15.404-4
Profit
FAR 15.404-4 requires agencies to use structured, factor-based approaches to set profit objectives in cost-based negotiations, ensuring statutory limits are observed and profit serves as a motivator for efficient contract performance.
Overview
FAR 15.404-4 establishes the policies and procedures for determining the profit or fee portion of the Government's prenegotiation objective in price negotiations that require cost analysis. It clarifies that profit is not simply net income but a motivational tool to encourage efficient contract performance and maintain a healthy industrial base. The regulation mandates the use of structured approaches for profit analysis in certain large, noncompetitive contracts and outlines the factors that must be considered when setting profit objectives.
Key Rules
- Profit as Motivation
- Profit objectives should incentivize efficient performance and attract qualified contractors, not just minimize costs.
- Structured Approaches
- Agencies must use structured approaches for noncompetitive contract awards over $100,000 totaling $50 million or more per year, unless exempted.
- Statutory Fee Limitations
- Specific statutory caps apply: 15% for R&D cost-plus-fixed-fee contracts, 6% for architect-engineer services, and 10% for other cost-plus-fixed-fee contracts.
- Profit Analysis Factors
- Contracting officers must consider factors such as contractor effort, contract cost risk, support for socioeconomic programs, capital investments, cost control, and independent development.
- Exclusions from Profit Calculation
- Certain costs, like contractor-acquired equipment and facilities capital cost of money, must be excluded from the profit base.
Responsibilities
- Contracting Officers: Must use structured approaches when required, ensure statutory fee limits are not exceeded, document profit analysis, and consider all required factors.
- Contractors: Should understand how profit is determined and may voluntarily submit supporting rationale for profit objectives.
- Agencies: Must establish and enforce structured approaches and may adopt those from other agencies.
Practical Implications
- Ensures profit is used as a tool for motivation and efficiency, not just a negotiable number.
- Requires careful documentation and adherence to statutory limits.
- Common pitfalls include failing to exclude certain costs from the profit base or not considering all required factors in the analysis.