Tuesday, March 8, 2011

Factors that the Government Considers in Determining Profit/Fee


Profit/fee is the dollar amount over and above allowable costs that is paid to the firm for contract performance. Most contract prices include either profit or fee. For contracts awarded on the basis of cost/price analysis, FAR requires the Government to use a structured approach to determining the reasonableness of the profit/fee included in the negotiated price. When cost information other than cost or pricing data are required, the Government may need to use profit/fee analysis to determine the reasonableness of any profit/fee included in the contract price.

According to FAR 15.404-4(b), the Government must use a structured approach to determining profit/fee. FAR only prescribes the factors that must be considered in establishing the profit/fee objective. It does not prescribe specific Government-wide procedures for profit/fee analysis.
The underlying assumption behind Government structured approaches to profit/fee analysis is the belief that contractors are motivated by profit/fee. Structured approaches provide a discipline for ensuring that all relevant factors are considered in developing Government profit/fee negotiation objectives.

It is in the Government's best interest to offer contractor's 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 to meet public needs.

The Government’s profit/fee calculations must consider the unique circumstances of the immediate negotiation. However, contract fee cannot exceed statutory limits that apply to cost-plus-fixed-fee contracts. There are two statutory limits on profit and fee. Experimental, developmental, or research work performed under a cost-plus-fixed-fee contract is limited to 15% of the estimated contract cost while all other cost-plus contracts are limited to 10%.

Each agency is responsible for developing its own structured approach. However, FAR stipulates factors that must be considered unless they are clearly inappropriate or not applicable.


Profit/Fee Factor
Provide greater
profit/fee opportunity to contractors who:

Contractor Effort
(i.e. complexity of the work and resources required for contract performance)
Undertake contracts requiring a high degree of professional and managerial skill and whose skills, facilities, and technical assets can be expected to lead to efficient contract performance.
Cost Risk
Assume a proportionately greater degree of cost responsibility and associated risk.

Federal Socioeconomic Programs
Have displayed unusual initiative in support of socioeconomic programs.

Capital Investments
Have made investments that will facilitate efficient and economical contract performance.

Cost Control and Other Past Accomplishments
Have demonstrated an ability to perform similar tasks effectively and economically.

Independent Development
Have undertaken relevant independent development without Government assistance.

Additional Factors
Actively support agency program objectives.


It is always beneficial for contractors to perform its own structured approach to determining the amount of fee included in proposals to the Government. Sometimes, solicitations require contractors do so and submit them with their bids. But even if not required, contractors will generally have better knowledge of the factors affecting the amount of profit/fee than the Government and can use this knowledge to ensure it maximizes profit on the contract.

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