Wednesday, August 2nd, 2017
Written By: Ronald Marta, University of Houston PTAC
It is well to begin by recalling the government’s position on profit. Federal Acquisition Regulation (FAR) 15.404-4 states: “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.” ‘Sufficient financial rewards’ is usually interpreted as ‘reasonable profit.’ We can say then that not only are small (and large) businesses entitled to a reasonable profit, but it is in the Government’s interest that they receive a reasonable profit because they then have an incentive to perform efficiently and effectively on their Government contracts.
For the discussion of profit, we note that U.S.C. 2306(d) and 41 U.S.C. 254 (b) impose certain statutory limitations with respect to profit: Under a cost-plus-fixed-fee contract, the cap is 15 percent for fee for experimental, developmental, or research work, 6 percent for fee for architect-engineer services for public works or utilities, and 10 percent for other cost-plus-fixed-fee contracts.
The Federal Acquisition Regulation (FAR) addresses the subject of profit in Part 15. FAR 15.404-4 establishes six factors for the analysis of profit. They are:
In addition to the preceding factors, each agency may include ‘Additional Factors’ in its structured approach or take them into account for profit analysis. It is to be noted that each of the factors may provide additional profit opportunities for the contractor.
The U.S. Department of Defense has a method to calculate profit. The method is called Weighted Guidelines. It is contained in DD Form 1547. The Weighted Guidelines method is based on the following contractor risk factors: technical, management cost control, performance risk, and contract type risk. In addition, working capital, facilities capital, and cost efficiency are important components of the method. The Defense Acquisition University (DAU) course CLC 104 Analyzing Profit or Fee provides excellent practice with the DoD Weighted Guidelines method.
In the final analysis, there is no magic answer for determining the profit percentages to be used in proposals for government contracts. The profit percentages should be based on the FAR factors identified and described above. At the same time, it should be remembered that profit percentages exist in the market place where competitive forces are usually in play. The profit analysis factors, as well as the interplay between competition and profit, will make for situations and outcomes that are continuously fascinating and exciting for both participants and observers.
Pricing Matters is a regular feature by Ronald Marta. Watch for future posts on a wide range of pricing issues.
More about Procurement Technical Assistance Centers (PTACs)
Ninety-eight PTACs – with over 300 local offices – form a nationwide network of procurement professionals dedicated procurement professionals working to help local businesses compete successfully in the government marketplace. Funded under the Defense Logistics Agency’s Procurement Technical Assistance Program through cooperative agreements with state and local governments and non-profit organizations, PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.