Category:Fee/Profit

Profit

Profit represents the element of the potential total remuneration that contractors may receive for contract performance over and above allowable costs. Profit is why contractors exist, and was reiterated by Frank Kendall, Office of the Under Secretary of Defense Acquisition, Technology and Logistics, in his Better Buying Power 3.0 white paper File:20014-09 - Kendall and Interim Release of BBP 30.pdf He wrote,

"Profit is the reason that the firms we rely upon exist, and we should not use profit as a cost-cutting measure; industry should expect a reasonable profit for the products and services it provides."

He goes on to say,

"Profit should not be excessive, however, and higher profit levels should be tied to better performance and lower levels to poorer performance. Our data analysis shows clearly that the way we structure our business deals does affect how industry performs. We all want a defense industry that is lean, competitive, innovative and productive. Profit is an effective tool to achieve these ends, when we use it appropriately."

A Common Mistake - DO NOT COMBINE NON-REIMBURSABLE COSTS WITH PROFIT

If costs are incurred on a contract and the US Government will not reimburse these costs, often times these costs will be buried in the profit. It is very important for a contractor to be able to break out this information, so that profit and costs (non-reimbursable) are not combined. Combining costs and profit gives the appearance that the profit is excessive.

For Example, Contractor XYZ incurs IR&D expenses to develop it's Product, Widget A. The government determines that it will not pay for the development of Widget A. As these development costs would be directly relevant to the sales of Widget A to the government, these costs should be separately categorized and the government should look at these costs (separately) in setting it's pre-negotiation objectives. A contractor should not capture these costs and profits together.

Structured Approach

FAR 15.404(a) and (b) establish policy to use as structured approach to determining profit. It also establishes the requirement that all relevant factors should be considered in appropriate in determining a fair and reasonable remuneration for contractor products or services.

FAR 15.404-4(b) of that provision says that the govt should typically use a "structured approach" such as, Weighted Guidelines to develop a profit negotiation objective. There is nothing in that provision that says that the [effective^[1]] profit rate that is developed based on a structured approach cannot be adjusted to reflect fairness factors.

The regulations state that a contractor should be paid a fair profit (opportunities for financial rewards) as follows:

"It is in the Government’s interest to offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities of qualified large and small business concerns to Government contracts, and maintain a viable industrial base."^[2].

"Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government’s interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance."^[3]