What Happens When You Underprice a Proposal and How a Government Contracts CPA Can Help
There’s a dangerous myth in government contracting, especially among small to mid-sized contractors: “If we just come in lower than everyone else, we’ll win.”
The truth is, low pricing doesn’t win high-performance contracts. It can often tank your margins, damage your past performance, and erode your credibility with government evaluators.
If your proposal strategy revolves around shaving dollars instead of defending value, you may undermine your business without realizing it.
Let’s unpack why underpricing is so risky, how the government evaluates pricing beyond just “low numbers,” and how to price smarter without jeopardizing your contracts or your cash flow.
The Hidden Cost of Underpricing
We’ve had clients who learned this the hard way before working with us.
On paper, their price was attractive. They landed the contract. However, they were pulling from reserves to cover payroll by year two. One client had underpriced labor by 15% in order to win a multi-year IDIQ. When wage increases hit and staff churn began, they had no margin left to adapt, and performance began to slip. By the time they asked for a rate adjustment, the damage had been done.
These are the pitfalls when a proposal is underpriced just to get the award:
- Profit Margins Collapse: What looked like a slim win becomes a cash drain.
- Staffing Falls Apart: You can’t afford the talent needed to deliver.
- Performance Suffers: Deliverables slip. Quality drops. Past performance takes a hit.
- Future Pricing Gets Skewed: You’re stuck justifying unrealistic rates in recompetes.
The truth is, winning at all costs is not a sustainable business model.
Understanding Price Realism
Price realism is required for most cost-reimbursement and some fixed-price solicitations. This is the government’s way of ensuring your bid isn’t just a number, but a reflection of your ability to deliver. A cost realism analysis determines the probable cost to the government and assesses whether a bidder’s proposed costs are realistic for the work being performed.
Contracting officers aren’t just comparing you to competitors, they’re asking: Can this company do what they’re promising for that price? They want to see you understand the work, your price is supportable, and you can deliver without cutting corners. They want certainty. If your price raises red flags, you’re out, no matter how great your technical approach looks.
Why Contractors Underprice and Why It Backfires
Underpricing is usually driven by fear or pressure, not strategy.
- You’re trying to break into a new agency.
- You’re up against an incumbent.
- You’re compensating for a weak technical volume.
These are understandable motivations. The reality is that a contract that’s not financially viable doesn’t serve your long-term goals. It drains resources, hurts morale, and sabotages your ability to deliver at the federal clients’ required level.
Even if you win, you might regret it. Unless you’ve built real cost efficiencies, your low price becomes a liability.
How to Price Smart, Not Just Low
- Start With Real Costs
Don’t build your bid from top-line goals. Build it from actuals. Pull data from your ICE submissions, historical job costing, and payroll records. If you’ve been tracking burdened labor accurately, you’ll know what it takes to deliver. Don’t guess, document.
- Use a Forward Pricing Rate Proposal (FPRP) Strategically
If you plan to bid on multiple cost-type contracts, an FPRP lets you standardize and defend your indirect rates. It also shows the government you’re thinking beyond a single proposal. Per DCAA guidance, a well-structured FPRP improves auditability and streamlines negotiations.
- Model ‘What-If’ Scenarios
You can’t price for a perfect world. Run scenarios where fringe increases, G&A spikes, or you need to hire faster than expected. What happens if one subcontractor underperforms? If you can’t survive that stress test, your pricing model is too brittle.
- Document Assumptions Clearly
The cost narrative is where you justify your numbers. If your pricing is lower than expected, explain why. Are you using in-house labor? Working from existing infrastructure? Leveraging volume discounts from a long-term subcontractor? Show the evaluators that it’s not guesswork but strategy.
- Involve a GovCon CPA Before Submission
Even the best proposal team benefits from a second set of expert eyes. A Government Contracts CPA can review your cost volume, spot unallowable costs, align your indirect rates with FAR Part 31, and ensure the entire submission is audit-ready from day one.
Get Help from a Government Contracts CPA
Winning a contract seems like the goal. However, sustainably performing and profiting from it is.
Government agencies care about cost realism, past performance, and your ability to deliver, not just who has the lowest number. If your pricing undermines your capacity, you take on more risk than reward.
Don’t let “being competitive” become your biggest risk. Let’s price your next proposal for performance and not just for paper.