Negotiating Commercial Prices with Federal Government Clients
June 1, 2023
Like any other client, the U.S. Federal Government (government) wants a good deal when procuring goods and services from a business or consulting firm. Yet, negotiating prices with a government client, specifically for commercial goods and services, differs slightly from negotiating with private-sector clients. Businesses must thoroughly research the government market, provide all requested documentation in a bid, and make concessions when necessary to establish a long-term relationship. As stewards of taxpayers’ dollars, the government prioritizes better buying power initiatives and cost savings.
Here are a few considerations and helpful strategies for successfully negotiating prices with a government client and sustaining positive, win-win business relationships.
U.S. Government Procurement Laws
Strict procurement laws and regulations bind the government. Federal government agencies must follow the laws of procurement and acquisition procedures before entering into any contract with a vendor. Under the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS), government agencies must conduct procurement and acquisition processes in a manner that is legal, ethical, fair, and open to competition. According to the FAR and DFARS, all qualified and responsible vendors must receive an equal opportunity to bid. Rather than favoritism or other forms of discrimination, objective and clearly defined selection criteria must direct the government’s selection.
A crucial strategy for pricing competitive bids and negotiating prices with the government is thoroughly researching the competitive market to determine the fair and reasonable market value of goods or services offered. Are prices proposed by prospective offerors competitive? Are direct and indirect labor rates, direct and indirect costs, and other associated cost information commensurate with the available cost data of industry competitors? The government must conduct market research following FAR Part 10 and DFARS Part 210 before developing Independent Government Cost estimates baselining the projected “should cost” for any anticipated procurement. Companies should continuously and proactively conduct market research and industry analyses to respond confidently and quickly with competitively priced proposals whenever the government posts attractive government requirements.
Vendors, too, must be upfront and transparent about proposed pricing. A vendor should be well-prepared to provide the government with all requested documentation and pricing data. Government clients should have readily accessible information such as:
• Exploded bills of materials
• Detailed breakdowns of labor rate base and pool allocations
• Updated and approved copies of commercial General Services Administration schedules
• Current Forward Pricing Rate Agreements approved and dated by the Defense Contract Management Agency
These forward-thinking suggestions demonstrate better business principles and save companies and the government time and money. Thus, a win-win.
Solid requirements writing is a continuous work in progress for the government. Often, government requirements packages are not as cohesively constructed as one might expect. Prospective offerors should fully understand the government’s specific needs and gather as much information as possible to tailor competitive offers that meet the requirements. Understanding and prioritizing government needs help companies better demonstrate the exact value of goods or services provided, how and why the goods or services meet or exceed government requirements, and delineate cost savings, actual or perceived. These strategic factors can — and often do — increase the likelihood that a government agency will agree to enter cost negotiations or accept pricing as proposed.
When factors other than price are more heavily weighted selection criteria (such as technical merit or performance schedule), ratings matter to move forward in the competitive process. For many requirements, the government is willing to “tradeoff” prices and expand the competitive range (number of offers and price range) to negotiate further prices based on other more significant, appealing strategic factors.
Take, for example, the two offerors denoted below. Whereas both seem equal on multiple evaluation factors, upon government review, Offeror B will likely be viewed more favorably due to: their better soundness of approach for the requirement (derived from a better understanding of the requirement as a whole) even though the pricing is higher than pricing proposed by other offerors. The key takeaway: Ensure a seat at the table to negotiate prices with the government.
Even with the soundest proposals, Offerors must be prepared to negotiate prices and be flexible with pricing adjustments. A government agency may not be willing to pay the initial asking price, but making concessions to reach an agreement is part of the negotiation process. Multiple factors go into the government’s analysis of a successful offeror’s proposal, such as profit or fee, contract type risk, direct and indirect costs, travel, etc. How the government approaches analyzing these factors is governed by FAR Part 15; all prospective offerors should familiarize themselves with this section of the FAR. Per FAR subpart 15.405, price negotiation is essential in allowing the Contracting Officer and the offeror to agree on a fair and reasonable price. Additionally, highlighting the benefits and value provided to the government and framing a fairly priced proposal as a good investment makes negotiating prices a positive, productive process for both companies and the government. Again, a win-win.
Consider the long-term relationship between a company and a government agency when negotiating a price. Government agencies often have ongoing needs for the goods or services a firm provides. Establishing positive, win-win relationships with government clients can — and often will — lead to repetitive business opportunities and better position companies to win new requirements in the future. In this case, negotiate a lower price in the short term to build a robust and long-term relationship with the agency for the future.
Washington Business Dynamics
At Washington Business Dynamics, our experts find negotiating prices with government clients challenging yet rewarding. We understand the specific and rigorous federal regulations and procurement processes to construct competitive and value-added bids. Our focus prioritizes mutually beneficial relationships with our government clients, and we negotiate fair yet profitable prices for all our goods or services.
Jay Hauser, Senior Consultant at WBD, is a client program manager supporting the Defense Information Systems Agency (DISA) Joint Service Provider (JSP) at the Department of Defense.
Evan Uscatu, Lead Consultant at WBD, is an acquisition, aerospace, defense, and change management professional engaged with the Department of Defense (DoD) and various commercial clients.