Going 1099: Make More Money by Practicing Firm Fixed Price Arbitrage
FIRM-FIXED PRICE ARBITRAGE
I wrote a good chunk of my book under the assumption that most of you will probably operate under a time and materials (T&M) type of arrangement. You work an hour, you get paid for an hour.
However, if you are willing to explore the firm fixed price (FFP) structure, you can increase your earnings and effective hourly rate dramatically!
» What is a FFP Project?
Let’s recount what exactly a FFP contract is. You agree to complete a deliverable or set of deliverables in a certain period of time. It might be a report, a dashboard, a survey, or something else. It doesn’t matter.
In exchange for the deliverables, you will receive a fixed price. It does not matter how many hours you took to complete it. So long as you give it to the government by the deadline, the prime will pay you that fixed amount.
» The opportunity
So here is where it gets interesting. Most government contractors still use an estimate of the total number of labor hours to determine what price to bid.
For example, the government wants X completed. Contractor Inc. has experience with X and knows that it will take a team of 5 full time people about one year to complete. They know how much those people cost them, so they figure out the cost of 5 people for twelve months and then tack on an acceptable profit margin.
This makes sense. However. as a 1099, who also has experience with X, knows that the team can be very inefficient and it actually takes about half the time Contractor Inc. says it does.
So you go to Contractor Inc. and you say, “hey I can do my part of X for $200,000.” That aligns with the cost they provided for one full time team member for one year.
The prime accepts your bid of $200,000, but because you are super efficient, you do your part in six months! (Note: the more likely scenario is that you work half days for the full year, rather than finishing the whole project early.)
If the $200,000 bid was based on a full time billable rate of $100/hour, you actually have an effective billable rate of $200/hour!
Now, you’ll only ever get $200,000, but you can use the extra time you have to either work on another project and earn more money, or just enjoy working part-time for full time compensation. I’ve done both and I personally prefer the latter but the choice is yours. Managing two projects can be stressful and at some points it wasn’t worth the extra money.
Now conversely if a FFP gets out of hand and you’re pulling overtime every week, you have now decreased your effective hourly rate.
A FFP project rewards efficiency and punishes inefficiency. If you are efficient, you can become much more profitable by minimizing the amount of hours you work on the project.
» Managing the risk
The risk of the FFP project stems from the project either taking longer than you expected, whether in terms of total hours worked or time period, OR, the client not accepting your work.
To mitigate these risks, you need to specify upfront with the prime what the deliverables are in the statement of work (SOW). Negotiate down the number of deliverables you are responsible for. Make sure, to the extent possible, those deliverables are under your control.
For example, if one your deliverables is some sort of technology solution but it is dependent on the government agency having a particular piece of software on their systems, you need to confirm that they have the software and you have access to it before you accept that deliverable.
I think the best FFP projects have a SOW that look a lot like T&M type of support. You are responsible for delivering X but X is mainly phrased as “do things that resemble X as needed for the next six months and as required.” This allows the government customer flexibility and allows you to simply be around enough to make sure the client is happy.
This works because if you’re a government contractor, there are probably lots of work days when there is not a lot to do You wish you could go home but you’re either a W2 employee and have to bill 8 hours or you are now a 1099 and get paid by the hour so you are incentivized to stick around.
When you’re an FFP on a support type SOW, you can just take off early one afternoon when your meetings are over and you have nothing to do. You’ll still get paid the same, so long as the government client is generally happy with the work you are doing. The deliverables are usually just a monthly report describing what you’ve worked on.
So overall, if there are actual real, concrete things you need to deliver, make sure they are specific and within your control.
Otherwise, if the deliverables are vague, try to get the SOW structured in a way that allows you to provide general support to the client’s satisfaction without too many deliverables beyond a monthly report.
» Payment terms
We covered this before but on a FFP project, you generally get paid when you achieve certain milestones on the project. If project X can be broken down into milestones A, B, C, and D. You will get paid once you achieve A, B, C, and D.
The risk is that if those steps or milestones are actual deliverables that are outside of your control, you could possibly face payment delays.
For example, if milestone A is a preliminary report that must be approved by the government client, and the government client goes on vacation after you turn it in, you’re not going to be able to invoice at least until the client gets back!
The alternative and safer arrangement is to negotiate an arrangement where you are invoicing every month in equal installments. If the FFP bid is $120,000 over 12 months, you should negotiate payment terms where you invoice $10,000 every month, payable on net-30 basis.
You’d still be on the hook for the listed deliverables but the payments are smoother. No need to dip into savings while you’re trying to complete the project and get paid.
If you have questions feel free to reach out to me directly at firstname.lastname@example.org. I can also add you to my informal mailing list in case I have updates or news or whatever.
This article is an excerpt from Chapter 13 (How to increase your income as a 1099) of my book.
You can read more about it here:
Going 1099: How to become a solo federal sub-contractor and gain control of your working life, earn more money and unlock more free time