How to Cost & Price a Firm Fixed Fee Government Contract

Calculate all project costs and associated risks before you determine the fee.
Calculate all project costs and associated risks before you determine the fee. (Image: Stockbyte/Stockbyte/Getty Images)

A firm fixed-fee contract places the maximum amount of risk on the contractor rather than the government. If you win a fixed-price contract, your payment amount equals your bid amount regardless of the amount of cost you incur. No adjustment to the contract amount occurs, even if your material cost escalates or your calculated labor estimate falls short of actual cost (Reference 1). To establish your bid for a firm fixed-fee government contract, consider all costs you will incur and add a fee amount to cover the risk you assume when accepting the work.

Things You'll Need

  • Project specifications
  • Company financial data
  • Spreadsheet or other calculating tool

Research similar previous government contracts to gather price intelligence in the absence of a stated budget range (Reference 2). Try to locate a recent project with the same government agency. Compare the work required by the predecessor contract to the current work statement and identify cost-driving differences.

Solicit bids for materials and unique services your firm does not perform internally. For high-value items, obtain quotes from multiple companies to get the best rate. Secure a locked-in rate for these direct-cost items, when possible, to avoid a loss from price escalation between the time of bid submission and award.

Establish a labor breakdown and determine manning required for the entire job performance. Review any published mandatory wage scale and choose appropriate job classifications for the required work. Include only the number of hours needed for a classification, even if the number requires part-time employees.

Calculate overhead costs and fringe benefits for the project. Include taxes, insurance, pension, workers' compensation costs and any items provided to the employees, such as uniforms, hardhats, identification badges or background checks. Include managerial wages dedicated to the project, if not accounted for in the labor breakdown.

Include any general and administrative costs not captured in other areas. Allocate an appropriate portion of office lease and equipment, accounting functions, company managerial costs and outside services such as legal and audit expenses. Use an established G&A rate to calculate these costs, if one exists.

Review a full expense report of your last completed job. Compare cost elements to the data you plan to include in your bid to identify any items you missed. Update your projected bid amount with additional potential costs.

Conduct a risk assessment of potential inflation, possible delay penalties and other changes in elements of work that could increase in cost. Consider the length of time until the job occurs to determine the stability of material cost projections. Estimate your fixed-fee amount based on how much profit you desire from the job plus an amount to cover the risks.

Calculate the total value of the direct costs, overhead, fringe benefits and general and administrative expenses. Compare this amount to the budget range or the price of previous similar contracts. If your costs appear excessive in comparison, review each element to determine possible reductions.

Add your fixed-fee to the determined costs and compare to the budget range. If your bid price exceeds the government’s budget, review the profit margin to determine any possible decrease. Evaluate reductions carefully since a contract win could cause a company loss if you reduce the profit margin too much.

Tips & Warnings

  • Request a copy of the previous contract to obtain pricing information.
  • Accounting rules for government contracts differ from private contracting. Contact an auditor for help in establishing a compliant accounting system.

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