GovCon Resource: The Ins [Pros] and Outs [Cons] of Firm Fixed Price (FFP) Contracts

GovCon Resource: The Ins [Pros] and Outs [Cons] of Firm Fixed Price (FFP) Contracts

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​Preparing an estimate at completion is a way to project and see whether your company is on target, performing below expectations, or exceeding them financially. For those who are new to government contracts or are not involved on the financial side, generally more profit is calculated into the price when bidding on FFP contracts because there is more risk. More risk can lead to greater reward - but with careful planning and management of your finances, under-performing can become over-performing!

​Conversely, if an FFP contract is not managed well, it can lead to a bigger loss. EACs should be completed either semi-annually or quarterly depending on the size of the contract. The more that is at stake, the more frequently an EAC should be performed. Below are some suggestions to consider when bidding, reviewing, and executing an FFP contract.

Understanding Man-Hours

For full-time employees, be aware of how many man-hours are proposed versus possible man hours that can be worked. Sometimes the government stipulates how many man-hours should be calculated into the proposal; and at other times man-hours are reduced to be price competitive.

​If fewer man-hours are proposal, have a plan for the extra time. ​​

• ​​Can employees help on proposals or other projects?
• ​Can you delegate certain administrative activities?

It may also be possible to have an employees take/coordinate paid time off (PTO) with contract and internal activities in mind. Undoubtedly this will require better and more consistent planning and even company guidelines so it's fair to all. Further, find out  as early as possible if/when employees are going to take vacation. If employees are going to be required to use their vacation during a certain time period, check with the HR department or an HR consultant to ensure this does not violate any labor laws and is in compliance with the company handbook and policies.

Wage Increases

When bidding, take into account when employees will be receiving performance reviews, especially if it is done on the employee's anniversary date and not at one time for the entire company.
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A "bigger picture" question for the company is whether salary increases depend on the financial performance of the contract or solely on one's individual performance. We have experienced companies basing increases both ways. We are not an advocate for a specific method; however, it must be consistent throughout the company.

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New Hires

Have there been any new hires? Depending on whether an employee with the necessary skill-set is relatively easy or difficult to find, this could affect the profit positively or negatively. 

• Does the company have to pay for the new employee to attend training?
  • If so, is this on the company's dime?​
• Does there need to be overlap with the former employee and the new employee? 

​This would be an additional cost that most likely could not be foreseen, but the impact should be measured.

Additional Costs (not included in bid)

​​Are there any costs that the company did not account for in the proposal and that are not covered by a separate Other Direct Cost (ODC) line item?

Examples Include:

• ​For example, did the company need to buy additional software specific to the project and not billable?

Indirect Rates

How do the provisional indirect rates compare to the actual indirect rates? If the actual indirect rates are lower, of course this increases profit. Conversely, if the actual indirect rates are higher, this lowers profit. After the EAC is complete, this is an opportune time for the company to review indirect rates, and make cuts if necessary. Reviewing suppliers and vendors on a regular basis is a best practice.

Partway through an FFP Service Contract, check and see whether the 10% profit that was bid is still projected to be 10% or will more likely be closer to 6% or 14% profit. The company may be pleasantly surprised. If not, possibly adjustments can be made. At the very least, the company cannot say it did not have advance warning and can plan accordingly.

Focus on the five areas listed above and your company will maximize its profit on FFP service contracts.