Negotiating Profit & Fee

2. Negotiating Profit & Fee Breakout Session #304 Fred Schlich Date July 19, 2010 Time 4:00pm - 5:15pm 1

3. Negotiating Profit & Fee Session Objective Broad Discussion About of Concepts Analytical Examination of a Number of Considerations for Negotiating Profit & Fee Recognition of the Abstract Nature of Profit - No Formula that Guarantees Success Session Outcome Negotiators Enthusiastic About Tackling Profit and Fee

4. Negotiating Profit & FeeWorking Definitions Negotiation - Where There is Some Discussion of the Cost Elements Competitive negotiations Sole source Contract changes Profit - Part of the Price Fee - In addition to Actual Costs

5. Profit & FeeDifferent Viewpoints Economists - profit is the cost of utilizing industry investment and is necessary to attract industry into the transaction Financial Analysts - seek a return on investment favorably compared to other potential investments Accounting/Bookkeeping - revenue less cost equals the bottom line FAR - potential enumeration over and above allowable costs Motivate efficient and effective performance Attract the best capabilities of qualified businesses

6. ProfitPricing Viewpoint Direct Costs Labor Material Other Indirect Costs Overhead G&A Profit

7. Negotiating Profit & Fee“The Dilemma” Negotiators are “uncomfortable” or “uncertain” with Profit Buyers compelled to minimize expense, profit takes the hit Statutory Limits exert downward pressure Sellers often are at a loss to fully explain proposed profit levels Guidance is Vague, General, and Limited or Overly Restrictive (Weighted Guidelines, etc.) Industry is Reluctant to Disclose Actual Profit Information Market Research is Speculative in Many Cases Profit Reasonableness is Virtually Un-Auditable Auditors can’t contribute much help Profit is Almost Always Expressed as a Rate Rates are less tangible than actual amounts Negotiation of Profit and Fee is Done Last Necessity to close the deal rushes meaningful discussion

8. Negotiating Profit & Fee“The Solution” As With Cost Analysis, Break Profit Into Elements for Analysis The FAR Describes a Structured Approach Utilize the Market to Set Profit Historical Data can be of Great Value Think of Profit in Terms of the Total Amount “How Much Will it Take to Attract and Motivate Industry into the Transaction” Negotiate Profit or Fee First Validate the assumptions that formed the basis for the profit agreement during cost analysis Verify the profit agreement at the conclusion of negotiations against constraints or external limits Profit is Always Negotiable Don’t automatically default to a precedent

9. Far 15.404-4 Describes a Structured Approach to Profit Analysis

10. Profit Analysis - Common Factors Contractor Effort Material Acquisition - effort necessary to obtain parts, material, subcontracted items; consider the complexity of the items, number of purchase orders required, and complexity of subcontracts Conversion of Direct Labor - direct contribution of labor to convert material, data, and subcontractor effort into contract requirements; consider diversity of the labor skills and supervision/coordination needed Conversion of Related Indirect Costs - contribution of indirect effort; consider the extent and complexity of this contribution General Management - contribution of Other Direct Costs and G&A expense; consider the extent and complexity of this contribution

11. Profit Analysis - Common Factors Contract Cost Risk - No Direct Correlation Between Contract Type and Appropriate Profit FFP doesn’t equate to higher profit - cost risk is not always present CPFF may deserve more profit due to the nature of the effort

12. Profit Analysis - Common Factors Federal Socio-Economic Programs Greater profit opportunity should be provided contractors that have displayed unusual initiative in these programs Capital Investments This factor takes into account the contribution of contractor investments to efficient and economical contract Cost-control and Other Past Accomplishments Additional profit opportunities if a contractor has previously performed similar tasks effectively and economically. In addition, consideration should be given to productivity improvements, and other cost-reduction accomplishments that will benefit the Government in follow-on contracts Independent Development - relevant to contract end item

13. Profit Analysis- Weighted Guidelines Application DoD Developed Weapons System Perspective Analysis Performance risk Technical Management Contract type risk Facilities capital employed Cost efficiency 

14. Negotiating Award Fee Pool Award Fee - Should Not Be Subject to Ordinary Profit Analysis Ultimately the result of subjectively evaluated performance Size of pool not influenced by anticipated contractor effort, contract cost risk, etc. Pool is Based on What Potential Fee Will Motivate Exceptional Performance Base verses Award Portion of Pool Consistency and predictability effect how much influence will award fee will provide Award Fee Should be Used in Highly Specialized Situations

15. Negotiating ProfitTime and Material or Labor Hours Each Unit or Hour Contains All Cost Elements Labor Indirect Costs Profit Material – Treatment Varies ODCs and Travel – Treatment Vaires T&M Profit Varies Directly with Cost Conceptually very close to Cost Plus Percentage of Cost Profit Negotiation By Task, Project, or Effort By Labor Category Variable Profit? Negotiation Could Include Concepts Considered in Any Profit Discussion

16. Negotiating Profit & Fee Breakout Session #304 Fred Schlich Date July 19, 2010 Time 4:00pm - 5:15pm 15