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Comment by Dylan16807 | Hacker News Reader

I think you're right, but on the other hand I wouldn't mind for it to be a violation of something to subcontract work and resell it to the government with a 10x profit markup. 37% of the work for 2.4% of the price they charged, what a perfect example of the pitfalls of government contracts.

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It is at least for DoD contracting. If I remember correctly we weren't allowed to have a higher profit margin than about 13% or near that. That's why in the DoD contracting space there is a huge emphasis of butts-in-seata because that's the only way they make more money.

There is no limit on the profit a company may take, though on Cost-Plus contracts the government may explicitly state the profit margin a company is allowed based upon performance metrics. The government CAN, however, audit your books for DCAA compliance on T&M (time and materials) and Cost-Plus contracts to ensure what's being charged to them isn't overly inflated.

On fixed-price contracts, however, companies can pull in 20-25% net margins sometimes. The average net margin on all contracts is between 8% and 12%. You can verify this by looking at the financials of the publicly traded contracting firms like Booz Allen and Leidos who are all in that 8% to 12% net margin range. There is no limit on these margins set by the government, however, just guidelines on what is "acceptable" to them to be included in your pricing (costs and profits passed on in the form of billed fully-loaded labor rates for hourly work).

It's actually more profitable for companies to do contractor-facilities (remote) work on a fixed-price basis, contrary to what people outside of the industry think.

Can you provide more detail about this? I'm really curious, a defense contractor I know of is moving to a fixed-price contract and there's a lot of messaging about how they just won't be able to afford a lot of folks and so forth. It would be highly interesting to me if they came out of it with a higher profit margin. Anything I should look out for to determine if that's the case?

This doesn't happen very often because, as a government contractor, you are subject to audit at any time and anything they deem unreasonable can make you non-competitive in that market.

The only time this (high margins) really happens is in the no-bid cleared (black ops) type contracts let by the intel community and such. Those margins can be huge, but it is because of the level of clearance and company expertise required to perform the work.

However, even in that case, it's not 10x. Maybe 30-40% margin, but not 10x.

I think you're right, but on the other hand I wouldn't mind for it to be a violation of something to subcontract work and resell it to the government with a 10x profit markup.

Why? If anything, it should be a violation by the department to pay x10 times for the same work they could get by going directly to the subcontractor.

That falls under "violation of something". But the department has plenty of buying power, they can easily put "promise not to do this" into the spec.

Sometimes they can explicitly tell you what margins you can make in a Cost-Plus type contract. The thing is, when they dangle a 5-year long $75,000,000 contract in front of you, you'll basically take any margin at all since the amount is so large that companies will work to undercut each other drastically and even work at a loss just to get the past performance, which is treated as an asset (like cash itself) in the federal market.

They can also audit you any time they want to determine the "reasonableness" of your pricing based on overhead, margins, etc.

Government contracting can be tricky. If the government pays $1m to an american company, they'll recover a significant amount of that through taxes. So the actual cost to the government wasn't actually $1m. If it's paid to an indian company, they won't.

This is exactly true. Not only in corporate taxes, but payroll taxes as well. So, literally, up to 35% of each contract goes back to the government in one form or another (whether directly or through overhead personnel salaries), hence the "buy American" thing in contracting with the government.

What's the opportunity cost? If the contractors would have been sitting on their hands, then the 35% argument rings true.

If they would have had taxable earning anyway, it doesn't matter.

(Of course, that's from a purely economic point of view. We are talking about politics here.)

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