How to build a defensible cost volume, calculate wrap rates and total contract value, and set a price to win under LPTA or best-value evaluations.
Last reviewed on September 28, 2026 by the Government.biz editorial team against FAR Parts 15, 17, and 31, DFARS 215, and the thresholds in effect since October 1, 2025.
A winning price in federal contracting has to clear three bars at once. It has to be competitive under the way the solicitation evaluates price. It has to be defensible — reasonable, realistic, and supported by your accounting system. And it has to be profitable enough to perform for the full base and option periods without cutting corners. Most losing prices fail one of the three: too high for the evaluation method, too thin to survive a realism review, or so low that the company loses money on every hour.
The rules behind federal pricing live mainly in FAR Part 15 (Subpart 15.4, contract pricing), FAR Part 31 (cost principles — what is allowable), and FAR Part 16 (contract types). DoD adds its own layer in DFARS Part 215. The FAR is currently being rewritten under the Revolutionary FAR Overhaul, and agencies are operating under class deviations while formal rulemaking proceeds, so always price to the provisions actually cited in your solicitation.
The same work prices very differently depending on who carries cost risk. See federal contract types for the full list; the pricing implications of the common ones are:
| Contract type | What you price | Who carries cost risk | Pricing priority |
|---|---|---|---|
| Firm-fixed-price (FFP) | A total price per line item or deliverable | Contractor | Accurate scope estimate plus risk contingency; profit is whatever you do not spend |
| Time-and-materials / labor-hour (T&M/LH) | Fixed hourly rates per labor category plus materials at cost | Shared — rates are fixed, hours are not | Competitive fully burdened rates that still cover indirect costs and profit |
| Cost-plus-fixed-fee (CPFF) | Estimated allowable costs plus a fixed fee | Government (largely) | Realistic costs that survive a cost realism analysis; fee within statutory caps |
| Incentive types (CPIF, FPIF) | Target cost, target profit, share ratio, ceiling | Shared by formula | Credible target cost and a share ratio you can live with |
A cost-reimbursement contract also requires an adequate accounting system; see DCAA compliance and DFARS business systems.
Most service contracts are mostly labor, so the heart of the cost volume is the fully burdened labor rate: the direct hourly wage plus the indirect costs your accounting system allocates to it, plus profit or fee. The ratio of the burdened rate to the direct rate is the wrap rate.
A common small-business structure uses three indirect pools: fringe (payroll taxes, health insurance, paid leave, retirement), overhead (costs of supporting direct staff: supervision, facilities, tools), and general and administrative (G&A) (running the company: executives, finance, business development, proposal costs). Your pool structure and allocation bases must match how your accounting system actually works — see indirect rate structures.
| Element | Rate | Base | $/hour |
|---|---|---|---|
| Direct labor (salary $104,000 ÷ 2,080) | — | — | $50.00 |
| Fringe | 30% | Direct labor | $15.00 |
| Overhead | 40% | Direct labor + fringe ($65.00) | $26.00 |
| Subtotal | $91.00 | ||
| G&A | 12% | Total cost input ($91.00) | $10.92 |
| Fully burdened cost | $101.92 | ||
| Profit / fee | 8% | Total cost | $8.15 |
| Billing rate | $110.07 |
Here the cost wrap rate is $101.92 ÷ $50.00 = 2.04, and the price wrap rate (including fee) is $110.07 ÷ $50.00 = 2.20. Wrap rates vary widely with business model: a firm whose staff work on-site at government facilities typically carries far less overhead than one providing offices, labs, and equipment. Compare yourself to competitors with the same model, not to a generic industry number. Our government contracting calculators can run this math for you.
Agencies usually evaluate your total evaluated price across the base period and all option periods (see FAR Part 17 on evaluating options), and many also evaluate the potential six-month extension under FAR 52.217-8. To calculate total contract cost:
Using the $110.07 billing rate above, 1,880 hours per FTE, 3% annual escalation, and $20,000 per year of travel burdened with 12% G&A (no fee on travel):
| Period | Rate | Labor (6 × 1,880 hrs) | Travel | Period total |
|---|---|---|---|---|
| Base year | $110.07 | $1,241,590 | $22,400 | $1,263,990 |
| Option 1 | $113.37 | $1,278,814 | $22,400 | $1,301,214 |
| Option 2 | $116.77 | $1,317,166 | $22,400 | $1,339,566 |
| Option 3 | $120.28 | $1,356,758 | $22,400 | $1,379,158 |
| Option 4 | $123.88 | $1,397,366 | $22,400 | $1,419,766 |
| Total (5 years) | $6,591,694 | $112,000 | $6,703,694 | |
| + 6-month extension (half of Option 4) | $709,883 | |||
| Total evaluated price | $7,413,577 |
Two things to notice. First, the total is well above the $2.5 million threshold for certified cost or pricing data under the Truthful Cost or Pricing Data Act (raised from $2 million on October 1, 2025; see acquisition thresholds) — so on a sole-source or other non-competitive award, expect to certify your data unless an exception such as adequate price competition or commercial pricing applies. Second, small changes compound: a $2.00/hour difference in the base rate moves this total evaluated price by about $130,000.
How the government trades price against quality is spelled out in the evaluation criteria (Section M or equivalent). Read it before you set a number.
| Evaluation method | How it works | Pricing strategy |
|---|---|---|
| Lowest price technically acceptable (LPTA) | Non-price factors are pass/fail; lowest-priced acceptable offer wins | Meet every requirement exactly; strip gold-plating; price as lean as sustainable |
| Best-value tradeoff | Government may pay more for a proposal it rates higher, with documented rationale | Price inside the competitive range and use strengths to justify any premium |
| Highest technically rated with a fair and reasonable price | Government ranks technical merit first and then confirms the top offer's price is fair and reasonable (recognized in the FAR overhaul's Part 15 text) | Invest in technical quality; price must still be defensible |
| Simplified acquisition / RFQ | Often price-driven with a quick check of capability | Sharp price, complete quote, fast turnaround |
LPTA is restricted by statute. Civilian agencies may use it only when specific conditions are met (FAR 15.101-2), and DoD must avoid it to the maximum extent practicable for categories such as information technology, cybersecurity, systems engineering and technical assistance, health care, and other knowledge-based professional services (DFARS 215.101-2-70). If you see LPTA on complex professional services, consider asking a clarifying question during the Q&A period.
Price to win (PTW) is your best estimate of the price that will win this specific competition. It is built before the final price, so the solution can be designed to hit it. A practical small-business PTW process:
A cost or price volume that evaluators can follow is a competitive advantage in its own right. Structure it around the RFP's instructions, typically including:
The government assesses price reasonableness for every award, and cost realism for cost-reimbursement awards, under FAR 15.404-1. On fixed-price competitions, it may also run a price realism analysis if the solicitation says so — meaning a price that is too low for the proposed approach can count against you as a risk. Unbalanced pricing, where some line items are significantly over- or under-priced, can also lead to rejection.
On competitive fixed-price and T&M work, the market sets your margin. On cost-plus-fixed-fee contracts, the fee is capped by statute: 15% of estimated cost for experimental, developmental, or research work; 6% of estimated construction cost for architect-engineer services; and 10% for other cost-plus-fixed-fee contracts (FAR 15.404-4). Negotiated fees are typically well under those caps. DoD contracting officers build profit objectives with the weighted guidelines method (DFARS 215.404-4), which scores performance risk, contract-type risk, and facilities investment.
After award (or loss), a debriefing often reveals the winning total price, which is the best calibration you will get for the next PTW.
Price to win (PTW) is an estimate of the price range most likely to win a specific competition, given the evaluation method, the customer's budget, and competitors' likely prices. It is a target used to shape your solution and cost structure before you finalize the price, not a guess at the lowest possible number.
Multiply each labor category's fully burdened rate by its hours for each period, apply annual escalation to each option year, add other direct costs such as travel and materials with any allowable burdens, and sum the base period and all option periods. Many solicitations also evaluate the potential six-month extension under FAR 52.217-8, so include it if the RFP says it will be evaluated.
A wrap rate is the multiplier that converts a direct labor rate into a fully burdened rate. It is calculated by dividing the fully burdened rate (direct labor plus fringe, overhead, G&A, and sometimes profit) by the direct labor rate. For example, a $50.00 direct rate that becomes a $101.92 fully burdened cost has a cost wrap rate of about 2.04.
Under lowest price technically acceptable (LPTA), proposals are rated only acceptable or unacceptable on non-price factors, and the lowest-priced acceptable offer wins. Under a best-value tradeoff, the government may pay more for a proposal it judges technically superior, as long as it documents why the extra benefit is worth the price. LPTA rewards lean pricing; tradeoff rewards demonstrated value.
There is no set margin for fixed-price competitive contracts; the market decides. For cost-plus-fixed-fee contracts, statute caps the fee at 15% of estimated cost for research and development, 6% for architect-engineer services on construction, and 10% for other work, and negotiated fees are usually well below those caps. DoD uses the weighted guidelines method in DFARS 215.404-4 to develop profit objectives when it negotiates.
Under the Truthful Cost or Pricing Data Act, certified cost or pricing data is generally required for negotiated contracts and modifications expected to exceed $2.5 million (the threshold since October 1, 2025), unless an exception applies, such as adequate price competition, prices set by law or regulation, commercial products or services, or a waiver.
Bidding below cost (buying in) is not illegal by itself on a fixed-price contract, but it is risky. Contracting officers must guard against recovering the loss through later change orders or follow-on work, the government may run a price realism analysis if the solicitation provides for it, and an unrealistically low price can be judged a performance risk. On cost-type contracts, cost realism adjustments can erase any apparent advantage.
Authoritative sources: FAR Part 15 — Contracting by Negotiation, FAR Part 31 — Cost Principles, DFARS Part 215, and the 2025 FAR inflation adjustment of acquisition thresholds. Example rates are illustrative only. This page is general information, not accounting or legal advice.