A defensible, accurate cost structure is the foundation of professional government tender pricing. It ensures that your bid price covers all real costs, recovers overheads, and delivers a viable margin — preventing the most damaging outcome in tendering, which is winning a contract at a price you cannot sustain. This module walks through the construction of cost structures for service contracts, supply contracts, and construction contracts.
For professional service contracts, the primary cost driver is people. Personnel costs in a loaded rate include the gross salary or fee, employer social contributions (UIF at 1% of remuneration, SDL at 1% of payroll, and COIDA contributions at the applicable industry rate), the cost of benefits (medical aid, pension, leave pay), a utilisation factor (typically staff are billable 60%–75% of total working days after leave, training, and non-billable time), and an overhead recovery percentage. A common approach is to calculate a daily or hourly 'fully loaded cost rate' for each category of staff and then multiply these by the number of days or hours estimated for the contract. Overhead absorption should cover rent, shared IT infrastructure, administration staff, insurance, and the cost of business development — these indirect costs are real and must be recovered from each contract.
Profit margin for government work is a nuanced topic. Unlike private sector clients, government procurement officials are sensitive to pricing that appears excessive — especially for professional services where cost build-up is scrutinised and abnormal profit margins can trigger value-for-money investigations. A margin of 10% to 20% on cost is generally accepted for service contracts; margins above 25% may invite scrutiny, particularly on cost-reimbursable or partially open-book contracts. For goods supply, margins are more variable and less scrutinised since the pricing is based on market competition rather than cost-build analysis. The key discipline is to be clear in your own cost model about what margin you have included and to ensure it is defensible if challenged.
VAT and tax implications must be handled correctly throughout the cost model. If your company is VAT-registered, your cost model should be constructed on a VAT-exclusive basis — VAT is added to the bottom line as a separate item when building the bid price. Your bid price to government will be VAT-inclusive, and you will collect the VAT component from government on your invoices and remit it to SARS. For imported goods, import duties and VAT paid at the border are input tax credits that reduce your net VAT liability, but they represent a cash outflow that must be financed until the credit is recovered. Correctly mapping the VAT implications through your cost model prevents both over-pricing (double-counting VAT) and under-pricing (forgetting to include VAT in the charged price).
Escalation clauses and price adjustment provisions are critical for multi-year government contracts. Government standard contracts typically include price adjustment provisions tied to published indices — the Consumer Price Index (CPI) for services, the Producer Price Index (PPI) for manufactured goods, or sector-specific indices like the SEIFSA Price and Index Page (PIP) for steel and engineering goods. When pricing a multi-year contract, you price based on current costs and rely on the price adjustment clause to protect you against inflation. If no price adjustment clause exists in a long-term contract, you are taking inflation risk for the full contract period — this risk must be reflected in your initial price as an explicit risk loading, or the contract terms must be negotiated to include an adjustment mechanism.
Risk contingency is a legitimate and necessary cost component that many inexperienced bidders fail to include. Identified contract risks — scope uncertainty, weather exposure for outdoor work, supplier price volatility, currency risk for imported goods — should each be quantified and an appropriate contingency applied. A structured risk register for each contract, with probability-weighted financial impacts, provides a defensible basis for contingency claims if costs are scrutinised. For construction contracts, risk contingency of 5%–15% of project cost is typical; for service contracts with well-defined scopes, 3%–8% is a reasonable range. Do not hide contingency in inflated individual line items — a transparent risk contingency line is more defensible and more professional.