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I have a major contractor that insists on charging 14% profit on new tasks on an IDIQ contract. He claims that all of the Govt contracts they have with different agencies pay them between 13.5% and 14.5 %. When I do weighted guidelines on his proposals, I keep coming up with a recommended profit margin around 10%. I am having a difficult time (morally) paying this contractor the 14% they are proposing. I know they are trying to get as much as possible and they know that I need them to do the work so they have all the leverage in this.

Can anyone provide advice on what I should or can do? I don't want to roll over and pay them what they want but I'm afraid I have no other choice. I do plan to annotate this somehow in their CPARs report. They are a good contractor but they are very stubborn on this issue...understandably so.

Please help!!

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Single award task order contract?

This probably is not a requirements contract or is it?

Is this the only contractor who can meet your requirements? Are the tasks so integrally related that you have to use only them?

If not, you can opt to compete the work, if the incumbent isn't wlling to meet a reasonable overall price for the proposal.

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So long as you have met the minimum requirement for that ID/IQ contract, you should be able to seek other contractors for that service or product. I have seen it where the terms of the contract guaranteed that the ID/IQ contract holder would have first opportunity, but if their cost was too high we could seek other sources.

And when the option year comes around for the ID/IQ contract, does your organization plan to execute the next option? Has anyone brought up the overly generous profit issue yet? And the time to prepare for a new solicitiation is alway now, regardless of when you will need a replacement contract.

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Single award task order contract?

This probably is not a requirements contract or is it?

Is this the only contractor who can meet your requirements? Are the tasks so integrally related that you have to use only them?

If not, you can opt to compete the work, if the incumbent isn't wlling to meet a reasonable overall price for the proposal.

The contract was competed and is valued at over $1B and is an IDIQ contract, not a requirements contract. The in-scope tasks that I need them to accomplish are in the $100K ball park and are mostly derived from Govt directed design changes or other issues that come up during product development. The bulk of the contract (competed aspect) actually has a really low profit margin. But for all new work, they want 14% profit when the reasonable amount should be around 10% (or less).

I know they basically cut their original profit to ensure they won the contract but now I have a feeling they are just trying to get right by charging a much higher profit margin on change orders (not really a new concept). As a big picture perspective on this, they will never be able to re-coup the profit they left on the table at contract award, but I need to evaluate each new task on a case by case basis. Each time we argue about profit. I say 10%, they say 14%. After a month of being stubborn, we usually end up settling on 12% (split the difference). I waste too much time and energy on this recurring issue. I tried to get them to agree to an across the board settlement of 12% for profit on all new work. They said they can go from 14% to 13.75%. Please!!!!

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"Please!!!!"

Are you begging? Begging for what? A miracle? What they are doing is neither illegal nor immoral.

Get off your knees and negotiate.

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"Please!!!!"

Are you begging? Begging for what? A miracle? What they are doing is neither illegal nor immoral.

Get off your knees and negotiate.

When I say PLEASE....I am saying that in the context of "Give me a Break". I am offended that they actually offered to drop their profit margin by a paltry .25%. I am willing to split the difference with them which is much more reasonable than I should be and they offer ridiculous counter. I just did another WGL on a different task and the profit objective came out to 8%. Claiming that they provide a great service and that they are wonderful does not justify charging a 14% profit margin. I can back up the profit objective with WGL...they just puff out their chests and say, stick it government, pay the 14% or go somewhere else. I am looking for advice because I'm not ready to terminate this contract over their stubborness to come down a couple percent on their profit. 12% is still a very respectable profit margin for anybody....especially in this economy. If I were buying R&D to develop a missile that can shoot down another missile in outer space, then maybe 14% is warranted. Not for buying the product that I'm buying (a automotive vehicle).

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Does it have to b e a separate task or can it be a change to the task order?

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When I say PLEASE....I am saying that in the context of "Give me a Break". I am offended that they actually offered to drop their profit margin by a paltry .25%. I am willing to split the difference with them which is much more reasonable than I should be and they offer ridiculous counter. I just did another WGL on a different task and the profit objective came out to 8%. Claiming that they provide a great service and that they are wonderful does not justify charging a 14% profit margin. I can back up the profit objective with WGL...they just puff out their chests and say, stick it government, pay the 14% or go somewhere else. I am looking for advice because I'm not ready to terminate this contract over their stubborness to come down a couple percent on their profit. 12% is still a very respectable profit margin for anybody....especially in this economy. If I were buying R&D to develop a missile that can shoot down another missile in outer space, then maybe 14% is warranted. Not for buying the product that I'm buying (a automotive vehicle).

They are entitled to as much profit as they can get you to give them. The weighted guidelines are for your use and are not binding on contractors, or necessarily persuasive. Tell me, do you know what Toyota's profit margin is on each sale? If not, how can you say that 14 percent is too much for an automotive vehicle? Do you know what the profit margin is on a medium sized box of popcorn at the movies? If you think 14 percent is too much for an automotive vehicle, then you don't want to know what they're making on popcorn. If I were the contractor I would laugh at all your weighted guidelines palaver (just like some of them laughed at mine when I was a young contracting intern). You could be just as offended as you wanted to be. If being offended is all you've got, then you don't got much. Unless you can get some higher-up to go to bat for you, you're probably done for. No point in trying to get tough now. They've got your number. Better not try it or they'll take back their .25 percent. Might as well pay up. Or find another contractor.

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They are entitled to as much profit as they can get you to give them. The weighted guidelines are for your use and are not binding on contractors, or necessarily persuasive. Tell me, do you know what Toyota's profit margin is on each sale? If not, how can you say that 14 percent is too much for an automotive vehicle? Do you know what the profit margin is on a medium sized box of popcorn at the movies? If you think 14 percent is too much for an automotive vehicle, then you don't want to know what they're making on popcorn. If I were the contractor I would laugh at all your weighted guidelines palaver (just like some of them laughed at mine when I was a young contracting intern). You could be just as offended as you wanted to be. If being offended is all you've got, then you don't got much. Unless you can get some higher-up to go to bat for you, you're probably done for. No point in trying to get tough now. They've got your number. Better not try it or they'll take back their .25 percent. Might as well pay up. Or find another contractor.

Thanks for the tough love Vern. I think I shot my last salvo across the bow yesterday at trying to get them to settle for 12% profit on all new work. Again, this would be splitting the difference between my position of 10% and their's of 14%. We'll see. I am somewhat confident that I can get them to 13.5% but I'd be really surprised to see them come all the way down to 12%.

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Thanks for the tough love Vern. I think I shot my last salvo across the bow yesterday at trying to get them to settle for 12% profit on all new work. Again, this would be splitting the difference between my position of 10% and their's of 14%. We'll see. I am somewhat confident that I can get them to 13.5% but I'd be really surprised to see them come all the way down to 12%.

What are you negotiating? A firm-fixed-price?

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Yes. FFP

FFP. Okay. I don't know exactly what you're doing, but it sounds like you're trying to negotiate to agreement on profit rate. ("I think I shot my last salvo across the bow yesterday at trying to get them to settle for 12% profit on all new work.") What I'm going to say now probably won't be of much use in the current negotiation, but may be useful in the future.

When negotiating a firm-fixed price, it is a mistake to try to negotiate to agreement on the amount of profit or any element of cost. Talk about those things, certainly, but don't try to reach agreement on them. It isn't necessary. Seek agreement only on bottom line price. There may be any number of reasons why a contractor's representative does not want to be on record as agreeing to a lower rate of profit than the one in the proposal, but he or she may be willing to agree without explanation to a lower price than initially proposed. By seeking agreement on the rate of profit, or on some element of cost, you may greatly complicate your negotiation and needlessly create an issue that could lead to a stalemate or delay the contract award.

Another thing. It's generally a bad idea to discuss profit in terms of a percentage rate. To the extent that you do discuss profit, discuss it in terms of specific amounts of money. If you want, use your weighted guidelines analysis to explain why you think the proposed amount is too much, but don't bargain over profit percentage rates. Negotiating on the basis of a profit percentage rate may be seen by the other party as committing you to a generality that you might not want to be committed to as the negotiation proceeds or in future negotiations. It's another needless complication. See FAR 15.404-4(a)(3):

Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance.

The other side will, of course, compute a rate based on the dollar amount that you say is appropriate, and may try to draw you into a discussion of rates, but remain steadfast and refuse to commit to a rate. Say that you are negotiating a bottom line and that profit is just one part of a bigger picture. Say that you are leaving it to them to decide how to adjust their price and don't want to reach agreement on an element-by-element basis.

In a cost-based pricing environment, in which prices are established by estimating direct costs and then adding markups, what you are really bargaining about is rival perceptions of uncertainty and risk. In many cases, neither side knows what the work will really cost or how much profit the contractor will actually obtain (although in many cases the contractor will have a pretty good idea). What matters is the bottom line that you will have to pay and that the other party will receive. That's the only agreement that you must reach and the only commitment, formal or informal, that you should make. Talk about your rival estimates of cost and profit, point out what you consider to be flaws in the other party's estimate, but don't seek the other party's agreement on anything but the bottom line.

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Hope this isnt a duplicate. I pushed the wrong button earlier. I do understand the problem of setting precedents if one accepts what they feel is an unreasonable profit rate. However, it is not wise to try to establish a flat rate for every future negotiation. Often, a firm might try to divert the negotiator's attention away from inflated direct cost pricing with an obvious and visible proposed profit rate, then most of the negotiation centers upon the profit rate, ignoring the direct costs. Those take more time and knowledge to effectively analyze and negotiate and can easily exceed the high profit rate.

In this instance, it appears that you are talking about a new task order for manufacturing automobiles or OEM parts or something. I truly don't know what the customary and reasonable industry OEM profit rate is for parts or for new vehicles. I do know that parts are a profitable share of the business at vehicle and farm machinery dealerships. My dad was parts foremen at an IH dealership and parts made up a big share of the profit there.

My friend's family has one of the original Ford Dealerships in Montana. Once a year, they can purchase one vehicle from Ford at a really great price. My friend bought a new 1997 or 1998 Ford F150 with extended cab, fully loaded with leather seats, etc. for about $12,900. The list price through a dealer was about $24,000 at that time. Now, was Ford making money , breaking even or offering it at a loss for good will and long term relationship? I have no idea but always suspected that it was probably about what it cost to build it...

If this isn't for manufacturing but simply for buying parts for a vehicle, I'd try going somewhere else to keep them honest, if at all possible. You also didn't ever explain why this was a separate task order. I'm now guessing that it is a new buy, not a change to another task order.

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Hope this isnt a duplicate. I pushed the wrong button earlier. I do understand the problem of setting precedents if one accepts what they feel is an unreasonable profit rate. However, it is not wise to try to establish a flat rate for every future negotiation. Often, a firm might try to divert the negotiator's attention away from inflated direct cost pricing with an obvious and visible proposed profit rate, then most of the negotiation centers upon the profit rate, ignoring the direct costs. Those take more time and knowledge to effectively analyze and negotiate and can easily exceed the high profit rate.

In this instance, it appears that you are talking about a new task order for manufacturing automobiles or OEM parts or something. I truly don't know what the customary and reasonable industry OEM profit rate is for parts or for new vehicles. I do know that parts are a profitable share of the business at vehicle and farm machinery dealerships. My dad was parts foremen at an IH dealership and parts made up a big share of the profit there.

My friend's family has one of the original Ford Dealerships in Montana. Once a year, they can purchase one vehicle from Ford at a really great price. My friend bought a new 1997 or 1998 Ford F150 with extended cab, fully loaded with leather seats, etc. for about $12,900. The list price through a dealer was about $24,000 at that time. Now, was Ford making money , breaking even or offering it at a loss for good will and long term relationship? I have no idea but always suspected that it was probably about what it cost to build it...

If this isn't for manufacturing but simply for buying parts for a vehicle, I'd try going somewhere else to keep them honest, if at all possible. You also didn't ever explain why this was a separate task order. I'm now guessing that it is a new buy, not a change to another task order.

The task orders issued off this IDIQ contract are basically change orders for the overall project of building a new and improved replacement vehicle (many times over) for the Military. Good point about the diversion from the main cost points by bidding a higher profit. I use this tactic myself in snowball fights...lob the one snowball high and pelt them directly in the face when they are looking up.

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FFP. Okay. I don't know exactly what you're doing, but it sounds like you're trying to negotiate to agreement on profit rate. ("I think I shot my last salvo across the bow yesterday at trying to get them to settle for 12% profit on all new work.") What I'm going to say now probably won't be of much use in the current negotiation, but may be useful in the future.

When negotiating a firm-fixed price, it is a mistake to try to negotiate to agreement on the amount of profit or any element of cost. Talk about those things, certainly, but don't try to reach agreement on them. It isn't necessary. Seek agreement only on bottom line price. There may be any number of reasons why a contractor's representative does not want to be on record as agreeing to a lower rate of profit than the one in the proposal, but he or she may be willing to agree without explanation to a lower price than initially proposed. By seeking agreement on the rate of profit, or on some element of cost, you may greatly complicate your negotiation and needlessly create an issue that could lead to a stalemate or delay the contract award.

Another thing. It's generally a bad idea to discuss profit in terms of a percentage rate. To the extent that you do discuss profit, discuss it in terms of specific amounts of money. If you want, use your weighted guidelines analysis to explain why you think the proposed amount is too much, but don't bargain over profit percentage rates. Negotiating on the basis of a profit percentage rate may be seen by the other party as committing you to a generality that you might not want to be committed to as the negotiation proceeds or in future negotiations. It's another needless complication. See FAR 15.404-4(a)(3):

The other side will, of course, compute a rate based on the dollar amount that you say is appropriate, and may try to draw you into a discussion of rates, but remain steadfast and refuse to commit to a rate. Say that you are negotiating a bottom line and that profit is just one part of a bigger picture. Say that you are leaving it to them to decide how to adjust their price and don't want to reach agreement on an element-by-element basis.

In a cost-based pricing environment, in which prices are established by estimating direct costs and then adding markups, what you are really bargaining about is rival perceptions of uncertainty and risk. In many cases, neither side knows what the work will really cost or how much profit the contractor will actually obtain (although in many cases the contractor will have a pretty good idea). What matters is the bottom line that you will have to pay and that the other party will receive. That's the only agreement that you must reach and the only commitment, formal or informal, that you should make. Talk about your rival estimates of cost and profit, point out what you consider to be flaws in the other party's estimate, but don't seek the other party's agreement on anything but the bottom line.

Vern, excellent quality advice!!!! Please know that you made a big difference today!

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