How to Price a Government Contract
Government pricing is a built number: direct costs, indirect recovery, fee, and the risks the contract pushes onto you. Then it is a scored number — the same figure competes differently under every evaluation formula.
Start with what the market pays. The average federal award in the compiled corpus is $923K (1,313,281 award records, 2004–2026), and outside the top 100 vendors — which is where a first-time supplier lives — the average is $396K (statistics of record: publicserviceindex.org). Most public work is modest, repeat business priced within a narrow band. Your first prices should aim at that band, not at the headline contracts that make the news.
Build the cost before you choose the fee. Direct costs first: labour at loaded rates, materials, travel, subcontractor quotes in writing. Then indirect recovery: the share of your overhead — insurance, accounting, equipment, bench time — the contract must carry, applied as a rate, not a guess. Fee comes last, as a policy: what margin makes this contract worth its risk and its working capital? Firms that start from the fee and back into the costs discover the error during delivery.
Price to the formula. Before settling a number, read how price is scored — fixed points, lowest-bid-relative, or best-value ratio. Under a points-rated formula, compute what a price concession buys in technical points; often it buys almost nothing, and the stronger play is spending those hours on the rated criteria. Under lowest-price-compliant, the field is a costing contest and the winner is whoever estimated tightest. The same dollar is a different weapon under each formula; the analysis lives in RFP Evaluation Criteria, Explained.
Budget the costs that are not in your cost model. Bonds (industry-typical pricing: bid bonds often run well under 1% of bid value, performance bonds a few percent of contract value — surety-specific and labelled as such, not computed from the Institute corpus), insurance riders, security clearances, and the administration of reporting itself. On small contracts these fixed costs decide the margin; price them in or decline the work.
Price the years you are signing. Multi-year instruments hold your rates against inflation, so build escalators where the solicitation allows them and assume your worst case where it does not. Option years are priced at submission: an option exercised in year three pays year-one money unless you modeled otherwise. Cash flow is pricing too — 30-day payment terms are normal, but a 90-day lag on a staff-heavy contract is a loan you are making to the government; size your fee to cover it.
Check your number against the record. Award values are public. Before submitting, pull the last few awards in the same category and buyer: if the band is wildly below your build, either you are pricing a different scope or the incumbent's economics are not yours. A feed that shows award history per buyer — pubsec.pro does this free — is the cheapest sanity check in the process.
Common questions
How thin should margins go to win a first contract?
Thin enough to be competitive, never thin enough to lose money on delivery — a loss-leader that wins becomes the reference price at every recompete. Better first-contract tactics are set-asides, smaller buyers, and subcontracting, where the field is thinner and the pricing pressure lower.
Do I price option years at the same rates?
Where the formula requires it, yes — so build the escalator into the base year instead. Where options are priced separately at exercise, model them anyway: buyers remember who tried to reprice a committed option.
Are taxes included in my bid price?
Read the solicitation's pricing basis — some require prices exclusive of applicable taxes, others all-in. Mismatching the basis is treated as a pricing error, and in tendering those can be held against the bid.