Government Contract Negotiations: A Guide for Contractors

Businesses that are open to government contracts can have a fulfilling and lucrative experience. Once firms enter this field, they can land more contracts if they perform well and follow all the rules.

But negotiating a government contract can be intimidating. Firms that are contracting by negotiation often must navigate an endless maze of rules, regulations and paperwork. Missing even one of the government's requirements could disqualify a firm from a contract before it even becomes a contender.

What is negotiated contracting? In negotiations—or “discussions”—a government agency asks a firm to amend costs or materially enhance its proposal in ways that will increase the likelihood of contract success for both parties. The agency's top priority is to ensure its own success. It's up to firms to ensure their own success.

In This Article:

• Are Government Contracts Truly Negotiable?
• The Differences Between Contracting by Negotiation & Sealed Bidding
• What Are the Main Stages of Government Contract Negotiations?
• How FAR Part 15 Enables You to Negotiate on RFP Content
• Government Contract Negotiation Examples
• Negotiation Tips for Contractors

The short answer is yes. The government contract negotiation process allows for bargaining. Each firm will typically have chances to revise its proposal before the agency awards the contract. 

But how does this process work? The negotiation process works much like the process in any business setting. It will include discussion and persuasion. The firm and the agency will work to find common ground on contract type, technical requirements, schedule and price. 

As firms submit proposals, the agency will give a few proposals higher ratings based on how well they’ve adhered to the evaluation criteria outlined in the solicitation. This subset is called the competitive range.

The agency will then limit its negotiations to the firms within that range. If a firm is a contender, it will have the chance to discuss its proposal, ask questions and make changes. But no firm will have insight into other firms’ proposals because it is illegal for government agencies to disclose this information. 

After this round of negotiations, the agency will invite each firm to submit its best and final offer. The agency will then award the contract to the firm that most closely fulfills the evaluation criteria outlined in the solicitation.  

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Contract arbiters should know the differences between the negotiations involved in each type of contract situation.

A negotiation conducted in a competitive acquisition is a discussion that takes place after the agency establishes a competitive range. Here, negotiations may take place prior to contract award. But this type of contract doesn’t always allow negotiation. For example, a standard provision can state that the “government intends to evaluate proposals and award without discussions.”

A contract may also state that the “government intends to evaluate proposals and award a contract after conducting discussions with offerors whose proposals have been determined to be within the competitive range.” Here, the agency must negotiate with any offeror in the competitive range.

Contracting by sealed bidding requires an agency to evaluate bids without discussion. The agency will then award the contract to the bidder whose bid will be best for the government in terms of price and price-related factors. In this form of contracting, negotiations aren’t permitted pre-award but are possible post-award.

During negotiations in the source selection process, there are typically seven distinct stages:

1. Proposal Submission: A government agency submits a detailed proposal that outlines its solution, pricing structure and a viable contractor’s ability to meet the government's requirements.
2. Evaluation and Clarification: The government reviews all proposals and may request additional information from some firms.
3. Competitive Range Determination: The government establishes a competitive range of the most qualified potential contractors.
4. Discussions and Revisions: Firms selected for the competitive range will enter negotiations with the government and may have the chance to revise their proposals.
5. Best and Final Offer (BAFO): Firms will submit revised offers containing their most competitive terms.
6. Final Evaluation and Selection: The government will select the winning contractor based on predetermined criteria.
7. Contract Award and Debriefing: The winning firm will receive the contract. Other firms may request a debriefing to understand the reasons for the award.

Throughout these steps in the government contract negotiation process, firms must be prepared to defend their pricing structure with detailed, data-filled justifications.

Pre- and Post-Award Negotiating

Depending on a contract’s timing, negotiations during a competitive contract can take many forms. Here are two of the most common scenarios:

• Competitive Pre-Award or Pre-Task Award Negotiations: Discussion can take place either before contract award or before award of a task order—under an indefinite-delivery, indefinite-quantity contract. These negotiations can help a firm prepare a proposal revision that will provide the best value to the government while taking into consideration constraints within the firm, such as an hourly rate or availability of qualified sub-contractors.
• Noncompetitive pre- and post-award negotiating: These discussions take place in non-competitive situations, such as:
  • Award of a new contract or a task/delivery order under an existing indefinite-delivery, indefinite-quantity contract: Firms can negotiate a fair price while still making a profit.
  • A bilateral contract modification: This reflects agreement about any modification of contract terms, including any necessary equitable adjustment related to the modification.
  • A fixed-price termination for convenience settlement: If a contract terminates early, a contractor can work out a settlement that fairly compensates them for work done and reparations for the terminated portions, including a reasonable allowance for profit.

Although determining fair and reasonable pricing is always the agency’s job, contractors can raise a protest if they disagree with a reasonableness judgment. This can be another way to begin a negotiation, but firms should carefully consider the potential impact on their reputation, revenue and potential future business with the agency.

The Federal Acquisition Regulation (FAR) helps protect taxpayers by ensuring the government gets the best value for its money when it hires contractors or purchases goods.

FAR Part 15: Contracting by Negotiation contains rules around the solicitation, negotiation and award of government contracts. It’s designed to simplify a rigorous evaluation process for agencies and contractors alike. 

As FAR Part 15.201 stipulates, agencies should communicate with all interested parties—including potential contractors—“from the earliest identification of a requirement through receipt of proposals.” These early exchanges of information can include RFPs. Agencies may invite certain contractors to submit preliminary RFPs that will ultimately influence the project's requirements. 

During this process, the agency may narrow its field of potential contractors and then invite them to submit proposals. It’s a win-win situation for agencies and contractors: agencies significantly reduce their administrative burden, and savvy contractors get to show off their industry knowledge and flex their negotiation skills before the formal proposal process begins.

Here are three real-world examples that showcase effective negotiation techniques:

1. Aerospace Technology Contract: $50 Million

A mid-sized aerospace company showed flexibility during negotiations to land a contract for advanced radar systems. When the government agency requested aggressive project timelines, the contractor proposed an innovative phased delivery approach. This compromise enabled the agency to go live sooner with critical components while giving the contractor more time to refine complex subsystems.

2. IT Services Agreement: $10 Million

A small business specializing in cybersecurity solutions used its past performance data to win a competitive contract. The contractor showcased cost savings and efficiency improvements from similar projects, which convinced the contracting officer of the firm's capabilities and value proposition.

3. Medical Supply Procurement: $100 Million

A healthcare products manufacturer negotiated a contract for personal protective equipment (PPE) that delivered on urgent public health needs. The firm’s willingness to adjust production schedules and offer volume-based pricing discounts proved its commitment to meeting the government's requirements. This flexibility, combined with transparent cost breakdowns, led to an agreement that benefited both parties.

1. Always Over-prepare

Never enter a negotiation less prepared than your agency counterparts. Your questions and responses should be so well-rehearsed that they flow easily during the dialogue. Consider role-playing your exchange with a trusted colleague.

Many negotiations—especially those involving agency audits, cost allowances and non-compliance—only happen well after you’ve won a contract. This makes preparation difficult. Your negotiations will always be more powerful if you have a standard procedure for documenting significant decisions as they happen and keeping those records available for quick access.

2. Don’t Discuss Price or Cost Until After You’ve Discussed Technical Requirements

You can’t decide on a price until you’ve made decisions about technical performance, which will have a dramatic effect on price. If, during technical performance discussions, the agency brings up something you missed in your review of the RFP, it could raise your cost of performing the work. In this case, ask for a subsequent meeting so that you can recalculate your pricing numbers.

3. Have High Expectations, But Steel Them with Caution

Unlike the government, a contractor firm must operate under statutory constraints when deciding how high to aim in pricing. There’s empirical evidence that a negotiator’s expectations influence the outcome of every negotiation. Be the eternal optimist, and you’ll always emerge in a better negotiating position than if you aren’t.

But you should always be willing to compromise. The higher your initial aim, the more room you have to lower your sights. Prepare your counteroffers cautiously, taking into consideration any offer the agency might make.

4. Keep your Shortcomings to Yourself, But Tactfully Ask About the Agency’s

What should you discuss with contracting officers during negotiations? Never volunteer information that would weaken your negotiating stance. Your agency counterparts will use the same approach. The government’s guidelines on negotiation instruct agencies to avoid disclosing known weaknesses by wording statements carefully and avoiding direct responses to direct questions. When you ask the agency a probing question, don’t accept a vague response. Keep rephrasing your question until you get the answer you seek.

5. Be Smart About Concessions

Don’t concede too much too soon—or all at once. Offering concessions is much like peeling layers of clothing when the weather warms up. Allow the value of your concessions to build in isolated and cumulative offerings, so that the other party perceives your offerings as greater than the sum of their parts. The more you concede, the more you should seek to extract from the deal in exchange.

6. Communicate with Emotional Intelligence

Listening closely to your counterpart can be your most strategic tool during a contract negotiation. If you can stay present and focused on their words, they will often inadvertently reveal vulnerabilities through tone, body language or outright slips of speech.

Let the agency representative speak without interruption. Refer frequently to the agency’s name—and never “you”—as you counter an argument or present your own case. Stay calm and conduct yourself with moderation. You can gain ground by communicating with respect and kindness.

7. Take it as Slowly as You Have to But Keep the Contract Profitable

Hasty contract pricing negotiations seldom end well. But in general, the longer your negotiation takes to reach “yes,” the more favorable the deal will be for the agency. Remember, the agency holds the money. Your agency counterpart may be counting on the possibility that you’ll do something rash, such as narrow your margin until it’s ultimately unprofitable.

8. Recognize When You Have to Walk

You may not settle on payment terms over a reasonable period. The agency may be unwilling to match one of your major concessions or to include one of your top priorities. If so, it may be best for you to walk away. It’s not worth risking your professional reputation to agree to a budget that’s too low, unreasonable deadlines or requirements beyond your expertise.

9. Involve a Professional Contract Mediator

If you’re unclear about contract terms, can’t seem to get sufficient explanation or have doubts about acceding your position too early or for too much, it may be wise to hire a professional contract mediator. This is especially true for first-time contractors.

10. Don’t Offer Gifts or Favors

Never offer a government employee perks or favors such as material gifts, promised future employment, loans or financial compensation, kickbacks or entertainment sprees. They could be fired if they accept.

11. Visit Agency Offices

Consider visiting the agency clients you’re hoping to deal with on a contract. You can talk about previous contracts you’ve completed and what you learned from them. Introduce prospective clients to the people in your firm and to compatible subcontractors who have the qualifications the agency needs. Explain any “extras” your firm offers that will boost your performance above that of your competitors.

12. Include Proof of Supply and Service Quality Controls in Negotiations

The RFP may mandate that any contracting firm must have an acceptable quality control system in place. If not, presenting documentation on your controls during negotiations could give you an advantage over less-prepared competitors.

13. Negotiate on Timing When you Can

If the agency has prescribed a strict performance or delivery timeframe, you can often ask for an extended set of deadlines during contract negotiations. The longer you have to perform the work, the better off you’ll be because your sub-contracted elements will be less expensive, as will your total cost to the agency.

14. Tactfully Offer to Improve the Agency’s Requirements

Every so often, you may conceive of a better way to perform the work involved in a contract. If so, include this in your proposal and bring it up again during negotiations. Be careful not to offer a completely different service than what the agency has specified. If accepted, your suggestion could be the deciding factor in helping you win the contract.

15. Get on the Same Proposal Software as Your Agency

Most government agencies use industry-standard proposal and pricing analysis software platforms, such as Deltek ProPricer, as they ratify contractor proposals. If you adopt the same platforms, you’ll save the government much time and headache by eliminating:

• Re-entry of your contracting cost model.
• Duplication of legacy proposal data.
• Conversion from spreadsheets to another format.
• Correction of formatting scrambles during transfer.

Think of using the right software as one of your ultimate bargaining chips. It will make dealing with you much easier than with any competitors who still submit proposals in spreadsheet format.

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