PROFIT OR FEE?
Fee is the portion of a cost-reimbursable award that is not intended to cover costs. Fee covers managing the work and accepting a degree of risk (unreimbursed costs). Although the final fee may not be Cost Plus a Percentage of Cost, the dollar amount of fee typically happens to represent a percentage of anticipated-cost dollars.
Examples of contract types that include fee are:
- Cost Plus Fixed Fee (where the dollar amount of the fee is fixed, regardless of total costs)
- Cost Plus Incentive Fee (where the amount of fee is higher with lower total costs, and vice-versa)
- Cost Plus Award Fee (where the amount of fee is partially fixed and partially incentive)
Generally, support for fee includes less risk than for other contract types. Because the U.S. Government believes that all reasonable costs are reimbursed, reimbursement lowers risk. Instead, the complexity of work and management of those complexities – for both quality and schedule – more strongly support fee. Also, see factors in support of Profit, some of which might directly apply to justification of higher fee.
The Profit is the portion of a Fixed Price award that is not intended to cover costs. Profit applies to elements of an award that carry a Fixed Price; for example, a Time and Material contract type uses fixed labor rates (by category), which include profit.
The fixed dollar amount of profit depends on factors described in the Federal Acquisition Regulations 15.404-4 (d) (1). Although the final profit may not be Cost Plus a Percentage of Cost, the fixed dollar amount of profit typically happens to represent a percentage of anticipated-cost dollars.
Support that justifies profit includes:
- Complexity and investment of contractor-resources
- Risk of overrunning cost (e.g., insufficient work description)
- Purchases from socioeconomic businesses (e.g., a veteran-owned, HUB zone small business)
- Contractor investment (i.e., money spent “up front” to provide the right facilities, equipment, and experts)
- Similar, past contracts and their cost-efficiency
- Independent Research and Development (not customer-paid Research and Development) that benefits the current award
We work with clients to strengthen justifications for high profit, especially when the proposal will be negotiated. Providing the Contracting Officer (or higher-tier Subcontract Administrator) measurable examples, which precisely address these factors, minimizes the buyer’s work to justify the client-proposed profit.