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Weighted Guidelines Method and Properly Allocating Risk for a FFP Contract


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@Atlas STS is a very small business that is in negotiations with the government to produce a product.  The contract is FFP over $10M and subject to TINA and Certified Cost and Pricing Data.  We were the only bidder and only source of supply for this product and it is not COTS.  We have supplied this data to the best of our ability, but are receiving pushback on our requested profit rate as being too high.

Our buyer has said that anything near 20% is unprecedented and likely a non-starter.  They proposed a 9% rate.  This seems very low to me for a FFP contract.  However, when I attempted to fill out the DAU Weighted Guidelines spreadsheet, I see that it is nearly impossible to get to 15% profit without exceeding "allowed" ranges in the spreadsheet.

I mentioned that we are very confident in our price, but we are unfamiliar with providing cost data in this manner and may have put some of our risk mitigation costs into profit that should be allocated elsewhere.  They seemed receptive to having us move costs from profit into overhead or G&A pools.

All that being said, I have a few questions:

1) Am I being unrealistic to expect over 10-15% profit on a FFP contract?  This seems very low to me.  Is the Weighted Guidelines Method required for contracts with Certified Cost and Pricing Data?  Are their any alternatives to this method?  The contracting officer said they have to take our contract before a board and they will not approve anything near our profit request.

2) Is it typical to put technical/schedule/execution risk contingencies or mitigations elsewhere in the proposal?  What are those costs called?  What pool do they fall in (overhead or G&A)?  I bid a reasonable "best case" proposal, but I know that issues will spring up based on the nature of our product and past performance.  How do I correctly capture those risks in my proposal if not in the profit?

Any insight or guidance would be greatly appreciated.

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12 hours ago, Atlas STS said:

@Atlas STS 

1) Am I being unrealistic to expect over 10-15% profit on a FFP contract?  This seems very low to me.  Is the Weighted Guidelines Method required for contracts with Certified Cost and Pricing Data?  Are their any alternatives to this method?  The contracting officer said they have to take our contract before a board and they will not approve anything near our profit request.

2) Is it typical to put technical/schedule/execution risk contingencies or mitigations elsewhere in the proposal?  What are those costs called?  What pool do they fall in (overhead or G&A)?  I bid a reasonable "best case" proposal, but I know that issues will spring up based on the nature of our product and past performance.  How do I correctly capture those risks in my proposal if not in the profit?

Any insight or guidance would be greatly appreciated.

1. A profit exceeding 10-15% is not necessarily unreasonable. The Weighted Guidelines method is required in some instances for the Government to arrive at a prenegotiation objective, but it does not limit what a prospective contractor can propose. It has as much relevance to the negotiation as the method the prospective contractor used to develop their prenegotiation profit objective. As far as what the contracting officer said about the board, that may be true. But that doesn't mean you have to lower your profit. The Government will need to decide if what they need is worth agreeing to what they consider an unreasonable profit. Is the Government ok with your bottom line price?

2. See FAR 31.205-7 regarding the inclusion of contingencies in cost estimates.

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28 minutes ago, Don Mansfield said:

The Weighted Guidelines method is required in some instances for the Government to arrive at a prenegotiation objective, but it does not limit what a prospective contractor can propose.

Nor does it limit the government in what it can agree to.  As Don pointed out, the weighted guidelines are supposed to be used to establish a negotiation position, not a limit on profit.

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Agree with the above posts.  If I were you I would not try to build a case for higher profit using weighted guidelines or restructuring assumptions.   It would be different to get much over 15-18%.  What I would do is start negotiations emphasizing risks your company is assuming in the fixed price arrangement.  Be prepared to explain in layman’s terms the complexity and potential complications in performance.

I recently saw data showing 25-30% profit is fairly common in the commercial sector within the technology sectors.  If the government wants to attract the best in the marketplace, it needs to better understand what’s happening from the business perspective especially with the latest technology.

You just need to decide on the minimum profit level you can get by with and the government needs to decide how important you and your contract performance is to them.  Maybe you both decide agreement can’t be reached and it’s not worth it.

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16 hours ago, Atlas STS said:

I mentioned that we are very confident in our price, but we are unfamiliar with providing cost data in this manner and may have put some of our risk mitigation costs into profit that should be allocated elsewhere.  They seemed receptive to having us move costs from profit into overhead or G&A pools.

2) Is it typical to put technical/schedule/execution risk contingencies or mitigations elsewhere in the proposal?  What are those costs called?  What pool do they fall in (overhead or G&A)?  I bid a reasonable "best case" proposal, but I know that issues will spring up based on the nature of our product and past performance.  How do I correctly capture those risks in my proposal if not in the profit?

Any insight or guidance would be greatly appreciated.

Profit is not cost. Your cost estimate, whether for direct or indirect costs, should include your best guess as to the costs you will incur during contract performance. Nothing more; nothing less. Why did you bid a "best case" proposal instead of a "most probable case" proposal?

Go back and review your estimated costs, both direct and indirect. Use a "best case" and a "worst case" scenario to develop a "most probable case" estimate. Be prepared to explain to the contracting officer how you arrived at your cost estimate.

Once you have a solid cost estimate, add to it the profit you believe is reasonable. As others have noted, it is difficult to get a profit percentage greater than 15% of estimated costs, but it can be done with the right arguments.

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On 4/23/2024 at 4:08 PM, here_2_help said:

Profit is not cost.

Assume an FFP contract, over the CCOPD threshold.

  • What if, via revised proposal, the bidder adds an indirect cost for insurance, allowable per FAR 31.205-19, and then decides post award it will forego that cost and take on the risk?
  • Or, say it adds a direct cost of a precaution to avoid a contingency, allowable per FAR 31.205-7(c)(1), and then similarly foregoes it post-award?

This exercise on contingencies that @Don Mansfield did a few years ago is pretty nifty, btw:

 

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Thank you all.  I think I'm tracking your recommendations.  My main confusion was where to put the contingency.  I think I have come up with a plan that should work, assuming it's approved.

On a side note, I was told in a previous forum topic that it wasn't that big a deal to submit Certified Cost and Pricing Data if you're complete and honest.  With some help from a spreadsheet Raytheon provided online for subcontractors and learning the concept of judgmental data from you smart folks, I think I did an ok job at capturing our expected costs in the format required.  However, learning that TINA also mandates the weighted guidelines method and limits profit to 10-15% at the end of this process was not a fun surprise!

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43 minutes ago, Atlas STS said:

However, learning that TINA also mandates the weighted guidelines method and limits profit to 10-15% at the end of this process was not a fun surprise!

That is not a true statement.  The Truthful Cost or Pricing Data statute (10 U.S.C. 3701 et seq. for DoD) only requires contracting officers to obtain current, complete and accurate cost or pricing data from contractors.  It says nothing of weighted guidelines or limits on profit. 

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2 hours ago, Voyager said:

I'm not arguing - I'm inquiring.  I'd like to know your answers to my questions.

Your "questions" were directed toward H2H.  Maybe he knows what you are asking, but I don't, because I don't see a question.  You wrote "what if" and "or say" then set out facts, but don't say what the question is.  Can you rephrase your questions?

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Okay, you're right.  Questions: Are these some accepted and common ways that a savvy contractor could increase profit while at the same time satisfying the customer's WGL requirements?  Must a contractor attempting these ways beware of any pitfalls in the Truthful Cost or Pricing Data statute or in FAR 31.201-2 "Determining allowability"?

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I wouldn't recommend pricing a proposal which includes costs you don't knowingly expect to incur. I would imagine this could be considered defective cost and pricing data.

However, I would recommend, due to the limitations of WGL, attempting to include in your proposal the costs associated with known risks instead of using a larger profit percentage to cover those risks. This could come in the form of additional labor hours to complete a task that is identified as a risk of occurring. In my experience, one thing to consider in this approach, is risks are needed to justify the profit percentage derived from the WGL form, so if you include costs in your proposal for all risks you may have a harder time supporting your proposed profit. It ends up being a balance between including and not including costs to cover risks.

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I believe that there is a difference between adding 100% costs as direct costs or as additional “profit” for one or more possible contingencies that may or may not occur versus identifying possible risks and then considering the probability of individual or multiple risk occurrences in the direct cost portion of the proposal.

Our Chemical Weapons Demilitarization, Systems contractor identified various risks and ran Monte Carlo probability simulations for the risk analysis in developing its CPAF direct cost estimate proposal for a task order for the design, construction and systemization of a plant to safely disassemble various types of chemical weapons munitions, drain and collect the agents, neutralize the agents, clean all the parts of the munitions and dunnage and dispose of the waste byproducts and metal components.

 

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3 hours ago, Voyager said:

Okay, you're right.  Questions: Are these some accepted and common ways that a savvy contractor could increase profit while at the same time satisfying the customer's WGL requirements?  Must a contractor attempting these ways beware of any pitfalls in the Truthful Cost or Pricing Data statute or in FAR 31.201-2 "Determining allowability"?

1. TINA is a disclosure requirement, not a use requirement.

2. When a proposal will be subject to cost analysis, then the contractor should expect the government negotiators to challenge any costs deemed to be unallowable.

In my experience, when a contractor has developed proprietary technology at its own expense, it is often in a strong bargaining position vis-a-vis the Government with respect to profit/fee negotiations. As has been noted, the WGL is used to develop pre-negotiation profit objectives, which may or may not be realized at the negotiating table.

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On 4/25/2024 at 5:04 PM, Retreadfed said:

That is not a true statement.  The Truthful Cost or Pricing Data statute (10 U.S.C. 3701 et seq. for DoD) only requires contracting officers to obtain current, complete and accurate cost or pricing data from contractors.  It says nothing of weighted guidelines or limits on profit. 

@Retreadfed I just realized that 215.404-3 states that "Contracting officers shall use a structured approach for developing a prenegotiation profit or fee objective on any negotiated contract action when cost or pricing data is obtained" (and later specifying the Weighted Guidelines Method is required) doesn't specify only when Certified Cost and Pricing Data is obtained.  So weighted guidelines method is a requirement of negotiated contracts and not a TINA requirement.  Thank you for the correction!

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