Source & Authority Information
- •FAR Part 16 - Types of Contracts(accessed 2026-01-15)
- •FAR Part 31 - Cost Principles(accessed 2026-01-15)
Understanding Government Pricing Fundamentals
Firm Fixed Price Contract Pricing
- Build detailed work breakdown structures to capture all required effort
- Use historical data from similar contracts to validate estimates
- Include realistic labor escalation over multi-year periods
- Account for learning curve effects on repetitive tasks
- Add appropriate contingency based on risk assessment
- Consider competitive positioning relative to expected competitor pricing
Time and Materials Contract Pricing
- 1Determine Direct Labor Rates
Calculate actual or planned salaries for each labor category. Consider where staff will work on the range for their category. Factor in planned salary increases over the contract period.
- 2Add Fringe Benefits
Include payroll taxes, health insurance, retirement contributions, paid leave, and other employee benefits. Fringe typically ranges from 25-40% of direct labor depending on benefit levels.
- 3Apply Overhead Rate
Overhead covers indirect costs of performing work including facilities, equipment, supervision, and support staff. Overhead rates vary widely by company type and typically range from 40-120% of direct labor.
- 4Add G&A Expense
General and administrative costs cover corporate functions like executive management, accounting, HR, and business development. G&A typically ranges from 8-20% applied to total costs.
- 5Include Profit
Profit rates on T&M contracts typically range from 7-15% depending on risk, investment, and competitive factors. Profit applies to the total of all costs.
Cost Reimbursement Contract Pricing
- Develop costs that are realistic and achievable, not optimistic or pessimistic
- Ensure technical approach and cost estimate are fully consistent
- Document assumptions and methodology for cost estimates
- Use historical data and analogies to support cost realism
- Explain any efficiencies that reduce costs below historical norms
- Consider probable cost rather than proposed cost in competitive positioning
Fixed Price Incentive Contracts
Cost Plus Incentive Fee Contracts
Award Fee Contract Considerations
Labor Rate Competitiveness Analysis
Indirect Rate Management for Pricing
Price to Win Analysis
Common Pricing Mistakes to Avoid
- Buying in: Pricing below cost to win then seeking modifications creates procurement integrity concerns
- Inconsistent rates: Using different rates in different proposals creates audit and compliance problems
- Ignoring escalation: Failing to include realistic cost escalation on multi-year contracts erodes margins
- Optimistic estimating: Assuming best-case scenarios leads to cost overruns on fixed-price work
- Missing costs: Omitting required costs like security, travel, or materials results in underpricing
- Rate compression: Cutting rates without reducing underlying costs creates unsustainable pricing
- Poor documentation: Inadequate support for pricing makes negotiations difficult and raises audit risk
