How to Construct a Profitable, Competitive and Compliant Federal Government Cost Proposal

For companies new to government contracting, developing a federal government cost proposal that’s both profitable and competitive, and of course, compliant, can feel like threading a needle.

Winning a federal contract isn’t just about your technical approach. Your pricing has to be just as strong. For companies new to government contracting, developing a federal government cost proposal that’s both profitable and competitive, and of course, compliant, can feel like threading a needle. This post will walk you through how to achieve all three.

Start with the RFP Instructions

Most of your pricing structure is already dictated by the RFP. Start with Section B (Supplies/Services and Price/Costs), and cross-reference with Section L (Instructions) and Section M (Evaluation Criteria). If the RFP asks for a specific format (e.g., Excel tabs broken down by CLIN), follow it exactly. If you stray from these requirements, you may be disqualified from the competition for non-compliance.

Understand Your Cost Elements

Make sure your budget includes all required cost elements or major line items, such as:

• Direct labor (by labor category and rate)

• Material Costs

• Subcontractors

• Indirect rates (fringe, overhead, G&A)

• Fee/profit

Make sure to itemize lower-level cost line items within the major ones. For example, your labor should outline each position, the quantity of hours or days, the unit cost, and total price. Your material costs will likely be varied. Perhaps you will incur travel costs, office rent, or training expenses.

Avoid presenting lump sum amounts in your line items as much as possible. The government wants to understand how you arrived at your price, and to do that they’ll want to conduct a cost analysis. That is, a line-by-line review of your cost volume to ensure amounts budgeted are reasonable, allocable, and allowable.

For example, if you are budgeting $100,000 for “training”, you’ll need to demonstrate how you arrived at that amount. What costs and quantities went into arriving at that figure? Lodging and per diem? Venue rental? Catering? What are some examples of trainings you expect to perform? And how many days will each training take to complete? Without these details, you’re essentially waving a red flag for the Contracting Officer that you either aren’t being transparent about what your approach will costs or that you don’t understand what they expect to see. Neither is a great look for your company.

Be Strategic, Not Reactive

If you’re new to federal pricing, avoid underbidding just to win. It might backfire, both in execution of the award, and in getting the award. Unless Section M of the solicitation says that award will be made to the offer that is “lowest-price technically acceptable” (LPTA), price (or “non-technical”) is probably going to be considered less important than technical factors under a tradeoff evaluation. That is to say, the government is often willing to pay a premium for a superior technical approach.

Make sure you include fixed fee/profit in your budget. On the surface, profit brings to mind corporate greed. But in reality, profit serves other purposes: to incentivize you to perform and to give you a buffer in the event you must incur unallowable costs that cannot be recouped directly or indirectly. “Fee” or “Profit” essentially serves as your unallowable cost slush fund. For example, the cost of taking out a line of credit (LOC) is not allowable under government contracts but if doing so is necessary for you to implement the contract, the cost of that LOC is coming out of your fee/profit pool.

On that note, make sure you justify your fee/profit. FAR 15.404-4 “Profit” is an excellent resource to understand how the government analyzes your proposed profit and what factors they will take into consideration when determining if the amount budgeted is fair. By addressing these factors (such as, contractor effort, contract cost risk, federal socioeconomic programs, cost-control, etc.) in your budget narrative, you are showing the Contracting Officer just how you will be earning that fee/profit.

Finally, highlight in your budget narrative how you are making best use of taxpayer dollars and bringing cost savings and control and other efficiencies in your approach.

Pricing Compliance Pitfalls to Avoid

Including unallowable costs. Hopefully this goes without saying but any inclusion of unallowable costs is likely to signal to the Contracting Officer that you are not a responsible source, which could cost you the award.

Forgetting to apply escalation to multi-year efforts. The government understands that inflation happens. Hedge your bets and build in escalation to all of your costs.

Unsupported indirect cost rates. Recovering your costs of doing business is essential to operating a healthy business. But your rates must be grounded in reality. If you do not have a Negotiated Indirect Cost Rate Agreement (NICRA) with the government, you may need to support your indirects with third-party audited or reviewed financials. Read Section L of your RFP to make sure you can meet the government’s requirements for indirect cost rate justification. If you can’t, you are likely batting out of your league and should consider passing on the opportunity. Instead, take the time to get your house in order and ensure your indirect cost rates are justifiable, and that your accounting system is set up to distinguish between direct and indirect costs and allowable versus unallowable costs.

Discounting indirect cost rates. On the flip side, if you have established and supported indirect cost rates, discounting these to be competitive should be done with extreme caution. You may risk undercutting your company’s ability to operate by doing so. It’s a common misconception to think that your indirect cost rates must be within a certain range to be acceptable. However, the government should not hold a contractor’s indirect cost rates against them when evaluating proposals, because every company is different and likely at a different stage of growth. As long as the rates are supported, they are reasonable.

Going above and beyond. While offering a superior technical approach is likely going to work in your favor, padding your budget with unnecessary or superfluous costs may cost you. Budget only for the costs that are truly mandatory to implement the project. In writing your budget narrative, if you find that you cannot reasonably justify the cost as being necessary to implement your proposed technical approach, it should be cut.

In the federal government contracting space, pricing is about strategy and compliance.

Following these guidelines will help you demonstrate to the Contracting Officer that your organization knows what’s expected of you and your team, and that you are capable of implementing at a high standard. With more than $500M in contract wins under our belt, Akiri Consulting can help small businesses price winning proposals by balancing profitability, competition and compliance. Need a pricing expert for your next proposal? Tell us more about it in our Prospective Client Questionnaire and we will be in touch about next steps.