Guide to Contract Pricing, 5th Edition

CHAPTER 10

Profit or Fee Determination

Reduced to its simplest terms, profit is whatever is left after all the costs of doing business are paid. Profit is often described as the reward for taking risks.

The profits that a company earns are the sum of its total revenues for the operating year less its total operating expenses. The company will try to make some profit on every job it does; if it is successful, the overall profits are higher. In many cases it will earn a profit on some jobs and take losses on others. The company will stay afloat if its profits on some jobs exceed its losses on others; in the long run, it will “go under” if the reverse is true.

Well-run companies have cost accounting systems that enable them to estimate costs likely ...