Contract Types NES, 5-17-2011 - National Contract Management

Transcription

THIS MATERIAL IS COPYRIGHTED BY NCMA 2011 AND MAY NOT BE DUPLICATED
LEATHERSTOCKING CHAPTER
TURNING STONE CASINO AND RESORT, VERONA, NY
MAY 17, 2011
Presented by Eric Esperne, JD, CPCM, Counsel, Dell Healthcare & Life Sciences
With Supplemental Information and Commentary
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THIS MATERIAL IS COPYRIGHTED BY NCMA A
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Course Outline
Unit 1: Contract Type Selection
General Factors To Consider
Unit 2: Basic Contract Types
Fixed-Price Contracts
Cost-Reimbursement Contracts
Unit 3: Applicable Accounting Regulations
FAR Accounting Regulations
Cost Accounting Standards
Truth In Negotiations Act
Unit 4: Incentive-Type Contracts
Incentive Fee
Award Fee
Award Term
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Course Outline
Unit 5: Other Specialized Contract Types
Fixed Price, Level of Effort
Indefinite Delivery
Requirements
Time and Materials
Labor Hour
Letter Contracts
Basic Agreements and Basic Ordering Agreements
Unit 6: Special Types of Acquisition
Performance-based Service Acquisitions
Commercial Items Acquisitions
Unit 7: Contract Types: Today and in the Future
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Contract
Type
Selection
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Unit 1: Contract Type Selection
CPFF
CPAF
Fee Subjective Criteria
Pool Determines Profit
Lower Profit
Fixed
Fee
Max Fee
Target
Fee
Award Fee Pool
100 / 0 Share
No Cost Control
Non-completion
Base
Fee
Estimated Cost
Share Ratio
Min Fee
Award Fee Base (0-3% DoD)
Target Cost
Non-completion
FPAF, T&M, BOA most commonly
used contract types in private
sector
FFP
FP-R used in outsourcing
FPIF
Moral Hazard
Profit
0 / 100 Share
Cost
Limited Cost
Control Incentive
Non-completion
Estimated Cost
Government/Contractor
CPIF
Limited Profit
Contractor Loss
Due to Poor
Pricing
Share Ratio
PTA (Govt. Share =
Ceiling)
Target
Profit
Target Cost
Contractor Loss
Due to
Price Unreimbursed
Ceiling Costs
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Contract Types: Quick Survey
1. What purposes are served by the choice of contract type?
2. Why does the contract type matter?
3. What agency-specific factors should affect the choice of
contract type?
4. What contractor-specific factors should affect the choice of
contract type?
5. What restrictions limit the choice of contract type?
Practice Tip: Using contract types is a high level skill that is developed over
years. Mentoring is highly recommended.
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1. What purposes are served by the choice of contract type?
 The contract should fairly allocate risks and benefits among the
contract parties.
 The contract type should link to the statement of work,
specifications, and deliverables.
 The contract must comply with statutory and regulatory
restrictions.
 Note: The choice of contract type is within the sound discretion
of the contracting officer.
Public/Private Comparison: Idea of fairness is foreign to private sector.
Govt.—Agency contracting officer determines the contract type.
Private Sector—Either the contractor determines the contract type or the parties
negotiate. In many industries, cost reimbursement contracts are rarely or never used.
References: FAR 12, 16, 34-37, DFARS Part 216
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2. Why does the contract type matter?
The contract type:
 Determines the allocation of cost and performance risk.
 Determines the degree of management and oversight that will be
needed.
 Determines the payment mechanism that will be used.
 Specifies incentives that can balance risks, motivate the
contractor to perform and control costs, and be financially
rewarding to the contractor.
Practice Tips:
Contract type is the predominant risk management tool in Govt. contracting.
Concept of transaction costs often gets overlooked.
Terms and conditions don’t necessarily add up to the parties achieving their objectives.
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3. What agency-specific factors should affect the
choice of contract type?
 What is the degree of price competition and the agency’s ability





to determine price reasonableness or cost realism?
What is the complexity, maturity, and type of system or service
being procured?
What is the procurement agency’s ability to administer the
contract?
How urgent is the requirement?
What is the period of performance or length of production run
(and is there a need for an EPA clause)?
What is the acquisition history (i.e., is this a recurring
acquisition or a one-time buy)?
Comment: First three Q’s ask “What is the agency’s competency?” Last Q gets to
special contract types.
Reference: FAR 16.104
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4. What contractor-specific factors affect the
choice of contract type?
 What is the contractor’s technical capability and financial
responsibility?
 Is the contractor’s cost accounting system adequate?
 What is the extent and nature of proposed subcontracting?
– SBA rules govern contractor/subcontractor allocations in set-asides to
ensure small business participation.
– DOD rules limit excessive pass-through charges where the contractor
does not provide sufficient “added value.” (DFARS 252.215-7003 and
7004) Comment: Item refers to shared savings with other contracts
under FAR 48.000 value engineering.
 Are there concurrent contracts and, if so, what will be their
impact on performance and cost?
 What budget constraints and considerations exist in
appropriations or funding policies?
Comment: Last two items are more agency specific than contractor specific.
References: FAR 16.104, DFARS 252.215-7003, 7004
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5. What restrictions limit the choice of contract type?
Statutory Restrictions: 10 U.S.C. 2306(a) and 41 U.S.C. 254(b)
 Cost-plus-percentage-of-cost contracts and subcontracts are
prohibited by law.
 Annual military construction appropriations acts restrict the use
of cost-plus-fixed-fee contracts.
Quick Quiz: How do percentage award fees in cost reimbursement contracts get around
this prohibition?
References: FAR 16.102(c), DFARS 216.306(c)
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5. Restrictions, continued.
Regulatory Restrictions
 Certain procurement methods limit the choice of contract type:
– Sealed Bidding: Only a firm-fixed-price or fixed-price-with- economic-
price-adjustments contract may be used. (FAR 16.102(a), FAR 14.104)
– Competitive negotiation: Any contract type may be used. (FAR
16.102(b))
– There are limits on the use of fixed price DOD research and development
contracts. (DFARS 235.006)
– Commercial items acquisition: Only firm-fixed-price, fixed-price
contracts with economic price adjustment, and certain types of time and
materials contracts may be used. (FAR 12.207)
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The Bottom Line:
The parties’ selection of the “right” contract type is important
to program success!
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Exercise: Questions to Consider
1. What types of contracts does your organization perform?
2. What types of contracts or subcontracts does your
organization award?
3. What is your organization’s process for determining what
type of contract to award, or what type of contract to seek?
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Basic
Contract
Types
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Basic Contract Types: Quick Survey
1.
2.
3.
4.
5.
6.
How do the basic contract types vary?
What are the two basic contract types?
What are the characteristics of fixed-price contracts?
What are the different types of fixed-price contracts?
What are the characteristics of cost-plus contracts?
What are the different types of cost-plus contracts?
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1. How do the basic contract types vary?
Contract types vary according to
 The degree and timing of the responsibility assumed by the
contractor for the costs of completion of performance;
 The degree of oversight exercised by the government over the
contractor’s performance; and
 The amount and nature of the profit incentive offered to the
contractor for achieving or exceeding specified standards or
goals.
 The degree to which the scope and end results of performance
are specified in the contract.
Practice Tip: Another way to describe variance is “How does the contract allocate
and manage 1) cost risk and 2) performance risk.”
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2. What are the two basic contract types?
 Fixed Price
– Performance/cost risk rests mainly with the contractor. (FAR Subpart
16.2/DFARS Subpart 216.2)
 Cost Reimbursement
– Performance/cost risk rests mainly with the government. (FAR Subpart
16.3/DFARS Subpart 216.3)
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Contract Family Characteristics
COST
FIXED PRICE
PERFORMANCE DUTY
Best Effort
Must Deliver
RISK TO CONTRACTORS
Low
High
RISK TO GOVERNMENT
High
Low
PERFORMANCE
PAYMENTS
As Incurred
Upon Delivery
PROGRESS PAYMENTS
None
% of Actual
ADMINISTRATION
Max Surveillance
Min Surveillance
FEE/PROFIT
Max: 6/10/15%
No Limit
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Common Abbreviations For Contract Types
Cost Reimbursement–
Type Contracts


I
n
c
e
n
t
i
v
e


Cost Reimbursement
Cost Plus Fixed Fee
(CPFF)
Cost Plus Incentive Fee
(CPIF)
Cost Plus Award Fee
(CPAF)



Fixed Price–
Type Contracts
Firm Fixed Price (FFP)
Fixed Price with Economic
Price Adjustment (FP-EPA)
Fixed Price Incentive (FPI)



Firm Targets (FPIF)
Successive Targets (FPIS)
Fixed Price with Award Fee
(FPAF)
C
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a
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Fixed Price–Type Contracts
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3. What are the characteristics of fixed-price contracts?
 Fixed-Price contracts are the most common contract type.
 The performance risk and cost risk to the government are small.
– The contractor assumes these risks.
– The contractor retains maximum control over job.
 The contractor’s incentive to assume these risks is the profit
potential—every dollar in cost savings becomes additional
profit.
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The Fixed-Price Benefit/Risk Tradeoff
Risk/Benefit to Contractor: The contractor must be willing to
complete the project at the fixed price without regard to cost
growth.
Risk/Benefit to Government: The government must draft and
administer the contract in a way that avoids claims for significant
price adjustments (i.e., scope creep).
Practice Tip: There are other risks to the Govt. under FP contracts:
--Contractor guessing at pricing or low balling
--Contractor cutting corners within existing scope during performance (moral hazard)
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4. What are the different types of Fixed-Price contracts?





Firm Fixed-Price Contracts
Fixed Price with Economic Price Adjustments
Fixed Price Incentive Fee Contracts
Fixed Price Redeterminable Contracts
Fixed Price Award Fee
Reference FAR 16.2
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Firm-Fixed-Price Contracts Considerations
 Firm-fixed-price contracts are suitable for acquiring commercial
items or supplies, or services based on reasonably definite
specifications.
 FFP contracts are appropriate when the risk of performance is
low (e.g., mature technology, proven processes, widely used
materials, etc.).
 May be deliverable-based or performance-based.
 FFP contracts are generally not appropriate for most research
and development (R&D) projects.
Practice Tip: Maybe the single biggest factor in choosing contract type is
“uncertainty.” The more certain the requirements and the cost, the better Fixed Price
becomes. Example: Buying McDonald’s for the kids versus catering your daughter’s
wedding reception.
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Firm-Fixed-Price Contracts: Fair and Reasonable Price
Determination
The contracting officer must be able to establish fair and reasonable
prices at the outset:
– Through adequate price competition,
– Through reasonable price comparisons with prior purchases, or
– Available cost or pricing information that permits realistic
estimates of the probable costs of performance.
– Performance uncertainties identified and estimated and cost impact
accepted by contractor
Public/Private Comparison: What is “fair and reasonable” and how is it determined?
Govt.:
--Adequate price competition-Sealed Bidding, Competitive Negotiation
--FAR 15.404-1(b)(2) lists seven price analysis techniques
--Cost and pricing information-Truth in Negotiations Act (TINA)/FAR 15.403 et.seq. (Unit #3 Slides
76-88), least preferred price determination method under the Federal Acquisition Streamlining Act
(FASA)
Private Sector:
--Adequate price negotiation- Often only negotiation at the table
--Benchmark database services, industry analysts, professional acquaintances
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Firm-Fixed-Price Contracts: Issues

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
Specifications are undefined or are changing
Reasonable price cannot be set at outset
Scope creep
Unclear acceptance criteria
Difficulty in making adjustments
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Fixed-Price Contracts with Economic Price Adjustments
 FP-EPA contracts permit upward or downward price
adjustments if economic conditions change during contract
performance.
– Prices are tied to changes in material costs or labor rates, or both based
on specified contingencies.
 May Be Used When
– There are serious doubts about the stability of labor conditions or market
conditions during an extended contract performance period, and
– Contingencies (otherwise included in the contract price in a FFP) are
identified and covered separately in the contract.
Practice Tips:
FP-EPA recognizes that there exists uncertainty but that the factors causing the
uncertainty can be identified and addressed in the contract.
FP-EPA does not cover other uncertainties, however, e.g., changing requirements,
technical obsolescence.
What other contract types are better for dealing with other uncertainties.
Reference: FAR 16.203-2
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Fixed-Price EPA Contracts Risk/Benefit Analysis
 Risk/Benefit to Contractor: An EPA contract mitigates the
contractor’s risks that market prices for labor or material will be
unstable over the life of the contract.
– The government assumes some risk for increases. The contractor obtains
the benefit of upward price adjustments
– The contractor assumes some risk for decreases. The government obtains
the benefit of downward price adjustment.
 Risk/Benefit to Government: Contract retains incentives:
– All EPA clauses contain caps/ceilings.
– The contractor is still responsible for completion.
– As in all fixed-price contracts, the contractor still realizes profit from cost
savings within its control.
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Fixed-Price Contracts With Economic Price Adjustments
There are three types of FP-EPA contingencies:
 Adjustments based on established prices (standard and semistandard supplies)
 Adjustments based on actual costs of labor and material
experienced by contractor
 Adjustments based on cost indexes of labor and material
Public/Private Comparison: How do contract terms account for price changes?
Govt.:
-- For actual costs, according to FAR, minimum 3% impact on price before takes effect and
maximum upward/downward adjustment of 10%
--No FAR guidance for indexes but agency supplements
Private Sector:
--Most favored nation or customer pricing (MFN) clause
--Cost of living adjustment (COLA) clause based on Economic Cost Index (ECI) published
by Bureau of Labor Statistics
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Fixed-Price Redeterminable Contracts
 In FP-R contracts price can only be adjusted downward
 Two types:
– Prospective: Used for quantity production (e.g., spare parts for major
systems) or services where it is possible to negotiate FFP for initial
period, but not for subsequent periods.
– Retroactive: Final price is negotiated after completion of work. Used in
R&D contracts under $100K, with short performance period.
 Used infrequently
– Contractor retains little incentive to control costs.
– Redeterminable contracts are administratively cumbersome.
Public/Private Comparison: FP-R commonly used in private sector outsourcing contracts
--Renegotiate scope and price after “transition period” from in house or other contractor, -”blue sky” provisions during steady state allow for renegotiation without triggers
(relationship management)
Reference: FAR 16.205, 16.206
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Cost Reimbursement Contracts
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5. What are the characteristics of cost-plus contracts?
 In Cost Plus contracts the contractor only agrees to provide “best
efforts”—even if this results in no deliveries, the contractor is
held harmless.
 Costs are reimbursed relative to a funding limit or cost ceiling.
– Cost savings are returned to the government.
– Cost overrun is paid for by the government.
 The contractor may not exceed funding without the contracting
officer’s approval.
 Contractor is reimbursed for “allowable costs.”
 To be allowable, a cost must be reasonable, allocable, properly
accounted for by contractor, and consistent with FAR Part 31
“Cost Principles” and the contract.
– Direct Costs
Comment: Item covered in FAR Cost
Principles Unit #3 slides 52-68.
– Indirect Costs must be Allocated
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Cost Reimbursement Risk/Benefit Analysis
 Cost-plus contracts are used when there are high performance
risks and high cost risks
– Cost-plus contracts are appropriate when the performance risk is high
(e.g., cutting edge technology, unproven processes, untried materials,
etc.).
– Cost-plus contracts should be used only when there is a high degree of
uncertainty associated with
Practice Tip: With cost reimbursement
• Labor Hours and Labor Mixes, contracts, the risk pendulum swings towards
the Govt.
• Material Costs, and
--Contractor will break even
• Other Expenses.
--Contractor doesn’t have to complete the work
 Risk/Benefit to Government: The government assumes
maximum performance/cost risk, but gets the benefit of cost
savings.
 Risk /Benefit to Contractor: The contractor’s incentive is a
higher margin by completing work at lower costs.
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Cost Reimbursement Contracts
Omitted
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Limitations on the Use of Cost-Reimbursement Contracts
 The contractor must have an adequate cost accounting system.
Comment: Covered in Cost Accounting Standards (CAS) Unit #3 slides 69-75.
 The government must exercise surveillance of cost controls.
 The government pays on a provisional basis until the books are
closed at the end of the contract.
– The government will review and approve billed costs.
– The government will disallow “unapproved” costs.
 Statutory limits exist on fees under FAR 15.404-4(c).
 Cost-reimbursement contracts are prohibited when acquiring
commercial items under FAR 12.207(e).
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Common Characteristics of Cost-Reimbursement Contracts
Omitted
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Limitation of Cost/Funds Clauses
 The contractor does not have to incur costs beyond the funding
or cost ceiling.
 The contractor must give advance notice when approaching the
funding limit:
– Generally, 30-90 days before reaching 75-85 percent of funding or
estimated costs.
– Calculation should be based on a current Estimate At Completion (EAC)
using “best available” indirect rates.
 The contracting officer must then advise contractor whether
additional funding is available.
 The contractor need not incur, and may not be able to recover,
costs in excess of the ceiling.
 Expenditures above the funding limit will be “at risk.”
Reference: FAR 52.232-20, 52.232-22
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Conversion of Contracts
The contract type may be changed during performance:
 Conversion of cost-reimbursement contract to fixed-price
contract during performance
– Concern: Does it represent lack of oversight?
 Conversion of fixed-price contract to cost-reimbursement
contract
– Concern: Does it represent bailout of contractor?
Practice Tip: Conversion of an existing contract from one type to another is possible.
FAR 16.103(c) “In the course of an acquisition program, a series of contracts, or a single longterm contract, changing circumstances may make a different contract type appropriate in later
periods than that used at the outset. In particular, contracting officers should avoid protracted use
of a cost-reimbursement or time-and-materials contract after experience provides a basis for
firmer pricing.”
40 See, e.g., General Dynamics Corp. v. United States, 671 F.2d 474 (Ct. Cl. 1982) (government
converting a firm fixed-price contract into a cost-reimbursement contract in order to obtain
completion of the work); Ball Bros. Research Group, NASABCA 1277-6, 80-2 BCA ¶ 14,562
39
(1980) (same).
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6. What are the different types of Cost-Plus Contracts?

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

Cost-Plus-Fixed-Fee Contracts
Cost-Plus Incentive
Cost-Sharing Contracts
Cost-Plus Award Fee
Reference: FAR 16.3
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Cost-Plus-Fixed Fee Contracts
 CPFF contracts are used when efforts might otherwise present
too great a risk to the contractor.
 However, they provide the contractor with only minimum
incentive to control costs.
 A fixed fee is negotiated at the inception of the contract. The fee
paid will not vary with actual costs.
– The fee includes profit, plus an allowance for unallowable costs.
– The fee may be adjusted if the contract scope changes.
 There are statutory limitations on permissible fees (10 U.S.C.
2306(d) & 41 U.S.C. 254(b)), FAR 15.404-4(c)(4):
– R&D: 15 percent
– A&E: 6 percent of estimated cost of construction
– Other than R&D and A&E: 10 percent
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CPFF Example
Negotiated Cost Estimate
$650,000
Negotiated Fee
$52,000
TOTAL CPFF Award Amount
$702,000
Scenario 1: Actual Cost Incurred
$600,000
Scenario 2: Actual Cost Incurred
$700,000
How much does the contractor get paid?
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 Cost-sharing contracts are used when both parties receive some
benefit from contract performance.
– The contractor agrees to absorb a portion of the costs.
– The contractor expects to receive substantial compensating benefits or is
a nonprofit entity.
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 Cost-sharing contracts are most commonly found in
– Research Contracts, where the contractor expects to derive a significant
commercial benefit from the work.
– Recoupment on Development Contracts, where the government attempts
to recover nonrecurring development and production costs.
• Used only under Foreign Military Sales (FMS) contracts since about 1992.
– Support of Commercial Development, where the government supports
research, development, or demonstration efforts, and the principal
purpose is ultimate commercialization and use of technologies by the
private sector.
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No-Cost Contracts
 The contractor agrees to provide something (typically services)
with little or no financial obligation on the part of the
government.
 The contractor recoups its costs (and hopes to make a profit) by
charging a third party, such as the general public, for the
deliverables or services.
 Examples:
– Stenographic reporting for the Federal Trade Commission
– DOD and GSA Surplus Property Sales/Auction Contracts
– Conference Planning Services
 The contractor must receive some kind of non-monetary
consideration (e.g., exclusive access or rights) and that the
contractor has a means of recouping its cost (and potential
profit) from third-party sales.
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1. What is your organization’s mix of fixed price and cost
reimbursement contracts?
2. Does your organization have an effective cost accounting
system?
3. Does your organization have processes in place to ensure
compliance with cost accounting rules?
Supplemental Information: For more on choosing contract types, see K. Manuel,
“Contract Types: An Overview of the Legal Requirements and Issues,” October 1,
2010. Congressional Research Service. R41168.
Case Study #1 The Fixed-Price Proposal
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Applicable
Accounting
Regulations
FAR, Indirect Rates,
CAS,
and the Truth in
Negotiations Act
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Accounting Requirements: Quick Survey
1.
2.
3.
4.
Why do we need cost accounting in government contracts?
What are the cost principles?
What are the Cost Accounting Standards (CAS)?
What is the Truth In Negotiations Act (TINA)?
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1. Why do we need Cost Accounting?
Why do we need to understand what things cost?
 Cost affects decisions surrounding:
– Estimating and pricing
– Allocation of resources
– Strategic priorities
 Contractors may be paid only on the basis of verified costs.
 Inaccurate or unreliable cost information may lead to bad
business decisions or failure to be paid.
 Charging for unallowable costs may lead to civil and even
criminal sanctions.
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Accurate Cost Accounting
 Accurate cost accounting is necessary for all types of contracts
– Original Cost Estimates
– Cost-Reimbursement Contracting
•
Invoicing, limitation of cost/limitation of funds requirements
– Fixed-Price Contracting
•
Progress payments, contract changes, and claims
– Estimates to Complete (ETCs) and Estimate at Completion (EACs)
•
•
EVMS (Earned Value Management System) reporting
Revenue recognition
– Impacts of CAS Practice Changes
– Termination Settlement Proposals
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Commercial versus Government Contractors
Commercial companies do not generally charge customers on the
basis of their costs. Therefore, they do not have to follow
government accounting rules and are free to do their accounting in
a way that helps their management processes.
– They can account for cost by product or product line.
– They do not have to do full absorption accounting.
– Their allocation of home office costs to business segments can be
inconsistent.
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Contract Cost Principles:
FAR Part 31
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What are the Contract Cost Principles?
FAR Part 31 applies
– To cost-reimbursement contracts (FAR 52.216-7)
– To changes/equitable adjustments to all contracts
– Whenever cost analysis is performed (FAR Part 15.404(1)(c))
– When the government terminates for convenience (FAR Part 49)
The cost principles in effect when the contract was awarded will
apply throughout the life of the contract (with certain exceptions).
Reference: FAR Part 31
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What are the Cost Allowability Criteria?
A cost is allowable only when the cost complies with all of the
following requirements:
– Reasonableness
– Allocability
– Cost Accounting Standards (CAS) or otherwise Generally Accepted
Accounting Principles (GAAP)
– Terms of the contract
– FAR Subpart 31.2 limitations
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What does cost reasonableness mean?
 A cost is reasonable if it does not exceed the amount that would
be incurred by a prudent person in the conduct of a competitive
business, considering
– Is it recognized as ordinary and necessary?
– Does it demonstrate accepted sound business practices, arm’s-length
bargaining, and compliance with federal and state laws and regulations?
– Is it consistent with the contractor’s responsibilities to customers, owners,
and employees?
– Does it conform to the contractor’s established practices?
 There is no presumption of reasonableness—the burden of proof
is on contractor.
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What does cost allocability mean?
A cost is allocable if it
 Is incurred specifically for the contract;
 Benefits both the contract and other work distributed in a
reasonable proportion to the benefits received; or
 Is necessary to the overall operation of the business, even
without a direct relationship to any particular contact or cost
objective.
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What are direct and indirect costs?
 Direct costs are related to a particular cost objective and can be traced to it in
an economically feasible way.
– Direct Labor
– Direct Materials and Subcontracts
– Other Direct Costs
 Indirect costs are identified with two or more final cost objectives or an
intermediate cost objective.
– Indirect costs are usually grouped into common pools and charged to
benefiting objectives through an allocation or indirect cost rate.
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How are contract costs calculated?

Identify cost objectives (both final and intermediate).
– Typically a contract or project (IR&D/B&P)

Identify direct costs of the cost objectives.

Pool indirect cost into logical groupings.

Select appropriate cost allocation base for each
cost pool.

Calculate rate per unit of the allocation base.

Assign costs to the cost objectives.
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The Indirect Cost Rate Formula
 The indirect cost rate determines the amount of indirect costs that
will be allocated to each contract (or “cost objective”).
– Indirect Cost Rate = Indirect Cost Pool (e.g., all fringe benefit costs) /
Cost Base (e.g., all Direct Labor costs).
– Allocation to contract = Indirect Cost Rate times Direct Labor Costs on
Contract.
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Typical Indirect Cost Pools and Rates
 Fringe benefits cost pool (health insurance, pension, FICA, etc.)
is normally allocated using all labor dollars as the allocation
base.
 Overhead cost pool (supplies, office space, supervisory and
support labor) is normally allocated using direct labor dollars as
the allocation base.
 G&A cost pool (management, legal, HR, home office) is
normally allocated using a total cost input allocation base.
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Types of Indirect Cost Rates
 Forward Pricing Rates are used for cost estimates.
– They should be the best estimate of indirect cost rates.
– They may be part of a forward pricing rate agreement (FAR
42.1701).
 Provisional Billing Rates are used for interim billings of
costs (FAR 42.704).
 Internal Booking Rates are used by the contractor for
revenue recognition purposes.
– E.g., may be percentage of completion
– Not audited by Government
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Types of Indirect Cost Rates, continued.
 Proposed Final Indirect Cost Rates must be submitted within
six months after the contractor’s fiscal year ends.
– Late submissions risk government action to establish final rates
unilaterally.
– DCAA will audit final rates, but is two to three years behind.
 Final Indirect Cost Rates have been audited and settled with
the government and are used for
– Billing updates (if different from provisional rates)
– Contract closeout (final payments)
 Quick Close-out Rates are used for quick closeout purposes
when settlement of final rates is delayed. These rates will not
serve as a precedent for other contracts (FAR 42.708).
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What costs are unallowable?
Unallowable Costs must be identified and excluded from billings,
claims, and proposals. These include:
– Costs that do not satisfy the FAR Part 31 criteria:
•
•
Costs that do not meet the reasonableness test
Costs that do not meet the allocability requirements
– Costs that are not consistent with public policy
•
Example: Alcohol
– Costs that exceed prescribed limitations
•
Example: Executive compensation for FY2008, $612,000
– Costs of certain regulated activities
•
Example: Lobbying activities
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What are some examples of expressly unallowable costs?
Cost Principle
31.205-3 Bad Debts
Description
Uncollectible Accounts Receivables
31.205-8 Contributions or
Donations
31.204-14 Entertainment Costs
Cash or Property
31.205-15 Fines and Penalties
31.205-20 Interest and Other
Financial Costs
31.205-49 Goodwill
31.205-51 Alcoholic Beverages
Amusements, Diversions, & Social
Activities
Violations of Government Laws on
Regulations
Interest on “Borrowings”
Price in Excess of Fair Value of Assets
Using Purchase Method of Accounting
All alcoholic beverages
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What must the contractor certify?
This is to certify that I have reviewed this proposal to establish
final indirect cost rates and to the best of my knowledge and belief:
1. All costs included in this proposal (identify proposal and date) to establish
final indirect cost rates for (identify period covered by rate) are allowable
in accordance with the cost principles of the Federal Acquisition
Regulation (FAR) and its supplements applicable to the contracts to which
the final indirect cost rates will apply; and
2. This proposal does not include any costs which are expressly unallowable
under applicable cost principles of the FAR or its supplements.
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What penalties apply to unallowable costs?
 Applies to Contracts >$650,000
 Penalties:
– Amount of expressly unallowable costs allocated to covered contracts
– Interest from midpoint of contractor’s fiscal year
– Double if contractor knew costs were unallowable before submission
 Contractor can avoid penalties if it withdraws final rate proposal
before audit begins.
 The government can waiver penalties under FAR 42.709-5 if the
amount is under $10,000 or the inclusion of unallowable costs
was inadvertent.
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Milestone and End Item Billings
 These issues are typical to both government and commercial
contracts.
 Normally, the contractor delivers the product or service
identified in the contract, submits an invoice for payment, and is
paid.
 Milestone billings allow payments before final delivery. They
coincide with identified (and tangible) events during contract
performance.
– Performance-related
– Schedule-related
– Separate CLIN
 Revenue is recognized when billed.
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Contract Financing
 The government may need to provide financing to maintain a broad base of
suppliers, especially for long-term contracts and to support small businesses.
 There are several forms of contract financing:
– Advance payments (loans) – FAR 52.232-12
– Cost reimbursements for cost reimbursement contracts (excluding services) –
FAR 52.216-7
– Progress payments for fixed-price contracts (80% of incurred cost) – FAR
52.232-16
– Performance-based payments for fixed-price contracts – FAR 52.232-32
 Overpayments must be liquidated at the end of the contract.
 Revenue recognition by the contractor is more complex, especially if it is
using the percentage of completion method.
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Cost Accounting Standards:
Applicability and Disclosure Requirements
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When do the Cost Accountability Standards (CAS) apply?
 To negotiated contracts and subcontracts (FAR Part 15) in
excess of $650K
 If contractor is currently performing a $7.5M “trigger” contract
 Contractors may be subject to full CAS Coverage (all 19
standards) or Modified CAS Coverage (four standards).
– Single Award $50 million or more, or
– $50 million or more of CAS-covered awards in previous fiscal period
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What contracts are exempt from CAS?





Sealed bid contracts (FAR Part 14)
Negotiated contracts and subcontracts below $650K
Small businesses
Contracts with prices set by law or regulation
FFP, FP w/EPA, T&M, and Labor Hour awards for commercial
items
 Contractors who do not have any CAS-covered contracts of $7.5
million or more
 Contracts performed entirely outside the United States
 FFP contracts with adequate price competition and without
submissions of cost or pricing data
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When must contractors submit CAS disclosure statements?
 A contractor must submit a CAS disclosure statement if:
 It receives a single award of $50 million or more.
 It was awarded CAS-covered contracts totaling $50 million or
more in preceding cost accounting period.
– A segment will be exempt if its CAS-covered awards were below $10
million and less than 30% of total sales.
 After its disclosure statement has been approved, a contractor
must disclose subsequent accounting changes.
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CAS Disclosure Statement Format
Part 1 General information
Part 2 Direct Costs
Part 3 Direct vs. Indirect Costs
Part 4 Indirect Costs
Part 5 Depreciation and Capitalization
Part 6 Other Costs and Credits
Part 7 Deferred Compensation and Insurance
Part 8 Corporate or Group Expenses
Continuation Sheets
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Example: Allocation of Direct and Indirect Costs
The purpose of CAS 418 is to provide:
 Consistent determination of direct and indirect costs
 Criteria for the accumulation of indirect costs in pools
 Guidance for selecting allocation measures based on beneficial
or causal relationships between an indirect cost pool and cost
objectives
Reference: CAS 418
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CAS 418 Requirements
 Written Policy
– Policy must classify costs as direct or indirect
– Policy must be consistently applied
 Homogeneity
– Indirect costs must be accumulated in homogeneous pools
– Indirect costs must be allocated to cost objectives in a reasonable
proportion to the benefits received from those costs.
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The Truth In Negotiations Act:
Cost or Pricing Data, and Defective Pricing
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What is the Truth in Negotiations Act (TINA)?
What is the Truth in Negotiations Act (TINA)?
 10 U.S.C. 2306a:
– When price is to be negotiated, the offeror must submit certified cost or
pricing data. If the data is not current, not accurate, or not complete, the
contract price shall be adjusted downward, as necessary.
 The purpose of the Truth In Negotiations Act is to place the
government and the contractor in an equal negotiating posture.
Supplemental Information:
15.403-4 Requiring certified cost or pricing data (10 U.S.C. 2306a and 41 U.S.C. 254b).
(a)(1) The contracting officer shall obtain certified cost or pricing data only if the contracting officer concludes
that none of the exceptions in 15.403-1(b) applies. However, if the contracting officer has reason to believe
exceptional circumstances exist and has sufficient data available to determine a fair and reasonable price, then
the contracting officer should consider requesting a waiver under the exception at 15.403-1(b)(4). The threshold
for obtaining certified cost or pricing data is $700,000. Unless an exception applies, certified cost or pricing
data are required before accomplishing any of the following actions expected to exceed the current threshold or,
in the case of existing contracts, the threshold specified in the contract:
(i) The award of any negotiated contract (except for undefinitized actions such as letter contracts).
(ii) The award of a subcontract at any tier, if the contractor and each higher-tier subcontractor were required to
furnish certified cost or pricing data (but see waivers at 15.403-1(c)(4)).
(iii) The modification of any sealed bid or negotiated contract (whether or not certified cost or pricing data were
initially required) or any subcontract covered by paragraph (a)(1)(ii) of this subsection.
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What contracts are exempt from TINA requirements
(FAR 15.403)?
 Cost or pricing data should not be required when:
– The contracting officer determines that prices are based on adequate
–
–
–
–
price competition
The acquisition is below $700,000
The price is set by law or regulation
A “commercial item” is being acquired (FAR Part 12)
A waiver is granted
 The Contracting Officer may request “information other than
cost or pricing data” in order to determine that proposed prices
are fair and reasonable. This may include:
– Prices at which the same or similar items have previously been sold
– Incomplete cost data
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When does adequate price competition exist?
Adequate Price Competition exists when:
 Two or more responsible offerors, competing independently,
submit priced offers and
– Price is a substantial factor in source selection, and
– The price is not found to be unreasonable.
 One offer is received, but there was a reasonable expectation by
that offeror that two or more competitors would submit offers.
 Price analysis clearly demonstrates that the proposed price is
reasonable in comparison with current or recent prices for the
same or similar items (adjusted to reflect changes in market
conditions and contract terms) under contracts that did result
from adequate price competition.
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Cost or Pricing Data Submission Requirements
CONTRACT
SEALED BID
(IFB)
NEGOTIATED
(RFP)
SOLE SOURCE
COMPETITIVE
PRICE ANALYSIS
NO COST OR PRICING
DATA REQUIRED
(UNLESS CONTRACT MODIFIED)
NONCOMMERCIAL
PRODUCT
COMMERCIAL
PRODUCT
HCA
WAIVER
INFORMATION OTHER
THAN COST OR
PRICING DATA
CERTIFIED
COST OR PRICING DATA
REQUIRED TO BE SUBMITTED
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Key TINA Concepts
 Cost or pricing data should be
– Factual, not judgmental information
– All information that a prudent person would expect to have a significant
effect on price
– Verifiable information
– Any facts available through the date of price agreement
 A TINA violation may occur even it
– The contractor does not intend to defectively price
– The contractor’s price negotiator does not have actual knowledge of the
defective data
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Cost or Pricing Data: The “Acid Test”
If the information would affect, to any degree, the buyer’s or
seller’s negotiating position, then the government will probably
claim that the information is cost or pricing data.
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What must the contractor certify under TINA?
 Under TINA, the contractor must certify that it has disclosed
“accurate, complete, and current” cost or pricing data.
 The data must be accurate, current, and complete as of the date
of price agreement, also know as the “handshake date.”
 The Certificate of Current Cost or Pricing Data should be
executed as soon as practicable after the “handshake date.”
 The failure to certify is not a defense to defective pricing
allegations as a matter of law.
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What are the key dates with respect to defective pricing risk?
PRICE AGREEMENT
SOLICITATION
SUBMISSION
CONTRACT SIGNING
PERFORMANCE
NEGOTIATION
MEDIUM RISK
HIGH RISK
*
NO RISK
*CRITICAL DATE
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What are the possible ramifications of defective pricing?
Failure to comply with TINA requirements can lead to:
 Price reduction including cost, fee, interest on any overpayments
and penalties (FAR 15.407-1)




A fraud investigation
Prosecution
Suspension or debarment
Allegations of violations of other statutes (e.g., False Claims Act,
False Statements Act, Conspiracy, Wire/Mail Fraud, etc.)
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What are the major causes of defective pricing?




Supplier costs are not current (e.g., rebates)
Rates are inaccurate (e.g., not updated)
Labor estimate is inaccurate (e.g., technical solution changed)
Management decisions are not disclosed (e.g., reorganization,
accounting change)
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What defenses can the contractor assert?
What defenses can the contractor assert?
 Contractor did not certify. (This is no longer a defense).
 Missing data is not “cost or pricing data” (burden of proof with
contractor).
 Missing data was not reasonably available before agreement on
price.
 The government had actual notice of the missing data.
 The parties would not have relied on the missing data (burden of
proof with contractor).
 Any price decrease should be set off against price increases that
would be justified by other missing data (only where contractor
was unaware).
 The contract is exempt from TINA.
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1. Does your organization have sufficient expertise in cost
accounting rules?
2. Is your organization covered by the Cost Accounting
Standards?
3. Is your organization frequently required to submit certified cost
or pricing data?
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IncentiveType
Contracts
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Incentive-Type Contracts: Quick Survey
1. When is it appropriate to use an incentive-type contract?
2. What are the two types of incentive contracts?
3. How do incentive-fee contracts work?
4. How do award-fee contracts work?
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1. When is it appropriate to use an Incentive-Type Contract?
 Incentive contracts are used when other fixed-price or cost-
reimbursement contracts are not appropriate because the risks
are moderate.
 Incentive contracts
– Impose some risks on contractors without requiring full assumption of
risks
– Incentivize contractors to economize on costs, perform more efficiently,
and/or adopt innovative performance/management techniques
Practice Tip: Basically, incentive contracts reward or penalize contractors based on
estimated targets set at the start of the contract using a predetermined formula.
Public/Private Comparison: Incentive contracts are widely popular with customers
in the private sector to the point of becoming boilerplate language in any kind of
service contract. Usually the targets are in the form of service level agreements
(SLAs).
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Incentive-Type Contracts: Risk/Benefit Analysis
 Risk/Benefit to Contractor: The contractor realizes higher
profits/fees by performing or completing the work below a
ceiling price or by meeting or exceeding objective or subjective
performance targets.
 Risk/Benefit to Government: The government benefits by
obtaining an end item or service at a lower cost, with greater
performance, or ahead of schedule.
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2. What are the two types of Incentive Contracts?
Objective – “Incentive Fee” contracts:
 Parties include a formula in the contract to determine the amount
of profit to be earned based on actual performance results
achieved. The contract can be either Cost-Plus-Incentive-Fee
(CPIF) or Fixed-Price-Incentive (FPI).
Subjective – “Award Fee” contracts:
 Parties agree that the profit earned will be determined by the
government based on its appraisal of the contractor’s
performance. The contract can be either Cost-Plus-Award-Fee
(CPAF) or Fixed-Price-Award-Fee Contracts (FPA).
Practice Tip: Under Performance Based Acquisition, award fees can be based on
objective measurements as well.
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3. How do Incentive-Fee contracts work?
 Incentive Fee contracts encourage cost, schedule, or
performance improvement based on quantifiable, measurable
criteria.
– Cost - Uses a Share Ratio for cost savings stated in
government/contractor percentages (e.g., 60/40).
– Schedule criteria (e.g., early delivery of acceptable product).
– Performance criteria - Measurable (e.g., payload, accuracy, etc.)
 Fee is determined by formula. Formula will specify maximum
fee and possibly minimum fee. The contractor must perform
satisfactorily on the defined contract elements to earn an
incentive fee.
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Cost-Plus-Incentive-Fee Contracts
 A CPIF contract sets forth
–
–
–
–
–
Initially Negotiated Target Cost
Initially Negotiated Target Fee
Government/Contractor Cost Sharing Arrangement
Maximum Fee Recoverable by Contractor
Minimum Fee Recoverable by Contractor
 The fee is adjusted upward or downward by the sharing formula,
based on the relationship of Total Allowable Cost to Total
Target Cost.
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Cost-Plus-Incentive Fee Incentive Application
Elements:
 Target Cost: 1,000
 Target Fee: 90
 Maximum Fee: 140
 Minimum Fee: 30
 Sharing Arrangement:
140
Fee
30
90/10
Step One:
Determine Underrun or
Overrrun
Underrun or Overrun =
Target Cost – Actual
Cost
90/10
90
Step Two:
Determine Adjusted Fee
Adjusted Fee = Target
Fee + (10% of Underrun
or Overrun)
Cost
1000
Step Three:
Compute Final Price
Final Price = Actual Cost
+ Adjusted Fee
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CPIF Examples
 Refer to previous slide for formulas.
– Scenario 1: Actual Costs $750
– Scenario 2: Actual Costs $1,100
 How much incentive fee did the contractor earn?
 How much money did the government save?
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Fixed-Price-Incentive Contracts
 A FPI contract provides for adjusting profit and establishing the
final contract price using the formula based on the relationship
of total final negotiated cost to total target cost.
– The final price is subject to a ceiling price, which is negotiated at the
outset.
– Formula adjusts target profit based on target cost.
– The contractor must complete performance of a FPI contract no matter
what the costs and even if costs go beyond the ceiling price.
 A FPI contract is similar to a CPIF contract, except:
– A CPIF contract does not have a ceiling price. Instead, a CPIF contract
includes minimum and maximum fees.
– A CPIF contract reimburses all allowable costs, subject to LOC/LOF
clauses.
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Fixed-Price-Incentive Contracts
 A FPIF contract sets forth:
–
–
–
–
–
Initially Negotiated Target Cost
Initially Negotiated Target Profit
Target Price
Ceiling Price
Government/Contractor Sharing Arrangement
 The Target Profit is adjusted upward or downward by the
sharing formula, based on the relationship of Total Allowable
Cost to Total Target Cost.
Point of Total Assumption (PTA): The point where cost increases that exceed the
target cost are no longer shared by the government according to the share ratio. At
this point, the contractor’s profit is reduced one dollar for every additional dollar of
cost. The PTA is calculated with the following formula.
PTA = (Ceiling Price - Target Price)/Government Share + Target Cost
(From WIFCON)
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Fixed-Price-Incentive Contracts: Two Basic Types
 Firm Target (FPIF) - profit varies inversely with the cost, thus it
provides a positive, calculable profit incentive for the contractor
to control costs.
– Specifies a target cost, a target profit, a price ceiling (but not a profit
ceiling or floor), and a profit adjustment formula.
– These elements are all negotiated at the outset.
 Successive Targets (FPIS) - Rarely used.
– Specifies an initial target cost, an initial target profit, an initial price
ceiling (but not a profit ceiling or floor), and an initial profit adjustment
formula.
– Contract also specifies a production point at which the firm target cost
and firm target profit will be negotiated, either is a FFP of a FPIF
contract.
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Fixed-Price-Incentive Contracts: Incentive Application
Elements:
 Target Cost: 1000
 Target Profit: 80
 Target Price: 1080
 Ceiling Price: 1200
 Sharing Arrangement: 70/30
100
70/30
80
PTA
Profit
Step One:
1000
Cost
Determine Underrun or /Overrun
Underrun or Overrun =
Target Cost - Actual Cost
Step Two:
Determine Adjusted Profit
Adjusted Profit = Target Profit
+ (30% of Underrun or Overrun)
1200
Step Three:
Compute Final Price
Final Price = Actual Cost + Adjusted Profit
(provided it is less than Ceiling Price)
Reference
Note: Point of Total Assumption = Ceiling Price - Target Price + Target Cost Government Share
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Fixed Price Incentive Example
 Refer to previous slide for formula
– Scenario 1: Actual Cost = 500
– Scenario 2: Actual Cost = $1,250
 How much profit did the contractor make?
 How much money did the government save?
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4. How do Award-Fee contracts work?
 In Award Fee contracts an award pool (funding) is made
available at contract initiation.
 Award fee plan states criteria for percentage fee awarded.
 Award fee board meets at regular intervals to determine award
fee.
 Fee may include fixed base fee.
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Award-Fee Contracts: Advantages and Disadvantages
 Advantages
–
–
–
–
Improved communication between government and contractor.
Incentive aligns final price with value received.
Periodic reassessment of performance.
Frequently viewed as yielding higher fees than CPFF contracts.
 Disadvantages
– Increased administrative costs to support evaluation process.
– May create disincentive to challenge government direction when
troublesome.
– Subjectivity of government evaluators’ award fee determination.
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Cost-Plus-Award-Fee Contracts
 Parties establish:
–
–
–
–
Estimated Costs
Base Fee (e.g., DoD CPAF contracts limited to 0% to 3%)
Maximum Fee
Award Periods
 Amount of fee awarded may be subjective.
– Decision based on criteria in award fee plan
– Contractor should seek input into plan and into evaluations
– FAR 16.402(a)(1) says CPAF cannot have technical incentives without
costs incentives
 Government determines fee unilaterally (committee, contracting
officer, other official)
 Fee award is not subject to the disputes clause.
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Cost Plus Award Fee
Period 4
Period 3
Period 2
Period 1
Fee
Cost Plus Award Fee
(CPAF)
Award
Pools

Each period has an award pool.

Each pool is awarded separately.

The Award Fee Board determines
what percentage of each pool to
award.

Pool portions not awarded may
be rolled to subsequent periods to
increase incentive.
Minimum Fee 0% - 3%
Cost
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Cost Plus Award Fee Application
Step One
 Evaluate Performance in accordance with Award Fee Plan.
 Determine percentage of fee earned for each category during
performance plan.
Step Two
 Determine Available Fee during performance period.
 Apply earned fee percentage to available fee.
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Award Application
Example: First Period - Pool Available $500,000
$ Value * Assigned Grade
=
Award $ Value
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Fixed-Price-Award-Fee (FPAF) Contracts
 FPAF contract used when government wants to motivate a
contractor, and other incentives cannot be used because
contractor’s performance cannot be measured objectively.
 Contract contains monetary incentives for exceeding established
targets or for better than satisfactory performance.
 Contract price is fixed.
 Government sets aside an award fee pool and contractor
performance is evaluated periodically.
Practice Tip: Maybe better way to define FPAF is to say that it is used when the
government wants to incentivize the contractor to perform better but also wants the
guarantee of completion of performance, i.e., we want to incentivize you knowing
that you have to perform to get paid anyway.
Is FPAF a better contract type for incentivizing innovation?
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Award-Term Contracts
 “Award term” is a contract performance incentive feature that ties
the length of a contract's term to the performance of the
contractor.
– The contract term can be extended for "good" performance or reduced for
"poor" performance.
– Similar to award-fee contracts (FAR 16.405-2), where contract
performance goals, plans, assessments, and awards are made regularly
during the life of a contract.
 Award term solicitations and contracts should include a base
period (e.g., 3 years) and a maximum term (e.g., 10 years),
similar to quantity estimates used in indefinite quantity/indefinite
delivery contracts for supplies (FAR 16.504).
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Award-Term Contracts
Additional challenges related to Award-Term Contracts:
 Contractors assume greater risk when pricing long-term
contracts
 Must comply with FAR 16.505(c) five-year limitation on
consulting service contracts
 Must consider effect of terminations for convenience on the
parties’ rights
 Requirement for Full and Open Competition
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1. Does your organization perform/award many incentive
contracts?
2. Does your organization seek input into award fee plans?
3. How well is your organization rewarded under award fee
contracts?
Case Study #2 The Limitation of Funds Clause
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Other
Contract
Types
And
Agreements
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Other Contract Types: Quick Survey
1.
2.
3.
4.
5.
What are FFP-LOE Contracts?
What are T&M and LH Hour Contracts?
What are the limitations on using T&M and LH Contracts?
What are Indefinite-Delivery Contracts?
What are the limitations on using Indefinite Delivery
Contracts?
6. What are Letter Contracts?
7. What are Basic Agreements and Basic Ordering Agreements?
8. What are contract options?
Practice Tip: While the advantages of these contract types is more administrative
in nature, a risk/benefits analysis should continue to be applied in considering
them.
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1. What are Fixed Price – Level of Effort
(FFP-LOE) Contracts?
 In FP-LOE contracts a fixed dollar amount is paid for a specified
number of labor hours expended over a stated period of time.
 Payment is made upon expenditure of the required hours of
effort.
 Allows flexibility in the amount of work assigned
 Permits a downward adjustment if not all hours are expended
according to a specified formula.
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Fixed Price – Level Of Effort
 Suitable for investigation or study in a specific research and
development area.
 End product is usually a report showing the results achieved
through application of the required level of effort.
 Payment is based on the total effort expended rather than on the
results achieved.
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Fixed Price – Level Of Effort
 FP-LOE Contracts may only be used when:
– The work required cannot otherwise be clearly defined;
– The required level of effort is identified and agreed upon in advance;
– There is reasonable assurance that the intended result cannot be achieved
by expending less than the stipulated effort; and
– The contract price is $100,000 or less, unless approved by the chief of
the contracting office.
 Should not be used for non-R&D efforts.
 Variation – Cost-Reimbursement LOE Term Contract in FAR
16.306(d)
Public/Private Comparison: In the private sector many services contracts intended to be T&M
and FP project end up being de facto LOE contracts because of poor drafting of the pricing or of
the project plan.
For contractors, LOEs offer an easy way to write a services contract that ensures the consultant
will be permanently assigned.
Is administrative convenience a legitimate reason to use an LOE?
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2. What are Time and Materials (T&M) and
Labor Hour (LH) Contracts?
 T&M and LH contracts are used when it is not possible to
estimate the extent, duration, and cost of the work with any
reasonable degree of confidence.
 Time: Fixed hourly labor rate, fully burdened.
– Rate includes wages, overhead, general and administrative costs, and
profit.
 Materials: To be supplied at cost or catalog prices, may include
material handling costs.
 Other Direct Costs: Travel, etc., may or may not be burdened
depending on contract.
 Government Surveillance: Contractor has no positive incentives
for cost control or labor efficiency.
Practice Tip: G&A and overhead are both indirect costs, but while G&A applies to the
whole operation, overhead applies to only a portion of the operation.
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Labor Hour Contracts
 A Labor Hour (LH) contract is a variation of the Time-andMaterials contract.
̶
The difference is that in an LH Contract no materials or other direct costs
are billable unless specified in the contract.
 Used by government when the contracting officer wants to
exercise control over other direct costs, especially travel.
 Issue: How is a contractor supposed to bill the government for
subcontracted or “purchased labor?”
– Issue: How is a contractor supposed to bill the government for
subcontracted or “purchased labor?”
• Prime Contract--$250/hour
• Subcontract 1--$175/hour; Subcontract 2--$300/hour; Subcontract 3-$300,000 fixed price for 2,500 hours
• How should the prime contractor invoice the government?
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“Purchased Labor” Issue
 Answer (???):
– FAR 52.232-7.
The Government will pay the Contractor as follows upon the submission of vouchers approved by the Contracting
Officer or the authorized representative:
(a) Hourly rate. (1) Hourly rate means the rate(s) prescribed in the contract for payment for labor that meets the labor
category qualifications of a labor category specified in the contract that are—
(i) Performed by the Contractor;
(ii) Performed by the subcontractors;
(2) The amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number
of direct labor hours performed.
(b) Materials. (1) or the purposes of this clause—
(i) Direct materials means those materials that enter directly into the end product, or that are used or consumed
directly in connection with the furnishing of the end product or service.
(ii) Materials means—
(A) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of the Contractor
under a common control;
(B) Subcontracts for supplies and incidental services for which there is not a labor category specified in the
contract;
(5) The Contractor may include allocable indirect costs and other direct costs to the extent they are—
(i) Comprised only of costs that are clearly excluded from the hourly rate;
(ii) Allocated in accordance with the Contractor's written or established accounting practices; and
(iii) Indirect costs are not applied to subcontracts that are paid at the hourly rates.
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3. What are the limitations on using T&M and LH contracts?
 T&M or LH contracts may be used to acquire commercial items
only when:
– The services are acquired under competitive procedures, procedures
other than full and open competition under FAR Subpart 6.3, or where
the contractors have been given a fair opportunity to be considered under
FAR 16.505(b) (IDIQ multiple award contracts).
– The Agency Contracting Officer:
• Executes a Determination and Findings (D&F) that no other authorized
•
•
contract type is suitable;
Includes a ceiling price in the contract that the contractor exceeds at its own
risk; and
Authorizes any subsequent change in that ceiling price only upon a
determination that it is in the best interest of the government to change the
ceiling price.
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4. What are Indefinite-Delivery Contracts?
 Indefinite-Delivery contracts are used to acquire supplies or
services when the exact times or exact quantities of future
deliveries are not known at the time of contract award.
 In the RFP, the government provides “best estimates” of
quantities to be needed.
 Individual orders are issued when exact quantity and delivery
date are known.
 In order to satisfy the requirement that a contract must have
consideration in order to be binding, the contract must provide
for a guaranteed minimum amount, which may be substantially
less than estimated quantity or contract maximums.
Reference: FAR 16.5
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What are the three different kinds of
Indefinite-Delivery Contracts?




Definite-Quantity/Indefinite Delivery Contracts
Indefinite Delivery/Indefinite-Quantity (IDIQ) Contracts
Requirements Contracts
Indefinite-Delivery Contracts are also known as delivery order
contracts (for supplies) or task order contracts (for services).
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Definite-Quantity Contracts
 A definite quantity of supplies or services will be required
during the contract period.
 Exact delivery dates are not established.
 Government issues delivery orders or task orders when delivery
dates are known.
 Contractor commits that supplies or services are regularly
available or will be available after a short lead time.
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Indefinite Delivery/Indefinite-Quantity Contracts
 Establishes an indefinite quantity, within stated limits, of
supplies or services to be provided during a fixed period.
 Government issues delivery orders or task orders when delivery
dates are known.
 Contract establishes a guaranteed minimum (which should be
more than nominal) quantity that must be ordered.
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Requirements Contract
 Provides for filling all actual purchase requirements for supplies
or services during a specified contract period.
 Deliveries or performance is scheduled by placing delivery/task
orders with the contractor.
 If feasible, contract establishes maximum limit of the
contractor’s obligation to deliver and the government’s
obligation to order.
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5. What are the limitations on using
Indefinite-Delivery Contracts?
 Indefinite-delivery contracts for commercial items may be used
only when
– Unit prices are established based on a firm-fixed-price or fixed-price
with economic price adjustment; or
– Rates are established for commercial services acquired on a Time-andMaterials or Labor-Hour basis.
 Additional limitations and determinations and findings may be
required when issuing individual orders on a T&M or LH basis.
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Issues Regarding Indefinite-Delivery Contracts
 Ordering out-of-scope work prohibited.
– GSA’s “Open Market” purchases
 There are statutory requirements for limited “competition.”
– “Fair opportunity to be considered”
 Can task-order awards be protested?
– GAO – Orders over $10 Million
– Agency ombudsman is an alternative avenue
 Special approvals may be required.
– DOD’s limits on use of multi-agency ordering vehicles
128
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DOD’s Limitations On Indefinite-Delivery, T&M & LH
 Section 803 of the 2002 Authorization Act normally requires
competition among IDIQ contract holders for task orders over
$100,000 (DFARS 216.505).
 DFARS 216.601 and 252.216-7002, Alt A, extend FAR Part 12
limitations on use of T&M and LH contracts to noncommercial
DOD contracts.
129
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6. What are Letter Contracts?
 Letter contracts are used in situations of unusual, compelling
urgency.
 The letter contract authorizes the contractor to begin
performance at the direction of the contracting officer, without
an agreement on price or terms.
 The letter contract contains a negotiated definitization schedule:
– A final agreement is to be executed within 180 days after the date of the
letter contract or before completion of 40 percent of the work—
whichever occurs first.
 Negotiations take place after performance has begun.
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Letter Contracts
 Letter contracts may not—
– Commit the government to a definitive contract in excess of the available
funds;
– Be entered into without competition when competition is required by
FAR Part 6; or
– Be amended to satisfy a new requirement unless that requirement is
inseparable from the existing letter contract.
131
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Letter Contracts Risks and Limitations
 Risk/Benefit to Government: The government bears substantial
risk. Accordingly, a letter contract may be used only after the
head of the contracting activity or designee determines in
writing that no other contract is suitable.
 Risk/Benefit to Contractor: The contractor may also be at risk.
– The letter contract must contain a not-to-exceed price.
– Contract definitization can be made unilaterally by the contracting
officer, subject to the Disputes Clause.
Practice Tip: There are also benefits (avoided risks) with Letter Contracts:
Govt.—Gets requirements satisfied without delay. Avoided risk is unsatisfied
requirements.
Contractor—Gets foot in the door and becomes a de facto incumbent. Avoided risk is
missed opportunity.
Public/Private Comparison: In the private sector Letter Contracts are abused by
sales people looking to avoid the delay of negotiating a contract.
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132
7. What are Basic Agreements and Basic Ordering Agreements?
 Basic agreements and basic ordering agreements are not
contracts. Rather, they are written instrument of understanding
that:
– (1) contain clauses applying to future contracts between the parties
during its term; and
– (2) contemplate separate future contracts that will incorporate by
reference or attachment required and applicable clauses agreed upon in
the basic agreement.
 BAs and BOAs are used when a substantial number of separate
contracts may be awarded and significant recurring negotiating
problems have been experienced with the contractor.
 BAs and BOAs may be used with negotiated fixed-price or costreimbursement contracts.
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8. What are Contract Options?
 An option is a unilateral right by which, for a specified time, the
government may elect to purchase additional supplies or services
called for by the contract, or may elect to extend the contract.
 Except for information technology contracts, for supplies and
services contracts the full contract period, including option
periods, may not exceed five years under FAR 17.204(e).
 Unpriced options are unenforceable unless they are conditioned
upon obligation to bargain in good faith.
Reference: FAR 17.2
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Contract Options
 The government must comply with terms of contract as well as
applicable statutes and regulations before exercising an option.
– The contracting officer must determine
•
•
•
•
that funds are available
that the requirement fills existing need
that exercise of the option is the best way to fulfill the need
that the option was properly synopsized
 The government has discretion to decide whether to exercise the
option.
– A decision not to exercise an option is not protestable.
– A decision to exercise an option is protestable, or subject to Disputes Act
claim.
135
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Risk and Control Continuum
(TYPES OF CONTRACTS)
FFP
CPFF
FFP/EPA
FPIF
FPR
T&M
OR
L/H
CS
CR
CPIF
CPAF
(RISK)
LOW
BUYER
HIGH
HIGH
LOW
SELLER
(PROJECT CONTROL)
LESS
BUYER
MORE*
MORE*
SELLER
LESS
FFP = Firm Fixed Price
CS = Cost Sharing
FFP/EPA = Firm Fixed Price
w/Economic Price Adjustments
CR = Cost Reimbursement
CPIF = Cost Plus Incentive Fee
FPIF = Fixed Price Incentive Firm
CPAF = Cost Plus Award Fee
FPR = Fixed Price Redeterminable
CPFF = Cost Plus Fixed Fee
T&M = Time & Materials
L/H = Labor Hour
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Major Systems: A Macro Perspective
Pre-Systems
Acquisitions
CPFF
FFP (Level
of Effort)
System Acquisition
CPFF CPIF CPAF
(FP – DoD)
Milestone A
Concept&
Technology
Development
FPI
Sustainment
FP(EPA) FFP
Milestone C
Production & Deployment
Milestone B
System
Development &
Demonstration
FPIF FFP
Initial
Capability
Full Capability
Operations &
Support
ILL DEFINED... DEFINED ... WELL DEFINED RQMT
Concept
Exploration
A
Product
Design
B
Initial
Mfg
PRODUCTION or
DEPLOYMENT
C
Milestones for Entry into Next Phase
WORK STATEMENT TYPE CHANNEL
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137
1. Does your organization perform/award many T&M or LH
contracts?
2. Does your organization perform/award many indefinite delivery
contracts?
3. How does your organization manage T&M, LH, and indefinite
delivery contracts?
Case Study #3 Faulty IDIQ Estimate
138
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Special
Types
of
Acquisitions
139
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Types of Acquisition: Quick Survey
1. What is different about commercial item acquisitions?
2. What limitations apply to commercial item contracts?
3. What are performance-based services acquisitions?
140
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1. What is different about Commercial Items Acquisitions?
 FAR Part 12 states a preference for commercial items.
– Government should conduct market research to determine whether
commercial items or NDIs (nondevelopmental items) are available to meet
the government’s requirements.
– Government should acquire commercial items or NDIs when they are
available and meet the government’s needs.
– Government should require prime contractors and subcontractors to
incorporate commercial items or NDIs into components of items supplied
to the government to the maximum extent practicable.
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 What is a commercial item?
– Sold, leased, or licensed to the general public; or
– Offered for sale, lease, or license to the general public; or
– With standard modifications, is available in the commercial marketplace;
or
– Has minor nonstandard modifications.
– Includes some types of services and some types of nondevelopmental
items (NDIs)
– 2009: Definition of Commercial Off The Shelf (COTS) items added to
FAR
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 Streamlines contract administration
– Cost Accounting Standards (CAS) do not apply.
– Many certifications and compliance rules do not apply.
– There are a limited number of mandatory flowdowns.
143
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2. What limitations apply to Commercial Item Contracts?
 A DOD Major Weapon System may be treated as a commercial
item, or acquired under FAR Part 12, only if
1.
–
–
–
The Secretary of Defense determines that
The major weapon system is a commercial item as defined in FAR 2.101
Such treatment is necessary to meet national security objectives
The offeror has submitted sufficient information to evaluate, via price
analysis, the reasonableness of the price for the system
2. Congressional defense committees are notified at least 30 days in advance
 A subsystem that meets the definition of commercial item may be
acquired as a commercial item only if the major weapon system is
being acquired under Part 12.
Reference: DFARS 234.7002
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Commercial Items Acquisitions Limitations
 For acquiring commercial items, under FAR 12.207(a) agencies
generally must use FFP Contracts and FP-EPA Contracts.
 For acquiring commercial services, under FAR 12.207(b) time &
materials, labor hour, and indefinite-delivery contracts may be
used in very limited circumstances.
 Use of any other contract type to acquire commercial items is
prohibited under FAR 12.207(e).
 Commercial items contracts may be used in conjunction with an
award fee or performance or delivery incentives when the award
fee or incentive is based solely on factors other than cost under
12.207(d).
Reference: FAR 12.207, 16.202-1, 16.203-1
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 T&M and L-H contracts may be used only when
– Services are acquired under competitive procedures, procedures other than
full and open competition, or where the contractors have been given a fair
opportunity to be considered
– CO executes a Determination and Finding (D&F) that there is sufficient
information to detemine price reasonableness and that no other authorized
contract type is suitable
– CO includes a ceiling price in the contract that the contractor exceeds at its
own risk
 Indefinite-delivery contracts may be used only when
– Prices are established based on a firm-fixed-price or fixed price with
economic price adjustment, or
– Rates are established for commercial services acquired on a time-andmaterials or labor-hour basis
146
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3. What are Performance-Based Acquisitions?
 Performance-based Acquisition ((PBA), formerly called
Performance Based Services Acquisition) emphasizes the use of
results or “what” is to be provided in lieu of more specific or
“how to” work statements.
 Work performance is assessed against measurable performance
standards (e.g., quality, timeliness, quantity) using quality
assurance plans.
 Financial incentives are used to encourage innovative and costeffective performance.
FAR Subpart 37.6, 16.402
Office of Federal Procurement Policy (OFPP) “Seven Steps to Performance Based
Acquisition” at www.acquisition.gov/comp/seven_steps/index.html
Reference: FAR 37.6
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Performance-Based Acquisition Policy
 Performance-based acquisition is the preferred method for
acquiring services. (Public Law 106-398, Section 821)
 Contracting officers are directed to use the following order of
precedence for contract types (section 821(a)):
─ Firm-fixed price performance-based contract or task order
─ Performance-based contract or task order that is not firm-fixed price
─ Contract or task order that is not performance-based
148
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Performance-Based Acquisition Incentives
 Performance incentives, either positive or negative or both, are to
be used to the maximum extent practicable under FAR 37.602-4,
16.402-2(b).
 Incentives should correspond to performance standards in the
contract’s QASP under FAR 37.602-4 and to the PWS/SOO under
FAR 16.402-2(c)-(e).
 Incentive-type contracts used for performance-based service
acquisitions include:
– Both fixed-price and cost-reimbursement contracts
– Both incentive contracts and award-fee contracts
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Performance-Based Acquisition
 Performance Work Statements (PWS)
‒
Defines results to be achieved while inviting wide range of solutions from
contractors.
‒
Allows for some input and innovation from contractors.
‒
Performance objectives are defined by agency
‒
Provides for measurable performance standards and incentives.
‒
Can include some tasks, is midway between an SOW and an SOO.
 Statement of Objectives (SOO)
‒
Invites greatest input from contractors.
‒
Contractors write PWS in response.
‒
No tasks, is the opposite of an SOW.
 Quality Assurance Surveillance Plans (QASPs)
 Competitive negotiation selection procedures used under FAR
37.602-3.
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150
1. Does your organization perform/award many commercial
contracts?
2. Does your organization perform/award many performancebased contracts?
3. Would your organization operate more effectively and
efficiently if it performed/awarded more commercial or
performance-based contracts?
151
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Today and
Tomorrow
152
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Today and Tomorrow: Quick Survey
1. What do the new OMB guidelines say?
2. What other new guidance has been issued?
153
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OMB Guidelines
 OFPP memorandum issued October 27, 2009
‒ Based on President’s March 4, 2009 Memorandum and OMB’s July
29, 2009 instructions
‒ OMB July 29 memorandum instructed agencies to reduce by at least
10 percent the amount obligated to contracts that are awarded 1) noncompetitively or are one bid, 2) cost-reimbursement contracts, or 3)
T&M/LH contracts
‒ Evaluate progress against targets on semi-annual basis and set new
targets in next FY
Quote from Oct. 27 memo: “In most cases, fixed price contracts will be best suited for achieving
this goal [minimize risk and maximize value] because they provide the contractor with the greatest
incentive for efficient and economical performance. In circumstances where there is considerable
uncertainty regarding the requirements, however, cost reimbursement contracts, or, in more limited
circumstances, time and material and labor hour…contracts may provide for a more effective
allocation of risk…”
In light of everything covered in the seminar, isn’t this statement so vague as to be misleading?
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OMB Guidelines
OMB October 27 memorandum sets out guidelines focused on three
questions:
 1. How is the agency maximizing the effective use of competition
and choosing the best contract type?
 2. How is the agency mitigating risk when noncompetitive, costreimbursement, or T&M/LH contracts are used?
 3. How is the agency creating opportunities to transition to more
competitive or lower risk contracts?
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1. How to maximize competition and choose best contract type?
 Develop requirements with sufficient information in SOW and
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sufficient response time.
Gather information from industry, understand market.
Use performance-based acquisition for acquiring services.
Use existing contracts.
Use task-order and delivery-order contracts.
Ensure maximum consideration of small businesses.
Prefer fixed-price contracts; use cost-reimbursable contracts only
when necessary resources are uncertain.
Convert cost contracts to fixed-price when uncertainty is
removed.
Use incentive payments to encourage cost control.
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2. How to mitigate risk on noncompetitive contracts?
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Limit performance period of contract.
Ensure price reasonableness.
Regularly assess contractor performance.
Submit performance assessments to Past Performance
Information Retrieval System (PPIRS).
Increase oversight of contractor accounting systems and cost
controls.
Link payment to quality, efficiency and timeliness of
performance.
Ensure that acquisition professionals have sufficient skills to
manage cost-type contracts.
Pay attention to justification for using T&M/LH contracts for
commercial items acquisitions.
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3. How to create opportunities to
transition to competitive contracts?
 Contact contractors that do not submit offers to understand why
they did not.
 Perform spend analysis of largest spend categories.
 Implement contract review boards, peer reviews, or contract type
advocates.
 Use hybrid contracts where possible.
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2. What other new guidance has been issued?
 DOD May 29, 2006 memorandum:
– Award fees should be tied to identifiable interim outcomes and structured
to motivate contractors.
– “Roll over” award fees should be the exception rather than the rule.
 DOD May 24, 2007 memorandum requires
– Use of objective measurable standards that mean something to the
program.
– Set specific % for specific rating—now required.
– Cannot now award maximum unless contractor exceeds standards.
 December 2007 OMB Best Practices mimics this as well. and also
reminds COs that to consider administrative costs.
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1. Has your organization encountered any changes in the
procurement environment as a result of the administration’s new
guidance?
2. What is your organization doing in response to the new
guidance?
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Case Study: Faulty IDIQ Estimate
GSA solicited bids for a contract to provide travel management services for
federal agencies in Maine. The successful offeror was required to provide
personnel, equipment, materials, supervision, and other items or services
necessary to perform the management and operation of a travel office to
service federal government customers. In return, the successful bidder
would receive commissions for providing government travelers with
reservations with airlines, hotels, and other travel providers.
The cover page of the solicitation provided in bold capital letters,
"INDEFINITE-DELIVERY, INDEFINITE-QUANTITY CONTRACT."
The solicitation contemplated that one, two, or three separate indefinitedelivery, indefinite-quantity ("IDIQ") contracts could be awarded to
provide the same travel management service. The bottom of the cover page
of the solicitation expressly provided: "[T]his is an indefinite-delivery,
indefinite-quantity contract with guaranteed revenue minimum of $100.
This differs significantly from a requirements contract.“
The solicitation indicated that bidders "shall base their offers on fiscal year
1994 figures" for federal agency travel management services usage in
Maine. The figures illustrated in the solicitation estimated business of
approximately $1,000,000 per year.
The solicitation stated in three places: "The fiscal year 1994 tables are for
informational purposes only and do not represent any guarantee of sales . . .
and do not reflect any commitments received by GSA from the federal
agencies . . . ." It further stated: "It is not known how many federal agencies
will choose to use this contract, and it is not known how much business this
contract will generate for the contractor." The solicitation also stated that:
"The resultant contract(s) is a preferred source for the agencies located in
the outlined geographic location whenever an agency has a need for
commercial travel management services."
Prior to the due date for the submission of bids, GSA learned that certain
DoD units - which comprised over half of the expected business in Maine
under the relevant solicitation - would no longer be utilizing GSAcontracted government travel management services. GSA failed to notify
bidders of this information.
On October 25, 1995, GSA awarded Trips ‘R Us a contract for travel
management services in the states of Maine. During the contract period
Trips ‘R Us realized gross sales in excess of $500,000 under the contract.
Trips ‘R Us submitted a breach of contract claim to GSA on the basis that
GSA had told offerors to base offers on fiscal year 1994 figures but had
failed to provide offerors with information, known to GSA, that indicated
that such figures were substantially overstated. After the CO denied its
claim, Trips ‘R Us appealed to the GSBCA.
1 - Did GSA meet its obligations under the IDIQ Contract?
2 - Is Trips ‘R Us entitled to compensation for GSA’s faulty estimate?
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Case Study Answer: Faulty IDIQ Estimate
Faulty IDIQ Estimate
 The Board and Court of Appeals came to different conclusions.
 The prevailing law is that the government is not responsible for faulty or
negligent estimates of quantities to be ordered in an IDIQ contract.
 In an IDIQ contract, once the government meets the minimum purchase
requirement it has fulfilled its purchase obligations, and the contractor will
have no recourse.
GSBCA Decision
The GSBCA split two-to-one. The majority determined, “By inducing Trips
‘R Us to base its proposal on quantities that GSA knew or should have
known were overstated, GSA breached its duty to deal with Trips ‘R Us
fairly and in good faith.”
Court of Appeals Decision
Both requirements contracts and IDIQ contracts provide the government
purchasing flexibility for requirements that it cannot accurately anticipate.
A requirements contract requires the contracting government entity to fill
all of its actual requirements for supplies or services that are specified in the
contract, during the contract period, by purchases from the contract
awardee. FAR § 16.503(a). Conversely, while an IDIQ contract provides
that the government will purchase an indefinite quantity of supplies or
services from a contractor during a fixed period of time, it requires the
government to order only a stated minimum quantity of supplies or services.
FAR § 16.504(a).
Under an IDIQ contract, the government is required to purchase the
minimum quantity stated in the contract, but when the government makes
that purchase, its legal obligation under the contract is satisfied and it is free
to purchase additional supplies or services from any other source it chooses.
An IDIQ contract does not provide any exclusivity to the contractor.
Trips ‘R Us entered into a contract with GSA that explicitly stated that it
was an IDIQ contract and that Trips ‘R Us was guaranteed no more than
$100 of revenue. The solicitation also stated that governmental agencies
could, but were not required to, use this contract for its travel management
services needs.
Regardless of the accuracy of the estimates delineated in the solicitation,
based on the language of the solicitation for the IDIQ contract, Trips ‘R Us
could not have had a reasonable expectation that any of the government’s
needs beyond the minimum contract price would necessarily be satisfied
under this contract.
When an IDIQ contract between a contracting party and the government
clearly indicates that the contracting party is guaranteed no more than a
non-nominal minimum amount of sales, purchases exceeding that minimum
amount satisfy the government’s legal obligation under the contract. Under
the terms of the IDIQ contract at issue, GSA was only required to purchase
the minimum quantity stated in the contract—sales that would lead to $100
in revenue. Trips ‘R Us realized over $500,000 of gross sales under the
contract, which netted Trips ‘R Us over $100 of revenue. Therefore, GSA
satisfied its obligation under the contract. Because GSA met the legal
requirements of the contract at issue, its less than ideal contracting tactics
fail to constitute a breach. Therefore, Trips ‘R Us is not entitled to any legal
relief.
Based on Travel Centre v. Barram, 236 F.3d 1316 (Fed. Cir. 2001).
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Case Study: Fixed Price Proposal
The Office of Naval Research (ONR) issued a Broad Agency Announcement,
which contemplated a two-phase award process for the development and
testing of a prototype waterjet to be used in advanced Navy ships. For Phase
I, the BAA required offerors to propose pump design, model fabrication,
and a large-scale demonstration plan. Phase II required large-scale at-sea
demonstrations and testing. The solicitation stated that “it is anticipated that
we will award one or more cost type contracts for this effort.”
Wortec and one other firm received Phase I contract awards. While the
other firm received a cost-plus-fixed-fee contract as anticipated by the
solicitation, ONR issued Wortec a fixed-price contract because Wortec did
not have an accounting system approved by the Defense Contract Audit
Agency (DCAA). During the Phase I period Wortec suggested to ONR that
it might also submit a fixed-price proposal for the Phase II award. ONR
responded that it awarded the first contract as a firm-fixed-price basis to
allow Wortec time to implement an approved accounting system, but would
not award Phase II as a FFP contract.
Phase II proposals consisted of a technical volume and a cost volume. Both
Wortec and the other Phase I awardee submitted Phase II proposals to the
ONR program officer, who conducted the technical review. After this review
the program officer selected both proposals for Phase II contracts in
accordance with the technical evaluation criteria. The program officer then
forwarded the proposals to the contracting officer for a cost analysis. The
contracting officer found that Wortec’s cost proposal did not provide the
needed level of cost detail but instead proposed that the award be made on a
fixed-price basis, and determined that Wortec was ineligible for a cost-type
award since DCAA still had not approved Wortec’s accounting system.
As a result, ONR made a Phase II award to the other Phase I contract
holder, but not to Wortec. Wortec challenged the rejection of its proposal
in a protest at the Government Accountability Office, arguing that the
solicitation did not require submission of a cost-type proposal but merely
stated that the agency anticipated making a cost-type contract award, and
that the agency properly could have and should have considered Wortec’s
fixed-price proposal.
Questions to discuss
1 – Could agency have properly considered Wortec’s fixed-price proposal?
2 – Did the agency properly reject Wortec’s proposal because not it was not
a cost-type proposal?
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Case Study Answer: Fixed-Price Proposal
The Fixed-Price Proposal
 An agency may award a fixed-price contract even though the solicitation expresses
a preference for a cost-type contract vehicle.
 Fixed-price contracts are preferred, but an agency can and should exercise its
discretion to award a cost-type contract when it is not possible to estimate the costs
at the time of award.
A fixed-price proposal generally may be considered by an agency notwithstanding
that the agency otherwise indicated a preference for a cost-type award. As explained
in FAR 16.103(a), the agency’s objective is to select a contract type that will result in
reasonable contractor risk and provide the contractor with the greatest incentive for
efficient and economical performance. Thus, while the FAR calls for the use of fixedprice contracts when the risk involved is minimal or can be predicted with an
acceptable degree of certainty, it states that other contract types should be
considered where a reasonable basis for firm pricing does not exist, particularly in
an R&D context. FAR § 35.006(b); see also FAR § 35.006(c) (the use of cost-type
contracts is usually appropriate in research and development procurements).
Further, DFARS 235.006(b)(ii) prohibits the use of fixed-price contracts unless
certain conditions are met:
For other than major defense acquisition programs (A) [d]o not award a fixed-price
type contract for a development program effort unless—
(1) The level of program risk permits realistic pricing;
(2) The use of a fixed price–type contract permits an equitable and
sensible allocation of program risk between the Government and the
contractor; and
(3) A written determination that the criteria . . .of this section have
been met is executed.
Ultimately, selecting the appropriate contract type is the responsibility of
the contracting officer. We conclude that the contracting officer had a
reasonable basis to conclude that the criteria set out in DFARS
235.006(b)(ii) were not met and that a fixed-price contract therefore could
not be awarded for this R&D procurement.
The solicitation for Phase II described a substantial development process
leading up to at-sea demonstrations of a large-scale waterjet. During
contract negotiations, ONR explained that “ONR considers sufficient
uncertainties to be involved with any effort under this program to not allow
for the use of a fixed-price contract.” The record also includes an affidavit in
which the program officer states that “[t]he work needed to do detailed
design, construction, delivery, and installation of a complete large scale
waterjet for at-sea testing on a candidate platform not yet constructed
cannot be realistically priced at this time. Use of a fixed-price contract by
any company for this effort would not permit an equitable and sensible
allocation of program risk between the contractor and the government.”
Based on the record here, we conclude that the contracting officer
reasonably determined that the conditions required for the award of a fixedprice contract under DFARS 235.006(b)(ii) were not present in this
procurement and thus properly decided not to consider Wortec’s fixed-price
proposal for a Phase II contract award.
(See Matter of Wartsila Defense, Inc., B-401224, May 26, 2009)
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Case Study: The Limitation of Funds Clause
On October 13, 1978, AMEC was awarded a cost-plus-fixed fee R&D
contract by the Army to produce electronic countermeasure test simulators.
The contract included the Limitation of Funds (LOF), clause which
provided that (1) AMEC was required to notify the contracting officer (CO)
in writing when AMEC had reason to believe that the costs that it would
incur in the next sixty days, when added to all previously incurred costs,
would exceed seventy-five percent of the funds then allotted to the contract;
(2) absent written notice from the CO increasing the allotted amount,
AMEC was not obligated to continue performance under the contract or
otherwise to incur costs in excess of the amount allotted to the contract, and
the government was not liable for costs incurred by AMEC in excess of the
total amount allotted to the contract.
In early June 1979, AMEC started experiencing cost growth, due in large
part to a subcontractor's performance problems. The technical
representatives conferred with AMEC on the problem. On June 27 AMEC
informed the technical representative that it anticipated a cost overrun and
that an estimate would be forthcoming. On August 21 AMEC notified the
CO of its anticipated cost growth of $1,124,200 (above the current contract
allotment).
On October 12, AMEC notified the contract specialist that it had exceeded
its present funding, requested preliminary funding of $500,000, and
indicated it was continuing performance of the contract. In preparation for
a meeting on October 23, the CO received a memorandum from the
contract specialist which advised that it was in the best interests of the
government for work to continue, stated that "every effort must be made to
fund this contract and thus continue performance," and recommended a
contract modification of $900,000. The CO determined that the proposed
modification would be in the best interests of the government and signed a
document authorizing the modification, but the modification was not
executed. On December 11, AMEC informed the CO that it would cease
work unless an additional $500,000 was added to the contract. On December
20, the CO informed AMEC that funds still were not available and might
not be prior to January 2, 1980. AMEC ceased work on December 21, 1979.
On January 8, 1980, the CO informed AMEC that no additional funding
had been received, whereupon, AMEC asked the CO to release the residue
of the $900,000 that had been promised by the contract specialist. After the
CO informed AMEC that no funds were available (including any “residue”
from the $900,000), AMEC submitted a claim for $1,361,644, which the CO
denied. AMEC then appealed to the Board.
(1) Did AMEC give timely notice under the LOF clause?
The technical representative met with AMEC on several occasions to discuss
the cost overrun and additional funding needed to complete the contract. On
September 25, AMEC indicated its cost growth was had reached $1,396,524.
The technical representative advised AMEC that the government had only
an additional $900,000 available for the contract.
(2) Was the Government estopped from invoking the LOF clause?
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Case Study Answer: The Limitation of Funds Clause
The Limitation of Funds Clause
 A contractor should strictly follow notice requirements in LOF (and
LOC) clauses, at the risk of not being paid for costs above the ceiling.
 If a contractor has not provided required notice under a LOF or LOC
clause, do not lose all hope; if the government was aware of the cost overrun
and the contractor’s continuing performance it may be estopped from
relying on the LOF or LOC clause.
 These decisions depend on the specific facts, and reasonable judges may
differ in their decisions.
Board Decision
The board finds that from early June 1979 through January 1980, the
government (the technical representative and the CO) knew that AMEC
had experienced a cost growth; by July, the cost growth was believed by
AMEC to be above the then contract limit. Subsequently the cost growth
continued to increase and was explained by AMEC in letters, reports and
conferences. During this period the government also knew that AMEC
continued to perform the contract. During this period the CO never
discouraged AMEC from performing and never gave AMEC any written
response to the actual notice that a cost overrun had taken place.
The board also finds that as of early June AMEC knew or should have
known that a cost overrun was an imminent probability. AMEC should have
given notice to the CO by early June 1979, but did not actually give notice
until late July. Nevertheless, AMEC never considered stopping
performance, as was its right under the contract, until six months had
passed. It is evident that both AMEC and the army wanted the contract to
be performed, but there is no evidence that the army indicated to AMEC
that additional funds were likely to be allotted to the contract above and
beyond the $900,000 disclosed to AMEC by the contract specialist.
AMEC failed to provide timely notice of the cost overrun, and the
government was not estopped from invoking the LOF clause. We affirm the
CO’s denial of AMEC’s claim for costs incurred in excess of the funds
allotted to the contract.
Court of Appeals Decision
We agree with the board’s factual findings on the notice issue and find that
AMEC failed to provide timely notice of the cost overrun.
In certain situations, however, the government may be estopped from
denying actions relied on by others to their detriment. Four elements must
be present to establish an estoppel: (1) the party to be estopped must know
the facts, (i.e., the government must know of the overrun); (2) the
government must intend that the conduct alleged to have induced continued
performance will be acted upon, or the
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Case Study Answer: The Limitation of Funds Clause (cont’d)
contractor must have a right to believe the conduct in question was intended to
induce continued performance; (3) the contractor must not be aware of the true
facts, (i.e., that no implied funding of the overrun was intended); and (4) the
contractor must rely on the government’s conduct to its detriment.
There is no question that the first and third elements are satisfied. With regard to the
first element, the board found and the government does not dispute that the CO
knew of the overrun. With regard to the third element, the board found that it was
not until December 20 that AMEC was aware for the first time that additional funds
might not ever be available.
With regard to the fourth element, the board found that AMEC continued
performance and was operating on its own funds. The clear import of the board’s
findings is that AMEC continued its performance because of the government’s
conduct. The board found there was no evidence of an indication to AMEC “that
additional funds were likely to be allotted to the contract above and beyond the
$900,000 disclosed to AMEC.” The necessary implication is that the government did
in fact indicate that $900,000 would be forthcoming.
The crux of this case is the second element, that is, whether the government intended
that its conduct be acted on, or whether it acted in such a manner that AMEC could
reasonably believe that the government so intended.
In preparation for the October 23 meeting, the contract specialist sent a
memorandum to the CO that detailed the strategy to be used by the
government. The board found that the aim of the government was to
negotiate a contract amendment of $900,000, and that the contract specialist
expected that negotiations would result in a $900,000 increase to the
contract. In response to the memo, the CO determined that a modification
to the contract was in the best interests of the government, wrote that “the
contractor advises that contract funding has been exceeded and additional
funding must be made available in order for the contractor to continue its
efforts,” and signed a document which authorized the $900,000
modification. Clearly the government expected AMEC’s continued
performance.
The government argues that AMEC had no reasonable basis to believe that
additional funds were or would become available. On the contrary, we can
see a sufficient reason. The contractor was reassured repeatedly that the
government had $900,000 easily available; in the seven-month period from
June 1979 to January 1980 “the contracting officer never discouraged
AMEC from performing.” The government representations were so
encouraging with regard to the $900,000 that it was not until December 20
that AMEC became aware for the first time that additional funds might not
ever be available. From the time that the government first learned of the
impending overrun until the time that AMEC finally stopped work,
government representatives, including the CO, consistently induced AMEC
to continue its performance by making representations that the government
would fund the overrun.
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Case Study Answer: The Limitation of Funds Clause – (cont’d)
The statements of the technical representative cannot be completely
disavowed and repudiated on the grounds that he was without authority to
speak for the contracting officer. When an official of the contracting agency
is not the contracting officer, but has been sent by the contracting officer for
the express purpose of giving guidance in connection with the contract, the
contractor is justified in relying on his representations.
The board’s finding that the government expected AMEC’s continued
performance satisfies the second element—that the government intended
that its conduct be acted on.
Thus, we find that all four elements of the estoppel test have been satisfied.
Based on the board’s findings of fact, we hold that the government is
estopped from relying on the LOF clause, not in full, but to the extent of the
$900,000 which it held out before AMEC as an inducement for its continued
performance.
(See American Electronic Laboratories, Inc. vs. United States, 774 F.2d 1110
(Fed. Cir. 1985.)
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Thank you
Any Questions?
Thanks
Eric Esperne, JD, CPCM
Counsel, Dell Healthare & Life Sciences
[email protected]
781-401-2107
169
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Contract Types NES, 5-17-2011 - National Contract Management

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