Pricing is one of the two scored components in South African government tender evaluation (the other being B-BBEE preference), and under the 80/20 system it accounts for 80% of the final evaluation score. This makes pricing arguably the most consequential single decision in the bid preparation process. Yet many bidders approach government pricing intuitively or based on habit, without understanding the mechanics of how the evaluation formula works or how their price compares to the competitive field.
The PPPFA Preferential Procurement Regulations prescribe a formula-based price scoring system. Under the 80/20 system, price points are calculated as: Ps = 80 × [1 − (Pt − Pmin) / Pmin], where Pt is the price of the bid being scored and Pmin is the lowest compliant bid price. The lowest compliant bid always receives 80 price points. A bid priced 25% above the lowest receives approximately 60 price points, losing 20 price points due to the premium. Under the 90/10 system, the same formula applies with 90 as the multiplier. This means that the price differential between you and the lowest bidder translates directly into score points that can determine whether you win or lose.
Understanding the relationship between price and B-BBEE preference points is the key to sophisticated pricing strategy. A Level 1 B-BBEE contributor earns 20 preference points under 80/20, compensating for a price that is approximately 25% above the lowest bid. A Level 4 contributor earns 12 preference points, compensating for roughly a 15% price premium. A non-compliant contributor earns zero preference points and must win purely on price. When planning your pricing, know your B-BBEE level and calculate the maximum price premium over the likely lowest bid that your preference points can compensate for. Bidding above this premium means you are unlikely to win regardless of your technical score.
Building a defensible cost model is the foundation of responsible government pricing. Service contract cost models must account for personnel time at loaded rates (inclusive of employment costs, leave, benefits, and overhead recovery), travel and subsistence, direct project costs (printing, communications, equipment), sub-consultant fees, insurance, and a risk contingency. Construction cost models must cover materials at current market prices, labour at sector agreement rates, plant and equipment costs, sub-contractor packages, preliminaries and general (P&G), and a risk allowance. A common and costly error is to focus only on direct costs and forget overhead absorption — your overhead costs are real and must be recovered from every contract.
VAT and tax handling requires specific attention. Prices to government entities are typically submitted inclusive of VAT. If your entity is VAT-registered, you will charge VAT on your invoices and remit it to SARS — so your selling price must include VAT and your cost model must be constructed on a VAT-exclusive basis. If you are not VAT-registered, your prices are VAT-exclusive. Mixing VAT-inclusive and VAT-exclusive figures in a pricing schedule is a common arithmetic error that evaluators detect and that can result in price disqualification or revaluation.
Common pricing mistakes that cost bidders contracts include: under-pricing due to incomplete cost models (leading to contract failure after award), over-pricing due to excessive risk loading, arithmetic errors in the pricing schedule, using incorrect units or quantities from the bill of quantities, failing to price optional items that are later required, and submitting pricing in a format that differs from the required SBD3.3 pricing schedule format. Before submission, have a second person independently check every number in the pricing schedule against the supporting cost build-up, and verify that the totals are correctly computed.