This video walks through the core concepts for this module. Watch it first, then use the slides below to go deeper.
A Houston staffing company won a major state contract. They priced labor at $18/hour — what they paid each employee per hour. Here's the critical distinction they missed: what you pay an employee is not what it costs you to employ them. Those two numbers are never the same.
Payroll taxes (7.65% employer FICA alone), workers' comp insurance, benefits overhead, G&A, and profit margin weren't included in the $18/hour bid. The actual fully loaded cost per employee was $24.50/hour. They were billing $18.00. Every single hour worked was a $6.50 loss. On a full-time employee working 2,080 hours per year, that's $13,520 lost per person per year — before they made a dollar of profit. They'd won the contract. And they were bleeding money on every invoice for 12 months.
The mistake wasn't greed — it was a knowledge gap. They priced what they saw (the paycheck) instead of what they owed (the total cost of employment). Government contracting is extremely profitable — but only when you price every cost component correctly from the start.
Your price in a government proposal does two jobs simultaneously, and they pull in opposite directions. Price too high, and you fail the price reasonableness test — the government concludes you're overcharging and may eliminate your offer. Price too low, and you fail the price realism test — the government concludes you can't actually do the work at that price and may reject your offer as unrealistic, or select you and watch you fail mid-contract.
The government's internal cost estimate (called the IGCE — Independent Government Cost Estimate) sets the ballpark. Your job is to price close enough to it to be credible, while covering every real cost of performance. That window is often narrower than new contractors expect.
Is your price consistent with what the market charges for this work? The government uses historical award data, market surveys, and the IGCE to assess this. A price significantly above the IGCE or market range will trigger a reasonableness concern — the CO may request justification, negotiate down, or award to a lower bidder. On competitive proposals, extreme overpricing simply loses.
Can you actually perform this work at the price you've proposed? A price far below the IGCE raises realism concerns — the government doesn't want a vendor who will fail, cut corners, or default mid-contract because they underpriced. On cost-reimbursable contracts, a realism analysis is required by FAR. On fixed-price contracts, it's common practice. A price realism finding can get your offer excluded — or saddle you with a performance obligation you can't afford.
For service contracts, labor is typically 60–80% of total contract cost. Every component below is a real cost you incur whether you account for it in your price or not. If it's not in your rate, you're paying it out of your profit — or out of your pocket.
| Cost Component | Example Rate | Why It Exists |
|---|---|---|
| Base salary (hourly equivalent) | $22.00/hr | What the employee takes home — the starting point, not the full cost |
| Payroll taxes (FICA, FUTA, SUTA) | $1.93/hr | ~8.8% employer match — Social Security, Medicare, federal/state unemployment. Non-negotiable by law. |
| Health insurance (employer share) | $2.85/hr | Employer's contribution to medical/dental — typically $400–$700/month per employee |
| Workers' comp & liability insurance | $0.88/hr | Varies significantly by industry — IT is low (0.5–1%), construction can be 5–15% of wages |
| Paid leave (PTO, holidays) | $1.54/hr | ~15 days/year = ~7% of annual hours. The employee is paid but not billing. You absorb this. |
| Equipment & tools allowance | $0.48/hr | Laptop, software licenses, phone — allocated per employee across their expected billable hours |
| Direct Labor Subtotal | $29.68/hr | Your true cost to have this employee working — before overhead |
| G&A overhead (20%) | $5.94/hr | Your share of office rent, accounting, BD, management — allocated across all contracts. Rate = your annual indirect costs ÷ annual direct labor cost. |
| Profit margin (10%) | $3.56/hr | Your business return. Without this, you're running a nonprofit. 8–12% is typical for service contracts. |
| Fully Loaded Billing Rate | $39.18/hr | What you charge the government — covers every cost layer above plus your profit |
Your G&A rate is not a number you pick — it's a number you calculate from your actual books. Formula: Annual Indirect Costs ÷ Annual Direct Labor Costs = Overhead Rate.
Example: Your company has $80,000 in annual indirect costs (office rent $24K, your own salary during non-billable time $40K, accounting software $4K, business development time $12K) and $300,000 in annual direct labor costs. $80K ÷ $300K = 26.7% overhead rate. Every dollar of direct labor you bill must also recover $0.267 in indirect costs.
In year 1 with no history, estimate conservatively and revisit after 6 months. A rate that's too low means you're underpricing; too high raises reasonableness concerns on cost-reimbursable contracts.
The employee's hourly pay is $22. Your billing rate must be $39.18 to cover actual costs and earn a return. Forget any component — payroll taxes, workers' comp, PTO — and you're absorbing that cost from your margin. The Houston company forgot most of these. That's how $18 became $24.50 in actual cost.
Every dollar your company spends falls into one of two buckets: costs you can trace directly to a specific contract, and costs that support the whole business. Understanding this distinction is foundational to building a defensible price — and to calculating the G&A overhead rate that goes into every proposal you submit.
Any expense you can tie to a specific contract: the labor hours your employees work on that project, materials or supplies purchased for that scope, travel to that client's site, subcontractor invoices for work on that deliverable, equipment rented specifically for that contract. These costs go directly into your bid price for that contract. You bill them at actual cost (plus fee on cost-plus contracts).
The key test: if the contract disappeared tomorrow, would you still incur this cost? If yes, it's probably indirect. If no — it only exists because of this contract — it's direct.
Expenses that keep your company running but can't be tied to a specific contract: office rent, accounting software, your own salary during non-billable time (business development, proposal writing, admin), liability insurance covering the whole company, payroll software, utilities. These can't be billed directly to any single contract — they support all of them. So you allocate them proportionally through your overhead rate.
Important: your own time is split. When you're working on a client deliverable — that's direct labor billed to the contract. When you're writing a proposal, managing the business, or doing BD — that's indirect labor that feeds your G&A rate. Tracking the split is how you know your real overhead rate.
Your overhead rate translates indirect costs into a per-dollar-of-direct-labor charge. The formula: Annual Indirect Costs ÷ Annual Direct Labor Costs = Overhead Rate.
Example: $120,000 in annual indirect costs (rent $30K, your non-billable time $60K, accounting $10K, software $20K) divided by $400,000 in direct labor = a 30% overhead rate. For every $1 of direct labor you bill to a contract, you also need to recover $0.30 in indirect costs. This rate goes into every labor line in your price volume — applied consistently across all positions and all proposals.
This rate should be recalculated annually. If your indirect costs grow faster than your direct labor base (you hired admin staff, moved to a bigger office, spent more time on BD), your rate goes up and your prices need to adjust.
FAR Part 31 defines which costs are "allowable" in government contract pricing — meaning the government will reimburse them or accept them as part of a price build-up. This matters most on cost-reimbursable contracts, but good practice on fixed-price bids too. Common unallowable costs: entertainment expenses, lobbying, general advertising not tied to recruitment, alcohol, fines and penalties, and contributions to political organizations. If you include unallowable costs in your G&A rate, a DCAA audit can force you to refund them and may trigger compliance findings.
For Texas state contracts: FAR Part 31 is a federal regulation and technically doesn't apply, but agencies may ask for cost breakdowns anyway. Keeping your cost accounting clean pays dividends across both federal and state work.
Pricing is where small contractors lose contracts they should win. Use Alex to pressure-test your rates before they go on paper.
PTW research is what separates a guess from a strategy. Before you build your price, you need to know the competitive price window — what the government has actually paid for comparable work at this agency type. USASpending.gov is public data. The government's own payment history is your most accurate market benchmark.
Every government contract is tagged with two classification codes. Your NAICS code (North American Industry Classification System) identifies your industry — e.g., 541512 for Computer Systems Design, 561320 for Temporary Help Services. You established this when you registered in SAM.gov.
The PSC code (Product Service Code) is a 4-character government-specific code that describes exactly what was purchased — e.g., "D307" for IT and Telecom — Systems Analysis and Design. PSC codes are more granular than NAICS and more specific to the government's buying vocabulary.
When you search USASpending for PTW research, filter by NAICS first, then narrow by PSC to find awards for work that is as close to yours as possible. The closer the match, the more accurate your price window.
Sometimes PTW research reveals that historical awards are running at $180K/year for work that genuinely costs you $210K to perform properly. This is a go/no-go decision — not a pricing problem. Do not submit a loss bid. Your options: (1) find cost efficiencies that bring you under the market price without cutting scope, (2) decide this contract type isn't profitable for your current overhead structure and pass, or (3) pursue the contract as a subcontractor under a prime who has lower rates — build experience, then bid prime later. "We'll make it up later" is how the Houston company ended up in financial distress. There is no mechanism to adjust your price upward on an FFP contract after award.
In many solicitations, the government prepares an Independent Government Cost Estimate (IGCE) — their own internal calculation of what the work should cost. The IGCE is often not disclosed in the RFP, but it's what evaluators compare your price against during the price reasonableness review. If your price is dramatically different from the IGCE (above or below), expect questions.
Some agencies release the IGCE or a contract budget in the solicitation — read Section B and any attachments carefully. When available, it's your single most useful pricing reference. When not available, your USASpending PTW research is the best proxy.
Each mistake below has a common logic behind it: something that feels financially reasonable in a commercial context that becomes financially fatal in a government contract context. The structure of government work is different — and your pricing has to reflect that difference from the first line of the cost model.
Commercial clients often pay an invoice rate that reflects your hourly time — not your fully loaded employment cost. If you charge commercial clients $35/hour for IT support and your loaded cost is $39/hour, you've been absorbing the $4 somewhere (from markup on other work, from not paying yourself enough, from skimping on insurance). Government contracts are isolated line items. The government doesn't subsidize your underpricing on other work. Every contract must fully cover its own costs. Rebuild your rate from scratch — start at base salary and add every layer from Slide 2.
The logic: "I'll accept a loss on this first contract to get my foot in the door and get my CPARS rating started. I'll make money on the recompete." The reality: if you can't perform the first contract profitably, you'll cut corners, deliver below expectations, earn a mediocre CPARS rating, and find yourself in a worse competitive position for the recompete than if you'd never bid at all. A bad CPARS follows you for years — agencies see it on every future proposal. Contractors who systematically underbid go out of business. Price what it actually costs you to do the work well.
On a 3-year contract, your employees will expect raises. Insurance costs will rise. Your rent will increase. If you bid year 3 at the same labor rates as year 1, you're paying 2025 wages at 2022 rates. Build in annual escalation — typically 2–4% per year for labor costs. The standard reference is the BLS Employment Cost Index (ECI) — published quarterly by the Bureau of Labor Statistics (bls.gov), it tracks wage and benefit cost growth by industry and region. Use the index for your industry and cite it in your price justification. It's government-accepted methodology and makes your escalation defensible.
Government contracts often require specific onboarding before the first deliverable: background checks, security clearance initiation, equipment provisioning, training, system access requests, kick-off meetings. These activities take time and cost money — and your first invoice is typically 30–45 days after contract award. If you budget for 12 months of billable output but spend the first 6 weeks ramping up, you've priced 11.5 months of production into a 12-month price. Include a ramp-up line in your cost model or fold ramp costs into your G&A for the base year rate. Either way — account for it.
Before your next bid, build a spreadsheet with your fully loaded labor rate for each position type your business fields (analyst, manager, technician, etc.). Include every row from Slide 2's table. Lock the formula so the billing rate updates automatically when you change base salary or G&A rate.
Update the model annually: new insurance quotes each fall, salary adjustments after annual reviews, BLS ECI for escalation factors. This spreadsheet becomes your pricing foundation for every proposal — you pull from it instead of rebuilding from scratch under deadline pressure. Under deadline pressure is where mistakes happen.
| Term | Definition |
|---|---|
| Fully Loaded Labor Rate | The fully burdened hourly billing rate for one employee — base wages + payroll taxes + fringe benefits + equipment allocation + overhead G&A + profit margin. What you actually charge the government per hour. Never the same as the employee's hourly pay. |
| G&A (General & Administrative) | Indirect costs that support the whole business — rent, accounting, admin, BD, your own non-billable time — allocated to contracts through a percentage rate. Calculated as: annual indirect costs ÷ annual direct labor costs = G&A rate. |
| Overhead Rate | Interchangeable with G&A rate in most small contractor contexts. The percentage applied to direct labor to recover indirect/shared costs. Must be calculated from your actual books and updated annually. |
| Price to Win (PTW) | Research-based estimate of the competitive price window for a specific contract, derived from historical award data on USASpending for comparable work at the same agency or agency type. Tells you what the government has actually paid, not what you hope they'll pay. |
| IGCE (Independent Government Cost Estimate) | The government's own internal estimate of what the contract should cost to perform. Sometimes disclosed in the solicitation; often not. Evaluators compare your price against the IGCE during the price reasonableness review. Your PTW research is the best proxy when the IGCE isn't published. |
| Price Realism | Government analysis of whether your proposed price is realistic for the scope of work — i.e., can you actually perform the contract at the price you bid? A price too far below market raises realism concerns and can result in offer rejection or a CO clarification request. |
| FAR Part 31 | Federal regulation defining which costs are "allowable" in government contract pricing. Unallowable costs (entertainment, lobbying, alcohol, fines) cannot be included in your overhead rate or billed to the government. Most critical for cost-reimbursable contracts; good practice for all federal work. |
| Firm-Fixed-Price (FFP) | The most common contract type for service contracts — you deliver the full scope of work at the price you bid, regardless of your actual costs. If you underestimate costs, you absorb the loss. If you finish under budget, you keep the savings. The binding nature of FFP is why pricing accuracy is non-negotiable. |
| BLS Employment Cost Index (ECI) | Quarterly index published by the Bureau of Labor Statistics tracking wage and benefit cost growth by industry and region. The government-accepted methodology for justifying annual labor rate escalation on multi-year contracts. Cite it in your price volume when building escalation into base/option year rates. |
| CPARS | Contractor Performance Assessment Reporting System — the government's official record of your contract performance ratings. Ratings (Exceptional, Very Good, Satisfactory, Marginal, Unsatisfactory) are visible to all agencies and directly affect your competitiveness on future proposals. A poor CPARS from underperformance follows you for years. |
A real scenario from the field. No answer permanently locks you out — but the consequences below are real. Choose one, then see what unfolds.
When the scenario says "the agency's market research report estimates the contract value at $165,000," that's the government's IGCE — their Independent Government Cost Estimate. The CO's team calculated what they believe the work should cost before issuing the solicitation. The IGCE is their benchmark. Your price will be evaluated against it.
An IGCE of $165K means one of three things: (a) the government genuinely believes the market rate for this work is $165K and has data to back it up, (b) the government underestimated the scope or complexity of the work, or (c) the government is trying to fit the requirement into a budget constraint that may be unrealistic. Your PTW research is the tool for figuring out which one it is.
If five similar contracts at similar agencies awarded at $180K–$220K/year, the IGCE may simply be wrong — and your $190K price is actually the more accurate number. That's an argument you can make in your price volume. If the market data supports $150K–$170K, then either your cost model is too high or this is a genuinely underfunded requirement you should walk away from.
You're pricing a 12-month IT services contract. Your analysis shows the work will cost you $190,000 to deliver properly. The agency's market research report estimates the contract value at $165,000. Your colleague says, 'just price it at $165K — you'll figure out how to make it work.'
Make a choice above, then continue to the knowledge check.
Three quick questions to lock in what you just learned. Click any answer — right or wrong, you'll see the full explanation. The goal is retrieval, not a grade.
Module 13 covers past performance — how to document what you've done, how to position commercial work as govcon-relevant, and how to use teaming to fill experience gaps on larger opportunities.
Paste any FAR clause number or text and get a plain-English explanation of what it requires, what it means for your pricing, and what to watch out for.
Module 13 covers past performance — how to document your prior work for maximum relevance, how to position commercial experience on your first government bid, and how teaming fills experience gaps on opportunities that are too large to pursue alone.
Module 13: Past Performance & Teaming →