Increased Profit Margins On Government Contracts

What are your current profit margins on government contracts? Are you still bidding a fee of 6% to 10%? Many contractors think they must accept low profit margins on government contracts. Not true! FAR 15.404-4(a)(3) clearly states,

“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.”

Profit/fee calculations must consider the unique circumstances of the immediate negotiation. The only statutory limits on profit/fee are for cost-plus-fixed-fee contracts:

Experimental, developmental, or research work performed under a cost-plus-fixed-fee contract – 15% of estimated contract costs
All other cost-plus-fixed-fee contracts – 10% of estimated contract costs

Are primes and contracting officers beating you with the Weighted Guidelines stick? That tool only applies to negotiated contracts when certified cost or pricing data is obtained. The Weighted Guidelines are certainly a tool to use in calculating a fair and reasonable fee, but not a constraint. Look at items 13-20 – COST. Since cost analysis is not applicable to many acquisitions (see FAR 15.403-1(b), and acquisitions below the threshold of $750,000 for certified cost or pricing data), cost data should not be supplied to the Government or prime and should not be the basis for price negotiations.

So, how much fee can you charge? A lot of factors go into pricing and price analysis, so there is no black-and-white answer. You should start at 30% and adjust your rates as necessary. Keep in mind that the contracting officer must determine that your prices are fair and reasonable (through market research), so higher rates will make you less competitive. I see many contractors successfully bidding and winning at 18% to 25%, well above the 6% to 10% myth.

Another myth is that you must offer the Government a discount, a rate less than you charge everybody else. Not true! The Government simply asks that you not charge them more than you charge your most favored customer for the same or similar products under the same or similar circumstances. If you offer discounts based on quantity, prepayment, or prompt payment, you need to offer those same discounts to the Government. If they do not meet the quantity requirements or choose not to negotiate terms and conditions (such as early or flexible delivery), then you don’t have to honor the discount. Just be sure your pricing schedule for government contracts reflects the same options and discounts you offer your best customer, nothing more. And, if you reduce your commercial pricing or offer additional discounts, make the same offer to the Government. See GSAM 538.270 for details on GSA’s “Most Favored Customer” clause.

Want to increase your profit margins on government contracts? Call today to learn more of our insider secrets. We’ll walk you through a cost and price analysis of your products.