In your Strategic Pricing® decisions, Government contractors must take the higher escalation rates we are experiencing into consideration. In this high-demand labor market and with inflation running higher than it has in some time, the days of using 2.5 percent escalation rates for pricing Government contracts must be in your rearview mirror. Recently the announcement that civilian federal employees will receive an average of 4.6 percent increase nationwide has underlined the point that salaries are increasing at a much higher rate than the lackluster 2-3 percent increase we have seen in recent history.

Strategic Pricing® Decisions
Salary increases, which the Society for Human Resource Management (SHRM) reports will average over 4 percent for the more senior or in-demand positions, are still at less than half of the current annual inflation rate of 8.5 percent. Almost all Government contractors are experiencing a shortage of available capable professionals in addition to competing companies vying for their existing cherished talent. There are growing recruitment and retention challenges, and this will continue to push up the demand for qualified people for quite some time.

What’s Changing the Rate for Pricing Government Contracts
Government contractors have been conditioned by competition and Government evaluations to bid conservative 2.5 percent to 3 percent escalation rates. Recently, we have seen some defense agencies (on cost-plus contracts) tell offerors the minimum realistic escalation would be between 4.5 to 4.7 percent. More importantly, if offerors did not adequately justify the realism of their escalation, they would get a price adjustment. This solicitation was for a three-year contract period, however. We do not know what we might see in solicitations for longer contracts or fixed-price arrangements.

Pricing Strategy Reasonableness
Bidders take note of pricing strategies for Government work. You must be credible in your quest to lower your price proposal to be competitive. Pricing a Government contract with less than at least the 4 percent to 4.5 percent range today is not believable. Your pricing strategy must take current historical escalation rates into account. That means doing the research and presenting your executives with sound data to make a wise escalation decision.

Escalation Rate

For more on this topic see: https://www.usinflationcalculator.com/inflation/current-inflation-rates/

 

 

Marsha Lindquist
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