Cost Proposal Preparation Guide: Winning Government Contract Pricing | BidFinds
Master cost proposal preparation for government contracts. Learn about direct costs, indirect rates, fee structures, cost realism analysis, and compliance requirements.
Quick Answer: What Is a Cost Proposal?
A cost proposal is a detailed breakdown of your proposed price for a government contract, including direct costs (labor, materials, travel, subcontracts),indirect costs (fringe, overhead, G&A), and fee/profit. It must demonstrate that your pricing is realistic, reasonable, and compliant with FAR cost principles. For cost-reimbursable contracts, it requires extensive supporting documentation to justify every cost element.
Cost Proposal Basics
A cost proposal is more than just a price—it's a comprehensive document that demonstrates your understanding of the work, your approach to staffing and resources, and your ability to perform the contract at a fair and reasonable price.
Types of Pricing
Cost-Type Contracts
- • Government pays actual costs + fee
- • Extensive cost proposal required
- • Subject to DCAA audit
- • Requires approved accounting system
- • Cost realism evaluation
Fixed-Price Contracts
- • Government pays fixed amount
- • Less detailed cost breakdown
- • Price reasonableness evaluation
- • Contractor bears cost risk
- • May still require cost detail
Standard Cost Buildup
Building Direct Costs
Direct costs are expenses specifically identified with the contract. The largest component is typically direct labor.
1️⃣Direct Labor
Direct labor is the compensation paid to employees for time worked directly on the contract.
Labor Cost Formula
Key Elements:
- • Labor Categories: Match RFP requirements (e.g., Senior Engineer, Project Manager)
- • Hours: Realistic estimate based on work scope
- • Rates: Current rates + escalation for out-years
- • Mix: Right proportion of senior/junior staff
2️⃣Direct Materials
Materials purchased specifically for the contract, including supplies, equipment, and consumables.
Include
- • Raw materials
- • Component parts
- • Contract-specific equipment
- • Consumable supplies
Document With
- • Vendor quotes (3+ for large items)
- • Bill of materials
- • Historical pricing data
- • Make/buy analysis
3️⃣Travel Costs
Travel directly required for contract performance.
Travel Cost Components
- • Airfare (coach class, per JTR/FTR)
- • Lodging (per diem rates)
- • M&IE (meals and incidentals)
- • Ground transportation
- • Rental car (if justified)
4️⃣Subcontracts
Work performed by other companies under subcontract to your firm.
- • Include subcontractor cost proposals
- • Show subcontractor selection rationale
- • May apply G&A to subcontract costs (check your rate structure)
- • Ensure subcontractor compliance with small business goals
5️⃣Other Direct Costs (ODCs)
Other costs directly attributable to the contract.
- • Consultants and special services
- • Special testing or equipment
- • Communications costs
- • Reproduction and printing
- • Training specific to contract
Applying Indirect Rates
Indirect rates allocate shared costs across all contracts. Use your approved or forward-pricing rates consistently.
Standard Rate Application
| Rate | Typical Range | Applied To |
|---|---|---|
| Fringe | 25-40% | Direct Labor Dollars |
| Overhead | 50-150% | Direct Labor Dollars (or Labor + Fringe) |
| G&A | 10-25% | Total Cost Input (all costs before G&A) |
| Material Handling | 3-8% | Direct Materials (if applicable) |
Rate Documentation
If You Have Approved Rates
- • Include rate agreement letter
- • Use approved provisional rates
- • Show any escalation factors
If You Don't Have Approved Rates
- • Provide rate calculation methodology
- • Include supporting cost data
- • Be prepared for DCAA review
Rate Escalation
For multi-year contracts, apply reasonable escalation factors to rates for future years. Typical escalation is 2-4% annually. Document the basis for your escalation assumptions.
Fee and Profit Structures
Fee (on cost-type contracts) or profit (on fixed-price contracts) represents your compensation for performance risk and return on investment.
Fee/Profit Guidelines
| Contract Type | Typical Range | Statutory Max |
|---|---|---|
| Cost-Plus-Fixed-Fee (CPFF) | 5-8% | 15%/10% |
| Cost-Plus-Incentive-Fee (CPIF) | 7-15% | 15% |
| Time & Materials (T&M) | Built into rates | N/A |
| Firm Fixed Price (FFP) | 10-15%+ | No limit |
| Fixed-Price-Incentive (FPI) | 8-12% | No limit |
* CPFF limits: 15% for R&D, 10% for other. Architect-engineer contracts: 6%.
Weighted Guidelines Method
The government often uses a weighted guidelines approach to evaluate profit/fee reasonableness:
- • Technical Risk: Complexity and difficulty of the work
- • Contract Risk: Type of contract and cost uncertainty
- • Facilities Investment: Capital required for performance
- • Performance Risk: Past performance and reliability
- • Cost Efficiency: History of cost control
Cost Volume Format
Follow RFP instructions precisely for format. A well-organized cost volume makes evaluation easier and demonstrates professionalism.
Typical Cost Volume Structure
Cost Narrative
Overview of pricing approach, assumptions, basis of estimates, and methodology
Summary Pricing
Total price by CLIN, year, and cost element
Labor Cost Exhibit
Labor categories, hours, rates, and calculations by task/CLIN
ODC/Material Exhibit
Detailed listing of non-labor direct costs with supporting data
Indirect Rate Exhibit
Rate buildup, supporting documentation, and rate agreements
Subcontractor Costs
Subcontractor proposals and cost/price analysis
Certifications
Required certifications (Certificate of Current Cost or Pricing Data if applicable)
Government-Furnished Templates
Many RFPs provide Excel templates for cost submissions. Use them exactly as provided— don't modify formulas or structure. Verify all calculations match template requirements.
Supporting Documentation
Strong supporting documentation validates your cost estimates and demonstrates your pricing is fair and reasonable.
Documentation by Cost Element
Labor Rates
- • Salary surveys (BLS, industry data)
- • Existing employee compensation data
- • Collective bargaining agreements (if applicable)
- • Recruiting salary data for vacant positions
Labor Hours
- • Bottom-up estimates by WBS/task
- • Historical data from similar contracts
- • Engineering estimates
- • Subject matter expert judgments
Materials/Equipment
- • Vendor quotes (3+ for items over $10K)
- • Catalog prices
- • Historical purchase data
- • Published price lists
Indirect Rates
- • DCAA-approved rate agreement
- • Forward pricing rate proposal
- • Incurred cost proposals
- • Rate calculation worksheets
Basis of Estimate (BOE)
The BOE explains how you derived each cost estimate. Include:
- • Methodology used (analogy, engineering, expert judgment)
- • Assumptions and ground rules
- • Data sources and references
- • Adjustments for complexity, location, or other factors
- • Risk and uncertainty considerations
Cost Realism Analysis
For cost-type contracts, the government performs cost realism analysis to determine if proposed costs are realistic for the work, reflect the offeror's understanding, and are consistent with the technical approach.
What Evaluators Look For
Cost Realism vs. Price Reasonableness
Cost Realism
- • Applied to cost-type contracts
- • Evaluates if costs are realistic
- • May adjust costs for evaluation
- • Low costs can hurt you
Price Reasonableness
- • Applied to fixed-price contracts
- • Evaluates if price is fair
- • Compares to IGE/market
- • Low price typically advantageous
Risk of Underpricing
On cost-type contracts, artificially low costs can result in your evaluated price being adjusted upward. The government may also question your understanding of the work. Price to win, but price realistically.
Common Errors to Avoid
Math Errors
Simple calculation mistakes are surprisingly common and immediately undermine credibility. Triple-check all calculations and have someone else verify independently.
Technical/Cost Disconnect
Your cost proposal must align perfectly with your technical approach. If your technical volume describes 10 engineers but your cost shows 5, you have a problem.
Incomplete Rates
Failing to apply all appropriate indirect rates results in understated costs. Make sure your cost buildup includes fringe, overhead, and G&A as applicable.
Missing Escalation
For multi-year contracts, using Year 1 rates for all years understates costs. Apply appropriate escalation for labor rates and indirect rates.
Inadequate Documentation
Unsupported cost estimates invite questions during evaluation. Provide clear basis of estimate for every cost element, especially labor hours and material costs.
Ignoring RFP Instructions
Cost volumes that don't follow RFP format requirements or miss required information may be considered non-responsive. Read Section L carefully.
Frequently Asked Questions
How detailed should my cost proposal be?
The level of detail depends on contract type and dollar value. Cost-reimbursable contracts require extensive detail; fixed-price contracts need less. When in doubt, provide more detail—it demonstrates understanding and supports your pricing.
What if I don't have DCAA-approved rates?
You can still compete. Provide your proposed rates with supporting documentation. Be prepared for more scrutiny during evaluation. Consider getting a pre-award accounting system audit if pursuing cost-type contracts.
How do I price if the RFP is unclear?
Document your assumptions clearly. Consider asking questions during the Q&A period. If significant uncertainty exists, you may include pricing notes or caveats, but be careful not to create non-responsive conditions.
Should I include management reserve in my cost proposal?
Generally no for cost-type contracts—reserve is typically addressed separately. For fixed-price, you can build contingency into your overall pricing. Check RFP instructions for specific guidance on reserves.
What happens during cost negotiations?
For competitive acquisitions, the government may conduct discussions and request revised proposals. Be prepared to explain and defend every cost element. Have supporting documentation readily available.
Next Steps
A well-prepared cost proposal demonstrates your understanding of the work and your ability to perform at a fair price. Start building your cost proposal capabilities today.
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