Pricing Strategy

Pricing strategy is the planned approach a buyer or supplier uses to determine, structure, submit and evaluate prices in a procurement. The goal is a fair and reasonable price, reached by balancing the type of contract, the cost of the work, and the profit or fee built into the price.

In defence and public-sector acquisition, the buyer's side of this work covers how prices are requested, compared and scored. The supplier's side covers how a price is built and presented in a bid. NATO's procurement documents describe this through related ideas such as the pricing objective, the price proposal and the award criteria, and they show how each part works in practice.

The fair and reasonable price objective

NATO's procurement manual states that the primary pricing objective is to obtain goods and services from responsible sources at fair and reasonable prices. It also states that the contracting officer's aim is a price that is fair and reasonable to both NATO and the contractor. The price has to work for the buyer and for the supplier delivering the work. Read the full wording in the NATO procurement manual.

Balancing contract type, cost, and profit or fee

The same manual says the contracting officer balances three elements to reach that result: contract type, cost, and profit or fee. Contract type shapes who carries the cost risk, and that in turn affects the price.

• Firm-fixed-price: the Bi-SC procurement rules state that the default contract type is generally firm-fixed-price.
• Fixed price with economic price adjustment: the same rules say routine purchase orders and contracts resulting from sealed bidding should generally be awarded on a firm-fixed-price or fixed-price with economic price adjustment basis.
• Price competition: the rules state that effective price competition normally results in realistic pricing, and that a fixed-price contract is ordinarily in NATO's interest.

These points come from the Bi-SC procurement rules.

How award criteria shape the price you submit

A pricing approach has to fit the way the buyer will evaluate price. NATO's procurement procedure lists the award criteria available for competitive procurement:

• lowest price technically compliant
• lowest lifecycle cost
• best price-quality ratio
• best value

Under the first, price decides the outcome among bids that meet the technical requirements. Under lowest lifecycle cost, the price is judged over the life of the item and not only at purchase. Under best price-quality ratio and best value, price is weighed together with technical merit. The criteria are set out in NATO's procurement procedure, and the solicitation states which one applies.

Price proposal requirements in NATO solicitations

NATO solicitations set out how prices must be presented. One NATO Allied Command Transformation invitation for bid required prices on a firm-fixed-price basis, including any relevant discount schedule. Another request for proposal required pricing in a supplied Excel workbook and stated that proposals not submitted in the proper format would not be considered. The price itself can be sound and the bid can still fail if it ignores the format and currency the solicitation specifies.

What it means for a supplier bidding on Canadian public contracts

Treat the solicitation's pricing instructions as the starting point for your pricing strategy. Confirm the contract type, the basis on which prices must be quoted, the format and currency, and the award method before you build the number. The NATO examples show that evaluation method and format rules decide how a price is judged. Build a price you can defend as fair and reasonable, one that covers your cost and a reasonable profit, and submit it exactly as the buyer asks.