DCAA Compliance Blog

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DoD War on Profits?

Posted by Mike Anderson on Fri, Apr 19, 2013 @ 04:28 AM

As the Federal Government's budget crisis continues to unfold, many people are starting to believe that there will be a "war on profits".  The government has always wanted a good deal from government contractors and that includes defining a certain limit on the amount of "fee" or profit that they are willing to pay.  This is especially true on cost reimbursable type contracts.  Of course, many government contractors are looking for excuses on why they are loosing some business from their biggest customer.  While the government is trying to reduce waste and trim budgets, they claim that they are not trying to force contractors to take unreasonably low profits or no profits.  The Pentagon has assured contractors that they are not trying to eliminate profits or restrict them.  They are trying to eliminate cases where any contractor may be taking advantage of the government.  This becomes a delicate line to walk.  Many times in the past the lower than normal profits on government contracts could be rationalized as a cost of doing business in exchange for a large customer that always paid their bills and always paid on time (as long as you followed the procedure).  You didn't have to worry about a "bad debt expense" with this customer. But there were a small percentage of firms that took advantage of the government.  This abuse caused headaches for all government contractors as more rules and regulations are constantly added to help prevent the abuse of "the system".  

One of the key issues being discussed is the difference between a "free enterprise" system and a system where government tells the contractor how much money it can make.  When the government buys on a fixed price contract and there is competition in bidding, a free enterprise system is in play.  The contractor should only make a fair profit based on market conditions since they are competing with other contractors for the business.  As long as a contractor doesn't "underbid" and sell at a loss to try and secure business, the government should get market price and the contractor should get a "fair" profit.  A cost reimbursable type contract is a little different situation.  In this type of arrangement, the government is agreeing to pay for some of the contractor's overhead expenses.  So limiting profit seems reasonable on these types of contracts since in a free enterprise system customers usually don't care what your costs are, just your price.   Now, having said that, to reduce profits below the normal levels of 5-9% on a cost type contract would be squeezing the contractor more than they have been in the past.  At some point, the contractor will decide that even thought a portion of their overhead is being covered, that they still want to make a profit.  What level of profit depends on the contractor but my guess is that as profit goes down, the contractor will look for more lucrative private markets for their goods and services.  Hopefully the Department of Defense is not having a "war on profit" and driving it down.   That would only serve to limit their available pool of suppliers and thus the quality of what they buy. 

Topics: DoD, Department of Defense, Profits