Module 11: Cost and Pricing

FAR Part 31 defines the cost principles for government contracts. The core concept is simple: some costs are allowable (the government will reimburse them or accept them in your indirect rates), and some costs are unallowable (you pay them out of profit, never billed to the government).

This matters even on firm-fixed-price contracts. Your indirect rates (overhead, G&A) are built from your cost pool. If unallowable costs leak into your indirect pools, your rates are overstated, and every invoice based on those rates is wrong. DCAA will find this in an audit and demand repayment with interest.

Allowable costs must pass three tests (FAR 31.201-2):

Reasonable: a prudent person would pay this amount for this item. A $500/night hotel in a city where $200/night is available is not reasonable. A $200/night hotel in Manhattan may be reasonable given market rates.

Allocable: the cost benefits the contract or the contractor's business generally. Rent for your office is allocable to overhead (it benefits all contracts). A vacation to Hawaii is not allocable to anything.

Consistent: you treat the same type of cost the same way across all contracts. If you charge travel as a direct cost on Contract A, charge travel as a direct cost on Contract B.

Costs that are always unallowable (FAR 31.205):

Entertainment (31.205-14): meals, events, or activities with no documented business purpose. Business meals with a documented discussion topic may be allowable, but the documentation bar is high.

Alcoholic beverages (31.205-51): always unallowable, no exceptions.

Charitable donations (31.205-8): not allowable as a cost, though small community contributions may be allowable under narrow circumstances.

Fines and penalties (31.205-15): never allowable. If you get fined for a safety violation, that is your cost.

Interest expense (31.205-20): generally unallowable. Narrow exceptions exist for certain facilities capital costs.

Lobbying (31.205-22): costs of lobbying Congress, state legislatures, or regulatory agencies are unallowable.

Bad debt expense (31.205-3): writing off uncollectible accounts is unallowable.

Costs that are always allowable:

Compensation for personal services (31.205-6): salaries, wages, and benefits for employees performing contract work. Must be reasonable for the position and geographic area.

Professional development (31.205-44): training, education, and conference attendance that maintains or improves job skills. This includes your ClariFAR subscription.

Insurance (31.205-19): business liability, E&O, workers comp, cyber insurance. All allowable as indirect costs.

Depreciation (31.205-11): depreciation on equipment used in your business, calculated using standard methods (straight-line or accelerated).

Travel (31.205-46): travel to perform contract work, at rates not exceeding the federal per diem rates (published at gsa.gov/perdiem).

The Truth in Negotiations Act (TINA), codified at 10 U.S.C. 3702, requires contractors to submit certified cost or pricing data for contracts above a certain threshold. As of June 30, 2026, that threshold is $10,000,000.

What "certified cost or pricing data" means:

You must provide the government with detailed cost breakdowns: labor rates, material costs, subcontractor quotes, overhead rates, G&A rates, and profit. You certify that this data is accurate, complete, and current as of the date of agreement on price. If the government later discovers that you withheld or misrepresented cost data, you are liable for a price reduction plus interest (the "defective pricing" remedy).

When TINA applies:

Your contract or modification exceeds $10,000,000 in value. Below that threshold, TINA does not apply and you do not need to submit certified cost or pricing data.

TINA exceptions (even above $10M):

Adequate price competition: if the government received two or more independent offers, and the lowest offer drives the price, TINA does not apply. Competition itself is considered sufficient price validation.

Prices set by law or regulation: utility rates, postage, certain fuel prices.

Commercial products or services: if the item is sold in substantial quantities in the commercial market, the commercial price is the benchmark and certified cost data is not required.

Waiver: the head of the contracting activity can waive TINA in exceptional circumstances.

What this means for small IT contractors:

If your contracts are under $10M (which covers nearly all small business contracts), TINA is not relevant to you. You do not need to submit certified cost or pricing data. The government may still request "data other than certified cost or pricing data" (FAR 15.403-3) to evaluate your pricing, but this is a lower bar. You might provide labor rate comparisons, market research, or historical pricing data without the certification requirement.

The key distinction: "certified cost or pricing data" has legal liability attached (defective pricing penalties). "Data other than certified cost or pricing data" does not carry the same liability. Know which one the solicitation is requesting.

If your business grows and you start bidding on contracts above $10M, you will need a cost accounting system (Module 4) that can produce the detailed cost breakdowns TINA requires. This is another reason to set up proper accounting from day one.

Cost Accounting Standards (CAS), administered by the CAS Board, are a set of rules that govern how contractors account for costs on government contracts. CAS is separate from FAR Part 31. FAR Part 31 defines which costs are allowable. CAS defines how you measure, assign, and allocate those costs consistently.

CAS applicability thresholds:

Modified CAS coverage: applies when a single CAS-covered contract exceeds $7.5 million (adjusted periodically). Under modified coverage, you must comply with CAS 401 (Consistency in Estimating, Accumulating, and Reporting Costs), CAS 402 (Consistency in Allocating Costs), CAS 405 (Accounting for Unallowable Costs), and CAS 406 (Cost Accounting Period). These four standards reinforce what you already should be doing per FAR Part 31 and Module 4.

Full CAS coverage: applies when a contractor receives $50 million or more in net CAS-covered awards in a cost accounting period (fiscal year). Full coverage adds 15 additional standards covering topics like depreciation, pension costs, deferred compensation, and indirect cost allocation.

CAS exemptions:

Small business concerns: if you are a small business under your primary NAICS code (as certified in SAM.gov), you are exempt from CAS regardless of contract value. This is a significant benefit of small business status.

Firm-fixed-price contracts awarded on the basis of adequate price competition: exempt from CAS.

Contracts under $7.5 million: exempt from CAS.

Sealed bid contracts: exempt from CAS.

What this means for small IT contractors:

If you are a small business (which you are, if your revenue is under the SBA size standard for your NAICS code), CAS does not apply to you. You are exempt. You should still follow good cost accounting practices (Module 4) because they align with CAS principles, but you do not need to formally comply with CAS standards.

When CAS becomes relevant:

CAS matters when you lose your small business size status. If your revenue grows past the SBA size standard and you receive a cost-type contract over $7.5M, CAS kicks in. At that point, you need CAS-compliant accounting (usually requiring Deltek Costpoint or Unanet rather than QuickBooks). But this is a future problem. Do not invest in CAS infrastructure before you need it.

The one CAS concept worth knowing now:

CAS 401 requires consistency between your cost estimates (proposals) and your cost accumulation (actual books). If you propose labor at $100/hour and your actual rate is $85/hour, your next proposal needs to explain the variance. Building this consistency from day one (Module 4) means you never have to retrofit your accounting to meet CAS later.

Pricing your first government bid is nerve-wracking because you have no pricing history to reference. Here is a practical approach.

Step 1: Calculate your fully burdened labor rate.

Start with your direct labor rate. This is what you pay yourself per hour. If you set a salary of $120,000/year, your direct rate is approximately $57.69/hour (2,080 hours/year).

Add fringe benefits. Health insurance, retirement contributions, payroll taxes. For a solopreneur, this is roughly 20-30% of your direct rate. At 25%: $57.69 x 1.25 = $72.11/hour.

Add overhead. Rent, software, insurance, utilities. For a home office with minimal overhead, this might be 15-30% of your direct labor cost. At 20%: $72.11 x 1.20 = $86.53/hour.

Add G&A. Accounting, legal, marketing, admin. Typically 5-15% of total costs. At 10%: $86.53 x 1.10 = $95.18/hour.

Add profit. Government contracts typically allow 7-15% profit on cost-type contracts. For firm-fixed-price, you can set whatever profit margin the market allows. At 10%: $95.18 x 1.10 = $104.70/hour.

Your fully burdened rate is approximately $105/hour. This is the rate that covers all your costs plus profit.

Step 2: Validate against the market.

Check GSA Schedule rates for your labor category and NAICS code. GSA Schedule rates are public and give you a benchmark. If similar IT consultants are billing $115-140/hour on GSA Schedules, your $105 rate is competitive.

Check award data on USASpending.gov. Search for contracts in your NAICS code and look at the contract values relative to the estimated hours. This gives you a rough market rate.

Check the Bureau of Labor Statistics (BLS) for salary data in your occupation and geography. Your proposed rate should be in the reasonable range for your area.

Step 3: Price the deliverables.

For a firm-fixed-price contract: estimate the total hours to perform the work. Multiply by your fully burdened rate. Add materials and travel at cost. This is your price. Build in a 10-15% contingency for unknowns.

For a time-and-materials contract: propose your hourly rates by labor category. The government will specify ceiling hours. Your rates need to be competitive but must cover your actual costs plus profit.

For a cost-reimbursement contract: propose your actual costs (labor rates, indirect rates, materials estimates). The government reimburses your actual costs plus a negotiated fee. Your indirect rates must be supported by your accounting records (Module 4).

Common pricing mistakes for first-time bidders:

Pricing too low to win. If your price is 40% below the independent government cost estimate (IGCE), the contracting officer may question whether you understand the scope. Unrealistically low prices signal risk, not value.

Forgetting indirect costs. Bidding your direct labor rate ($57/hour) as your total rate means you lose money on every hour worked. Always use the fully burdened rate.

Not accounting for non-billable time. You will not bill 2,080 hours per year. Between holidays, sick time, admin work, and proposal writing, a realistic billable utilization is 1,600-1,800 hours. Your rate needs to cover the non-billable hours too.

Pricing ODCs (Other Direct Costs) at zero. Travel, software licenses, and materials that the contract requires cost money. Estimate them and include them in your price.