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I have heard there is a FAR clause that regulates this, but I don't know what it is, or if it even exists.

The purported clause limits the amount of profit a company can make on a contract - as a percentage of the work.

I've heard the percentage varies with the contract type - cost plus/ T&M/ Fixed price.  I have heard the profit for Fixed price is limited to 30%.  Fee is calculated as a percentage of cost, not percentage of the selling price.

Example:  Fixed price contract has $25,000 in direct cost plus another $20,000 in fringe/overhead/ganda for a total cost of $45,000.  Revenue on the contract is $75,000 meaning the Fee (or profit) is $30,000.  Since $30,000 is 67% of $45,000, if the FAR ceiling is 30%, then profit would be limited to $13,500.  Under this purported FAR clause the contractor would have to give $16,500 back to the government.

Is there such a FAR clause that limits profit?  If so, have I applied it correctly?  Does such a FAR clause have to be "invoked" upon the contract to be effective?

 

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Be careful what you believe. Most of what you "hear" is nonsense. I suggest you research rather than rely on what you hear. In this case, I'll do your homework for you. See FAR 15.404-4(c)(4). There are no other maximum profit levels.

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Also consider supplements to the FAR for whatever agency you may be negotiating a contract with.   By example you might want to see DoD's supplement in the DFAR at 215.404-4.  Sometimes folks use the structured approach for determining a pre-negotiation objective as a reference for a required profit.

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In regard to Carl's post, note that the DFARS structured approach is used to establish the government's negotiation position.  The results of application of the weighted guidelines are not binding on contractors.  Further, DFARS 215.404-4 is not a contract clause.

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Guest Vern Edwards
22 hours ago, Corduroy Frog said:

Maximum Profit per FAR??

I have heard there is a FAR clause that regulates this, but I don't know what it is, or if it even exists.

The purported clause limits the amount of profit a company can make on a contract - as a percentage of the work.

I've heard the percentage varies with the contract type - cost plus/ T&M/ Fixed price.  I have heard the profit for Fixed price is limited to 30%.  Fee is calculated as a percentage of cost, not percentage of the selling price.

Example:  Fixed price contract has $25,000 in direct cost plus another $20,000 in fringe/overhead/ganda for a total cost of $45,000.  Revenue on the contract is $75,000 meaning the Fee (or profit) is $30,000.  Since $30,000 is 67% of $45,000, if the FAR ceiling is 30%, then profit would be limited to $13,500.  Under this purported FAR clause the contractor would have to give $16,500 back to the government.

Is there such a FAR clause that limits profit?  If so, have I applied it correctly?  Does such a FAR clause have to be "invoked" upon the contract to be effective?

@Corduroy Frog

Ignoring 'I have heard," everything you wrote above is false. The answers to the three questions in your last sentence are: No and, given that answer, Meaningless and Meaningless.

Now, by way of explanation:

TERMINOLOGY

First, let's sort out the terminology. FAR does not define the terms profit and fee; they are terms of art, and each refers to a different thing.

By convention, the term profit is used in connection with fixed-price contracts, time-and-materials contracts, and labor-hour contracts.

The term fee is used in connection with cost-reimbursement contracts, also by convention. The term fee is also used in connection with fixed-price architect-engineer (A-E) contracts, but in that context it refers to the total price (professional fee) paid to the architect-engineer. That usage is not relevant to what follows. Otherwise, the term profit is used in connection with fixed-priced A-E contracts in the same way that it is with reference to any other fixed-price contracts.

PROFIT

Under a fixed-price contract, the total price includes direct costs (see FAR 31.202), indirect costs (see FAR 31.203), and profit (see FAR 15.404-4). When discussing time-and-materials and labor-hour contracts, the hourly rates are unit prices that include direct costs, indirect costs, and profit (see FAR 16.601(c)(2)).

Profit is not separately stipulated in contracts. Profit, in the government contracting sense, is simply whatever amount is left after the contractor deducts direct and indirect costs from the total price it receives. There are no statutory or regulatory limits on (a) the amount of profit that may be negotiated between the government and its contractors or (b) the amount of profit that a contractor may realize through performance. However, agencies have issued negotiation guidance to contracting officers for the establishment of negotiation objectives ("structured approaches") that can, effectively, limit the amount that a contracting officer should include in his or her objective. However, contracts do not stipulate a limit on profit, so such guidance has no effect on the amount of profit that a contractor can realize through performance.

FEE

Fee refers to a negotiated dollar amount that is expressly stipulated in a contract and that is designed to compensate a contractor over and above reimbursement of its incurred direct and indirect costs. Congress has written laws, 10 USC 2306(d) and 41 USC 3905, that limit the amount of fee that a contracting officer can include in a cost-plus-fixed-fee contract. Those statutory limits are stated in terms of percentages of cost.  See FAR 15.404-4(c)4)(i)(A) and (C). (The limits do not apply to cost-plus-incentive-fee contracts.) However, because of the statutory and regulatory prohibition against the use of cost-plus-a-percentage-of-cost contracts, see FAR 16.102(b), the fee is always stated as a dollar amount, not as a percentage.

As with profit, the negotiation guidelines issued to contracting officers may effectively further limit the fee. Thus, under a cost-reimbursement contract, the contractor will stipulate an amount of fee no greater than 10 or 15 percent of the estimated cost, but if the contractor completes the work for less than the estimated cost, an cost "underrun," it can realize a higher percentage fee. On the other hand, if the contractor "overruns," the realized fee will be a lower percentage.

CONCLUSION AND ADVICE

So there you have a very brief explanation of profit and fee in government contracting. I hope the explanation is clear.

Welcome to the Beginners Forum. As you can see, the kinds of responses you'll get here vary.

It appears that you are newly interested in government contracts and are trying to get up to speed. If that is so, then I suggest that you buy and study three books: Formation of Government Contracts by Nash, Cibinic, and Yukins; Administration of Government Contracts by Nash, Cibinic, and Nagle; and The Government Contracts Reference Book by Nash, O'Brien-Debakey, and Schooner. If you really want to understand something, buy and read books about it. Don't come here every few hours looking for instant enlightenment. Some people will get tired of your questions if you do that too often, especially since you write long lead-ins before getting down to business.

Vern

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