How to Price a Government Proposal — Pricing Strategy Guide
Pricing is where government proposals are won or lost. Price too high and you are eliminated. Price too low and you either lose money or trigger a "price realism" concern. Getting it right requires understanding contract types, cost structures, and what the government is actually evaluating.
This guide covers the four major contract types, how to calculate direct and indirect costs, wrap rate mechanics, and common pricing mistakes.
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Types of Government Contract Pricing
The government pays a single fixed price for a defined deliverable or scope of work. If your costs come in under the fixed price, you keep the difference as profit. If costs overrun, you absorb the loss. FFP is the most common contract type and is preferred by the government because it transfers cost risk to the contractor.
The government reimburses all allowable costs plus a fixed fee (profit) that does not change regardless of actual costs. This is used when costs cannot be reliably estimated upfront. Your costs must comply with FAR Part 31 cost principles and are subject to audit by DCAA.
The government pays fixed hourly rates for each labor category plus actual material costs. You are paid for actual hours worked at pre-negotiated rates, regardless of output. T&M is used when the scope of work is not defined enough for FFP but the labor rates can be established.
Similar to CPFF, but a portion of the fee is awarded based on the government's subjective evaluation of contractor performance. A base fee (typically 3-5%) is guaranteed, and an award fee pool (additional 5-10%) is available based on periodic performance evaluations.
Direct Costs
Direct costs are expenses that can be specifically identified with a particular contract. They are the foundation of your price build-up.
Direct Labor
The largest cost element in most service contracts. Includes base salary/wages for each labor category (e.g., Project Manager, Senior Engineer, Analyst). Use market data, salary surveys, and Bureau of Labor Statistics data to set competitive rates. Consider the Department of Labor Service Contract Act (SCA) or Davis-Bacon Act wage determinations if applicable.
Materials
Physical supplies, equipment, software licenses, and hardware directly used on the contract. Must be specifically identified to the contract and not included in overhead pools. For significant material purchases, get vendor quotes to support your estimates.
Other Direct Costs (ODCs)
Costs that are directly attributable to the contract but do not fall into labor or materials. Common ODCs include specialized training, certifications, equipment rentals, printing, and shipping. Be specific in your basis of estimate for each ODC line item.
Travel
Estimated travel costs including airfare, lodging, per diem, rental cars, and mileage. Must comply with the Federal Travel Regulation (FTR) or Joint Travel Regulations (JTR) for DoD. Use GSA per diem rates for your estimates. Specify the number of trips, duration, and destination.
Indirect Costs
Indirect costs are expenses that benefit the entire organization and cannot be directly assigned to a single contract. They are applied as rates (percentages) on top of direct costs. Together, they form your "wrap rate."
Fringe Benefits
25-40% typicalIncludes employer-paid FICA/Medicare (7.65%), health insurance, retirement/401(k) match, paid time off (PTO), workers compensation insurance, life insurance, disability insurance, and other employee benefits. The fringe rate is calculated as total fringe costs divided by total direct labor costs.
Overhead
30-80% typicalCosts related to running the operational side of the business. Includes facilities/rent, utilities, IT infrastructure, project management tools, non-billable staff time (training, bench time), equipment depreciation, and office supplies. Higher overhead rates are common for companies with expensive facilities or large bench staffs.
General & Administrative (G&A)
8-20% typicalCompany-wide expenses that support the entire business. Includes executive salaries, accounting, HR, legal, business development, proposal costs, insurance, and corporate functions. G&A is applied as the last indirect rate before fee/profit. It covers the cost of running the company as a whole.
Fee / Profit
6-15% typicalYour margin. For cost-reimbursement contracts, fee is disclosed and capped by statute (10% for R&D, 15% for other). For FFP contracts, profit is embedded in the price and not separately disclosed. The government evaluates whether your overall price is fair and reasonable, not your profit percentage specifically.
Understanding Wrap Rates
Your "wrap rate" is the multiplier that converts a direct labor dollar into a fully burdened cost. It captures all indirect costs in a single number.
Example Wrap Rate Calculation
In this example, the wrap rate is 2.449x. For every $1.00 of direct labor, the fully burdened cost is $2.45. A project manager with a $60/hour base rate would be billed at approximately $147/hour.
Wrap rates in government contracting typically range from 1.8x to 3.0x depending on the company's cost structure. Large companies with expensive facilities and robust benefits tend toward the higher end. Lean companies with lower overhead can compete with rates closer to 2.0x.
Your wrap rate directly affects competitiveness. Two companies bidding the same labor categories at the same base rates will produce very different prices if their wrap rates differ. This is why indirect rate management is as important as technical capability in government contracting.
How to Build a Competitive Price
Research historical pricing data
Before you build your price, research what the government has paid for similar work. Use FPDS and USAspending data on Bureauify to find comparable contract awards. Check GSA Schedule pricing for relevant labor categories. Look at the government estimate if published in the solicitation.
Use the right labor mix
Do not staff every position with senior people. Use a realistic mix of senior, mid-level, and junior staff. The government evaluates whether your staffing approach makes sense for the work. Over-staffing with expensive senior resources makes your price uncompetitive.
Challenge every labor hour estimate
Build your hours estimate bottom-up from actual tasks and deliverables. Avoid padding. The government will evaluate whether your hours are realistic. Excessive hours are as much a red flag as too few hours.
Know your indirect rates cold
If you have DCAA-audited rates, use them. If you are a new contractor, develop provisional rates based on your actual cost structure and document your methodology. Unrealistically low indirect rates trigger price realism concerns.
Consider uncompensated overtime strategically
For exempt employees on cost-reimbursement contracts, uncompensated overtime (working 44+ hours but billing 40) reduces your effective labor rate. This is a legitimate competitive lever but must be documented and realistic. Do not assume 60-hour weeks.
Price to win, not just to cost
Understand the evaluation criteria. If price is the primary factor (LPTA), you need the lowest technically acceptable price. If it is best value, a slightly higher price with a stronger technical approach may win. Read Section M of the solicitation carefully.
Common Pricing Mistakes
Lowballing to win
Winning at an unrealistically low price leads to performance problems, staffing issues, and potential default. The government may also reject your price for lacking realism under FAR 15.404-1(d).
Ignoring the evaluation criteria
Pricing for best value when the evaluation is LPTA (or vice versa) misaligns your strategy. Always read Section M and price accordingly.
Using placeholder indirect rates
Made-up rates that cannot withstand DCAA scrutiny or price analysis will sink your proposal. Base rates on actual costs or supportable estimates.
Forgetting escalation
Multi-year contracts need annual escalation factors (2-4% typical) to account for salary increases, benefits cost growth, and inflation. Flat pricing across 5 years will erode your margins.
Underestimating transition costs
New contracts require ramp-up: hiring, training, security clearances, facility setup. These costs are real and must be in your price. The government expects to see transition plans and costs.
Not checking wage determinations
Service Contract Act (SCA) wage determinations set minimum wages and fringe benefits for many service contracts. Pricing below SCA minimums violates the law and will disqualify your proposal.
Research Competitive Pricing on Bureauify
Use historical award data from FPDS and USAspending to benchmark your pricing against real government contract awards. Find comparable contracts and understand what agencies are paying.