Since labor burden is a direct cost to the contractor should the contractor be allowed to add profit to the labor burden?
To answer your question in one word, YES. A few of the FAR and DFARS references to support the response are copied below. Without providing the detail of a contract pricing class, the following comments are offered.
Profit is the amount realized by a contractor after the costs of performance (both direct and indirect) are deducted from the amount to be paid under the terms of the contract (The Government Contracts Reference Book, Third Edition).
Far 15.404-4(a)(2) states that is in the governments interest to offer contractors opportunity for financial reward....
FAR 15.404-4(d) provides "profit analysis" factors to include (B) Conversion direct labor ...measures its contribution...
DFARS 215.404-70 ...Weighted Guidelines... states that when performing profit analysis... the Government considers four profit factors...performance risk, contract type risk, facilities capital employed, and cost efficiency... and performance risk is the degree of risk in fulfilling the contract requirements.
A service contract is the purchase of a contractor’s labor and expertise. Both are performance risk factors in fulfilling contract requirements. In addition, the Government must consider "direct labors" contribution to performing the contract requirements. Direct labor should always be a profit analysis factor as long as the requirements for allowable, allocable, and reasonable are met.
15.404-4 -- Profit.
(a) General. This subsection prescribes policies for establishing the profit or fee portion of the Government prenegotiation objective in price negotiations based on cost analysis.
(1) Profit or fee prenegotiation objectives do not necessarily represent net income to contractors. Rather, they represent that element of the potential total remuneration that contractors may receive for contract performance over and above allowable costs. This potential remuneration element and the Government’s estimate of allowable costs to be incurred in contract performance together equal the Government’s total prenegotiation objective. Just as actual costs may vary from estimated costs, the contractor’s actual realized profit or fee may vary from negotiated profit or fee, because of such factors as efficiency of performance, incurrence of costs the Government does not recognize as allowable, and the contract type.
(2) It is in the Government’s interest to offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities of qualified large and small business concerns to Government contracts, and maintain a viable industrial base.
(3) Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government’s interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance.
(d) Profit -analysis factors --
(1) Common factors. Unless it is clearly inappropriate or not applicable, each factor outlined in paragraphs (d)(1)(i) through (vi) of this subsection shall be considered by agencies in developing their structured approaches and by contracting officers in analyzing profit , whether or not using a structured approach.
(i) Contractor effort. This factor measures the complexity of the work and the resources required of the prospective contractor for contract performance. Greater profit opportunity should be provided under contracts requiring a high degree of professional and managerial skill and to prospective contractors whose skills, facilities, and technical assets can be expected to lead to efficient and economical contract performance. The subfactors in paragraphs (d)(1)(i)(A) through (D) of this subsection shall be considered in determining contractor effort, but they may be modified in specific situations to accommodate differences in the categories used by prospective contractors for listing costs --
(A) Material acquisition. This subfactor measures the managerial and technical effort needed to obtain the required purchased parts and material, subcontracted items, and special tooling. Considerations include the complexity of the items required, the number of purchase orders and subcontracts to be awarded and administered, whether established sources are available or new or second sources must be developed, and whether material will be obtained through routine purchase orders or through complex subcontracts requiring detailed specifications. Profit consideration should correspond to the managerial and technical effort involved.
(B) Conversion direct labor. This subfactor measures the contribution of direct engineering, manufacturing, and other labor to converting the raw materials, data, and subcontracted items into the contract items. Considerations include the diversity of engineering, scientific, and manufacturing labor skills required and the amount and quality of supervision and coordination needed to perform the contract task.
215.404-70 DD Form 1547, Record of Weighted Guidelines Method Application.
Follow the procedures at PGI 215.404-70 for use of DD Form 1547 whenever a structured approach to profit analysis is required.
215.404-71 Weighted guidelines method.
(a) The weighted guidelines method focuses on four profit factors—
(1) Performance risk;
(2) Contract type risk;
(3) Facilities capital employed; and
(4) Cost efficiency.
(b) The contracting officer assigns values to each profit factor; the value multiplied by the base results in the profit objective for that factor. Except for the cost efficiency special factor, each profit factor has a normal value and a designated range of values. The normal value is representative of average conditions on the prospective contract when compared to all goods and services acquired by DoD. The designated range provides values based on above normal or below normal conditions. In the price negotiation documentation, the contracting officer need not explain assignment of the normal value, but should address conditions that justify assignment of other than the normal value. The cost efficiency special factor has no normal value. The contracting officer shall exercise sound business judgment in selecting a value when this special factor is used (see 215.404-71-5).
215.404-71-2 Performance risk.
(a) Description. This profit factor addresses the contractor's degree of risk in fulfilling the contract requirements.