Government Contract Pricing Pitfalls: 3 Ways to Avoid a Race to the Bottom

Are you caught up in a race to the bottom? It can feel that way when you rely on low pricing to win contract bids. Before you settle on low pricing as your go-to strategy, consider the following:

Today’s government contracting landscape is more competitive than ever. One way some contractors cope is to cut their bid pricing as low as possible to guarantee a win. In the past, the Lowest Price Technically Acceptable (LPTA) source selection process encouraged such an approach. Instituted in the early 2000s in reaction to federal budget restrictions, LPTA procurements require source selection officials to choose the lowest priced bid that meets the minimum technical specifications of the project.

The LPTA process has fallen out of favor, however, because it limits agencies’ ability to balance performance and price to get the best value. Congress enacted legislation to limit LPTA use in military procurements and in 2018, passed the National Defense Authorization Act (NDAA) to expand restrictions on LPTA use to civilian agencies. The Federal Acquisition Regulation (FAR) has been revised to reflect these limitations.

In It to Win It

Nevertheless, even firm fixed price (FFP) and time and materials (T&M) contracts can tempt contractors to “low-ball” on price to get the win. The price set in an FFP contract may not be adjusted post-award to account for the contractor’s actual cost in performing the contract. A T&M contract price is based on the costs of labor, materials, indirect expenses, and the contractor’s profit, however once bid, that is the set price that a contractor can bill its labor. A contractor can still gain a false sense of security with a strategy to bid one price on an FFP or T&M contract, then execute it at a lower cost to increase the margin.

Whatever the bidding process, is your company ever better off cutting its pricing “to the bone” to secure new business? Be wary of any plan to come in low to get your first award thinking that the customer will eventually allow a re-bid or price increase on follow-on work. This is often not the case. Most customers who buy low expect to continue that pattern.

What to do?

How can you set competitive pricing and still avoid a race to the bottom? Try these alternatives:

  1. Review your annual budget and target rates. See where you can make concessions to either cut some indirect expenses or lower your rate to a realistic level during bidding.
  2. Conduct a rate impact assessment before you submit a bid. The assessment can give you an outlook on how additional work will impact your existing indirect rates. Your rates may drop naturally with increased volume. You can then determine if you want to bid lower indirect rates that go into effect only if you win.
  3. When bidding on FFP and T&M opportunities, answer these questions:
    • If I need to backfill a position, can the fully burdened rate support an increase in salary without significantly impacting my profitability?
    • If I blend pricing for particular positions, will a change in staffing during execution significantly change my profitability outlook?
    • Am I leaving enough margin in the bid rate to cover future salary increases that exceed the annual escalation but are needed for retention? In other words, can I keep staff happy in the out years of the contract?

Pricing is a crucial part of success in government contracting. CAVU advisors have expertise in all aspects of the process, including pricing, proposals, budgeting, and bid strategy. Reach out to our team for help with maximizing your proposal opportunities… and wins!