Separate cost, price, and risk

After this lesson you should be able to tell cost from price, tell markup from margin using a labeled fictional calculation, and see why a firm-fixed-price quote locks in risk that AsherGate cannot remove. This module does not promise profit and does not recommend a margin percentage.

Commercial cost-buildup arithmetic is not a contractual formula.

For this lesson, cost means the money your company expects to spend to perform the line item: supplier goods, freight you must pay, packaging the files require, labor, and other outlays you can name. Price means the amount you offer the Government. FAR 15.401, for contract-pricing work in FAR subpart 15.4, defines price as cost plus any fee or profit applicable to the contract type. That definition describes how the Government talks about an offered price. It is not a promise that your commercial markup will be accepted, and it is not a recommended percentage.

A firm-fixed-price contract, under FAR 16.202-1, provides a price that is not subject to any adjustment on the basis of the contractor’s cost experience. That contract type places on the contractor maximum risk and full responsibility for all costs and resulting profit or loss. If you omit freight and later discover the delivery term is f.o.b. destination, the extra trucking is usually yours. Do not invent a higher number after award to cover a cost you skipped.

How you estimate cost inside your company is commercial practice. What you must put on the quote—unit prices, option prices, and any breakdown the instructions demand—is a contractual requirement copied from the solicitation. FAR 15.402 tells contracting officers to purchase at fair and reasonable prices and to price each contract separately, without using proposed price reductions under other contracts as an evaluation factor or considering losses or profits realized under other contracts. Those are Government pricing-policy rules. They are not permission to hide an incomplete cost estimate.

The next figures are a labeled fictional illustration. They are not a recommended rate, not a FAR formula, and not a prediction of profit.

Fictional calculation. Suppose your cost to perform CLIN 0001 is $800 and you offer a price of $1,000. The difference is $200. Markup on cost is $200 divided by $800, which equals 0.25, or 25 percent. Margin on price is $200 divided by $1,000, which equals 0.20, or 20 percent. Same $200. Different denominators. If you treat a 25 percent markup as if it were a 25 percent margin, you would set price by dividing $800 by 0.75 and get $1,066.67, not $1,000. Write which percentage you mean before anyone copies the number onto a quote sheet.

Nothing in this arithmetic is required by the FAR. A solicitation may tell you to enter a unit price, an extended amount, or both. It rarely tells you to disclose markup. Do not add a percentage because a blog named one. Do not assume AsherGate will compute either figure.

Keep this as a side note. If certified cost or pricing data are required, FAR 15.404-1 says cost analysis is used to evaluate separate cost elements, and FAR 15.403-4 currently states a $2.5 million threshold for prime contracts awarded on or after July 1, 2018, with $950,000 for primes awarded before that date, unless an exception in FAR 15.403-1 applies. Adequate price competition and commercial products or commercial services are listed exceptions. Part 31 cost principles apply when the contract says they do, not to every simplified quotation. Confirm the clause and any DoD-specific statute or deviation in the files rather than memorizing a dollar figure from training.

Using the Pinewharf story below, add the supplier, freight, packaging, and labor dollars until you reach $800. Then write a $1,000 total price as $12.50 each for 80 lanterns. Check 80 × $12.50 = $1,000, markup 25 percent on cost, margin 20 percent on price.

Store the RFQ in an AsherGate draft. Do not ask the product to calculate the bid. Do not submit a quotation.