Have you used the Weighted Guidelines Method (WGM) to develop a profit factor on a bid? The WGM can enhance the overall profit level of your federal contracts. Weighted guidelines can also help when you negotiate with certified cost or pricing data.
Read on for how to wield this tool to your advantage in contract negotiations with your Federal clients.
The Government Supports Profit
The Federal government recognizes that profit is part of doing business. Federal Acquisition Regulation (FAR) 215.404-4 lays out a structured approach (DD Form 1547) for developing profit objectives on negotiated contracts. Factors to consider when evaluating profit include the contractor’s cost and technical performance record, capital and facility investment, and price risks.
The Department of Defense and other Federal agencies, as well as Govcons, use the WGM to calculate their versions of a fair and reasonable range for the profit percentage on a contract. Agency and contractor then determine the final percentage during contract negotiations.
A CAVU client experience illustrates how the WGM can benefit Govcons. Our client used these weighted guidelines to clearly articulate a valid profit rationale. As a result, the company enhanced profit by 1.5% over a predecessor contract. This means that if the firm averaged an 8% profit on the previous contract, the successor contract increased to 9.5%.
The Most-Asked FAQs About WGM
CAVU clients new to the benefits of weighted guidelines often ask us:
When should my company use the WGM?
Use weighted guidelines for negotiated contracts that call for certified cost and pricing data. Even if the guidelines aren’t required, the Federal Contracting Officer (CO) may encourage you to use them to describe the proposed profit. The CO may also ask that you use the weighed guidelines to develop negotiated subcontract rates.
Are there circumstances where weighted guidelines are not appropriate?
The WGM is not part of negotiations for cost-plus-award-fee contracts. Even then, however, you may find it useful to use the WGM to validate your proposed profit. If your company competes for a highly cost-competitive procurement, for example, calculating your lowest acceptable profit is key to your bid. The Government will specify the nature of the solicitation to let you know if it is a negotiated procurement. Even if it is not, calculating the WGM could help you know how much profit is foregone in your pricing decisions.
How does the WGM work?
A short instruction list follows. Download this DD Form 1547 template to follow along.
There are six main areas to enter the data used to calculate profit:
- Start by entering all of your existing costs before fee in lines 13-19.
- Enter an assigned weighting for Technical vs. Management/Cost Control. The percentages must add up to 100%.
- Enter an assigned % value for Technical.
- Enter an assigned % value for Management/Cost Control.
- Enter a Contract Type Risk %.
- Enter an assigned % value for the Cost Efficiency Factor.
Note that the section for Working Capital and Facilities Capital Financed may also apply to your proposal.
Your profit objective in total dollars is calculated on line 33, followed by the total price and, finally, the weighted average total markup rate—the outcome of the WGM profit determination.
When you assign weightings, consider the type of contract you are negotiating.
If it is a development contract, it may have a higher technical percentage than a production contract. When you enter a Technical percentage, the template will complete the Management/Cost Control that will bring the total to 100%.
The largest driver to your profit is how you position yourself in the Designated Range.
You can quickly see from the table below that there is a noticeable increase when you can substantiate that your contract risk factors for the Technical category fall in the Technology Incentive range.
Assigned Values for Technical and Management/Cost Control:
Although the FAR states that the Standard designated range applies to most contracts, read carefully through the Technology Incentive description. If you can support this range, you will have the best outcome for profit. According to the FAR, “contracting officers may use the Technology Incentive range for acquisitions that include development, production, or application of innovative new technologies.…”
Factors to consider include:
- Technology being applied or developed by the contractor
- Technical complexity
- Program maturity
- Performance specifications and tolerances
- Delivery schedule
- Extent of a warranty or guarantee
The Contract Type Risk % referenced in item 5 above is determined from the following table:
Determine if you qualify for a special factor to incentivize bidders to reduce costs.
This factor may be added up to a maximum of 4% when you can demonstrate cost reductions that will benefit the contract. Examples from the FAR include:
- Actual cost reductions achieved on prior contracts.
- Reduction or elimination of excess or idle facilities.
- The contractor’s cost reduction initiatives (e.g., competition advocate programs, technical insertion programs, obsolete parts control programs, spare parts pricing reform, value engineering, and outsourcing of functions such as information technology). Metrics developed by the contractor, such as fully loaded labor hours (i.e., cost per labor hours, including all direct and indirect costs) or other productivity measures, may provide the basis for assessing the effectiveness of the contractor’s cost reduction initiatives over time.
- The contractor’s adoption of process improvements to reduce costs.
- The contractor’s effective incorporation of commercial items and processes.
- The contractor’s investment in new facilities when such investments contribute to better asset utilization or improved productivity.
You must adhere to statutory ceilings based on FAR 15.404-4(a)(3):
For expert guidance, contact the Govcon financial/accounting pros at CAVU and take advantage of our extensive experience with helping our clients apply the WGM for maximum profitability.
You can find more helpful resources for developing a profit factor using the WGM at:
https://www.dau.edu/tools/Lists/DAUTools/Attachments/122/WGL%20Extraction.pdf
https://www.acq.osd.mil/dpap/dars/dfars/html/current/215_4.htm#215.404-70 (relevant FAR sections)