The Government Is Pushing Fixed Price. Program Control Just Became Even More Important.
The federal government has made its preference clear: when appropriate, fixed-price contracting should be the default.
For contractors, especially small businesses, that deserves attention.
Because when the government moves more cost risk to the contractor, winning the work is only half the battle.
You still have to perform it profitably.
And that's where Program Control becomes incredibly important.
First, What's Changing?
Executive Order 14402, Promoting Efficiency, Accountability, and Performance in Federal Contracting, established a government-wide preference for fixed-price contracts and requires additional approval and justification for certain non-fixed-price awards.
That direction is also being reflected through the Revolutionary FAR Overhaul, including the rewrite of FAR Part 16.
The government's reasoning isn't difficult to understand.
Fixed-price contracts can provide greater cost predictability for the government. The agency knows what it has agreed to pay for the required work, and the contractor assumes greater responsibility for controlling the costs of performance.
For contractors, though, that last part is important.
The price may be fixed. Your costs aren't.
The Contract Looked Profitable When You Priced It
Imagine your company proposes a five-year FFP contract.
You carefully estimate:
Labor hours
Labor categories and labor mix
Salary rates
Escalation
Fringe and indirect costs
Subcontractor costs
Travel
Other direct costs
Schedule
Contingencies
Profit
Everything works.
You submit the proposal.
You win.
🎉
Based on your assumptions, the contract should generate a healthy profit.
Then performance starts.
And reality has absolutely no obligation to follow your proposal spreadsheet.
This Is Where Profit Starts Quietly Disappearing
Maybe you estimated that a task would require 1,000 hours.
It takes 1,300.
Maybe you planned to perform the work with a particular mix of junior and senior employees.
Then hiring becomes difficult and you end up using more senior—and more expensive—employees than planned.
Maybe you assumed a position would be filled in 30 days.
It takes 90.
Maybe travel costs increase.
Maybe your subcontractor burns through its budget faster than expected.
Maybe employees receive raises that exceed the escalation built into the proposal.
Or maybe the customer begins asking for:
“Just one little thing.”
Then another.
Then another.
None of these things necessarily causes an immediate crisis.
Your invoices are still going out.
Revenue looks good.
The customer is happy.
The program appears healthy.
Meanwhile...
your profit margin is quietly shrinking.
Revenue Is Not the Same Thing as Profitability
This sounds obvious.
But it's surprisingly easy for a growing contractor to focus heavily on revenue and backlog without having equally strong visibility into what it's actually costing to deliver that revenue.
On a Firm-Fixed-Price contract, exceeding your internal budget generally doesn't mean you get to send the Government a larger invoice.
You agreed to a price.
Now your company has to manage performance within it.
That's why an FFP contract needs more than an invoice showing how much you've billed.
Leadership needs to know:
What did we think this work would cost?
What has it actually cost?
What will it cost to finish?
And ultimately:
Are we still going to make the profit we expected?
That's Program Control.
Your Original Budget Is Only the Beginning
At award, the proposal assumptions should become a usable performance budget.
Not a spreadsheet that disappears into a proposal archive.
Program Control should understand the baseline:
Hours. Dollars. Labor mix. Schedule. Subcontractor budget. ODCs. Travel. Indirect assumptions. Margin.
Then actual performance needs to be measured against it.
If the proposal assumed 500 engineering hours through June and the program has already used 450 by April, that's something leadership should know now.
Not when the contract is 90% complete.
ETC and EAC Matter—a Lot
Two of the most useful questions Program Control can ask are:
What will it take to finish?
That's your Estimate to Complete (ETC).
And:
What will this contract ultimately cost us?
That's your Estimate at Completion (EAC).
A budget-versus-actual report tells you what already happened.
An EAC forces you to look forward.
Suppose you originally expected:
Contract Value: $1,000,000Estimated Cost: $850,000Expected Profit: $150,000
Six months into performance, costs are running higher than expected.
Your updated EAC is now:
Estimated Final Cost: $925,000
The contract value didn't change.
But your expected profit just went from:
$150,000 → $75,000
Half of the expected profit disappeared.
Nothing necessarily went “wrong” contractually.
The program may still be on schedule.
The customer may still be delighted.
But financially?
You have a problem worth addressing.
And the earlier you see it, the more options you have.
Watch the Labor Mix
For many service contractors, labor is the biggest cost driver.
That makes labor mix especially important.
Your proposal may have assumed work would be performed by:
20% Senior Engineers50% Mid-Level Engineers30% Junior Engineers
But what if actual performance looks like:
45% Senior45% Mid-Level10% Junior
The work is getting done.
The customer may be thrilled.
But you're using a much more expensive workforce than you priced.
On an FFP contract, that difference comes out of your margin.
Program Control should be watching not only total hours but who is charging those hours and at what cost.
Scope Creep Becomes a Margin Problem Too
Program Control and Contracts should be talking to each other constantly on FFP work.
Why?
Because sometimes a budget variance isn't really a budget problem.
It's a contract problem.
If hours are increasing because the customer is requesting work outside the original scope, telling the Program Manager to “control costs better” isn't necessarily the answer.
The real question may be:
Are we performing work we weren't contracted or priced to perform?
That's when Contracts needs to get involved.
Customer direction, evolving requirements, additional deliverables, schedule changes, and seemingly minor requests can all affect the cost of performance.
A strong Program Control function can help identify those trends before they become normalized.
Variances Should Trigger Questions, Not Just Reports
A variance report isn't useful simply because someone produces it every month.
Someone needs to ask:
Why are we over?
Is this temporary or a trend?
Is the remaining budget realistic?
Did our assumptions change?
Do we need to adjust staffing?
Is this a schedule issue?
Is the customer asking for additional work?
Does Contracts need to get involved?
What does this do to our EAC and expected margin?
That's the difference between reporting numbers and controlling a program.
Small Businesses Can't Afford to Find Out Too Late
Large contractors generally have established Program Control organizations, formal forecasting cycles, integrated financial systems, and layers of management reviewing performance.
Small businesses may not.
The PM may be managing the budget.
Accounting may be producing financial reports.
The owner may review revenue monthly.
And nobody may actually own the question:
“Based on what we know today, what do we think this contract will cost when it's finished?”
That question becomes increasingly important as the government emphasizes fixed-price contracting.
You don't necessarily need an enormous Program Control department.
You need visibility, accountability, and a repeatable process.
What Should Contractors Be Watching?
At minimum, I'd want regular visibility into:
Budget vs. actual costsWhere are we compared with the baseline?
Labor hours and labor mixAre we using the workforce we priced?
Burn ratesAre hours or dollars being consumed faster than planned?
ETCWhat do we realistically expect to spend from today through completion?
EACWhat do we now expect the total cost of the contract to be?
Subcontractor performance and spendAre subcontractors tracking to their budgets and schedules?
ODCs and travelAre actual costs consistent with assumptions?
Schedule performanceAre delays creating additional cost?
Scope and customer directionAre we performing work that wasn't included in the original price?
Expected marginHas the profit we thought we were going to make changed?
And most importantly:
What are we going to do about it?
Program Control Isn't Just a Finance Function
Good Program Control sits at the intersection of:
Contracts + Accounting + Operations + Program Management + Leadership
Accounting tells you what happened financially.
The PM understands what's happening operationally.
Contracts understands what the company agreed to do.
Program Control helps connect those pieces and asks:
Where are we headed?
That's why I think Program Control becomes even more valuable in an environment where fixed-price contracting is increasingly emphasized.
The Government Wants Cost Predictability
Fixed-price contracting can give the government more predictability.
But contractors shouldn't mistake the government's cost certainty for the contractor's cost certainty.
Your revenue may be fixed.
Your labor costs aren't.
Your hiring challenges aren't.
Your subcontractor performance isn't.
Your schedule isn't.
Your operational problems aren't.
And your profit certainly isn't guaranteed.
The contractor has to manage those variables.
The Bottom Line
Winning a $5 million FFP contract doesn't mean you made $5 million.
And calculating the expected profit at proposal submission doesn't mean that's the profit you'll ultimately earn.
The proposal established the plan.
Performance determines the result.
As the federal government places greater emphasis on fixed-price contracting, small businesses should be asking themselves:
Do we have the Program Control processes necessary to know whether our fixed-price contracts are actually performing to plan?
Because on an FFP contract, finding out you're over budget at the end is easy.
The value of Program Control is finding out while you still have time to do something about it.
Comments