The 5 Most Common Mistakes in Government Proposal Pricing (and What DCAA Is Actually Looking For)
When creating government proposal pricing, contractors repeatedly make the same mistakes. Those mistakes cost them awards, create audit problems, or trigger cost disallowances that wipe out profit margins.
The frustrating part is that most of these errors are preventable. They are not the result of complicated regulations or obscure requirements. They happen because contractors don’t understand what DCAA is actually looking for when they evaluate proposal pricing.
If you are preparing for a proposal submission or trying to avoid problems in future audits, understanding these five mistakes and what DCAA expects instead will save you time, money, and headaches.
Mistake #1: Indirect Rates That Do Not Reconcile to Your Accounting System
This is the most common problem, and it’s often the most damaging. Contractors propose indirect rates that have no clear relationship to their actual cost structure or historical performance.
They will use a 50% overhead rate because that is what they used on the last proposal, or because it seems competitive, or because their business development team thinks it will help them win. However, when DCAA asks for supporting documentation, the numbers don’t tie back to anything real.
According to the DCAA Cost Proposal Adequacy Checklist, every indirect rate you propose must be supported by detailed cost pool calculations, clear allocation bases, and reconciliation to your accounting records. That means you need to show what costs are in each pool, what base you’re using to allocate those costs, how you calculated the resulting rate, and how that rate compares to your historical actual rates.
What DCAA is looking for
They want to see that your proposed rates are based on your actual cost structure, adjusted for known changes. If your overhead rate last year was 42% and you are proposing 50%, you need to explain what is changing and why. Are you adding staff to indirect functions? Moving to a larger facility? Spreading costs over a different revenue mix? The explanation needs to be specific and supportable.
I worked with a contractor who proposed a G&A rate of 18% because it was in their approved Forward Pricing Rate Proposal. The problem was their actual G&A for the most recent closed year was 12%, and they couldn’t explain the 6-point difference. DCAA questioned the rate, delayed the contract award, and the contractor eventually had to reprice using more realistic assumptions.
How to fix it
Build your indirect rates from the bottom up using actual cost data from your accounting system. Start with your most recent incurred cost submission, adjust for anticipated changes, and document every adjustment. If you are proposing rates higher than your actuals, have clear, specific reasons backed by budgets, staffing plans, or other verifiable data.
Mistake #2: Labor Rates That Are Not Consistent With Your Payroll Records
Labor costs are typically your largest cost category, which means labor rates get the most scrutiny. Contractors run into trouble when their proposed labor rates do not align with what they actually pay employees or when they cannot demonstrate how they calculated loaded rates.
Some contractors propose labor categories that do not exist in their organization. Others use average rates that are not supported by individual employee data. Many fail to properly calculate burden, creating gaps between what they propose and what they will actually bill.
FAR Part 31 requires that all costs be adequately supported by contemporaneous records. For labor, that means timekeeping systems that capture actual hours worked, payroll records that verify wages paid, and documentation showing how you calculated fringe and burden.
What DCAA is looking for
They want to see a clear path from your proposed labor rates to the actual people who will perform the work. That means showing which employees or skill levels will fill each labor category, what base wages those employees earn, how you calculated fringe costs like FICA, health insurance, and retirement contributions, and how you applied overhead and G&A to arrive at fully burdened rates.
When DCAA conducts pre-award audits, one of the first things they check is whether your labor categories match your organizational structure and whether your rates are based on real payroll data rather than aspirational numbers.
How to fix it
Create a labor rate build-up for each proposed labor category. Start with actual or anticipated base wages for the specific employees who will work on the contract. Add your actual fringe rate based on verifiable benefit costs. Apply your indirect rates consistently. Document everything so you can defend your calculations during evaluation or audit.
Mistake #3: Subcontractor Costs Without Adequate Supporting Documentation
Many proposals include significant subcontractor costs, but contractors often treat these as plug numbers without obtaining proper cost support from their subs. They will get a high-level quote and drop it into the proposal without any backup documentation or analysis.
This creates two problems. First, DCAA cannot verify that subcontractor costs are reasonable without adequate data. Second, if your prime contract requires cost or pricing data, you likely need to obtain it from major subcontractors as well.
According to FAR 15.404-3, contractors must conduct cost or price analysis for proposed subcontractor costs. You cannot just accept the sub’s quote at face value. You need to evaluate whether their pricing is reasonable and provide documentation to support that evaluation.
What DCAA is looking for
They want to see that you’ve done your homework on subcontractor costs. That means obtaining detailed cost breakdowns from subs showing labor categories, hours, rates, materials, and other direct costs. It means conducting a price analysis by comparing quotes from multiple potential subs or by comparing them against historical prices for similar work. It means documenting the basis for selecting your subcontractor and why you believe their price is fair and reasonable.
For subcontracts above certain thresholds, you may need to flow down cost or pricing data requirements, meaning your sub must provide the same level of detail you are providing to the government.
How to fix it
Treat subcontractor pricing with the same rigor you apply to your own costs. Get detailed cost breakdowns, not just lump-sum quotes. Conduct competitive analysis when possible. Document your evaluation of subcontractor pricing. If cost or pricing data is required, ensure your subcontractor provides it. However, build time into your proposal schedule to properly collect and analyze this information.
Mistake #4: Cost Elements That Violate FAR Part 31 Allowability Rules
This mistake can be the most expensive because unallowable costs identified during an audit must be removed and refunded. Contractors include costs in their indirect pools or direct charges that are not allowable under government contracts, and they do not realize the problem until DCAA points it out.
Common unallowable costs include entertainment expenses, certain advertising and public relations costs, charitable contributions, interest on borrowings, penalties and fines, bad debts, portions of executive compensation above allowable limits, and lobbying costs.
FAR Part 31.205 lists dozens of cost categories with specific allowability rules. Some costs are completely unallowable, others are unallowable beyond certain limits, and some require advance approval.
What DCAA is looking for
They expect you to understand the allowability rules and demonstrate that you have identified and excluded unallowable costs from your indirect rate calculations. When they audit your indirect rates, they will review your cost pools, looking for unallowable items. If they find them, they will question your entire rate structure.
The test is not whether a cost is ordinary and necessary for your business. The test is whether it is allowable under FAR Part 31. These are different standards, and many normal business costs don’t meet the FAR test.
How to fix it
Review your indirect cost pools systematically against FAR 31.205. Identify any costs that are unallowable or potentially unallowable. Either exclude these costs from your pools before calculating rates, or create separate schedules showing the adjustment. Train your accounting team to flag potentially unallowable costs as they are incurred. Consider working with a government contracts advisor who understands the allowability rules and can proactively review your cost structure.
Mistake #5: Inadequate Documentation and Basis of Estimate
This is the mistake that underlies many of the others. Contractors provide numbers without explaining how they arrived at those numbers. They assume the government will accept their pricing at face value without understanding the supporting rationale.
Every element of your proposal pricing needs a clear basis of estimate. How did you determine the hours required? What assumptions did you make about productivity or learning curves? Why did you select these labor categories rather than others? How did you estimate material quantities and unit costs? What factors influenced your subcontractor selection?
The DCAA Contract Pricing Proposal Adequacy Checklist includes specific requirements for the basis of estimate documentation. They are asking for the specific methodology, assumptions, and data sources you used to develop each cost element.
What DCAA is looking for
They want to understand your estimating methodology well enough to evaluate whether your costs are realistic and reasonable. That means seeing historical cost data for similar work, technical analysis of requirements and how they translate to hours or materials, comparison to industry standards or catalog pricing where applicable, and a clear explanation of how you handled uncertainty or risk.
The documentation does not need to be elaborate, but it needs to be specific. Saying “based on our experience” is not adequate. Saying “based on performance of three similar contracts where we averaged 2,100 hours per deliverable, adjusted upward by 15% for the additional security requirements in this SOW” is adequate.
How to fix it
Treat your basis of estimate as if you are explaining your methodology to someone unfamiliar with your business. Provide specific references to data sources, historical performance, or analytical methods. Use spreadsheets that show calculations rather than just final numbers. Keep records of the decisions and assumptions made during pricing development. Remember that the goal is to give evaluators confidence that you understand the work and priced it realistically.
What Makes a Proposal Adequate in DCAA’s Eyes
When DCAA evaluates proposal adequacy, they are not trying to make your life difficult. They are trying to determine whether your proposed costs are realistic, whether you understand what you are pricing, and whether the government can rely on your numbers.
An adequate proposal according to DCAA guidance includes clear identification of all cost elements, detailed supporting schedules for labor, materials, indirect rates, and other costs, basis of estimate for each element, reconciliation to accounting records and historical data, explanation of significant differences from historical norms, and sufficient detail for evaluators to understand and assess your methodology.
The standard is not perfection, but adequacy. Can evaluators understand what you’re proposing and why? Can they verify your numbers tie to real data? Can they assess reasonableness and realism? If yes, your proposal is probably adequate. If not, you are going to get deficiency notices and requests for additional information.
The Pricing Pre-Flight Checklist
Before you submit your next proposal, walk through these questions:
For indirect rates: Do my proposed rates reconcile to actual historical rates from my accounting system? Can I explain any significant variances with specific, documented changes? Are my cost pools free of unallowable costs? Do my allocation bases make sense and comply with FAR and CAS requirements?
For labor: Are my labor categories based on real positions in my organization? Are my base wage rates supported by payroll records or documented wage surveys? Are my fringe calculations based on actual benefit costs? Have I applied indirect rates consistently?
For subcontractors: Do I have detailed cost breakdowns from all major subs? Have I analyzed whether their pricing is reasonable? Have I obtained cost or pricing data where required? Can I explain my subcontractor selection rationale?
For all costs: Can I explain how I estimated each cost element? Do I have documentation supporting my assumptions? Have I excluded unallowable costs? Does everything tie back to verifiable data sources?
If you can answer yes to all of these, you are in good shape. If you are answering no or unsure to any of them, that is where you need to focus your effort before submission.
Government Proposal Pricing Wrap Up
DCAA is looking for evidence that you understand your costs, that your pricing is based on real data, and that the numbers you are proposing are defensible.
The contractors who consistently pass DCAA reviews are not the ones with perfect proposals. They are the ones who build proposal pricing from solid accounting foundations, document their estimating methodology clearly, and can defend their numbers with specific supporting data.
Those foundations are not built during proposal development. They get built through proper accounting systems, consistent cost tracking, and understanding what makes costs supportable under government contracting rules.
If you are treating proposal pricing as a fill-in-the-blanks exercise, you are going to keep running into problems. If you are treating it as the natural output of well-maintained financial systems and disciplined estimating processes, DCAA reviews become routine rather than stressful.
Ready to build proposal pricing that passes DCAA scrutiny the first time? Let’s talk about what adequate really looks like for your business.