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Fee/Profit – Key Determinative Factors – FAR 15.404-4

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You never know if/when you may have to defend your Fee/Profit Objective. I recommend utilizing the information below to develop your documented policy. Utilize those excerpts below that apply to your company as a whole but more importantly on each specific contract. This is because contract type determines fee/profit limits and factors that may apply. I have highlighted in various colors/bold/underline those items that are of particular importance. The following is what the government is instructed to follow so why not incorporate the applicable elements into your companies’ process and supporting data.

FAR 15.404-4 Profit

(a) General. This subsection prescribes policies for establishing the profit or fee portion of the Government prenegotiation objective in price negotiations based on cost analysis.

(1) Profit or fee prenegotiation objectives do not necessarily represent net income to contractors. Rather, they represent that element of the potential total remuneration that contractors may receive for contract performance over and above allowable costs. This potential remuneration element and the Government’s estimate of allowable costs to be incurred in contract performance together equal the Government’s total prenegotiation objective. Just as actual costs may vary from estimated costs, the contractor’s actual realized profit or fee may vary from negotiated profit or fee, because of such factors as efficiency of performance, incurrence of costs the Government does not recognize as allowable, and the contract type.

(2) It is in the Government’s interest to offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities of qualified large and small business concerns to Government contracts, and maintain a viable industrial base.

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