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Government Contractors

The “How-To” for Defining Profit or Fee in DoD Price Proposals

A common question many contractors may find themselves asking: “How are we going to determine and bid profit/fee percentages to be applied in a proposal?”

As always, each individual contractor has the right to determine the amount of applied profit/fee they want to bid for each contract. Dependent upon work scope, products/services offered, and even contract type, the risk is different and the competition providing proposals to the end users can vary greatly without going over statutory limitations. Contractors can utilize the Defense Federal Acquisition Regulation Supplement (“DFARS”) Weighted Guidelines approach as a tool in determining their profit negotiation position, per Federal Acquisition Regulation (“FAR”) 15.404-4 Profit and DFAR 215.404-71. The weighted guidelines often helps define what the government may consider to be the appropriate amount of profit to be applied within a proposal.

The overarching objective of the weighted guidelines is to define, based on specified criteria, how well a contractor and/or the proposed effort aligns to that criteria, and provide a measurable way to quantify a profit percentage objective. This analysis provides the government support in justifying profit/fee percentages applied to total proposed direct and indirect costs. A structured approach for developing a pre-negotiation profit or fee objective on any negotiated contract is pertinent when certified cost or pricing data is obtained or requested.

The weighted guidelines method takes into account:

  1. The contractors degree of performance risk in producing the goods or services purchased under the contract;
  2. The contract-type risk assumed by the contract under varied contracts and incentive arrangements;
  3. The level of working capital needed to perform the contract;
  4. The nature of the contractor’s facilities capital to be employed; and
  5. Contractor cost reduction efforts that the contractor can demonstrate will benefit the pending contract.

An additional approach would be the modified weighted guidelines method (DFARS 215.404-72) on contract actions with nonprofit organizations other than Federally Funded Research and Development Centers. Lastly, the alternate structured approach (DFARS 215.404-73) may be used when the contract action is:

  • At or below the certified cost or pricing data threshold ($750K) (see FAR 15.403-4);
  • For architect-engineering or construction work;
  • Primarily for delivery of material from subcontractors;
  • A termination settlement; or
  • The weighted guidelines method does not produce a reasonable overall profit objective and the head of the contracting activity approves use of the alternative approach in writing.

Each of these weighted guidelines has more detailed criteria with some subjective and objective facets in determining estimated final profit percentages. If you have any questions or concerns regarding utilizing the weight guidelines procedures within your next price proposal, please do not hesitate to contact one of our experienced GovCon professionals for assistance.

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