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.