Government Contract Pricing Methodology and Best Practices

Government contract pricing is a big deal. There’s the copious amount of information you have to master – we’ve posted before about key components of government contract bidding, types of government contracts and cost estimation methods, as well as types of compliance and other regulatory mechanisms you may encounter. It’s not enough, of course, just to know what the fundamentals are – you have to know what to do with them. You need a government contract pricing methodology and best practices.

Methodology

Crafting and following a structured procedure for pricing will help you in a variety of areas, including: improving bidding efficiency, achieving more consistent results, accumulating better data for future bidding, and realizing more reliable profit margins.

Precision is a key under-recognized component to pricing proposals. You have to control the relationship between cost estimation and pricing, because if the gap is too narrow, then you’ll struggle to maintain adequate profit margin; if the gap is too large, then your proposed price may come out too high to be competitive.

To achieve that precision, OAE recommends a five phase government contract pricing methodology: Assess, Design, Construct, Review, Adjust.

Assess

This is the foundation for the whole thing. Like all foundations, you have to make sure it’s solid and matches the structure you plan to build.

The cornerstone of the foundation is analyzing the project requirements as provided by the agency.

• Have you studied the solicitation, including all applicable schedules, clauses, and attachments?
• Do you fully understand the contract type, what (if anything) will be reimbursed, and the relative value attached to value vs. price?
• Do you need to form any new relationships to complete the bidding process?
• What are the objectives?
• What are the deliverables?
• Who are the stakeholders?
• What materials, labor, and equipment will be needed?
• Will you need to subcontract out any of the effort, and can you complete that in the time available?
• What risks are there to estimating costs (regulatory changes, supply disruptions, etc.)?
• What risks are there to delivering it?
• Have you previously done something similar enough that you can reuse proposal data?
• How confident are you that (if applicable) you’ll be able to do adequate research to present a competitive bid?
• Will any of the material involved in or generated for the project be subject to protection or security controls?
• Do you already understand the Compliance requirements, or will there be a learning curve?
• How much work will you need to do to meet the Compliance requirements?
• If export is involved, do you understand – and can you comply with – relevant export controls?
• How confident are you that you’ll be able to delivery quality by the deadlines specified?
• Are your financial processes and systems ready for the level of auditing scrutiny required?

Design

Once you’re confident that you’ve thoroughly analyzed the project requirements, it’s time to prepare your proposal’s design.

• Allocate all the resources you’ll need to submit a quality proposal on time.
• Be sure you track and observe the deadline for questions.
• Work to form any new relationships the bidding process will need.
• As soon as is feasible, register for any online portal the agency uses for bidding, procurement, contractors, etc.
• If the agency has provided a template, stock sections, or other required elements your proposal must contain, be sure you work from that.
• Identify any previous projects with similar components whose data you can reuse.
• If reusing data, identify what will need adjustment for inflation, materials, labor, equipment costs, subcontractors, margins, administrative costs, and other indirect costs.
• Based on the contract type, the quantity and quality of available previous data, and how much wiggle room you have in meeting the proposal submission deadline, craft an estimation strategy.
• Itemize and define the formulas and calculations, assemblies, equipment types, and other reusable data elements the estimate will need.
• Gather all the data needed to estimate direct and indirect costs and pricing, including for any subcontractor you emply.
• Do any research you can toward a competitive bid, and identify adjustments you can make to better compete.
• Craft the narrative your proposal will use, with an emphasis on substantiating how you can meet the agency’s specific needs.
• Plan any modifications you need to make to your processes and systems to meet Compliance and auditing requirements.
• Based on your risk analysis, allocate contingency funds toward unexpected expenses.
• Make a list of all components the proposal must include.
• Ensure you comply with all applicable legal requirements for the contract type, as well as for the agency’s bidding and procurement regulations. Note that regulatory requirements are often only referred to in federal contracts, rather than spelled out.

Construct

With a solid, thorough design, you’re ready to construct your pricing proposal.

• Implement your cost estimation strategy.
• Assemble your cost and pricing estimates, with reusable data elements wherever you can use them.
• Integrate any adjusted previous data with the current data.
• Apply inflation or other cost/price escalation factors as needed.
• Be sure to include all the costs of the bidding process itself into your overhead/indirect costs.
• As you estimate, explain the rationale, and build in evidence that the proposed values are fair and reasonable (a separate Basis of Estimate may be needed).
• Document assumptions, sources, and constraints transparently for audit purposes.
• Construct a compelling narrative that makes a compelling case for your firm as the best choice to meet the agency’s need.
• Include a one-page capability statement (or add to an executive summary, cover letter, etc.) that clearly outlines your specific capabilities and skills, past performance history, and awards and commendations, and that provides resume summaries of key management personnel.
• Address all evaluation components specified in the solicitation.
• Doublecheck, proofread – your mastery of every detail will show the agency they can rely on you (and keep you out of trouble).
• Make absolutely certain your proposal package includes all required elements in the required format(s).

Review

It’s not enough that your proposal completely satisfies the solicitation parameters. It has to have all stakeholders and involved teams on board – including the project manager who would handle this job – because even if the agency loves your proposal and awards you the contract, there’s a lot that can go wrong later. Even with everyone doing their own work diligently, if the right information doesn’t flow, you can end up:

• Misapplying previous data because there were aspects of the previous project the estimators were unaware of.
• Burning through your profit margin because certain cost instabilities weren’t communicated.
• Discovering you can’t actually deliver what the proposal promised.

And so on. Every error risks financial penalties and loss of reputation with government agencies. So before you actually submit the proposal, you need a review meeting. Ideally this meeting features real-time editing, because if someone has to take notes and make updates later, you introduce the risk of error. By the end of this meeting, every stakeholder and team member should have a chance to speak up if they see something amiss.

This is your last chance to make sure that:

• The rate cards are accurate.
• The assemblies are accurate.
• Any calculations or formulas are correct.
• Overhead and indirect costs are accurate and complete.
• Cost forecasts are realistic.
• All previous data has been appropriately adjusted.
• All the above are sourced and explained.
• All margins – whether applied at the project, work item, or line item level – are optimal.
• The overall margin is competitive without exposing you to loss.
• All uncertainties and risks you can anticipate are accounted for.
• You’re not over-promising.
• Everyone understands what is required for Compliance and audits, and their role in achieving it.
• You can meet the agency’s timeline.
• You can deliver what the agency wants.

Once the review is done, and all changes have been made, follow the solicitation’s instructions for submitting, whether it’s digital upload, email, snail mail, fax, etc.

Adjust

If the solicitation and contract types allow for adjustment between submission and award, you need to plan for that. What that looks like depends on whether or not bidding is sealed.

FAR makes a fundamental distinction between sealed bid contracts and negotiated contracts. It’s a simple binary: any contract “awarded using other than sealed bidding procedures is a negotiated contract” (FAR 15.000).

Adjusting sealed bids

By nature, of course, sealed bids are evaluated without any input; negotiation is limited to post-award “economic price adjustments.” However, adjustments during the bidding process may still be needed. There may be procedural issues with your bid, a defect or variation from the exact requirements of the solicitation that doesn’t materially affect the content of your proposal.

This covers errors like:

• Returning the wrong number of signed bid copies.
• Failing to provide the required information concerning the number of your employees.
• Failing to acknowledge receipt of an amendment to the solicitation.

Your CO may either give you a chance to correct the error(s), or waive the need to.

And, of course, there may be mistakes in your proposal. If your CO notices what they believe is a mistake, they will notify you, and if you agree it’s a mistake, you can provide the correction. You can also report mistakes to your CO, which triggers an evaluation process. You provide evidence to establish what the correction should be, and the agency will determine whether the bid can be corrected, must be withdrawn, or will stand as submitted.

Adjusting negotiated contract bids

There are three stages in negotiated contract bidding during which adjustments may be possible: before the solicitation closes, before the competitive range is established, and before the contract is awarded. Despite the name, negotiated contracts don’t always allow for negotiation – some solicitations make clear that the agency will be evaluating proposals and awarding the contract without discussion (though limited exchanges may occur).

Adjustments might be needed because:

• You discover information that needs to be added or modified.
• You need to modify some of the costs or prices.
• The CO requests a modification to clarify or correct information.
• Either party initiates bargaining over the price, schedule, technical requirements, type of contract, or other terms of the contract.

Whatever communication you need to do with the agency, it’s vital to maintain trust. Err on the side of communicating more rather than less. Be honest and reasonable. Assume the agency is acting in good faith. Understand and respect the agency’s position and needs. The government wants you to succeed, because the more successful contractors they have to choose between, the better value they can get.

Key Best Practices

The above government contract pricing methodology gives you a structured procedure to follow. Here are key best practices to optimize every phase of the process.

Stop repeating work

Cost estimation and pricing for government contracts – and other contracts – necessarily involves copious details. And many of those details are repetitive both within a project and across projects. Here are some examples of information that are often repeated in an estimate:

• A total revenue value representing multiple rate card columns
• A rate card value based on data in each work item
• A price per square foot calculation
• A margin calculation of revenue minus cost of goods and services
• The cost of a piece of equipment per hour, day, etc.
• The proportion of the total project cost of using a piece of equipment, that applies to each relevant work item
• The ratio between a work item’s labor hours and the amount of QA needed
• The cost of performing standard work on an area

Every time a piece of information is entered into an estimate more than once, you waste time and risk errors. Every time information in a previous estimate is reused by manual entry into a new estimate, you waste time and risk errors. So your estimation system has to do its utmost to prevent that repetition, through features like:

• Defining a static value once, then using that defined value anywhere it’s needed.
• Defining static values at each level of the estimate.
• Defining a formula once, then using it anywhere it’s needed.
• Apply percentages of total project costs across work items based on data in each work item.
• Define assemblies – the standard costs associated with an estimating component like a piece of equipment – then use those standard costs anywhere they’re needed.
• Overriding default definitions for individual projects.
• Overriding project-level definitions for individual work items.

The goal has to be to repeat work as little as possible.

Collaborate at speed

In today’s distributed workplaces, pricing proposals are often assembled by teams whose members each specialize in one area, and they may not work in the same office. Whatever the source material is – engineering specs, drawings, research, historical data, etc. – pricing teams need to be able to collaborate efficiently on an estimate. And as we noted in the Review phase of the methodology, real-time editing is key. You can’t afford to deal with hassles like:

• Estimators having to wait for each other to finish before working on an item
• Source material and project files scattered in multiple places
• Having to manually copy data from previous proposals to new proposals.
• Waiting for legacy software to be installed or maintained on individual computers.
• Managing multiple copies of a proposal file, whether as a form of version control or to share with others.
• Estimation software that can’t provide project managers and reviewers live, accurate data at each level of the estimate
• Confusion over who owns which work or who needs to review what

You need quality, accurate, consistent collaboration that doesn’t slow you down.

Learn from the past

Pricing for government contracts is a lot of work, requires a lot of knowledge, and involves a lot of data. As we noted above, your goal has to be to repeat as little work as possible. So you need to keep past data accessible to estimators for new proposals. It’s worth investing in a cost library, a centralized repository of historical cost data that can transform how organizations approach project cost management. By systematically capturing and organizing cost information from past projects, these databases enable faster and more accurate estimation, better budget control, and improved decision-making throughout the project lifecycle.

Centralizing your cost and pricing knowledge improves your consistency and accuracy, and saves time, but it does a lot more than that. The data captured in proposals by senior estimators represents their expertise. Making that expertise available to all estimators provides two major benefits:

• It raises the level of quality junior estimators can achieve.
• It mitigates the impact of employee turnover, and keeps your estimation capacity steadier.

The work of your estimators is part of your intellectual capital. Preserving and mining it for lessons that improve future estimation leads to stronger margin performance, better production, and execution overall.

OAE Is Built for Pricing Government Contracts

The pricing software you use is the key to effective bidding. OAE supports the government contract pricing methodology and best practices we’ve covered here.

Contact us today to learn how OAE helps you win more and scale faster.