The Importance of Pricing

Pricing is an important element of winning government proposals.  Although most government agencies state that they are interested in what is commonly called “best value” – a combination of good products or services and reasonable prices – price matters a great deal.

Most government agencies select the best value solution within their budgets.  In other words, if reviewers rate the top three proposals on a 100-point scale as 91, 93, and 95, the winning contract is likely to be the one with the lowest price, as long as it is realistic.  Price matters, especially in today’s sour economic climate.

To develop a competitive pricing structure for your government proposal, take the following steps:

  • Differentiate between price and value.  Price is what you charge for your products or services.  Value is what the government agency believes is the value of your product or service.  Throughout your proposal, you must explain why you are providing outstanding value at a reasonable cost.
  • Begin creating your budget early in the proposal development process.  Sales and budget personnel should be working closely with program personnel and the proposal development team from the beginning.  Budgets created at the end of the application process are not likely to be accurate or competitive.
  • Find out what is the government’s cost estimating rationale.  You must understand what government agencies consider to be reasonable direct and indirect expenses.  For example, some government agencies will establish limits on overhead rates and profit margins.
  • Determine very early in the proposal development process whether or not your price proposal is likely to be competitive.  If it is not, either modify your budget or withdraw from the competition.

One of my most important pieces of advice regarding pricing regards the bid/no bid decision.  If the Request for Proposals emphasizes the importance of lowest price in the evaluation process, do not bid.  There are two good reasons for you to walk away from these kinds of competitions.

First, you will never be able to underbid all your competitors.  Some organization is likely to submit a lower bid than you.  And second, even if you win the contract with the lowest bid, you are not likely to make a profit.  In fact, you may even lose money.

The size of the contract is irrelevant.  A $20 million contract may look very attractive, but if you spend $21 million to fulfill it, your company has lost money.  You should not bid on any contracts if you cannot cover all of your expenses and make at least a little profit.

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