Many aspiring entrepreneurs and non-public sector companies believe that Federal Government contracting has razor-thin profit margins. They ultimately question if this industry is simply worth their effort. This is a commonly believed perception regarding government contracting.
What is the basis of this “myth?”
Who perpetuates this “lie?”
Well, it’s hard to believe, but the Federal Government does! Why? The Federal Government has been burned so many times in the press with stories about $400 hammers, $600 toilet seats, and $7,000 coffee makers that they will only give contract awards to “low-profit” bidders. And, on paper, this is correct.
To give the government the political cover that they want, bidders propose a ridiculously low profit margin while managing to a higher, yet reasonable, profit during the execution of the contract. In other words, bidders will “propose A% profit and manage to Z% profit.” This is a common phrase in this industry.
Government Contracting Academy founder, Randy Wimmer, has personally bid as low as 3% profit and managed to earn well over 30% profit while still meeting all contractual obligations. Let’s be honest, the government KNOWS that no reasonable company would ever assume the risks of any contract requiring millions, if not billions, of dollars of work for a comical 3% return.
Simply stated, the razor-thin profit myth is just that—a myth promulgated by government entities to make themselves look like good stewards of taxpayer dollars. Yet, they turn-around and spend millions of dollars on contractor support. Why? It’s not their money!
Frequently, the government will massively overpay for a product or service simply because they would rather modify an existing contract at a much higher price than launch a laborious competitive solicitation to obtain better value. When considering these decisions, “best value” really translates to avoiding the need to work late by spending somebody else’s money.