Pricing is where many first federal bids go wrong — either too high to win or too low to survive. The right price depends on the contract type, the evaluation method, the labor rules attached to the work, and your real costs. This guide covers the basics a small firm needs before submitting a first price.
Contract types and who carries the risk
Contract types are described in FAR Part 16. The two most common for small firms are:
Firm-fixed-price (FFP)
You agree to deliver the work for a set price. If it costs you more than you expected, you absorb the loss; if you perform efficiently, you keep the savings. FFP is the most common type for well-defined work and commercial buys (FAR 16.202). Your risk is in the estimate, so understand the scope thoroughly.
Time-and-materials (T&M) and labor-hour
The government pays fixed hourly rates for labor (which include wages, overhead, general and administrative expense and profit) plus materials at cost, up to a ceiling price (FAR 16.601). Labor-hour is the same without materials. These types are used when the amount of work cannot be estimated with confidence. Your risk is in the rates: if your actual costs per hour rise above your billing rate, you lose money on every hour.
Cost-reimbursement
The government reimburses allowable costs plus a fee. These contracts require an accounting system adequate for determining costs (FAR 16.301-3) and compliance with the cost principles in FAR Part 31. Most small firms start with FFP or T&M work instead.
Build the price from the bottom up
1. Understand the scope and the CLINs
Read the statement of work and Section B (the contract line items). Price exactly what the line items ask for, in the format the solicitation's pricing template requires. Note the base period and each option period.
2. Estimate labor
For each task, estimate hours by labor category. Base estimates on your real experience: how long similar jobs actually took, not how long you wish they took.
3. Apply wage rates and fringe
Use realistic pay rates for the location, then add fringe benefits (payroll taxes, insurance, paid leave). If wage determinations apply (see below), they set minimums.
4. Add indirect costs
Overhead (costs that support the work, such as supervision or facilities) and general and administrative expense (running the company) must be recovered somewhere. Calculate your rates from your own books.
5. Add materials, equipment, travel and subcontracts
Get written quotes from suppliers and subcontractors. Follow the solicitation's travel instructions; many agencies reimburse travel under the Federal Travel Regulation limits.
6. Add profit
Profit is a business decision. Set a margin that reflects your risk, especially under FFP.
7. Escalate for option years
Multi-year contracts usually have option periods. Build in reasonable wage and cost escalation; once you sign, you are generally held to your option prices.
Labor laws that drive price
- Service contracts. Many federal service contracts are covered by the Service Contract Labor Standards statute (formerly the Service Contract Act), which requires paying at least the wages and fringe benefits in the wage determination attached to the solicitation.
- Construction. Covered construction contracts are subject to the Davis-Bacon and Related Acts, which require prevailing wages from the applicable wage determination.
Wage determinations are published on SAM.gov and are usually listed in Section J. Underpricing them is not just risky — it can mean paying the difference out of your own pocket later. See FAR Part 22.
Know how price will be evaluated
- Under LPTA, price wins once you are technically acceptable — sharpen it.
- Under a best-value tradeoff, a higher price can win with a stronger technical proposal, but the premium must be worth it to the evaluator.
- Agencies check that prices are fair and reasonable, and sometimes check for realism — an unrealistically low price can signal you do not understand the work.
Research what the government paid before
Public data helps you avoid pricing blind. USAspending.gov shows prior awards and amounts, and PinPeek's NAICS pages summarize recent awards in each industry. For labor rates on professional services, GSA's CALC+ tool, available from buy.gsa.gov, shows awarded GSA schedule rates. Use these as context, not as your price — your costs are your costs.
Final checks before you submit a price
- Every line item and option period has a price, and totals add up correctly.
- You used the agency's pricing template exactly, without changing formulas or formats.
- Labor rates meet or exceed any applicable wage determination, including fringe benefits.
- Your pricing assumptions match your technical approach — the staffing you describe is the staffing you priced.
- You have acknowledged every amendment, including any that changed quantities or pricing sheets.
Frequently asked questions
Which is riskier for a contractor, FFP or T&M?
FFP puts cost risk on the contractor for the whole job. T&M shifts the quantity risk to the government, but the contractor still bears the risk that its fixed hourly rates do not cover its real costs.
What is a wage determination?
A Department of Labor schedule of minimum wages and fringe benefits for covered service or construction work in a given location. It is usually attached to the solicitation.
Can I lower my price after award?
You can offer lower prices on modifications or future orders, but once the contract is signed you are generally bound to the prices you proposed, including option years.
What happens if my price is too low?
The agency may question whether it is realistic, may find you do not understand the requirement, or may award it to you and leave you to absorb losses. Price to your real costs.
This guide is general information, not legal advice. Rules change — always check the solicitation and the official sources linked here.