In the world of federal government contracting, there are several main types of contracting vehicles used. As a result, there are several different ways for the private business to make money contracting with the government. Conversely, there are many ways in which the contractor must be aware of issues that might cause the contractor to lose money. While it is not the government's intent that the contractor lose money, it behooves the contractor to be aware of certain risks before hand in order to control their destiny. Now I don't mean that the contractor should take advantage of the government, that is not ethical or proper and not my point here. I'm merely suggesting that if the contractor is not diligent and aware of the environment they are in and how it differs from the commercial world, they could suffer a loss very easily on a government contract.
The most obvious type of contract (and sometimes the most obvious point of failure) is the Firm Fixed Price Contract. This type of contracting vehicle represents the least risk to the government and the most risk to a contractor to control costs in order to make a profit. If it takes the contractor more work (time and/or material) to complete the description of deliverable on the contract then the contractor eats into the profit and can even over-run the budget and lose money on the contract. Sometimes the reasons are not so obvious. Many times the contractor does not employ a good job cost accounting system and merely doesn't recognize the amount of resources being used to satisfy a contract. This is easily solved by employing a job cost system designed to keep track of the costs on a per project basis and monitor performance though the life of the contract. The other problem with a fixed price type of contract is what is commonly referred to as "scope creep". This is where the government (usually with a fairly innocent seeming conversation) asks for something and the contractor feels it would be easy to supply. Because the contractor recognizes this as something easily supplied, they do not check to see if it is contained in the original scope of work, and even worse, does not request that the contract be modified to add this "verbal" request to the scope of work. Of course, and addition to the scope of work should be followed by a change in the compensation from the receiving party (in this case the federal government). As a result, costs go up but the revenue potential does not change. This can be a dangerous path and I have seen these incidents cause multi-millions of dollars in losses to the federal government contractor.
On a cost type contract, a federal government contractor can get in trouble by not doing a good job of job cost accounting as well. The ramifications are more obvious on this type of an award. The contractor may not be able to bill properly, resulting in either delays in payment or sometimes even rejection of payment from the government. It also could result in an improper calculation of indirect billing rates, an incorrect Indirect Cost Proposal submission or a failure to support a billing rate in an audit. It could also result in a failed government audit that could jeopardize the current contract as well as future contracts.
Since a cost reimbursable type contract represents more risk to the government, audits are usually involved to verify that the contractor maintains a job cost accounting system in accordance with GAAP, FAR and DCAA requirements. This represents a certain amount of cost, first to set up and maintain such a system and then to pay for time should an audit occur. If the audit has findings, much more effort and cost is associated with the efforts. Since the accounting costs (including audit support) go into the administration part of the company accounting, it tends to raise indirect costs. The remedy in this area is to employ someone (or some company on an outsourced basis) that knows this type of system and how to operate it.