Cost Proposal Writing Guide: Win Government Contracts with Compelling Pricing
Master the art of writing winning cost proposals for government contracts. Learn pricing strategies, cost volume requirements, and common mistakes to avoid.
Quick Answer: What is a Cost Proposal?
A cost proposal is the pricing volume of your government contract proposal. It details how you calculated your price, including labor rates, indirect costs, materials, and profit. A well-structured cost proposal demonstrates your understanding of requirements and provides a credible basis for your pricing.
Cost Proposal Basics
Your cost proposal is more than just a price tag—it's a detailed breakdown of how you will spend the government's money to accomplish the work. The level of detail required depends on the contract type and dollar value.
For negotiated procurements (FAR Part 15), the cost proposal must be sufficiently detailed for the government to evaluate your pricing methodology and determine whether your costs are fair and reasonable.
Key Components
Cost Narrative
Written explanation of your pricing methodology and assumptions
Cost Spreadsheets
Detailed calculations showing labor, materials, and other costs
Supporting Documentation
Rate certifications, subcontractor quotes, basis of estimate
Contract Types and Pricing Requirements
Firm Fixed Price (FFP)
You bear all cost risk. Price is set before work begins and doesn't change regardless of actual costs incurred.
Cost Plus Fixed Fee (CPFF)
Government reimburses allowable costs plus a fixed fee. You have less risk, but less potential upside.
Time and Materials (T&M)
You're paid based on labor hours at fixed rates plus materials at cost. Shared risk between contractor and government.
Cost Plus Incentive Fee (CPIF)
Fee varies based on performance against cost, schedule, or technical targets. Rewards efficiency and excellence.
Cost Elements Explained
Direct Costs
Costs that can be specifically identified with a particular contract or project.
- •Direct Labor: Wages/salaries for employees working directly on the contract
- •Direct Materials: Supplies and materials consumed in performance
- •Subcontracts: Work performed by subcontractors
- •Other Direct Costs (ODCs): Travel, equipment, consultants
Indirect Costs
Costs that benefit multiple contracts and cannot be directly assigned to one project.
- •Fringe Benefits: Health insurance, retirement, payroll taxes (typically 25-40% of labor)
- •Overhead: Facility costs, equipment, supervision (varies widely, often 40-100%+)
- •G&A (General & Administrative): Executive salaries, accounting, HR, BD (typically 10-25%)
Fee/Profit
Your profit margin. Rates vary by contract type and risk level.
Pricing Strategies
Price to Win (PTW)
Estimate the price point needed to beat competitors while maintaining profitability. Consider incumbent pricing, market rates, and evaluation criteria weighting.
Cost-Based Pricing
Build your price from the bottom up based on actual expected costs plus target margin. Required for cost-reimbursement contracts.
Market-Based Pricing
Set prices based on what the market will bear and comparable contract awards. Research GSA schedules and similar contract values.
Value-Based Pricing
Price based on the value you deliver rather than just costs. Works when you offer unique capabilities or significant efficiencies.
Balance Price and Performance
The lowest price doesn't always win. In best value procurements, agencies evaluate the tradeoff between price and non-price factors. A slightly higher price with superior technical approach or past performance may win over the low-price competitor.
Cost Realism Analysis
For cost-reimbursement contracts, the government performs a cost realism analysis to determine if your proposed costs are realistic for the work to be performed.
What Agencies Evaluate
- •Labor Mix: Are you proposing the right skill levels for the work?
- •Labor Hours: Are the hours sufficient to accomplish the tasks?
- •Labor Rates: Are rates consistent with your actual compensation?
- •Indirect Rates: Are your overhead and G&A rates reasonable and properly allocated?
- •Technical Approach Alignment: Does pricing support what you proposed technically?
Warning: Unrealistically Low Costs
Bidding too low can backfire. If the government determines your costs are unrealistic, they may adjust your evaluated cost upward—or reject your proposal for demonstrating a lack of understanding of requirements.
Common Cost Proposal Mistakes
- ✗Math Errors
Simple calculation mistakes undermine your credibility. Triple-check all formulas.
- ✗Inconsistency with Technical Volume
Your staffing and resources must align with your proposed technical approach.
- ✗Unsubstantiated Rates
Be prepared to justify every rate with market data, payroll records, or other support.
- ✗Missing Required Elements
Carefully follow the RFP instructions. Missing elements can lead to rejection.
- ✗Underestimating Level of Effort
Low-balling hours looks unrealistic and suggests you don't understand the work.
- ✗Forgetting Escalation
Multi-year contracts need annual escalation for labor rates and materials.
Cost Volume Structure
A well-organized cost volume typically includes these sections:
Executive Summary
Overview of total price, key cost drivers, and competitive positioning. Make your value proposition clear upfront.
Basis of Estimate
Narrative explaining your methodology, assumptions, and rationale for proposed staffing and pricing.
Labor Cost Details
Breakdown by labor category, hours, and rates. Include rate build-up showing base salary and applied indirect rates.
Other Direct Costs
Travel, materials, equipment, subcontracts with supporting quotes or estimates.
Indirect Rates
Current and projected rates for fringe, overhead, and G&A. Include rate certification if required.
Frequently Asked Questions
How do I determine appropriate labor rates?
Base rates on your actual payroll, market salary surveys, and BLS data for comparable positions. For labor categories you don't currently have, research market rates and document your methodology.
What if I don't have established indirect rates?
New contractors can develop provisional rates based on a reasonable budget. You may need a DCAA audit for larger cost-reimbursement contracts. Consider using a forward pricing rate agreement (FPRA) once established.
Should I include profit on subcontractor costs?
Generally, you can apply G&A to subcontractor costs, but profit/fee is typically only applied to your own work, not passed through to subs. Check the solicitation for specific guidance.
How detailed should my cost proposal be?
Follow the RFP instructions exactly. For cost-reimbursement contracts, expect to provide extensive detail. For FFP under simplified acquisition, less detail may be required—but always enough to demonstrate your price is reasonable.
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