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Understand the Mechanics of the Government Contract Bidding Process

Filed under Government Contracting. Fact checked on May 24, 2012.

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Once you have found a government contract that you might want to bid on, you should get the bid package and then ascertain the type of contract and bidding process involved. There are different types of contract arrangements in use, so be sure you understand exactly what you have to do to fulfill your obligations if you are awarded the contract. This can be difficult, because different buying offices using different terminology.

What is the next step if you find a bid that you are interested in? You will have to get the bid package (it is also sometimes referred to as a solicitation package). To get the package, you can do one of the following:

  • Contact the buyer and request the bid package. The buyer's name, address, phone number, and e-mail address are listed on the bid notice. When you request the bid package, also ask for any amendments that might have been issued.
  • Locate the web page address in the bid notice and download the bid package off the Internet. A word of caution: Before you start downloading, double-check the number of the bid contract you have selected for download to make sure it's the right one. The solicitation number will be something like: DAA123-00-R-1234. Or it may say: SOL: or SOL Number. Proceed carefully; all of the numbers sometimes start to look the same. Solicitation numbers from NASA will be something like NNH or NRA08 for the year, and for the Department of Energy might be something like DE-RP09 or RP10. Watch those numbers: they will be important to you if you starting using a database or are trying to look up an old solicitation.

Once you get the package, review it carefully to determine exactly what the purchasing office wants to buy, and compare that with what your business is capable of delivering.

In addition, look at what type of contract is being sought. The three major contract varieties are fixed-price, cost-reimbursement, and special situation. This important because while you merely place a traditional bid for many contracts, there are other bidding techniques that come into use. Finally, make absolutely sure you understand the contract terminology. Unfortunately, the terminology used differs from one buying office to the next.

Fixed-Price Contracts

These are the types of contracts that small businesses will, for the most part, be dealing with. Under the fixed-price arrangement, the final price is basically determined before the work is performed. There are various types of fixed-price contracts:

  • Firm fixed-price: The price is not subject to adjustment. The contractor is obligated to perform the contract at the awarded price and accepts 100 percent of the profit or loss of performing the contract within that price. (See FAR 16.202)
  • Fixed-price with economic price adjustment: The price may be adjusted upward or downward based upon the occurrence of contractually specified economic contingencies that are clearly outside the contractor's control. (See FAR 16.203)
  • Fixed-price incentive: The profit is adjusted and the final price is established by a formula based on the relationship of the final negotiated cost to the target cost. (See FAR 16.204)
  • Firm fixed-price, level-of-effort: A fixed price is established for a specified level of effort over a stated time frame. If the level varies beyond specified thresholds, the price may be adjusted. (See FAR 16.207)

Cost-Reimbursement Contracts

Cost-reimbursement contracts provide for the final price to be determined either when the work is finished or at some interim point during contract performance. If a contract is cost-reimbursable, the contractor can legally stop work when all contract funds are spent. Thus, the cost risk is essentially shifted to the government. There are various types of cost-reimbursement contracts:

  • Cost: Reimbursement consists of allowable cost; there is no fee provision. (See FAR 16.302)
  • Cost-sharing: An agreed portion of allowable cost is reimbursed. (See FAR 16.303)
  • Cost-plus-fixed-fee: Reimbursement is based on allowable cost plus a fixed fee. (See FAR 16.306)
  • Cost-plus-incentive-fee: Reimbursement consists of allowable cost incurred and a fee adjusted by a formula based on the relationship of the allowable cost to the target cost.(See FAR 16.304)
  • Cost-plus-award fee: Reimbursement consists of allowable cost incurred and a two-part fee (a fixed amount and an award amount based on an evaluation of the quality of contract performance). (See FAR 16.305)

Special Situation Contracts

There are also special types of contracts, including:

  • Time and material: Direct labor hours expended are reimbursed at fixed hourly rates, which usually include direct labor costs, indirect expenses and profit. Material costs are reimbursed at actual cost plus a handling charge, if applicable. (See FAR 16.601)
  • Labor hour: Direct labor hours expended are reimbursed at a fixed hourly rate, usually including all cost and profit. (See FAR 16.602)
  • Definite-quantity: The contract quantity is defined, but the delivery schedule is flexible. Payment is made on some form of fixed-price basis. (See FAR 16.502)
  • Requirements: Actual delivery schedules and quantities are flexible during the contract period. Payment is based on a predetermined fixed-price basis. (See FAR 16.503)

Special Bidding Techniques and Bid Office Terminology

There are two new bidding techniques that the government is using that the small business needs to be aware of:

  • Auction — A government buying technique where the bidding continues until no competitor is willing to submit a better (i.e., lower) bid. The technique is often referred to as "reverse auction" because the government is looking for the lowest price, not the highest price.
  • Bundling — A technique where the government consolidates two or more requirements that were normally bought separately into a single contract. The support contracts of many military bases, which require a variety of work disciplines to keep the base operating, are being bid this way.

Both can present potential problems for small businesses.

If you decide to compete for a bid using the auction method, you need to spend time and effort researching and preparing so that you are sure that you can do what is required at the price you offer. You also need to protect yourself from the auction mentality that can take over. This is a fast-pace environment, and it is easy to get caught up in the moment. In an effort to win, you could end up bidding too low, receiving the contract, and not being able to cover your costs.

In bundling, there may be requirements included in the solicitation that cover areas that a small business cannot perform or manage. If you are considering making a bid, make sure you carefully read every provision of the bid to make sure you have the capability to perform all that is required, including project management.


A word to the wise: Be very cautious if you choose to participate in these bidding techniques.

Buying Offices' Terminology

The following information is from the Defense Supply Center Richmond (DSCR), illustrating procurement processes at a DoD buying office. DSCR is part of the larger DoD buying organization, and if you understand better what DSCR is doing, you will be better prepared to work with the other Supply Centers and federal buying offices.

DSCR, like many other buying offices, issues many long-term contracts. These contracts are more than just fixed-price, fixed-quantity awards. Generally, they contain a range of annual estimated quantities, a separate ordering quantity and a small guaranteed quantity. These quantities will be utilized over a period of a year or years with option terms. For long-term contracts over $100,000, the most common type is referred to as an Indefinite Quantity Contract (IQC). Long-term contracts under $100,000 are identified as Indefinite Delivery Purchase Orders (IDPOs).

  • Indefinite Quantity Contract (IQC): An IQC is a contract issued for an estimated but indefinite quantity of supply to be ordered via delivery orders during a specified period of contract performance. This is the government's preferred method of long-term contracting. Total value of an IQC, including all option years, is anticipated to exceed $100,000. The limitation of the contract is based on the maximum estimated annual demand quantity for each contract period. Typically, contracts are issued with a base year and up to four option years. Each option year must be exercised via a modification to make the option effective. The determination to exercise the option is made solely by the government.
  • Indefinite Delivery Purchase Order (IDPO): An IDPO is a purchase order (not a contract) issued for an estimated but indefinite quantity of supply to be ordered via delivery orders during a specified period of contract performance. Like the indefinite quantity contract, it sets minimum and maximum delivery order sizes and an estimated annual demand. Its term is based on the maximum contract value of $100,000. The contract expires whenever the threshold of $100,000 is attained, with a maximum of 5 years allowed.

Long-Term Contract Clauses

If you hope to compete for a long-term contract, there are a number of features that are unique to these kinds of arrangements. Be sure you understand these various elements before committing yourself to a project.

Guaranteed Minimum. This is the minimum quantity the government agrees to buy during the contract period. The government is not obligated to buy any quantity beyond the guaranteed minimum quantity and may, if justified, buy elsewhere after that quantity has been procured (though that is not the intent and is not a common occurrence). The guaranteed minimum provides a vendor assurance of some sales and delineates where vendor risk in pricing begins.

Estimated Annual Demand/Quantity. This spells out the actual quantity the government estimates that it will order during the contract period. Estimates are based on prior demand history but not assured. A check with contract history will reflect the consistency pattern of prior demand history.

Contract Maximum Quantity. This is the maximum cumulative quantity the government can procure during the period of contract performance. If a contract period runs from January to December and in September the full quantity is reached, no further orders will be issued until the new contract period (option) is exercised.

Minimum Order Quantity. This shows the minimum quantity that will be ordered at one time in a delivery order. It is usually based on average demand quantity ordered by requisitions. Consideration of this quantity is critical in pricing and considering the size of a production run.

Maximum Order Quantity. This sets the maximum quantity that will be ordered at one time in a delivery order. The Government may order a larger quantity but vendors have the right to decline the order or request a modification to the delivery schedule to meet the increased demand. At no time can the order quantity exceed the (accumulated) maximum contract quantity.

Flexible Option. This clause allows the government to exercise an option earlier than the expiration of the contract term. If a contract covers a period from January to December, and the full contract quantity is utilized in September, the contracting officer will not have to wait until December to exercise the option. With the flexible option, the option can be exercised in September and the new contract period would then run from September to August of the next year. While this process may shorten the ultimate contract period, the quantities are not altered and both vendor and government are unharmed by the action.

Paperless Order Processing System (POPS). This requires the use of special software and a Value Added Network (VAN) when electronically sending delivery orders via Electronic Data Interchange (EDI). Failure to comply with POPS during award performance may result in a termination for default. While a vendor does not need to have the system in place at the time of solicitation, it must be in place within 30 days after award. Your local PTAC can help you identify potential VANs.

Blanket Purchase Agreements, Surge Requirements, and Marketbaskets

There also are other factors to consider such as purchase agreements, surge requirements, and marketbaskets.

Purchase Agreements

Some buying offices refer to "purchase agreements," which are pre-arranged agreements signed prior to doing business with the agency. The Defense Supply Center Richmond requires no such agreements, only that you are registered on the CCR. These purchase agreements are often confused with Blanket Purchase Agreements.

DSCR does have a Blanket Purchase Agreement (BPA) program, which is utilized to make awards below $25,000 (See FAR 13.303 and FAR 16.7). A Blanket Purchase Agreement is a negotiated set of terms under which awards can be made. Once in the BPA program, vendors compete for solicitations, with delivery orders issued against the terms of the BPA. These agreements have a number of features:

  • A wide variety of items in a broad class of supplies or services are generally purchased, but the exact items, quantities, and delivery requirements are not known in advance and may vary considerably.
  • Commercial sources of supplies are needed for one or more offices or projects in a given area that do not have or need authority to purchase otherwise.
  • Numerous purchase orders do not need to be written.
  • No current contract exists for the required supply or service.

If you want to be considered as a supplier under the BPA program, you are evaluated on these criteria:

  • A dependable past performance
  • A history of quality services and supplies at lower prices
  • Numerous purchases have been provided at or below the simplified acquisition threshold
  • A letter certifying status as an authorized distributor for a manufacturer
  • Access to electronic commerce/electronic data interchange capability (EDI Standard ANSI X12)

Solicitations issued under the BPA system will have a "Z" in the ninth position of the solicitation number. Award numbers will contain an AA or AB in the ninth position of the basic agreement. Once the BPA number is issued, it will remain in effect until the vendor requests removal of the BPA. The BPA award number is automatically updated every year with a new fiscal year in the seventh and eighth position. No formal notice is sent to confirm this.

Surge Requirements

In order to cover emergency situations, many DoD long-term contracts now specify surge quantities. Surge requirements are excess requirements (above the basic quantity) that must be available with an accelerated delivery. These would typically be utilized during times of war or unforeseen surges in demand. Vendors must be capable of supplying any normal contract quantities at the same time as any surge requirement.

Surge items are listed as a separate line item, allowing vendors to reflect a premium price (if justified) to compensate for any overtime shifts, stock rotations/storage, equipment, shipping costs required to supply the surge quantity. The government determines the quantity and delivery desired for the surge requirements. The vendor provides the price necessary to meet the demand.

Due to the critical nature of availability, vendors are generally asked to provide the government with a surge and sustainability plan that details how the vendor will meet the requirements (See DFARS 217.208-70 and DFARS 252.217-7001). Look for the surge clause in section I of the solicitation.


Marketbaskets are long-term contracts for large groupings of multiple items with National Stock Numbers (NSN) that are lumped together based on manufacturing processes. Due to the variety and size of these buys, they are evaluated on a line-item basis, enabling a vendor to respond to one, few or all of the items needed. Most of these buys contain competitive item descriptions and are solicited as some type of set-aside (SB, HUBZone or 8(a)).

Vendors interested in these buys must be careful to consider the volume of items they quote, the impact on their production lines, the ability to meet delivery of multiple items at the same time, the impact of surge requirements as well as the normal impact of packaging and delivery order requirements. Careful attention must be paid to detail in the solicitation. Marketbaskets are highlighted on the DSCR Business Opportunities page, under Corporate Contracting/Special Acquisitions and Small Business Acquisitions.

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