Are You Really Making a Profit on Your FFP Contracts?

FFP contracts are great — in theory – are they really great in practice?

You put your proposal together: you budgeted your labor, indirects and add in a 7% profit.

Congratulations – you are awarded $100,000 to produce 3 deliverables.

Are you really making a 7% profit —- or don’t you know?

It is really great to know how much revenue you will make, but if you don’t actually track your directs and indirects against the contract you may actually wind up losing money.

You are obligated to the deliverables – you can’t ask for more money – that’s the point of a fixed price contract.  The government doesn’t care if you lose money on the contract – they just want you to produce what you committed to.

Most contractors are not concerned about tracking costs and indirects against specific contracts unless they have a Cost Plus Fee contract. But the fact of the matter it is just as important, from a financial management perspective, to track your costs on all contracts to ensure that you are covering your costs and maintaining a profit.

According to a recent article by Steven Mendiburu in the Contract Management magazine, “Fixed-price contracting is now the preferred vehicle of choice by the U.S. government”; even for large R&D contracts.

Now is the time to get your systems and processes in place to accurately bid on and track actual costs on all of your contracts and make sure you actually make the profit you bid on your proposal.

There is no cost recovery option in FFP contracts like there is in CPFF contracts, so your top line will not change for the contract; but your real bottom line may take a hit if you don’t track you costs accurately.

Advertisements

3 comments

  1. Agreed, a firm will rarely if ever make the profit it figured in its bid leading to the award. This is why it is even more important to make a risk assessment to calculate how little profit it is willing to accept and if that assessment results in too low of a rate or if raising its bid will deem it noncompetitive, don’t bid.

  2. Definitely – The push from the Government to award FFP type contracts – even for large dollar and/or R&D – will make it even more risky for government contractors. Particularly the very small R&D firms out there.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s