What is the FAR 49.202 profit formula?

FAR 49.202 does not provide a fixed formula for profit on T4C settlements — it establishes a framework of factors that the TCO considers when negotiating an appropriate profit rate.

The factors under FAR 49.202: (1) the extent of risk assumed by the contractor — complexity, performance uncertainty; (2) the contractor's investment in work, facilities, and resources; (3) the quality of performance; (4) the degree to which the government directed or supervised the contractor's work; (5) the amount of government-furnished property or facilities used; (6) the reasonableness of the contractor's costs.

Reference to weighted guidelines: FAR 49.202(a) directs the TCO to consider the weighted guidelines methodology in FAR 15.404-4 as a starting point. This is the same method used in competitive negotiated procurements.

Typical range: For most small business service contracts, a defensible profit rate is 8–12% on allowable direct and indirect costs. This reflects moderate technical risk (professional services, IT, consulting), reasonable contractor investment in labor and overhead, and satisfactory performance.

What TCOs scrutinize: Profit rates above 12% on service contracts will be challenged. Profit claimed on unallowable costs will be rejected. Profit on settlement expenses themselves (the accounting and legal costs of preparing the proposal) is not allowed.

How to present your profit claim: State the rate you are claiming (for example, 10%), apply it to your total allowable cost base before settlement expenses, and include a brief narrative explaining why the rate is appropriate given the nature of the work.

RELATED GUIDES

• → Profit in a T4C settlement
• → Recoverable costs in a T4C settlement
• → What is a FAR 49.206 settlement proposal?