Pricing
How to Price a Government Contract Bid: A Complete Guide
Step-by-step pricing framework for federal contracts: loaded labor, overhead, margin, and the three tests every bid must pass before you submit.
Most small contractors first learn government contract pricing the hard way. They bid based on intuition, win the contract, and then discover three months in that they're losing money on every billable hour. By then it's too late — the contract is signed, the wage rates are fixed, and the only way out is to walk away from a federal contract (which often means losing past performance credibility for years).
This article walks through how to price a federal service contract bid correctly, the first time. The framework is consistent across industries — janitorial, security, IT, staffing, food service — but the inputs vary by industry, contract type, and locality.
1.Know What Type of Bid You're Pricing
Federal solicitations come in several pricing structures. The structure determines how you build your price.
Firm-fixed-price (FFP): You quote a fixed dollar amount. You bear all cost overrun risk. Most common for service contracts with predictable scope.
Time-and-materials (T&M): You quote hourly billable rates by labor category. The government pays for actual hours worked. Lower risk for you, but contractors with this structure are scrutinized heavily on rate buildup.
Cost-reimbursable: You quote estimated costs and a fixed fee. Less common for small contracts. Requires DCAA-compliant accounting in most cases.
Indefinite delivery / indefinite quantity (IDIQ): You quote rates that get used across many task orders. Initial rate buildup matters enormously because it locks in pricing for the entire IDIQ ceiling period.
The pricing framework in this article applies to all four, but the precision required scales with how locked-in your rates are. An IDIQ rate held for 5 years needs to be built far more carefully than a single-job FFP bid.
2.Calculate Your True Cost Per Billable Hour
Most contractors price too low because they don't account for everything that goes into the true hourly cost of an employee on a contract. The build-up has three layers:
Layer 1: Loaded labor rate — what you actually pay to have a person on payroll, per hour worked.
Layer 2: Overhead allocation — what you have to recover per billable hour to cover the costs of running your business (rent, insurance, software, admin payroll, vehicles).
Layer 3: Profit margin — what you need on top of total cost to operate sustainably.
Each layer compounds. Skipping or shortcutting any of them means underbidding by 15-40% on every contract.
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