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Frequently I am asked how a Government contractor
makes money on the various types of contracts. Keep the formula
[Profit = Revenue - Costs] in mind as you take a look at the table
below.
| Changes in Revenue Relative to Changes in
Costs |
| Contract
Type |
Number
of Hours / Units |
Direct
Wage Rates |
Indirect
Rates |
| Cost Plus
Fixed Fee |
Proportional |
Proportional |
Proportional |
| Time &
Materials |
Proportional |
No Effect |
No Effect |
| Fixed Price |
No Effect |
No Effect |
No Effect |
The important thing to keep apparent is that if
your costs of providing a product or service to the Government
decreases, the effect on revenue varies with the contract type.
Cost Plus Fixed Fee (CPFF) contracts:
-
Revenue decreases with decreases in any costs
incurred.
-
Fee percentage is fixed for the life of the
contract.
-
Once the contract is in place, the only way to
increase profit is to increase the contract value and costs
incurred. Five percent of a
million dollars is more than five percent of a thousand.
Time and Material (T&M) contracts:
-
Revenue decreases with decreases in the number of hours
delivered.
-
Reductions in the direct labor wage rates after
contract signing, have no affect on level of revenue.
-
Reductions in the indirect rates after contract
signing, have no affect on level of revenue.
-
Profit is maximized by negotiating a lower wage
rate, minimizing indirect rates, and/or increasing the number of
hours delivered.
Fixed Priced Contracts
-
Revenue remains constant in spite of decreases
in hours incurred, wage rates, and/or indirect rates.
-
Profits are maximized by delivering the required
product or service while minimizing the hours incurred, wage rates,
and indirect rates.
If you have plenty of experience delivering your
product or service and have good project management tools, fixed priced
contracts are the way to go. They provide the most mechanisms and
opportunity for maximizing profits on Government contracts.
However, they also provide the most opportunity for loss.
For more information on maximizing profits on
Government contracts, contact:
Kevin Duncan, CPA, MBA
K Duncan & Company
cpa@kduncan.com
301-608-3200 ext.201
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