Thursday, January 5, 2012

Government Approach to Profit/Fee Analysis

We've discussed profit and fee several times in this blog but it is worth repeating because we continue to hear of situations where the Government attempts to coerce prospective contractors into accepting paltry profit and fee amounts during negotiations. This aggressiveness may well be contrary to Government policy.

The underlying assumption behind Government approaches to profit/fee analysis is the belief that contractors are motivated by profit/fee (see FAR 15.404-4(a)). The Government is required to use a structured approach (usually the weighted-guidelines method) which provides a disciplined approach 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.  

If the Government is to use profit/fee to motivate contractor performance and achieve the above goals, practices primarily intended to reduce profit/fee or diminish the impact of profit/fee analysis are not in the Government's best interest (see FAR 15.404-4(a)(3)).

  • Negotiations aimed at reducing prices by reducing profit/fee without proper consideration of the profit function.
  • Negotiation of extremely low profits/fees
  • Use of historical average profit/fee rates without regard to the unique circumstances of the immediate negotiation
  • Automatically applying predetermined profit/fee percentages without regard to the unique circumstances of the immediate negotiation.

While profit/fee calculations must consider the unique circumstances  of the immediate negotiation, contract fee cannot exceed statutory limits that apply to cost-plus-fixded-fee contracts;

  • 15% for experimental, development, or research work
  • 10% for all other cost-plus-fixed-fee contracts.

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