Situation: A contractor is asked to reduce the price proposed due to government funding limits. The contractors' past performance is exceptional and they are in good standing with the customer. The contractor knows they cannot provide a quality product at the price the contracting officer is asking. What should they do?
First: Relationship skills! State your understanding of their constraints and you are willing to be flexible. Next, specifically identify those "Work line items" that you feel can be changed, reduced or eliminated while still providing a quality product within funding limitations. Then be sure to ask your client what they think about your suggestions!
Restate your desire to do the job and work with them on the price. However, remind them that because you know your cost, you do not want to commit to anything you know will not result in a quality product and a win-win situation. Let your customer have the opportunity to counter-offer. This is one of several approaches I personally use.
Remember, you can only successfully use this win-win strategy if you "Know Your Costs". Finally, whatever the final offer on the table, a firm management decision must be made by you. Yes or No. And be prepared to live with the results of your decision... Learn and move on.