Pricing a government tender is a balancing act. Price too high and you lose to cheaper competitors. Price too low and you either lose money or can't deliver quality work—damaging your reputation and future opportunities.
Here's how to price government tenders competitively while protecting your profit margin.
How government tender pricing works: the preference point system
Most South African government tenders don't award to the cheapest bidder automatically. Instead, they use a preference point system that scores both price and B-BBEE contribution.
80/20 preference system (contracts under R50 million)
- 80 points for price (lower price = more points)
- 20 points for B-BBEE (higher B-BBEE level = more points)
90/10 preference system (contracts over R50 million)
- 90 points for price
- 10 points for B-BBEE
The bidder with the highest combined score wins—not necessarily the cheapest. This means your B-BBEE status significantly affects your competitiveness. Learn more about B-BBEE certificates and how they affect your tender score.
How price points are calculated
In the 80/20 system, the lowest bidder gets 80 points. Everyone else is scored relative to the lowest price using this formula:
Price points = 80 × (1 − (Your price − Lowest price) / Lowest price)
Example
Tender for office furniture supply:
- Bidder A: R100,000 (lowest) = 80 price points + 12 B-BBEE points (Level 4) = 92 total
- Bidder B: R110,000 = 72.7 price points + 20 B-BBEE points (Level 1) = 92.7 total
- Bidder C: R120,000 = 66.7 price points + 14 B-BBEE points (Level 3) = 80.7 total
Result: Bidder B wins despite being R10,000 more expensive, because their higher B-BBEE level compensated for the price difference.
This is why understanding the preference system is critical—and why most tenders fail at compliance, not price.
Steps to calculate your tender price
1. Calculate your true costs
Break down every cost involved in delivering the contract:
- Direct costs: Materials, labor, equipment, subcontractors
- Indirect costs: Overheads (rent, utilities, admin salaries, insurance)
- Compliance costs: Certifications, inspections, quality control
- Delivery costs: Transport, logistics, installation
- Contingency: 5-10% buffer for unforeseen issues
Don't guess—use historical data from similar projects to estimate accurately.
2. Add your profit margin
Government contracts typically have profit margins of 10-20%, depending on the industry and risk level. Factor in:
- Industry norms (construction may be 10-15%, IT services 15-25%)
- Payment terms (government pays in 30-60 days—do you need cash flow buffers?)
- Risk (complex or risky contracts warrant higher margins)
3. Research market pricing
Before finalizing your price, research what others are charging:
- Check past tender awards: The eTender Portal publishes award values—search for similar contracts
- Ask industry peers: Network at briefing sessions and industry events
- Review market reports: Industry associations often publish pricing benchmarks
4. Model different scenarios
Use a spreadsheet to model how your price performs against likely competitors at different B-BBEE levels. This helps you understand how much pricing flexibility you have.
Common pricing mistakes to avoid
1. Undercutting to win at all costs
Bidding too low might win you the tender, but if you can't deliver quality work on that budget, you'll:
- Damage your reputation
- Get blacklisted from future tenders
- Face penalties or contract termination
Government tracks contractor performance. A history of poor delivery makes it harder to win future bids.
2. Ignoring B-BBEE in your pricing strategy
If you have a strong B-BBEE level (1-3), you can price slightly higher and still win. If you're Level 5-8 or non-compliant, you'll need to be more price-competitive. Understanding this balance is key.
3. Forgetting payment terms
Government typically pays within 30-60 days (sometimes longer). If you don't have cash flow to cover materials and labor upfront, factor in financing costs or payment milestones.
4. Not reading the pricing schedule correctly
Many tenders have detailed pricing schedules with line items, breakdowns, and escalation clauses. If you misread the format or leave sections blank, you could be disqualified. See how to check tender compliance before submitting.
When to walk away from a tender
Not every tender is worth bidding on. Walk away if:
- You can't meet the mandatory requirements (see what is a responsive tender)
- Your costs make it impossible to price competitively and stay profitable
- You don't have the capacity to deliver on time and at quality
- The contract terms are unreasonable (e.g., no payment for 90 days, excessive penalties)
Tips for competitive pricing without sacrificing profit
- Negotiate better rates with suppliers: Bulk purchasing or long-term contracts can reduce material costs
- Improve your B-BBEE level: A higher B-BBEE level gives you more pricing flexibility—see how to improve your B-BBEE score
- Optimize operations: Streamline processes to reduce labor and overhead costs
- Partner with other businesses: Joint ventures or subcontracting can help you access better pricing and capacity
- Focus on value, not just price: Highlight quality, experience, and compliance in your bid—these can offset a slightly higher price
Resources for tender pricing
- eTender Portal – Research past tender awards and pricing
- National Treasury – Preference point system guidelines
- Industry associations – Pricing benchmarks and market reports
Bottom line
Pricing government tenders in South Africa requires understanding the preference point system, calculating your true costs, and finding the balance between competitiveness and profitability.
Don't underprice just to win—it damages your reputation and future opportunities. Instead, optimize your costs, improve your B-BBEE level, and focus on delivering value. And remember: most tenders are lost at compliance, not price—so get your documentation right before you worry about being the cheapest.
