How to Maximize Profit on Firm Fixed Price (FFP) Service Contracts

Recently, we prepared an Estimate at Completion (EAC) for one of Streamline’s clients for a Firm Fixed Price (FFP) contract. This is a service we recommend and provide to companies to project and see whether they are performing on-target, under-performing, or over-performing financially. For those who are new to Government Contracts or are not involved on the financial side, generally more profit is calculated into the price when bidding on an FFP contract because there is more risk. More risk can lead to greater reward if it is managed well. Conversely, a FFP contract that is not managed well can lead to a bigger loss. EACs should be completed either semi-annually or quarterly depending on the size of the contract. The more that is at stake, the more frequently an EAC should be performed. Below are some suggestions to consider when bidding, reviewing, and executing a FFP contract.

Number of Man-Hours Bid
Be aware of how many man-hours are proposed versus possible man hours that can be worked. Sometimes the Government stipulates how many man-hours should be calculated into the proposal; and at other times man-hours are reduced by the Government Contractor to be competitive. If fewer man-hours are proposed, have a plan for the extra time. Can employees help on proposals or other projects? Perhaps, it is not possible to have employees take extended leave from the contract; however, it may be feasible to have an employee take one day “off” once every two weeks to work on other assignments. Find out if/when employees are going to take vacation. If employees are going to be required to use their vacation during a certain time period, check with the HR Department or a HR Consultant to ensure this does not violate any labor laws and is in compliance with the company handbook and policies.

Employee Increases
When bidding, take into account when employees will be receiving performance reviews, especially if it is done on the employee’s anniversary date and not at one time for the entire company. A “bigger picture” question for the company is whether salary increases depend on the financial performance of the contract or solely on one’s individual performance. I have experienced companies basing increases both ways. I am not an advocate for a specific method, however, it should be consistent throughout the company.

New Hires
Have there been any new hires? Depending on whether an employee with the required skill-set and/or certifications is relatively easy or difficult to find, this could affect the profit positively or negatively. Does the company have to pay for the new employee to attend training for the contract? If so, is this on the company’s dime or is this an Other Direct Cost (ODC) expense charged to the Government? If an employee resigns and there is a transition, does there need to be overlap with the former employee and the new employee? This would be an additional cost that most likely could not be foreseen, but the impact should be measured.

Additional Costs (not included in bid)
Are there any costs that the company did not account for in the proposal and that are not covered by a separate Other Direct Cost (ODC) Line Item? For example, did the company need to buy additional software specific to the project and not billable?

Indirect Rates
How do the provisional indirect rates compare to the actual indirect rates? If the actual indirect rates are lower, of course this increases profit. Conversely, if the actual indirect rates are higher, this lowers profit. After the EAC is complete, this is an opportune time for the company to review indirect rates and make cuts if necessary. Reviewing suppliers and vendors on an annual basis or as their agreements renew is a best practice.

Partway through a FFP Service Contract, check and see whether the 10% profit that was bid is still projected to be 10% or will more likely be closer to 6% or 14% profit. The company may be pleasantly surprised. If not, what adjustments can be made? At the very least, the company has advance warning and can plan accordingly.

Contact Streamline if you have feedback, questions, or another topic of interest.

This blog is for informational purposes only. None of the content is, or will be deemed to constitute legal opinions or legal advice.

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