Government Contract Bidding Fundamentals

Pricing for government contracts is a world unto itself, thanks to the copious regulations in place.  See our Modern Guide to Government Contract Compliance for much more on that topic.   But before most of that becomes relevant, you have to understand the proposal components, solicitation types, estimation types, and contract types.  So let’s review those government contract bidding fundamentals.

Key Components 

Whether you’re bidding on contracts at the local, county, state, or federal level, there are some elements you’ll likely encounter.

A specification or work package

In order for an agency to obtain an accurate price from you, they have to provide clear and thorough descriptions of what they need. The level of detail will, of course, vary widely based on the complexity of the need, as well as what type of contract is up for bid (see the next section for more on that). In your proposal, you have to make clear how you would deliver on every requirement in the bid solicitation.

A strong Basis of Estimate with explanation

Since contracting fraud is a real concern, and governments have a responsibility to spend taxpayer money wisely, a pricing proposal can’t just present your prices – it has to justify them with a Basis of Estimate (BOE). A BOE explains how you arrived at each pricing item, including any assumptions you made.

Justification for subcontractor pricing

There are two sides to this. If you’re a prime contractor (working directly with a government agency) looking to subcontract out some of the work for a project, then you’re usually required to obtain price quotes from at least three subcontractors, and provide a clear description of how you selected one. If you’re subcontracting from a prime contractor, you need to explain how you arrived at the price you’re charging the prime contractor.

Capability statement

On a basic level, government contracting is a lot like personal job-hunting, whether you’re responding to a solicitation on an agency’s website or using a portal site that helps connect agencies and contractors. The capability statement is like a resume – a one-pager whose job is to capture enough of the reader’s interest that they want to learn more about you and what you can do for them.

When crafting a capability statement, remember that the CO will read top to bottom and left to right, so order the sections accordingly. You want the most important, impactful information first.

• Don’t get fancy with the font or graphics. If the agency wants to scan the statement into a database, the scan needs to come out clean and clear.
• Tailor the statement to the agency or opportunity, like you would a resume.
• Don’t repeat yourself! Every section and piece of information should add something new, as concisely as possible.
• Be specific as much as possible. Listing “our people” as a differentiator isn’t nearly as effective as listing employee qualifications, like academic credentials and specialized certifications.
• Your CAGE Code and UEI should be easy to spot, because they show you’re registered in SAM.gov and are ready to work with the agency.
• Introduce your organization in a paragraph, capturing what makes you you, in a way that’s relevant to the opportunity. Pull from material you already have, like mission, values, and vision statements.
• List core competencies – whether products, services, expertise, etc. – with the ones most relevant to the opportunity at the top. Keep this concise, factual, and specific.
• List relevant past performance. Show you can do the job because you’ve done it before. What did you do, for who, what was the period of performance, and how much were you paid? Stick to facts – specific examples and metrics to demonstrate your organization’s capabilities and achievements. No testimonials here.
• Describe what sets you apart from competitors. Why are your employees, offerings, experience, methodology, etc., superior? You can pitch yourself here, but use data where possible to back up your claims (anyone can make claims!).
• List certifications (at any government level), licenses, awards, commendations, contract vehicles, clearance levels, licensing, bonding, intellectual property and patents, etc., and use data where possible.
• Include logos for any key relevant customers, commercial or governmental.
• Provide contact info, incorporation data, geographical areas you operate in, as well as DUNS, NAICS or related codes.

Uniform contract format (UCF)

For many (but not all) federal solicitations and contracts, a standard format is required. The UCF provides consistency that saves time on all sides and in all phases of the project, and makes references to contract terms easier. FAR 15.204 lays out the parts and sections and what each must contain.

Types of Solicitations

Whether at the local, county, state, or federal level, agencies mostly use one of these common types: Request for Information (RFI), Invitation for Bid (IFB), Request for Proposal (RFP), and Request for Quote (RFQ).

The differences lie in how well the buyer knows what they want and how much non-price factors matter, plus whether they need any input from you as to how the need will be met, or know exactly how to meet it and just need to pick someone to do that.

While variations occur – there are so many agencies, after all – here’s an overview of them.

RFIs

Why use a Request for Information?

Successful decisions require information, and sometimes you have to acquire more information before you can make a decision. A buyer uses a Request for Information when they need to educate themselves about something before, for example, issuing a more involved, concrete type of solicitation (see below). They may want to get a sense for what’s available, need a general price range for financial planning, want to generate a list of vendors to take the next step with, and so on. This is often done as part of the market research phase of a project.

What to expect

RFIs are often managed using a third-party platform, so you’ll need an account on that platform. An RFI may be open or closed.

Open: A public invitation to view the solicitation and submit a response. Government RFIs are usually open to ensure a fair selection process.

Closed: The solicitation is sent privately to specific vendors chosen by the buyer.

Common elements you’ll find in an RFI include:

• Introduction to the buyer and their objectives
• Summary of the project
• Detailed description of the deliverables, including any delivery timeline, parameters, functional requirements, etc. – enough detail for you to respond
• The evaluation criteria, so you know the key points to hit in your response
• Clarification on any information NOT desired
• How to respond, including any template to be used, plus the deadline for responses

Your goal

You want to submit a complete, helpful response that follows all the submission requirements. Take the time to make sure you understand why the buyer wants what they want. Put yourselves in their shoes, and provide the kind of response you’d want to receive. Don’t be generic – highlight the value your organization brings to the table.

IFBs

Why use an Invitation for Bid?

A buyer uses an Invitation to Bid when they are confident up front about exactly what goods and/or services they need, how the work will be done, and what the contract will contain. They don’t need competitive bidding or negotiations, and don’t need input from a contractor, just a price. It’s usually simpler, low-cost projects that get IFBs. Contracts are typically awarded to the lowest, most responsible and responsive bidder meeting the specifications. 

What to expect

The Invitation should describe the agency’s requirements thoroughly, clearly, and accurately, and provide all documents you need to understand the requirements and submit a bid. The bid you submit is sealed, meaning that no one but you and the agency can see it, until the time and place specified in the Invitation, when all bids will be opened and evaluated. The winning bid will then be chosen based only on price and price-related factors, with no room for negotiation.

IFBs typically come with a quick timeline between being posted and awarded. Though the documentation you provide with the bid may be fairly straightforward, it will be scrutinized just as closely by the agency as a more complex type of contract would be. Contracts from IFBs are often firm fixed price.

Your goal

Aim to submit the lowest bid, accounting for any price-related factors spelled out in the Invitation. Since the bids are sealed and you don’t know what other bidders submitted, you’re limited to more general research plus your experience.

RFPs

Why use a Request for Proposal?

A buyer uses a Request for Proposal when they know what end result they want, but they know it can be achieved multiple ways, and want bidders to explain how they would achieve that result, and for what price. With an RFP, price is not the deciding factor – the buyer may select a higher-priced proposal if, for instance, they believe they’ll get more value from it, or if they believe that vendor is more likely to deliver better quality results.

RFPs are typically employed when the buyer doesn’t have the internal expertise, or the time, to determine the best approach on their own. These tend to be the more complex, expensive projects.

What to expect

As should be clear from the above, RFPs ask more of you than the other types. Here are common elements:

• Some background on what the agency needs and why
• Administrative details like the procedure for asking questions about the RFP
• Description of what the cover letter should or may contain
• Precise specifications, outputs, responsibilities, and deliverables, so you understand the scope of work
• Any optional components that the agency would like to have but doesn’t have to have
• Logistics and timelines for delivery
• A detailed description of your qualifications and experience to perform the requested work
• A list of references
• A list of documents to demonstrate your business’s ability to complete the contract, like management plans, drawings, personnel information, and so on – often provided as template attachments
• The desired structure of the proposal, so you know what order to provide information in, as well as any page limit
• The evaluation criteria, listing each factor and its relative importance (a.k.a. scoring metrics), which can be things like the vendor’s qualifications, organization and resources, management team, service methods, expertise, creativity, past performance, staff capacity and skill, any required interviews that will be factored in – and, of course, a complete price breakdown
• How to submit the proposal – paper vs. electronic, file format, etc.
• An explanation of the bidding process and contract terms, including whether there will be multiple bidding rounds or room for negotiating terms
• A sample contract, typically containing standard language present in all of the agency’s contracts

Your goal

You want to convince the agency that you can provide the best value-for-money solution. Show your creativity. Establish your quality, service, and reputation. Make suggestions you believe would improve the project. You can offer multiple solutions, which can give your creativity a better chance to stand out. The agency has chosen to use an RFP because they want the benefit of your experience and creativity to recommend the best solution.

RFQs

Why use a Request for Quote?

A buyer uses an Request for Quote when they know what they need, and want to compare supplier prices, delivery terms, or other key information. Typically RFQs are used for lower-cost procurements when the agency isn’t necessarily ready to award a contract. Price is usually, but not always, a key factor. Like RFPs, these are issued after any market research solicitations have been processed.  

What to expect

The Request may be one page, one page with attachments, or multiple pages with or without attachments. It may or may not follow a standard format like the UCF, depending on the agency, products/services needed, award amount, and other details. The contents will include, of course, details on the products/services needed, plus some or all of these elements (and more):

• Who’s issuing the RFQ, including agency and office
• Any FAR sections dictating the RFQ’s handling
• Delivery date, if any
• Any orders that will definitely be issued
• The type of contract that will apply to the issued orders, including whether it will be sealed or negotiated
• Applicable NAICS codes
• The evaluation criteria, including any non-price factors
• The timeline of solicitation dates, from issuing the solicitation to when the work begins, including the deadline for submitting questions about the RFQ
• How to submit your quote

If the agency issues an order to you, and you accept it, then you will be awarded a contract.

Your goal

Aim to provide the best quote you can while maintaining your margin. As always, meeting all the solicitation’s requirements is key.

Types of Federal Contracts

Since the solicitation type doesn’t determine the contract type, no discussion of government contract bidding fundamentals would be complete without covering contract types. The array of types can be overwhelming – between all the different levels of government and the many agencies, there are a lot of potential factors that a contract might need to account for:

• How much is the contract for?
• Is price the most important factor, or are factors like delivery time or contractor performance also important?
• Does the agency know exactly what work is needed, or are they open to proposals from bidders on how to accomplish the end result?
• Can the agency establish fair and reasonable prices up front?
• Does the agency anticipate adequate price competition?
• Can the agency reasonably compare this project to previous projects to establish a price expectation?
• How stable are market and labor conditions expected to be during the contract period?
• Is this for a research, development, or test project?
• Can the work required be defined up front in sufficient detail that contractors can provide meaningful prices?
• Is a particular delivery schedule required?
• Does the agency know up front what the exact timeline and/or quantities needed are?

Most federal contracts with the Executive branch are governed by Federal Acquisition Regulation (FAR), which defines seven types in Part 16 – and most of those have subtypes and variations. Many federal agencies have their own regulations governing procurement that spell out deviations from FAR, which you can find on acquisition.gov. There are entire books about government contracts, so what follows is just an overview.

Fixed-price contracts

Whenever possible, agencies prefer contracts whose final cost is predictable. Fixed-price contracts either provide for an exact, firm price, or for a price that is fixed but with a provision for adjustment under defined conditions. A contract might, for example, allow for regular adjustment to allow for fluctuations in certain materials over the length of the contract. If the contract does allow for adjustment, it will contain clauses that spell out exactly how and when the adjustment is to occur. Fixed-price contracts are common for commercial products and services.

Cost-reimbursement contracts

Some government efforts, typically but not exclusively for R&D, aren’t about achieving a certain result so much as exploring possibilities, which means it’s difficult to predict the end cost up front. Cost-reimbursement contracts provide a mechanism for letting the contractor do however much work it takes – subject to defined limitations, and typically up to a cap. They may involve an incentive to boost technical performance or delivery, or to deliver on a timeline.

Incentive contracts

These contracts overlap with the previous two kinds, defining an incentive or award component for fixed-price and cost-reimbursement contract. Incentives and awards, which can be applied to cost, performance, delivery, or a combination of those, may be desirable in some situations both to motivate contractor efforts and to discourage contractor inefficiency/waste. The difference between an incentive and an award lies in whether objective incentive targets can be clearly defined up front.

Indefinite-Delivery contracts, a.k.a. IDIQ contracts

Despite the name, these contracts aren’t inherently about indefinite deliveries (one subtype is), but they do allow agencies flexibility when they know they’ll need supplies or services, yet can’t exactly predict how much or when. To illustrate from daily life, we use a lot of tissues when we get a cold, but not as much otherwise, and we can’t predict when we’ll be sick. Indefinite-Delivery contracts let agencies keep the need met at whatever level is required in the moment – often with multiple contractors – and they can provide a vehicle for having supplies shipped directly to the end users. They typically define a minimum amount, and often a maximum as well, so that the contractor can both rely on some income and avoid surprise needs they can’t meet in time.

Time-and-Materials, Labor-Hour, and Letter contracts

This is a trio of contract types that are intended to cover other sorts of uncertainties that IDIQ contracts aren’t a fit for. Sometimes an agency can’t accurately anticipate costs or the extent of work required, and doesn’t want to use an incentive or award structure – or they just need to get supplies or services going right away with the best information they have at that time.

Time-and-Materials contracts let an agency acquire supplies or services with fixed hourly labor rates, plus reimbursing for actual material costs. Typically these come with substantial government monitoring to ensure that efficient methods and cost controls are used. Labor-Hour is a variety of Time-and-Materials that does not reimburse for materials.

Sometimes agencies (like all of us) find themselves needing supplies or services immediately, and don’t have time for a full contract cycle like the above contracts require. Letter contracts are preliminary, authorizing the contractor to begin right away and continue while a full contract is worked out. Due to the time limitation, full details are often not available when the work starts.

Agreements

Agreements are not contracts. They are legal “instruments of understanding” that may lay out terms, clauses, and other information pertaining to future contracts between the agency and a contractor. They may or may not describe specific supplies or services to be provided or methods for pricing and delivery. They’re often used by smaller governmental organizations to fill recurring needs.

FAR defines two types in Part 16, Basic Agreements and Basic Ordering Agreements, and another in Part 13, the Blanket Purchase Agreement.

Other contract types and vehicles

While obviously each agency needs to be able to provide for its needs, there are common needs that span many agencies. So the General Services Administration (GSA) provides an array of programs and contract vehicles, like Multiple Award Schedule, Multi-Agency Contracts (MACs), and Governmentwide Acquisition Contracts (GWACs), that provide a single contract for multiple agencies to purchase goods or services with better economies of scale, and lower lead time and overhead. As a contractor, you only have to qualify once, and then agencies can simply choose you in GSA’s system.

Contracts with the other federal branches

The Judicial branch uses a subset of the contract types that FAR defines (see Vol. 14, Ch. 4 of the Guide to Judiciary Policy). Each branch of the US Congress manages their own procurement, led by the Sergeant at Arms in the Senate and the Chief Administrative Officer in the House. Since by far the most contracts and money come from the Executive branch, we won’t get into the others here.

Types of Estimation

Before you can arrive at a pricing proposal, you need to know what costs you expect – otherwise you have no idea what margins to set to ensure profit from a contract.

So in this last section of government contract bidding fundamentals, let’s look at the most-used approaches to estimating your costs. They’re often presented as “choose one, then use it,” but they’re more like tools you can combine to produce a complete, accurate cost estimate. And given the rigorous requirements of pricing for government contracts, some are usually more appropriate for certain phases in the proposal process.

Bottom-Up

Ultimately, no matter how you approach cost estimating, the only way to know for sure that your estimate is accurate is to guarantee that it reflects every cost element. And the only way to do that is to establish costs for every work item, no matter the scale, or whether it’s direct, indirect, etc.

Bottom-up accomplishes that, because it starts the estimating process by assigning costs to every individual item, then rolling those values up to each level of the estimate – providing, at the top level, the key total estimate value that keeps you competitive.  So for most government contract pricing, you’ll need to use bottom-up at some point.

The level of detail required for bottom-up is, of course, substantial – and may not be not available in early stages of a project. This detail also might never be available for the contract types designed for situations with uncertainty or tight timelines.

Analogous

Early in the bid preparation process you often don’t have all the details needed for bottom-up estimating, but the sooner you can form even a ballpark estimate, the sooner you can start to plan and adjust. And of course, those details don’t all come in at the same time, so you may need approximate values until fairly late.

Analogous estimating pulls data from previous similar projects, and makes high-level adjustments for obvious differences like size, inflation, and complexity to produce a usable approximation. Unlike bottom-up, analogous works at every level in the estimate, which is one of the reasons it remains useful throughout the estimating process. And note that you can use analogous at intermediate levels too, pulling data from multiple previous projects if parts of each of them are closer to what you need for your current bid.

Three-point estimating is a common variant. In addition to producing the most likely estimate, it adds a pessimistic and an optimistic estimate to provide a sense for the overall financial risk.

Obviously this method is only as good as your previous data, so – as if the degree of accuracy and completeness required for government contract pricing weren’t enough – it’s crucial to retain your proposals in a format and location that makes it easy to copy and adjust.

Parametric

Of course, if you’re producing accurate and complete proposals, and you’re retaining previous proposals, you should have a wealth of detailed historical data to use as the basis for a new cost estimate. And in that case, you can use it for more than the high-level comparisons the analogous method relies on.

Parametric estimating is a quantitative, calculation-driven approach based on the fact that many costs, durations, etc. are predictable. For example, security fencing on level ground might reliably cost so much per 10′ and take so long to install, which means all you really need to know in order to estimate the cost is the total length needed. For similar projects, on-site office space generally consumes electricity, coffee, printer paper, etc. at similar rates, so all you need to know is the duration.

Of course, similar doesn’t mean identical, and you need accurate certainty when adjusting for the differences between projects. You can achieve that AND save time and errors by: using formulas to standardize these mathematical relationships, and storing as variables the data points that differ between projects.

Take, for example, the cost of gas – it varies by location and over time. So while a formula can capture the fact that the cost of gas is an inherent part of the cost of using gas-powered equipment, if you have to modify the formula for each project because the cost of gas is different, that takes time and risks errors. If you store the cost of gas as a variable in each project, then the formula can refer to that variable, which means estimators can reuse it without modification.

Parametric estimation can produce a false sense of accuracy, if the source data is unreliable, there are parameters you can’t quantify, you fail to account for unique project factors, and so on. It requires time, preparation, consistency, and attention to detail, as well as honesty and transparency about any points of weakness in the source data and formulas. So make sure it’s a good fit for a project before committing to it.

OAE Is Built for Pricing Government Contracts

The pricing software you use is the key to effective bidding. OAE supports all these government contract bidding fundamentals, and is built for compliance. Contact us today to learn more.