Wednesday, April 28, 2010

Improving Profitability

It is not to hard to figure out whether you're losing money on a particular Government contract as long as you have an adequate job cost system. It is a little more difficult to figure out why the loss is occurring. Usually it comes down to poor estimating or poor cost control, or both. Contractors often fail to factor in contingencies or have a much too optimistic view of their future work which impacts indirect rates. Some contractors, upon receipt of a contract and feeling temporarily flush, will go out and buy things they shouldn't, don't need, or could lease more cheaply, hire employees before they're really needed, or misjudge the time it really takes to perform the work.  Sometimes however, cost overruns could also occur because of changed contract performance conditions which were not anticipated in the original contract solicitation.

If you find that poor estimating practices are the source of the cost overruns, you should perform a comprehensive estimating system review and implement corrective actions to ensure that estimating problems do not affect future contract profitability. If poor cost controls are the source of the cost overruns, you should identify and implement effective budget and cost controls to ensure costs are better managed.

If you are experiencing conditions that were not anticipated based on the solicitation requirements, you should consider submitting an equitable adjustment proposal. This could include differing site conditions (construction contract), delays in receipt of Government furnished materials, and government caused slowdowns, to name a few. Preparing, submitting, and negotiating an equitable adjustment proposal can be a time consuming process; however, an equitable adjustment to the contract price is the only way to recover increased contract costs due to changed conditions.

Contractors are often limited to what they can do to recover on a previously unprofitable contract; however, steps can be taken to prevent this unwanted condition for happening on future contracts. But don't wait. The time to act is now.

No comments:

Post a Comment