Can you afford to chase premium price? Maybe.

When the government awards a contract to other than the lowest priced offeror, it pays a price premium to make that award. How much price premium the government will pay is left to the judgment of the selecting official. This amount varies by type of service or product being procured, details of each solicitation, and experience of the source selection official.

In 1999, the price premium in a GAO study averaged about 7 percent. In 2010, the price premium in another GAO study averaged about 5 percent. Today, in the middle of the sequestration battle, the price premium is probably less than that; however, it’s difficult to generalize because the price premium can be unique to individual procurements. Here’s what we learned from the GAO studies and how you can apply this to your capture strategy.

GAO studies

In October 2010, GAO published a report, Enhanced Training Could Strengthen DOD’s Best Value Tradeoff Decisions (GAO-11-8). In the report, GAO reviewed 68 best-value contract awards made by Defense Department agencies. In the sample of 68 procurements, 42 percent (29 out of 68) were awarded to the highest rated offerors who also had the lowest price. This is where most bidders want to be—the number one rated proposal and the lowest price.

For the remaining 39 bids, the government conducted a best-value tradeoff. In those instances where the price premium was 5 percent or less, 92 percent (12 out of 13) of the awards were made to the highest rated offer.

As the price premium increased, the chance of receiving the award decreased. When the price premium increased above 5 percent, but was less than 20 percent, the award was made to the highest rated offeror 53 percent of the time (7 out of 13). When the price premium exceeded 20 percent, only 15 percent of the bidders (2 out of 13) received the award.

The GAO sample of 68 procurements was not selected randomly from DOD awards, so it would be statistically inappropriate to draw sweeping conclusions from their data. Even so, it is tempting to generalize that half the best value awards go to the offeror with the highest rated/lowest price score. When the government conducted a best-value tradeoff, about 54 percent of the time the award was made to the highest rated offer, and 46 percent of the time it was awarded to the lowest priced offeror. When the price premium was within 5 percent, the offeror had a 92 percent chance of winning. However, when the price premium increased above 5 percent the probability of win dropped to 53 percent, and above 20 percent the probability of win dropped to only 15 percent.

In April 1999, GAO published another study entitled Acquisition Reform – Review of Best Value Procurements (B-281983). In this older study, GAO reviewed 250 procurements covering 37 procuring organizations. Again, the contracts were not selected randomly, so results should not be generalized to all buying organizations across the government.

Of these contracts, 53 (21 percent) were awarded to offerors who were not the lowest priced offeror because the selecting official believed these companies offered the best value. The 53 contracts had a combined value of $5.3 billion and a price premium, defined as the difference between the awardee’s evaluated price and that of the lowest priced acceptable offeror, of $367 million—or a price premium of about 7 percent. The majority of these contracts were for sophisticated government services and products.

The tradeoff between non-cost and cost factors often cited the offeror’s superior technical ability, exceptional management practices, outstanding relevant experience, and ability to meet technical requirements within statutory timeframes because of superior relevant experience. GAO noted that the justification for award to the higher priced offerors was documented in the contract files, and buyers complied with the laws and Federal Acquisition Regulations (FAR) in making these awards.

Setting your strategy

Most government procurements are competed using a best-value approach. In these cases, the solicitation must state whether non-cost factors are significantly more important, equally important, or less important than price. The exception to this is lowest price technically acceptable (LPTA) procurements. In these instances, there is no best-value tradeoff because the government has determined that offers will be evaluated as either acceptable or not acceptable, and there is no additional value for exceeding solicitation minimum requirements.

In best-value tradeoff procurements, the selecting official must trade off the non-cost factors such as past performance, technical approach, management approach, small business subcontracting plan, and company experience with price. Technical and/or past performance are most often the top evaluation factors. To be the highest rated offer, you must strive to have an outstanding proposal—one that is rich in features that will be scored as proposal strengths (see my article on 7 Steps from Good to Great Proposals).

From a strategy point of view, you want your proposal to be the highest rated, and you want your bid to be the lowest acceptable price or be within 5 percent of that amount, otherwise the odds start lining up against you for receiving the award.

Here’s an example of how this might apply to your bid. Suppose you’re bidding a best-value procurement for $100 million. You decide that you could write a pretty good proposal, but if you spent another $100,000 on the proposal, you could make it outstanding. If you had an outstanding proposal, you would probably be in the zone where the selecting official is looking at your proposal and trading it off against price. If you are within 5 percent of the lowest bid, you have a pretty good chance of winning. That 5 percent is worth $5M on this procurement.
Would you spend an extra $100,000 to buy $5 million of price protection that the bid will not go to another bidder whose price is less than yours? Without trying to be self-serving, I would do it every time. Your win strategy is get the price right and spend the money to have an outstanding proposal.

We welcome your comments and are especially interested if you have data on price premiums that the government has paid. Every bit of data helps us better understand how to advise clients and how to price to win.