Government Contract Pricing Strategies

Pricing is where many government contractors either win big or fail completely. Unlike commercial sales where you have flexibility, government pricing is scrutinized, audited, and must follow specific rules. Get it wrong and you either lose the competition or end up underwater on the contract.

This video covers the fundamentals of government contract pricing — from understanding cost structures to competitive positioning.

Types of Government Contracts

Your pricing approach depends heavily on the contract type:

Firm-Fixed-Price (FFP) — You commit to a total price. If costs exceed your estimate, you absorb the loss. If you come in under, you keep the profit. Most common for well-defined requirements.

Cost-Plus-Fixed-Fee (CPFF) — Government reimburses your costs plus a fixed fee. Lower risk but requires detailed cost accounting. Common for R&D and complex services.

Time-and-Materials (T&M) — Government pays hourly rates plus materials. Requires ceiling price. Used when scope is uncertain.

Cost-Plus-Award-Fee (CPAF) — Cost reimbursement plus fee based on performance evaluation. Incentivizes quality.

Understanding Your Cost Structure

Government pricing requires breaking down your costs into specific categories:

Direct Labor — Wages and benefits for employees working directly on the contract. You need to establish labor categories and hourly rates.

Direct Materials — Supplies, equipment, and materials used specifically for the contract.

Indirect Costs (Overhead) — Costs that support multiple contracts: facilities, management, HR, IT infrastructure. These are applied as a percentage rate.

General & Administrative (G&A) — Corporate expenses: executive salaries, accounting, legal, marketing. Also applied as a percentage.

Profit/Fee — Your margin. Government has guidelines on reasonable profit (typically 7-15% depending on contract type and risk).

Building Labor Rates

For service contracts, labor rates are the foundation of your pricing:

Step 1: Determine Base Salary

What do you pay (or would you pay) someone in each labor category? Use market data from Salary.com, Glassdoor, or industry surveys.

Step 2: Add Fringe Benefits

Health insurance, retirement, PTO, payroll taxes. Typically 25-40% of base salary.

Step 3: Apply Overhead Rate

Your indirect costs as a percentage of direct labor. New contractors might be 50-80%. Established contractors often run 100-150%.

Step 4: Apply G&A Rate

Corporate overhead as a percentage. Typically 10-25%.

Step 5: Add Profit

Your margin. Consider risk, competition, and strategic value of the contract.

Competitive Pricing Strategies

Being competitive is not just about being cheapest:

Best Value Competitions — Price is weighed against technical quality. A higher price can win if your technical approach is superior. Focus on demonstrating value.

LPTA (Lowest Price Technically Acceptable) — Price is king. Once you meet the technical threshold, lowest price wins. Sharpen your pencil.

Price Realism — Prices that are too low raise red flags. Evaluators question whether you understand the work or can actually perform. Unrealistically low prices can disqualify you.

Common Pricing Mistakes

• Ignoring indirect costs — New contractors often forget overhead and G&A, then wonder why they lose money on contracts
• Using commercial rates — Government rates need to account for compliance costs, reporting requirements, and audit risk
• Not reading the RFP pricing instructions — Each solicitation has specific pricing format requirements. Miss them and you may be non-responsive.
• Pricing to win instead of pricing to perform — Winning a contract you cannot profitably execute is worse than losing
• Forgetting escalation — Multi-year contracts need to account for wage increases and inflation

Price Analysis Tools

Before submitting, validate your pricing:

• GSA Price Lists — Compare your rates to published GSA Schedule rates for similar services
• SAM.gov Contract Data — Research what agencies paid for similar contracts
• Labor Category Comparison — Ensure your labor categories align with government standards (often Service Contract Act or professional services categories)
• Independent Government Cost Estimate (IGCE) — Sometimes included in the solicitation or available through FOIA