Stating the obvious – fixed price contracts, in their essence, are when you agree to perform services or provide goods for a fixed price. Carrying this through – if cost of performance increases – the contractor cannot increase the price – it’s a fixed price contract. Similarly, if cost of performance goes down, the government cannot ask for a reduction in what it has to pay – it’s a fixed price contract.
Government contractors get this. But since most government contractors are incredibly conscientious, ethical, and inclined to follow the law to a tee so much so that a question I find federal government contractors ponder at times is – “Can I make too much profit on my fixed price contract?”
How does this question even come about? Let’s say you’re the incumbent on a five year fixed price contract. Therefore, your business has been doing the work for some time. You’ve built processes and developed efficiencies over the years. As a result, your costs have gone down and you’re making more money.
Can this result in too much profit since you are a government contractor? After all, you know the government expects fair and reasonable prices.
The short answer: No, unless you’re running some type of fraud with your cost and pricing.
FAR Part 16 provides a basis for this answer.
FAR Part 16 explains that the Federal Government uses fixed price contracts when it wants to place most of the risk for cost of performance on the contractor. This means that fixed price contracts are generally not subject to being adjusted as a result of the contractor’s costs or profits increasing or decreasing in performance. This gives the contractor an incentive to control the costs and perform efficiently when working a fixed price contract.
However, what if the cost of performance ends up being a lot less than the budget submitted with the proposal? In other words, will the government contractor run afoul of the law if they make a profit above and beyond the budgeted or proposed profit? Does the contractor have to tell the government about the increased profit?
Two reasons why the FAR and courts don’t give much leeway to the government to pursue a contractor for making more profit on a fixed price contract:
- The FAR itself states that fixed price contracts provide for a price that will not be adjusted just because the contractor’s costs in performance are more or less than detailed in the proposal. This is what the FAR means when it says that fixed price contracts place the risk and responsibility for all costs and any resulting profit or loss on the contractor.
- Generally, the government finds it difficult making a case against contractors for violating the False Claims Act when the contractor makes more profit than budgeted or proposed on a fixed price contract and does not inform the government.
Courts have generally rejected the government’s False Claims Act accusations against contractors when the government claims the contractor acted falsely because the contractor did not tell the government that it performed the fixed price contract for less cost than anticipated – even if substantially less cost. That is, simply performing a fixed price contract less expensively than anticipated – does not mean the contractor violated the False Claims Act.
In some circumstances, the courts have even said that when a contractor increases profit and decreases costs by reducing head count, as long as performance was not impacted, the government is still required to pay the fixed amount it had agreed to.
However, this all depends on the facts of why the contractor made more profit.
Beware of False Claims…
In some situations contractors performed the contract for less cost and therefore had a higher profit, courts have determined that the contractor violated the False Claims Act. This was due to the contractor making statements about pricing, costs, or performance during the bidding, contracting or invoicing processes that were “false”.
And…. on that term “false” – remember the law says that any statement or document to the government that may be inaccurate, mistaken, or outdated even if not intentional, may be a “false” statement to the government. Changing the quality of deliverables to increase profit runs afoul of the False Claims Act. Or ignoring facts that should be discovered or omitting facts – may be considered a “false” statement to the government.
So … although making more profit on a fixed price contract may be a contractor’s reward for operating efficiently, if the increased profit occurred because of some false, inaccurate, or incomplete statements, the government may consider it foul play and take action.
Andy Warhol on art, profit and business:
Making money is art.
Working is art.
And, good business is the best art.