A CCP 998 offer is a statutory provision to encourage serious consideration of a settlement offer. If you do not obtain a better result in trial or arbitration you can be required to pay court costs of the other party, and perhaps the fees of experts testifying at trial or arbitration. You should evaluate the offer with your attorney. If your not represented, consider getting a neutral 3rd party with subject matter knowledge to help you with your evaluation.
You do not have to respond to the CCP 998 offer, but it you don't do better than the offer at trial you will end up paying the other side's costs. Those could be substantial.
Some studies of settlement offers versus trial verdicts have shown plaintiffs tend to mistakenly reject settlements more frequently than defendants, but the magnitude of error is much greater for defendants when they mistakenly reject settlements.
You should seriously and objectively consider the value of your case. Be fully prepared to go to trial.
I answer questions on Avvo to try to help get you pointed in the right direction. But, I am not your attorney. Beware, my answers here are general, limited, incomplete, and can never be as complete, thorough, or accurate as one I would give to a client after hearing all of the facts and details of my client's situation and applying the correct law. Also, I am admitted to practice law only in California and all of my answers are intended exclusively for the Golden State.