Government Contract Pricing Strategies: Complete Guide to Competitive Pricing
Master government contract pricing with strategies for competitive proposals. Learn cost estimation, pricing models, and how to price to win while maintaining profitability.
Quick Overview: Government Contract Pricing
Pricing government contracts requires balancing competitiveness with profitability. Unlike commercial sales, government pricing faces scrutiny for reasonableness and compliance. Understanding contract types, cost structures, and evaluation criteria is essential for winning profitable contracts.
Contract Types & Pricing Implications
The type of contract determines who bears risk and how pricing is structured. Understanding this is fundamental to developing competitive prices.
Firm Fixed Price (FFP)
Price is set and doesn't change regardless of actual costs. Contractor bears all cost risk.
- • Used for well-defined requirements
- • Maximum contractor risk
- • Potential for highest profit margins
- • Price must cover all contingencies
Cost Plus Fixed Fee (CPFF)
Government reimburses costs plus a fixed fee (profit). Contractor has minimal cost risk.
- • Used for R&D or uncertain scope
- • Requires certified cost or pricing data
- • Fee is fixed regardless of costs
- • Subject to audit and cost allowability
Time and Materials (T&M)
Paid for labor at fixed hourly rates plus materials at cost. Risk is shared.
- • Used when scope can't be defined
- • Labor rates include profit
- • Materials typically at cost
- • Ceiling price often required
Fixed Price Incentive (FPI)
Target cost/price with sharing formula for over/under runs. Balanced risk sharing.
- • Target cost, ceiling price, share ratio
- • Incentivizes cost control
- • Can earn higher profit below target
- • Complex administration
Cost Estimation Fundamentals
Accurate cost estimation is the foundation of competitive pricing. Poor estimates lead to either losing bids or losing money.
Cost Categories
| Category | Examples | Estimation Method |
|---|---|---|
| Direct Labor | Project managers, engineers, technicians | Hours × loaded rate |
| Direct Materials | Equipment, supplies, parts | BOE or vendor quotes |
| Subcontracts | Work performed by subs | Sub quotes + handling |
| ODCs | Travel, equipment, software | Historical data + specifics |
| Indirect Costs | Overhead, G&A, fringe | Rate × base |
| Fee/Profit | Your margin | % of total cost |
Estimation Techniques
Bottom-Up Estimating
Estimate each task individually, then roll up. Most accurate but time-intensive. Best for well-defined work.
Analogous Estimating
Use historical data from similar projects. Good for rough estimates. Adjust for differences in scope and complexity.
Parametric Estimating
Use statistical relationships (e.g., cost per square foot, hours per deliverable). Works well with good historical data.
Pricing Models & Approaches
Different pricing approaches serve different strategic purposes. Choose based on the opportunity, competition, and your objectives.
Cost-Based Pricing
Start with your costs and add margin. Traditional approach.
- • Calculate all direct costs
- • Apply indirect cost rates
- • Add fee/profit percentage
- • Validates you can do the work profitably
Market-Based Pricing
Price based on what the market will bear and competitor pricing.
- • Research competitor rates
- • Analyze past award prices
- • Consider customer budget
- • Adjust to competitive position
Value-Based Pricing
Price based on value delivered to the customer, not just costs.
- • Identify customer pain points
- • Quantify value of your solution
- • Price a portion of that value
- • Defend with ROI analysis
Strategic Pricing
Price based on strategic objectives, not just immediate profit.
- • Market entry or expansion
- • Building past performance
- • Relationship investment
- • Follow-on opportunity positioning
Price to Win (PTW) Strategy
Price to Win is a disciplined approach to determining the optimal price that balances competitiveness with profitability.
PTW Process
Analyze the Competition
Identify likely competitors, their pricing history, cost structures, and competitive positioning. Use public award data and industry intelligence.
Understand Evaluation Criteria
How important is price relative to technical and past performance? LPTA requires lowest price; best-value gives more flexibility.
Estimate the Target Price
Based on competitive analysis and evaluation weighting, determine the price range that gives you the best chance of winning.
Validate Against Your Costs
Can you actually deliver at the target price profitably? If not, what efficiencies or innovations can close the gap?
Make the Bid/No-Bid Decision
If you can't reach competitive pricing profitably, it may be better to no-bid than to win and lose money.
PTW Warning
Never let PTW drive you to price below your actual costs. An unrealistically low price may trigger government scrutiny, and winning an unprofitable contract is worse than not winning at all.
Competitive Intelligence for Pricing
Understanding your competition helps you price more effectively.
Sources of Competitive Intelligence
FPDS-NG
Federal Procurement Data System contains award data including prices
USASpending.gov
Searchable database of federal spending by contractor
GSA Advantage
GSA Schedule prices are publicly available
Bid Tabulations
State/local governments often publish all bid prices
Award Debriefs
Post-award debriefs may reveal pricing position
Industry Research
Salary surveys, rate benchmarks, industry analysis
Pricing Compliance Requirements
Government pricing has specific compliance requirements. Non-compliance can result in criminal penalties.
Truthful Cost or Pricing Data (TINA)
For contracts over $2 million, you must certify that cost or pricing data is accurate, complete, and current. False certification is criminal. Data must be accurate as of the date of price agreement.
Cost Allowability
Not all costs are reimbursable on cost-type contracts. FAR Part 31 defines allowable vs. unallowable costs. Entertainment, lobbying, and certain compensation are examples of unallowable costs.
Defective Pricing
If your certified cost or pricing data was inaccurate and resulted in overpricing, the government can demand a price reduction plus interest. This can be discovered in post-award audits.
Price Reasonableness
Government contracting officers must determine that prices are fair and reasonable. Prices significantly above or below market may require additional justification.
Common Pricing Mistakes
1. Pricing Too Low to Win
Unrealistically low prices raise red flags and may win you a losing contract. Government evaluators know what things cost.
2. Ignoring Indirect Rate Impact
Underestimating or misapplying indirect rates dramatically affects total price. Ensure your rates are current and properly applied.
3. Not Reading the RFP Instructions
Each solicitation has specific pricing format requirements. Using the wrong format can make your proposal non-responsive.
4. Math Errors
Spreadsheet errors are embarrassingly common. Triple-check formulas and have multiple people verify calculations.
5. Forgetting Escalation
Multi-year contracts need escalation for labor costs, materials, and indirect rates. Today's rates won't apply in year 5.
Frequently Asked Questions
What profit margin should I target?
There's no standard answer—it depends on risk, contract type, and competition. FFP contracts might support 10-15%+ margins due to risk. Cost-type contracts typically see 5-10% fees. Services often have lower margins than products.
How do I know if my rates are competitive?
Research publicly available data—GSA Schedule rates, award prices in FPDS, salary surveys for your industry. Compare your loaded rates to similar contractors in your market.
Should I price aggressively on my first contract?
Sometimes strategic pricing makes sense to break into a market or build past performance. But never price below your actual costs, and don't expect to raise prices significantly on follow-on work.
How do I handle pricing for indefinite quantities?
Price based on anticipated volume, but be cautious—if actual volume is lower than expected, your unit economics may not work. Consider volume tiers or include assumptions in your proposal.
What if I realize my price was too low after winning?
You're generally stuck with your price on FFP contracts. Learn from it for future bids. If there are significant scope changes, you may negotiate equitable adjustments, but the original pricing stands for original scope.
Find Contracts Worth Pricing
Effective pricing starts with the right opportunities. BidFinds helps you find contracts matched to your capabilities where you can compete—and win—profitably.
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