Beautiful, Beautiful Cost Efficiency Factor

The cost efficiency factor gives a lot of flexibility to a negotiator. Let’s be honest: the profit percentage that Weighted Guidelines DD 1547 gives you are very low. In fact, I can’t think of many commercial businesses that would accept a profit of 3% on a contract, especially after all the effort a contractor puts into preparing and negotiating it. However, the suggested profit is something to stand on. After all, deciding on profit is not a science.

One of my favorite parts of the DFARS is the cost efficiency for profit/fee. Basically, the contractor can get a much higher profit if the contractor gives adequate evidence it reduced costs. However, the amount earned cannot be more than 4% of the contract value and cost efficiency factor use is solely at the discretion of the contracting officer, and the cost efficiencies must affect the pending contract.

This is an incentive for contractors to earn money for their past deeds that save money for the government. However, some say its just the government giving away money. I think its simply another tool to be used on a case by case basis. Don’t just give money away; make sure the money saved actually benefits the government. Do that, and you should motivate a contractor.

Sound off — do you think the cost effiency factor wastes money, is always useful, or is a tool to be used in given situations?

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Brandon Jubar

I haven’t used this with any government contracts yet, but tried it several times with contracts I negotiated in the private sector. Frankly, it wasn’t worth it. Even though we had what seemed to be extremely clear metrics in place to determine savings, it was still a point of strong contention. We spent dozens of hours debating the savings calculations with the contractor, and then when we tried to pay the contractor the increased amount, we spent dozens of additional hours debating with the budget-holders who didn’t want to “give away” the money.

I suppose it’s a tool that could be effective in the proper circumstances, but I’ve learned to keep in mind the indirect costs of actually using such tools.

Brandon Jubar

It’s been a few years, but if I remember correctly there were both savings created jointly and savings that were created solely by the supplier. However, one of the major issues revolved around “cost savings” vs. “cost avoidance”. If the cost of a widget went from $5 to $4, that was $1 in cost savings. If the supplier came up with an idea that meant we didn’t have to buy the widget at all, some of our executives wouldn’t count that as $5 in “cost savings” but rather as $5 in “cost avoidance”… and then they claimed that they didn’t have to pay the supplier anything extra for “avoidance”, just for “savings”.

Sterling Whitehead

Interesting distinction between “cost savings” and “cost avoidance”. I’d have been mad too if I didn’t get paid because of “cost avoidance”.

Terri Jones

This is just fascinating, it shows how detailed the system has become and I wonder if we have created something that is difficult to sustain. Just reading your comments made me wonder if this isn’t like the tax code, the more permutations, the greater the risk of unintended effects. I am going with it is a tool, but I wonder if we need to simplify so we can predict the effect of the measures and therefore be better able to confirm that they produce the right incentives for the contractor?