Minimum Profit/Fee on Competitive Contracts

[phabell]

Here is a scenario. A contracting activity releases a competitive solicitation for a requirements / firm-fixed price, materials reimbursement type contract. The solicitation also includes a performance incentive in which the winning contractor has the ability to receive a quarterly fixed amount if the contractor meets specific performance goals in that quarter. The contractors proceed to bid on the effort with either no or negative profit/fee. This is based on the intent that they will pass the performance goals and receive the performance incentive. In the follow-on competitive solicitation, the contracting activity decides to remove the performance incentive. Is there a process in place, either policy or regulation, or some instance in which a minimum profit/fee was included in the solicitation to prevent a contractor from bidding either no or negative profit/fee? Is it possible to establish a minimum or is it the contractor's business decision to bid that particular way?

[Guest Vern Edwards]

I assume that the "follow-on" contract will be firm-fixed-price.

I know of no policy or regulation providing for a contractually guaranteed minimum profit under a firm-fixed-price contract, and I know of no instance in which the government has awarded a firm-fixed-price contract with a contractually guaranteed minimum profit.

[phabell]

Yes. The next contract will be FFP as well.

[phabell]

To slightly rephrase the question, is there any instance in which the Government has required in a solicitation for a contractor to bid at least a minimum profit/fee in their proposal?

[Guest Vern Edwards]

I'm not aware of any such instance.

[here_2_help]

(a) Buying-in may decrease competition or result in poor contract performance. The contracting officer must take appropriate action to ensure buying-in losses are not recovered by the contractor through the pricing of

(1) Change orders or

(2) Follow-on contracts subject to cost analysis.

(B ) The Government should minimize the opportunity for buying-in by seeking a price commitment covering as much of the entire program concerned as is practical by using --

(1) Multiyear contracting, with a requirement in the solicitation that a price be submitted only for the total multiyear quantity; or

(2) Priced options for additional quantities that, together with the firm contract quantity, equal the program requirements (see Subpart 17.2).

(c ) Other safeguards are available to the contracting officer to preclude recovery of buying-in losses (e.g., amortization of nonrecurring costs (see 15.408, Table 15-2, paragraph A., column (2) under “Formats for Submission of Line Item Summaries”) and treatment of unreasonable price quotations (see 15.405).

[Guest Vern Edwards]

I'm not sure how you'd guarantee a profit under a firm-fixed-price contract without guaranteeing to cover all of the contractor's costs and to pay some amount in excess of those costs.