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  • Question

    Why is profit referred to as "fee" under cost reimbursement contracts but called "profit" under fixed price contracts? Why the different terminology if they're both basically "profit" to the contractor?


    Answer

    The reason for the different terminology is the way in which "profit" is realized under the two different types of compensation arrangements. The profit under a fixed-price contract is subject to the contractor's actual cost performance. For example, for every dollar by which a contractor reduces its cost of performance under a firm fixed-price arrangement, the contractor realizes an extra dollar of profit (and vice versa). Under a cost reimbursement contract, the "profit" is either fixed (e.g., cost plus fixed-fee arrangement) or semi-fixed by being subject to the specific incentive arrangement set up with the Government (e.g., cost plus incentive-fee arrangement). It's referred to as "fee" to acknowledge the difference between how profit is realized under a fixed price contract. This logic, however, is not air tight. For example, profit is still called "profit" under a fixed price incentive contract (which is also subject to a sharing/incentive arrangement), but you get the general idea. Another distinction between profit and fee is that the FAR has statutory limits on the maximum fee that can be paid to a contractor for some cost reimbursement contracts (see FAR 15.404-4(c)(4)(i)), while no such statutory limits exist for "profit" under fixed price contracts.


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