.
The idea is to include enough periods – at least three – to sufficiently spread the risk, adding periods as needed to cover longer pre-award lifecycles. If a period is too long, the government may pay higher costs due to higher risk premiums. Fixed prices may not age well in a market where prices are prone to change dramatically in a period. Best practice is to rely on thorough market research to find the right balance between period number and length, and thus optimal risk mitigation.
Step 2: Select Appropriate Period Weights
As part of a PIVOT solicitation, the government will often include a fillable pricing template in Microsoft Excel, to include the full CLIN structure, along with a set of locked periods of defined length, and the respective weight for each period. The best description of these weights is that they indicate confidence in market prices.
Ask any offeror to predict concrete prices tomorrow and they will no doubt have high confidence in their prediction. The same cannot be said if you ask them to estimate the price of lumber 10 months from now. Higher confidence equals a higher period weight. The later the period, the harder it is to accurately forecast market prices; as confidence falls over time, so do period weights. Thus, the government includes a specific numeric weight for each PIVOT period as part of the solicitation package.
Step 3: Define the Scaling Method
At its core, PIVOT is a tool to scale prices over time. Awarding early means greater confidence in market prices, less risk premium, and a lower cost to government. Awarding late means paying offerors higher risk premiums to cover price exposure. But what is the best method to scale prices? USACE employs three price scaling methods: Percentage Scaling, Indexed Scaling, and Vendor Parlay.
Perhaps the easiest scaling method is Percentage Scaling (Figure 4), where prices simply ramp up based on a fixed percentage per period. Government picks a percentage, say 10%, and scales prices by that value. The solicitation Excel file gives offerors a blank field per CLIN for Period 1. From there, the Excel file calculates each offeror’s scaled prices in the other periods, based on the 10% scaling factor. To ensure consistency in evaluation, and for offerors to be considered responsive, firms must submit prices for all CLINs and all periods. 
The second method to scale prices is Indexed Scaling (Figure 5), which relies on certain publicly available indices to scale prices. A good example is the Producer Price Index (PPI), which allows the government to select a particular index closely aligned with their requirement, such as Non-Residential Building Construction.
The advantage is a scaling strategy better aligned with the scope of the acquisition. As with percentage scaling, offerors simply enter their Period 1 price per CLIN and Excel automatically populates the remaining prices. The challenge with both the Percentage and Indexed Scaling is that prices scale in a linear fashion as the slope of the line remains fixed. USACE quickly realized that line slope was an inherent weakness of any linear scaling model. 
As you refer to Figure 6, imagine an offeror who sees high risk in Period 3, and thus a 40% risk premium. If presented with a 10% linear scaling model, the slope of the line will never “cover” the offeror’s risk in Period 3. Remember, with both Percentage Scaling and Indexed Scaling, offerors only provide a single Period 1 price per CLIN, the tool calculates the rest based on the scaling factor. So, if an offeror needs a 40% premium in Period 3, but the scaling method only gives them a 10% factor, in order to “cover” the offeror’s perceived 40% risk, their only choice is to include a 40% risk premium in all periods (blue shading). The end result is that government pays unnecessary premiums in earlier periods, not unlike traditional FFP solicitations with only one price. 
The final approach to scale prices is Vendor Parlay (Figure 7), where offerors have freedom to tailor prices by period and CLIN. This approach is perhaps most familiar to the market as it closely aligns with traditional fixed price acquisitions, where offerors rely on their own proprietary pricing methods to tailor proposed prices to customer, scope, and market.
Parlay provides contractors with much higher fidelity by period. They can choose to include a low-risk premium in Period 1, typically the highest weighted period for evaluation, and in so doing, potentially increase their chance of winning the contract award. Likewise, in later periods, firms are free to adjust risk premiums to cover risks that may be unique to their company. Perhaps they have key subcontractors locked in for only the first six months, giving them higher exposure in later periods where perhaps they have yet to ink subcontractor commitments.
One USACE contractor reported having a six-month inventory of a key input, bought, paid for and on the shelf. This inventory strategy equipped the offeror with a unique price advantage, for at least the first two periods, giving them short-term immunity to market price fluctuations. To date, all PIVOT acquisitions at USACE relied on the Vendor Parlay construct. In our experience, this method maximizes flexibility for our industry partners, while increasing the probability that government will pay a lower price…if they award quickly.
Step 4: Tailor the Solicitation
Purveyors of PIVOT should pay particular attention to CLIN schedules. On traditional acquisitions, there is a tendency to reduce the number of CLINs for efficiency. The risk with this approach is we may inadvertently combine two elements of scope with radically different exposure to market volatility. When possible, list these elements of scope as separate CLINs, which allows offerors to apply premiums to only those finite elements truly at risk.
As part of any PIVOT solicitation package, it is best practice to include a well-vetted Microsoft Excel file, with locked fields and formulas. This not only drives consistency and reliability with offers, but it also aids the evaluation team and funding activity by providing unprecedented insight into the cost of government delays, and specifically how costs will increase over time with a late award.
For example, in Figure 7, if the contracting officer awards by day 90, the total cost is $11.3 million. Delay even a single day, and the schedule slip will cost government at least $2.5 million more if the award drags into later periods. PIVOT serves as a mirror of sorts, displaying consequences, and thus heightening awareness, motivation, and accountability for the government team.
An unintended consequence of this visibility into period prices lies with the customer. Now when a buyer seeks additional customer funding, the clock is ticking, and customers know specifically how much time costs, as PIVOT shines a light on the exact dollar consequences of delays that cross periods.
During general industry days and project-specific pre-solicitation conferences, USACE will often explain PIVOT in detail to ensure a level playing field. This is an excellent forum, benefiting the immediate acquisition, but also helping to rebuild trust with industry. One item USACE always reinforces is our promise that PIVOT offerors will never be asked to extend or hold earlier period prices to a later period.
As in the previous example, even one day can cost the government $2.5 million, so the temptation is high to ask an offeror to hold their price, especially when teetering on the threshold of a new period. Don’t do it! PIVOT is built on a foundation of trust and only works if all parties understand the tool, commit to the constraints, and use integrity during implementation. That uncomfortable $2.5 million jump is there by design. It monetizes offeror risk. It reduces government risk premiums in early periods. And it provides necessary grease for the gears of government.
A best practice is to employ this same transparency with the buying activity team. Communicate early and often to address any confusion and questions, well before making a solicitation public. In our experience, overcommunication is the very best strategy to ensure a successful PIVOT implementation.
Step 5: Evaluate Price
During PIVOT source selection, the acquisition team focuses all price evaluation on a new construct called Total Adjusted Price (TAP), which is simply a confidence-adjusted price. To calculate TAP, the acquisition team first calculates Contract Award Price (CAP) by period by totaling each offeror’s proposed CLIN prices. Next, multiply CAP by the respective government weight for the period to arrive at the Adjusted CLIN Price.
The final step is to calculate TAP by totaling the Adjusted CLIN prices for each period. Note that TAP is not the ultimate contract award price but is instead a calculated value used to provide consistent price evaluation across offers. The final contract award price is simply the successful offeror’s price in the period of contract award, which is one reason that PIVOT IGCE’s mirror the solicitation, providing prices by period.
In Figure 9, the TAP may be $13.2 million but the actual award price in Period 1 would be $11.2 million. If the award is delayed to Period 3, the award value increases to $16.4 million.
Step 6: Contract Award
The value of a PIVOT contract award is the sum of the unweighted CLIN prices in the period of award. Given that PIVOT uses a trade-off source selection process, the source selection authority (SSA) does select the offeror, but that offeror may or may not represent the lowest price. It all hinges on the period of award.
In Figure 10, Vendor 1 has the lowest total award price in Periods 1 and 2, but in Periods 3 and 4 that outlook shifts – now Vendor 2 offers the lowest award price. PIVOT solicitations require BVTO for exactly this reason because a trade-off may or may not occur depending on award period, which is unknown at the time the SSA makes its selection decision. For this reason, PIVOT Source Selection Decision Documents (SSDD) focus on TAP for the evaluation, and both TAP and offeror prices for the fair and reasonable price determination and SSA documentation.
Lessons Learned
Market prices can change quickly, especially in today’s economic ecosystem, so acquisition teams should be prepared for updated wage determinations and delayed awards. As any seasoned contracting professional can attest, new wage determinations pop up at the worst possible time, usually in the home stretch leading to award.
PIVOT acquisitions respond to these changes in the same way as traditional acquisitions – by issuing a post-closing amendment to all firms in the competitive range, giving them the opportunity to update prices. In this situation, or any situation that requires updated proposals, previous periods are considered “dead” and thus no longer play a role in the evaluation.
In Figure 11, more than 180 days have passed since the original solicitation closed. Now at day 181, the government issues an amendment to include a new wage determination and request revised pricing. Periods 1 and 2 are in the past, so they are considered dead. Although the original values will remain locked in the Amendment Excel file, they are included for reference only, and have no impact on the new TAP and ultimate award price. 
Note in this example, the contracting officer updated period lengths and weights, even adding a fifth period to ensure sufficient time to award. In turn, offerors submitted revised pricing, with higher confidence in Period 3 prices now than previously. Finally, the team recalculates TAP and uses this new value for the updated price evaluation, as well as any necessary edits to the selection documents and SSA decision.
Conclusion
PIVOT is neither a cure nor a hammer. It will not cure Congressional budget woes. It should not be used as a hammer, as every acquisition is not a nail. Instead, PIVOT is a surgical instrument to increase competition by attracting more competitors, who stay longer and hold prices valid for the duration of the procurement process.
It will not hedge all risk, so manage expectations with industry and government stakeholders accordingly. PIVOT is responsive, timely, and aligned. USACE created the tool explicitly to respond to post-pandemic volatility with market prices. The tool is timely in that it is available now for full implementation in the public and private sectors. Multiple federal agencies are evaluating PIVOT and advancing implementation. Fortunately, PIVOT is already aligned with the FAR and requires no special approvals.
Finally, PIVOT is one potential solution to hedge market pricing risk. It is a truly dynamic tool, easily adjusted for lessons learned, and ready to adapt to the constantly evolving competitive marketplace. Hopefully PIVOT can transform some of your chaos into acquisition opportunity. CM
David M. Curry is a Regional Chief of Contracting for the U.S. Army Corps of Engineers. He has more than 30 years of public and private sector experience, including key acquisition experience in USACE and the Air Force. Positions with industry include President and CEO of a technology corporation, VP of Engineering for a software company, and Senior Manager of Strategy at a Fortune 500 consulting firm. Curry’s professional certifications include Certified Merger & Acquisition Advisor (CM&AA), Project Management Professional (PMP) and Certified International Project Manager (CIPM). He enjoys mentoring the next generation of acquisition leaders and invests his time with innovation and entrepreneurship.
ENDNOTES
1 Sun Tzu, The Art of War.
2 Federal News Network, “Why do so many contractors leave the federal market each year?”, Tom Temin, March 14, 2023, https://federalnewsnetwork.com/contracting/2023/03/why-do-so-many-contractors-leave-the-federalmarket-each-year/
3 Department of Defense Report, State of Competition within the Defense Industrial Base, Office of the Under Secretary of Defense for Acquisition and Sustainment, February 2022, https://safe.menlosecurity.com/doc/docview/ viewer/docNC57B9FF0C3ECafeef0d
c4970065b725fa0da3cdd1ef601ce74c499defa
49699e224a7bceb2f7
4 Statista.com, “Monthly 12-month inflation rate in the United States 4 from December 2019 to December 2023”, https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/
5 The Fabricator, by John Packard and Michael Cowden, 22 December 2021, “Steel prices and material lead times trending downward”, https://www.thefabricator.com/thefabricator/article/metalsmaterials/steel-prices-and-materiallead-times-trending-downward
6 AmericanRhetoric.com, Antonin Scalia, Opening Statement on American Exceptionalism to a Senate Judiciary Committee, delivered 5 October 2011, Washington, D.C., https://www.americanrhetoric.com/speeches/antoninscaliaamericanexceptionalism.htm
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