Cost reimbursable contracts accounted for the largest share of federal work in 2007, according to a survey of contractors by the consulting firm Grant Thornton. Service contractors reported receiving 45% of their revenue from cost reimbursable contracts, up from 28% three years earlier.

 

But that contract type is now under attack. Congress last year ordered federal agencies to minimize the use of such contracts. In a position paper during his campaign, President Obama also called for limits on cost-plus contracts. "These contracts are vulnerable to waste because they provide no incentive to control costs," the paper said.

 

"It is difficult to equate the high use of cost reimbursable contracts with the notion that the government is attempting to use more commercial processes to streamline federal procurement," Grant Thornton commented. "The commercial environment normally uses fixed price or time and material contracts while the government continues to maximize the use of cost reimbursable contracts."

An additional 39% of revenues came from time and materials contracts, which have also drawn criticism because they pose additional risk of increased costs. The Defense Department has ordered its contracting officers to use T&M contracts only when "no other contract type is suitable."  Just 20% of contractor revenues were derived from fixed-price contracts.

Grant Thornton surveyed 120 government contractors of all sizes, primarily in the professional services field, about their financial results for fiscal 2007. Thirty-nine percent of the companies responding reported profits in the range of 6% to 10% of revenues. Almost one-third said their profit rate was 5% or less.  Contractors said the level of executive compensation was the most frequent issue raised by government auditors. Labor rates and consultant costs were next most-likely to be challenged by auditors. The companies reported employee pay raises averaged 3.5% to 4% in 2007, unchanged from the year before.