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Profit & Fee Are Good Things, But They’re Not the Only Things

The goal of every business is to remain in business.

In order to do that, the business has to make a profit. True, that may be a long term goal. It’s entirely possible that a business may make money one year and lose money the next — but at the end of the day, profit is a goal and an expectation. 

If you look in any business school textbook, you’ll find profit identified as “cost + fee.”

I believe that in today’s hypercompetitive environment, that definition is too narrow. 

I think a better formula now is profit = cost + strategy.

The reason is that, in the short term, customers often have business goals and objectives that may or may not include profitability. For example….

Say you’ve never worked in a certain marketplace before, and you want to arrive on the scene in a big way. To enter the marketplace in a way that gets you noticed, you may decide to bid on a project at a rate that doesn’t include profit. Heck, you may decide to even bid at a loss, especially if you know that the customer is likely to award based on low price simply to either gain market share or announce your presence in the contracting arena by securing the award. 

I frequently tell prospective vendors entering the federal marketplace that no U.S. contracting officer has ever gone to jail for selecting the lowest price. In fact, contracting officers frequently have incentive to pick the lowest price. Therefore, it is not outside the realm of possibility for a contracting officer to approach a competitor and try to negotiate the amount of profit contained in the submission. If your goal is profit, there are tactics you can use to protect the margin you have included that we’ll discuss in a future blog.

In addition, there may be times when the government agency really wants you to participate in the acquisition process. Under the Federal Acquisition Regulations (FAR) competition for bid awards is strongly encouraged. Contracting officers are looking for a minimum of three bids. They get uncomfortable when there are only two, and downright cranky when there’s only one. Reviewing only one bid for an RFP triggers all sorts of time-consuming tasks from FAR, so contracting officers work hard to ensure a competitive field. If you are asked to submit a bid that you are not in a position to service, creating a submission at a high price makes sense to avoid if not exclude selection.  

Are there other reasons for a contractor to submit a bid that are not driven by profit? Here’s one that’s underhanded and just this side of dishonest, but it serves to demonstrate how an unscrupulous company owner can manipulate the government contracting system for their own gain. Several years ago, a privately owned company wanted to sell. Their valuation was relatively low, which drove their asking price down. The owners developed a strategy that would inflate their revenue, making them look more appealing on paper. They bid on and won several high-dollar government contracts at impossibly low prices. The purchasing company spent the next five years on the verge of termination for cause on all of these projects because the pricing was artificially low and the contracts were nearly impossible to service. Again, driving the on-the-books revenue up to inflate the asking price was unethical, but it works within the owners dubious but nonetheless effective business strategy.

Fee and profit are very good things, but they are not the only things that determine why contractors go after programs. Sometimes, your business strategy creates goals that are better met outside of the conventional approach to profit and loss.