Federal Contract Pricing Strategy: Wrap Rates, Indirects, and Fee

Note that the productive hours denominator matters significantly. Using 1,880 hours (accounting for PTO and holidays within the base rate) versus 2,080 hours (accounting for PTO in fringe) produces different base rates and fringe rates but should yield the same loaded rate. The key is consistency with your disclosed accounting practices.

Fee and Profit

Fee (profit) is the return you earn for performing the work. The appropriate fee level depends heavily on contract type, risk profile, and competitive dynamics. Understanding the norms for each contract type prevents you from either leaving profit on the table or pricing yourself out of the competition.

• Firm-Fixed-Price (FFP): Fee typically ranges from 10% to 15%. FFP contracts shift performance risk to the contractor, justifying higher margins. If you accurately estimate scope and execute efficiently, FFP offers the best profit potential. If you underestimate, you absorb the loss. Government evaluators accept higher margins on FFP because they bear no cost overrun risk.
• Time & Materials (T&M): Fee is embedded in your loaded hourly rates, typically yielding an effective margin of 7% to 10%. T&M contracts provide less risk to the contractor since you bill actual hours at negotiated rates. The government takes on more cost risk, so fee expectations are lower. Your competitive lever here is the loaded rate itself—not fee percentage.
• Cost-Plus-Fixed-Fee (CPFF): Fee ranges from 5% to 8% of estimated cost, with a statutory cap of 10% for most service contracts (15% for R&D). The fee is fixed at contract award and does not change with actual costs. The government bears the cost risk. Pricing too high a fee on CPFF signals either misunderstanding of the contract type or excessive greed—neither of which scores well in evaluation.
• Cost-Plus-Incentive-Fee (CPIF): Base fee of 2% to 5% with incentive fee of 3% to 7% tied to performance targets. Your pricing strategy must balance the base fee (your guaranteed minimum) against the incentive structure. Propose realistic targets that demonstrate confidence while leaving room to exceed.

A common mistake is applying a uniform fee percentage regardless of contract type. Smart pricing teams calibrate fee by contract type, risk level, and strategic importance of the win. On a must-win recompete, you might reduce fee to 6% on a CPFF contract. On a high-risk FFP systems integration, 15% or higher may be appropriate.

Price-to-Win Strategy

Price-to-win (PTW) is the analytical process of determining the optimal price point that maximizes your probability of winning while maintaining acceptable profitability. PTW is not simply undercutting the competition—it is a disciplined analysis that balances competitive positioning with financial viability.

Competitive Pricing Analysis

Effective PTW starts with competitive intelligence. You need to estimate what your competitors will price. Sources include:

• FPDS data: Historical contract values for incumbent and competing companies reveal their rate structures
• GSA schedule rates: Publicly available rate cards for companies on GSA schedules provide ceiling rates
• IGCE estimates: The government's Independent Government Cost Estimate, sometimes revealed through FOIA or debriefings, establishes the target budget
• Salary data: Bureau of Labor Statistics, Glassdoor, and cleared salary surveys help estimate competitor base rates

Should-Cost Models

A should-cost model builds the price from the bottom up based on what the work should reasonably cost. Start with the staffing plan: how many people at what labor categories, working how many hours, over what period. Apply market-rate salaries, industry-average indirect rates, and reasonable fee. The resulting total is what a reasonably efficient competitor would price. Your PTW target should be at or below this number while remaining above your cost floor—the price below which you lose money on the contract.

The most effective PTW strategies often focus not on reducing rates but on reducing scope assumptions. Can you accomplish the mission with 8 FTEs instead of 10 by leveraging automation? Can you use a mix of senior and mid-level staff where competitors will propose all-senior teams? Staffing efficiency is a legitimate discriminator that can lower your price without cutting margins.

DCAA Compliance Considerations

The Defense Contract Audit Agency (DCAA) audits contractor cost accounting systems, indirect rates, and individual contract costs. Your pricing structure must be consistent with your disclosed accounting practices and compliant with Cost Accounting Standards (CAS) if applicable. Pricing is also impacted by your broader compliance posture—particularly cybersecurity requirements that add real costs to your rate structure. See our CMMC compliance guide for how these requirements affect your business.

Key DCAA compliance requirements that directly affect pricing:

• Adequate accounting system: Your accounting system must segregate direct from indirect costs, accumulate costs by contract, and produce reliable financial reports. DCAA will audit your system before you can be awarded cost-type contracts.
• Consistent rate application: You cannot cherry-pick which indirect pools to apply to different contracts. Your disclosed practices must be applied uniformly.
• Unallowable cost exclusion: FAR 31.205 identifies costs that cannot be charged to government contracts—entertainment, alcohol, lobbying, certain legal fees, and others. These must be excluded from your indirect rate pools.
• Timekeeping compliance: DCAA requires contemporaneous timekeeping. Employees must record time daily, and corrections must follow documented procedures. Timekeeping violations are one of the most common audit findings.
• Cybersecurity cost allocation: CMMC compliance costs—SIEM tools, encrypted communications platforms, security personnel, assessment fees—are legitimate indirect costs that belong in your overhead or G&A pools. Do not bury these costs or exclude them from your rate calculations. They are real, recurring expenses that the government expects to see reflected in contractor rates.

Forward pricing rate proposals must include supporting schedules that reconcile to your accounting system. DCAA auditors will compare your proposed rates against historical actuals and forward projections. Significant variances require explanation and documentation.

Common Pricing Mistakes

After reviewing hundreds of GovCon pricing volumes, certain mistakes appear repeatedly. Avoiding these pitfalls can be the difference between profitable growth and a death spiral of underfunded contracts.

Underpricing to Win

The most dangerous mistake in GovCon pricing is buying in—deliberately underpricing a contract with the intention of making up revenue through contract modifications or option years. This strategy rarely works as planned. You end up understaffed, under-delivering, and earning poor CPARS ratings that damage future competitiveness. A contract won at an unprofitable price is not a win. Moreover, evaluators trained in price realism analysis will flag unrealistically low prices as a risk indicator, potentially eliminating you from consideration.

Ignoring Rate Escalation

Multi-year contracts require rate escalation to account for annual salary increases, benefits cost growth, and inflation in indirect cost pools. Failing to build in 2-4% annual escalation on a five-year contract means you are effectively giving the government a discount every year while your costs rise. On a $10M/year contract, omitting 3% annual escalation costs you roughly $1.5M in cumulative revenue over the period of performance. Always propose escalated rates for option years and clearly present your escalation assumptions.

Misallocating Indirect Costs

Inconsistent allocation of costs between direct and indirect pools creates DCAA audit exposure. Common errors include: charging business development labor as direct when it benefits no specific contract, inconsistently treating similar costs (e.g., software licenses as direct on one contract and indirect on another), and failing to properly segregate unallowable costs. These errors do not just affect the audited contract—they can trigger a system-wide audit that disrupts your entire portfolio.

Fee Miscalibration

Proposing 10% fee on a CPFF contract when 6-7% is the norm signals that you either do not understand cost-type contracting or you are padding your price. Conversely, proposing 5% fee on a high-risk FFP integration project signals that you have not adequately assessed risk—which makes evaluators question your technical understanding. Match your fee to contract type, risk profile, and market norms.

Staffing Plan Disconnects

Your pricing volume and technical volume must tell the same story. If your technical approach describes a team of 12 but your pricing shows labor hours for 10, evaluators will question your realism. If your management approach promises a dedicated program manager but your pricing shows that role at 50% utilization across two contracts, your credibility suffers. Ensure your pricing team and technical team are synchronized before submission.

Pricing in the Capture Lifecycle

Pricing does not happen in isolation—it is a core element of the broader capture strategy. Price-to-win analysis should begin during the shaping phase, months before the RFP drops. Competitive intelligence gathered during capture management feeds directly into PTW models. Teaming decisions affect rate structures. Technical approach decisions affect staffing plans, which affect total price.

The most successful GovCon companies treat pricing as a strategic function, not a back-office calculation. They invest in pricing tools, maintain competitive intelligence databases, and conduct win/loss analyses that feed back into their rate strategies. They understand that winning at the right price—not just winning—is the foundation of sustainable growth in the federal market.

For a comprehensive view of how pricing fits into your competitive strategy, explore our Winning Federal Contracts guide which covers the full lifecycle from pipeline development through post-award performance.