Government contract negotiation relies on a relatively simple premise: If your contracting firm submits weak technical proposals, there’s usually little room to negotiate pricing on a contract from an agency perspective.
However, if you focus on proposals that provide innovation and significant value to the government, contracting by negotiation can become a mainstay of your firm’s business plan—provided you always focus on creating a win for both sides.
Acceptable price negotiation methods appear in FAR 15.405. They cover discussions, clarifications, and proposal revisions that can lead to greater profitability for your firm. And for the government, an outcome that optimizes the use of taxpayer money.
You’ve probably heard that contract negotiations can be just short of grueling. However, practical negotiation training can equip you with powerful tools and perspectives and train you to systematize your cost and pricing techniques.
Pro Tip: Develop a negotiation with "target" and "floor" positions. Your objective is to conclude the negotiation where you achieve a price as close to the target position as possible while never going beneath the floor. This practice involves submitting initial pricing that falls between the two amounts.
What you’ll learn in contract negotiation training
Wherever you take your contract negotiation training—and we’ll recommend a few sources in a minute—successful negotiation is based on a few tried and true principles.
- Be over-prepared
- Research both pricing positions—yours and the agency’s
- Develop flexible options
- Stay alert to non-verbal communications 7
Your training will cover the above points. Also, there are a few more standard operating procedures you’re likely to learn in any reasonable cost and price negotiation training.
Here are a few:
The templatized negotiation process that all contractors use
Contracting Officers (COs) represent the federal government during procurement. They’re your clients. Still, COs must gain internal approval of a proposal within their respective agencies before they can award you a contract.
In federal contracting, each type of contract scenario passes through the following template of negotiation steps:
A. Audit. When a CO receives your proposal as a result of your response to an RFP, they will order a Defense Contract Audit Agency (DCAA) audit of your proposal.
The DCAA may also visit your facility and complete a "Pre-award Survey of Prospective Contractor Accounting System" form. The survey checks compliance with Cost Accounting Standards 401 and 402 to ensure that you have set up your contract on job cost accounting in the same manner it was proposed—in effect identifying direct labor, direct material, and other direct costs to the contract.
How this applies to price negotiations. A DCAA audit doesn’t extend to the negotiation phases of a contract. Still, if you’re astute, you’ll request a copy of the audit and revise your proposal based on any errors the auditor found in preparation for negotiations with your prospective agency client.
B. Fact-finding. At this point, your CO might request additional information. They will use this to look for disconnects between your technical approach and the prices you estimate to do the job.
Your agency might want to examine previous contracts where you’ve done similar work. Remember that most government agencies put together an independent cost estimate of what they feel a product or service should cost.
At this point, your CO is assessing the cost and the risk associated with the program. The cost will be the first negotiation item, and risk directly influences the government's position on profit.
How this applies to price negotiations. If your pricing lacks rationale or you’ve written questionable past proposals, the less profit your agency will likely allow you during the negotiation phases. Make sure your justifications and your reputation are buttoned up.
C. Pre-award Survey. If you’re a contractor brand new to government work, the agency will pay you another visit to determine if your operation is set up to honor the contract, should you receive an award. For example, are your production operations sufficient? Is your manufacturing equipment reliable? What about staff and sub-contractors you may bring on?
How this applies to price negotiations. The younger you are in the contracting game, the more an agency will scrutinize your business processes, and the more rigid they will likely be about your profit.
D. Cost Negotiations. Here is where the metal meets the road. Once the government makes a counter-offer to your proposal cost (and they will), you’ll need to see how far the counter is away from your “floor” and how close it is to your “target.”
You’ll likely decide that further negotiations are necessary. The profit issue moves to the sidelines, and talks commence around reasonable costs. These are the most critical elements of negotiation since fully loaded cost makes up most of the contract price. Your firm and the agency will discuss each direct and indirect cost.
The cost elements most open for negotiation? Labor categories and hours, travel, data technology, and materials.
E. Final Profit Negotiations. Once you and your agency agree on costs, your profit rate depends on the risk you can take. An agency rarely proposes profit at a rate higher than 25% and only at that level on firm, fixed-price contracts where the risk to the contractor is highest.
Pro Tip: The above template is recognized throughout the Federal Acquisition Regulation (FAR) and in the Defense Contract Audit Agency (DCAA) Handbook. 5
Avoid short-term pricing tactics in long-term contract negotiations
Contract negotiation training will teach you and your pricing team how to adapt your interaction strategies. For example, you are too focused on a current contract without considering how it may impact similar contracts with the same agency in the future. In that case, procurement negotiation training can help you develop a more forward-thinking approach to your negotiations.
Learning how to negotiate effectively is more than just learning a series of steps to be completed to succeed in a negotiation. Effective negotiation hinges on your ability to adapt to changing circumstances, evaluate your prospective client agency and its goals, and set yourself up for future success with that same agency.
Contract negotiations can be some of the most challenging scenarios, but they can also be incredible opportunities for taking your firm to the next level. 1
Who should teach you
1. In-person training. Federal Publications Seminars are live, onsite 2-day training sessions that are excellent, experiential ways to learn cost and pricing negotiations that benefit both sides of the table. Most importantly, they help you craft a good working relationship with your agency after an award.These seminars cover the specifics of negotiating contract and subcontract provisions, prices, and claims—and include instruction on creating teaming agreements, subcontract agreements, and terms and conditions. 4
2. Online training. Udemy offers highly regarded contract negotiation training and instruction on many other topics in building a relationship with the government. Start with this introductory pricing negotiation class, FAR 15 Cost Proposals, Cost Analysis, and Negotiations, then work your way up. Among other topics, this class helps you understand how the federal government calculates profit and fee rates, as well as some of the best ways you can negotiate them.
How ProPricer smooths your negotiation runway
As direct and indirect rates change during negotiations, quickly modifying your proposal line items with ProPricer Contractor Edition is as easy as making a few clicks, significantly shortening your timelines between phases.
Compare this to what you go through with Excel. You’ll see why contracting firms and agencies prefer a synchronous platform that makes file transfers a breeze during negotiations. Sign up for a free demo today.
- SNI Article: Why You Should Consider Procurement Negotiation Training
- Watson & Associates Article: Contracting by Negotiation Process with the FedGov
- Federal Publications Seminars: Negotiating Skills for Government Contractors
- RKW Law Group Article: Subcontracting Tips in Government Contracting
- Micromentor Article: Small Business Contracting Negotiation Techniques
- Harvard Business Review Article: Why Ethical People Become Unethical Negotiators
- Granite Leadership Strategies Blog: The Soft Side to Negotiations — Overcoming Myths and Obstacles