Let’s face it—government contracting is not a hobby for the faint of heart or fuzzy on math. Costing and pricing can feel like assembling IKEA furniture: there’s a thick manual, oddly shaped pieces, and you’re pretty sure something is missing.
But here’s the good news: once you understand how costing and pricing work in the world of federal contracts, you can stay competitive and profitable, without guessing what your margins are or sweating bullets every time the RFP clock ticks down.
And with today’s shifting industry trends, pricing strategies are evolving fast. This guide is your clear, jargon-free roadmap for nailing the numbers while still sleeping well at night.
Why Costing and Pricing Matter More Than Ever
In federal contracting, pricing isn’t just about slapping on a margin and hoping for the best. Your numbers need to be:
- Competitive (so you don’t price yourself out of the running)
- Compliant (because Uncle Sam has rules, lots of them)
- Profitable (because you’re not running a nonprofit—unless you are, in which case, carry on)
With federal agencies keeping a closer eye on value and accountability, staying aligned with industry trends in pricing is crucial. The government is expecting more for less, and businesses that can adapt will continue to win.
Know Your Costs Like You Know Your Favorite Coffee Order
Before you even think about pricing, you’ve got to know your cost structure inside and out. We’re talking:
- Direct Costs: Labor, materials, subcontractors
- Indirect Costs: Overhead, administrative support, insurance, IT
- G&A Costs: General & administrative expenses
- Fringe: Benefits, vacation, payroll taxes
You’d be surprised how many companies just wing it, and spoiler alert—it usually ends with them losing money or underpricing themselves out of credibility.
If “cost pools” sound like a relaxing spa, think again. But understanding them is critical for accurate pricing.
Pricing Models: Pick Your Weapon
There are several common pricing models in government contracting, and choosing the right one depends on both project type and current industry trends.
Fixed Price
You take the risk, but the rewards are clear-cut. Best when you’re confident about your costs.
Pro tip: Don’t get tempted to underbid. If the work takes longer or costs more, you eat the loss—not the government.
Cost-Reimbursement
The government covers allowable costs. This model is riskier for the agency, but great for R&D, innovation, and uncertain scopes.
Time and Materials (T&M)
You bill for labor hours and materials used. Great when the scope isn’t 100% clear.
But agencies are now cautious with T&M—industry trends show a slow pivot toward performance-based contracts.
Indirect Rates: They’re a Big Deal (Even if They Sound Boring)
If you’re working on cost-type contracts, your indirect rates can make or break your pricing strategy.
You’ll typically need to calculate:
- Overhead Rate
- G&A Rate
- Fringe Rate
- Possibly Material Handling or Subcontractor Handling rates
And yes, this is where having a good accountant or DCAA-compliant system pays off big time.
The best firms track their industry trends in overhead and adjust rates annually. Falling asleep yet? Don’t worry. Just remember, bad math = lost contract.
Staying Competitive Without Giving Away the Farm
We’ve all seen it—companies that win a contract by coming in way under everyone else. And we’ve also seen them crumble mid-performance when they realize they can’t deliver at those prices.
Industry trends show that agencies are now more sceptical of “too good to be true” pricing. So instead of racing to the bottom, focus on:
- Value justification: Show why your price makes sense
- Past performance: Prove you can deliver, even if you cost a little more
- Differentiators: Certifications, tech advantages, speed, or specialized staff
Don’t try to be the cheapest—try to be the best value. The government is catching on to this, and industry trends back it up.
Let’s Talk Profit
Contrary to popular myth, the federal government does not expect you to work for free. They understand you need to make a profit. They just want to make sure it’s fair, reasonable, and tied to performance.
Most agencies will expect:
- 7%–12% for fixed-price service contracts
- Up to 15% for construction or specialized work
- Negotiable profit on cost-type contracts
The key is transparency. Your pricing breakdown should clearly show where the profit is built in—and why it’s justified.
Fun fact: “Reasonable profit” is a thing in FAR (Federal Acquisition Regulation) language. That’s right, even the government knows you have bills.
Pricing Tools to Make Life Easier (and More Accurate)
There’s no badge for building pricing spreadsheets from scratch. Plenty of tools and resources exist to make costing and pricing smarter:
- ProPricer: Powerful cost estimation tool
- Deltek Costpoint: Robust for DCAA compliance
- BidSpeed or GovWin: Market pricing intelligence tools
- SBA’s Price Proposal Templates: Free and surprisingly useful
Many savvy small businesses are using pricing tech in line with industry trends—automating indirect rate calculations, tracking bid prices, and running “what-if” analysis before submitting proposals.
Trust us, Excel can only take you so far.
Pricing for Scale: What Happens When You Win Bigger Contracts
Pricing gets even trickier (and riskier) when you start winning bigger contracts.
Here’s how to prepare:
- Invest in scalable systems (payroll, HR, project tracking)
- Hire a pricing expert or fractional CFO
- Track actual vs. estimated costs constantly
- Refine your rates quarterly based on real data
If your small business is growing fast, this is a good problem to have—but failing to price correctly at scale can sink you just as quickly as it helped you rise.
The good news? Industry trends support more set-asides and large awards to agile small businesses. So, now’s the time to get your pricing house in order.
What the Industry Trends Are Saying (and Why You Should Care)
Let’s zoom out. Here are a few current industry trends you should consider when setting your prices:
- Value-based contracting is on the rise
- Sustainability and climate accountability are being priced into bids
- Cybersecurity compliance costs are becoming part of baseline expectations
- Agencies are expecting real-time cost tracking and data transparency
Your pricing must reflect these realities, or your bid could feel outdated—even if your numbers are solid.
And here’s the kicker: contracts are being scrutinized post-award. So if you said you could deliver something for $400K, but end up needing $600K? That’s a bad look (and possibly a canceled contract).
Final Thoughts: Price Smart, Profit Strong
Costing and pricing in government contracts doesn’t have to be a painful guessing game. When done right, it becomes your strategic advantage.
Remember:
- Know your real costs
- Pick the right pricing model for the job
- Watch industry trends to stay ahead
- Avoid underbidding—it’s not a sustainable flex
- Use tools and experts to keep things compliant and scalable
Government contracting is competitive, but it’s also full of opportunity—especially for small businesses that price smart and deliver well.
You don’t need to be the cheapest bidder—you need to be the smartest one in the room.
