AnonX on Wednesday, November 28, 2001 - 01:12 pm:
I am soliciting some opinions.
Here's the situation. A contractor is performing under a CPAF
contract. He is projecting an over-run at completion of
approximately 10%. The contract is incrementally funded on an
annual basis in accordance with the funding profile in the
contract. The contractor's projected over-run puts funding
pressure on each of the 3 years remaining on the contract. In
order to minimize the funding pressure in FY '02 we are
considering deferring some deliveries in '02 as well as in each
of the subsequent calendar years. Although this relieves funding
pressure in FY '02, this change in schedule increases the
contractors' over-run from 10% to 15%. This is, however, our
preferred option. Under this scenario, is the contractor
justified in applying award fee against the costs associated
with the schedule slip? He is not claiming fee against the
currently projected 10% over-run
anon32 on Wednesday, November 28, 2001 - 02:12 pm:
Have you considered who is
responsible for the 10% overrun? That caused the funding
problem, which results in the additional 5% overrun that the
contractor wants to be fee bearing.
CMERCY on Thursday, November 29, 2001 - 08:45 am:
What is the award fee based on?
Vern Edwards on
Thursday, November 29, 2001 - 08:57 am:
Does the schedule slippage entail
more work or make the already contracted-for work more
difficult? If not, then I wouldn't pay more fee.
AnonX on Monday, December 03, 2001 - 02:37 pm:
If this is a repeat message, it's
because I replied once earlier today but it appears, from my
side of cyber-space anyway, that my post didn't take. Here is my
reply to some of your questions:
1. The contractor is responsible for the 10% over-run. He does
not need the schedule extension. This is driven primarily by the
funding profile problem.
2. The award fee criteria includes a number of factors, but
includes cost and schedule performance.
3. The schedule extension does not include more work, just more
time; thus the additional 5% cost over-run. Thank you for this
question. I believe it will be the cornerstone for my argument.
4. Sorry for not responding sooner. I was unexpectly called out
on business travel and just returned.
joel hoffman on Monday, December 03, 2001 - 03:32 pm:
Anon X, I agree with Anon32 that,
if the Contractor's overrun ultimately caused the schedule
slippage (cost overruns exceed the funding profile - Gov't had
the funds to cover the Contractor's original spend plan), then
the impact costs are non-fee bearing. The party which caused the
problem should not profit from the impact. happy sails! Joel
on Monday, December 03, 2001 - 06:56 pm:
Hold on! The award fee should
have been calculated on the proposed cost, not the actuals. The
award fee would not vary under the circumstances given here --
except that the originally calculated fee should be reduced for
due cause (failure on cost and schedule criteria) and used to
mitigate the government's expenses.
Yes, if the increase or decrease was due to a planned scope
change, such as an engineering change proposal (ECP), the fee is
adjusted accordingly. Doing so on the basis of an effective
change due to the contractor's failure to perform on schedule
may well be considered a fee as a percentage of costs. That is
AnonX on Tuesday, December 04, 2001 - 09:31 am:
Anonymous - That too is an
interesting argument that will go in my arsenal. The contractor,
however, argues that the schedule adjustment is driven solely by
the Government's funding limitations, not by the contractor's
There seems to be a concensus that the contractor should not be
due fee on these additional costs. If anyone knows of a similar
case that was decided in either party's favor, it would be
Thanks for you help.
Vern Edwards on
Tuesday, December 04, 2001 - 10:03 am:
Due to a contractor cost overrun the government doesn't have
enough money to fund continued performance within the original
performance schedule. Is that right?
So the government wants the contractor to slow its performance
in order to reduce the rate at which costs are incurred and at
which funds will be required. Is that right? The only other
choice would be to let the contract die as provided by the
limitation of funds clause. But you don't want to do that
because you think you can get more money. Right?
If these statements are correct, then why aren't you issuing a
stop work order?
AnonX on Tuesday, December 04, 2001 - 11:17 am:
I played left field in High School so I'll go with you on this
one. But let me address your comments first. The Government
currently has enough money, in total, to fund continued
performance within the original schedule, but the funding is not
in the right years. By slowing down performance, contract effort
is shifted to the right, thus further increasing the contractors
estimate at completion.
Now help me here. What will a stop work do for me? Won't this
also delay performance, plus add stop work costs on top of the
costs attributable to delayed performance - all of which the
contractor would argue are fee-bearing? I stand ready to catch
your line drive to deep left.
on Tuesday, December 04, 2001 - 05:38 pm:
This contractor accepted an award
fee contract. The fee awarded, not scheduled as in other
fee schemes, is based upon cost and schedule performance among
other factors. Cost has become a major issue due to the
contractor's failure to maintain schedule and the government's
budget schedule is impacted.
The shift to the right and all other problems are the direct
result of the contractor's own failures. This contractor wants
fee on the impacts! Outrageous. Zero fee for periods under which
these conditions exist as an award
would not be unreasonable considering both impacts upon contract
performance and the government's own budget cycle. Fee on
additional cost over the original estimate where no substantial
change in work has been negotiated, except additional cost
generated by the contractor's actions, is very likely illegal.
By the way, a good AF schedule will have a significant chunk
reserved for completion to prevent loss of interest as the fee
pool winds down. Notify the contractor that unless they mitigate
the government's difficulties and avoid further loss that the
entire remaining fee schedule is now scheduled for amortizing
those. In addition, they should be reminded of what past
performance is likely to look like. Suggest their best hope for
not being damned there is to enable the government to add
mitigating words. Something along the lines of "after serious
schedule slips with impact to government's cost and budget
planning the contractor worked closely and cooperatively to
mitigate damages and correct the situation" vice something along
"you'd be a fool to hire these clowns" for the next few years.
If these folks can't get it through their heads that they don't
deserve more fee and are not even entitled to existing
fee under an award scheme a termination for cause is a
consideration. Award fees have been justly criticized for
failure of the government to use the carrot and the stick.
Somehow the stick gets shelved. Don't add to the record in an
outrageous fashion. They staked their profit on a promise to
deliver on schedule. They lost. Nail these folks.
joel hoffman on Tuesday, December 04, 2001 - 08:47 pm:
Anon, considering that the
typical cost contract experiences an average 30-35% overrun (a
20 year average, according to my EVMS instructor), and further
that the Contractor has no contractual obligation to complete
the project within the target ceiling, I think you are
overreacting a little bit. I agree that the award fee
determination should take the cost overrun into consideration
and I agree that no fee is due on the overrun or on the impact
costs. "Termination for cause" is probably not warranted under
the circumstances. The contract shouldn't have been awarded as
CPAF, if the cost to complete was known with certainty, at
award. If it were completely determinable, another contract type
should have been selected. happy sails! joel
Vern Edwards on
Wednesday, December 05, 2001 - 04:16 am:
Well, here's my thinking:
You need to slow (delay)the contractor's performance to
accomodate your funding situation. How will you do it? You will
either have to issue an order to stop some part of the work,
effectively slowing performance, or renegotiate the delivery
schedule. Either way, your action will entitle the contractor to
an equitable adjustment, which would include an adjustment for
any increased costs and which the courts have said includes an
allowance for additional fee.
I hadn't thought of it this way when I made my first response to
you. Am I making sense?
AnonX on Wednesday, December 05, 2001 - 07:45 am:
You have a history of making perfect sense Vern, but what you
are saying is consistent with what the contractor is arguing. In
this case, we have elected to renegotiate the delivery schedule
due to the funding profile problems discussed earlier. The
contractor says that he is due fee on the additional cost
associated with the schedule extension. My "feelings" are that
this is undeserved in that it was the contractor's initial
over-run that created the funding profile problem. From your
post however, and recognizing it was made at 4:00 in the
morning, I gather you agree with the contractor. Correct?
formerfed on Wednesday, December 05, 2001 - 08:00 am:
Sorry for jumping in on this so late. From what I read, the
contractor is entitled to the extra fee due to the government's
action. I realize the contractor is responsible for the overrun
that caused the situtaion. However, once the parties get past
that, the government is responsible for what transpires next -
and that is an extended performance period which causes the
contractor to incur extra costs (fee bearing)
Vern Edwards on
Wednesday, December 05, 2001 - 09:44 am:
In the interests of full disclosure, I'm working overseas this
week and it was much later in my day than 4am when I made that
Yes, I think I agree with the contractor. When a contractor
undertakes a cost-reimbursement contract it does not promise to
complete the work within the estimated cost, it only promises to
make its best effort to do so. A cost overrun is not necessarily
evidence of poor performance. The fact that the parties chose to
use a cost-reimbursement contract presumptively indicates that
they did not have a high degree of confidence in the cost
estimate. So the fact that the contractor "caused" the overrun
does not sway me.
An incrementally-funded contract makes provision for the
eventuality that the contractor cannot perform within the
available funding. The government can provide the contractor
with additional funds in time to prevent interruption of the
work and require it to continue to perform without additional
fee or it can allow the contract to expire without completion.
However, I don't know of any clause under which the government
can require the contractor to change the method or manner of
performance without an equitable adjustment, and the contractor
must change its method or manner of performance in order to slow
its rate of cost incurrence.
So, if you want the contractor to postpone delivery until you
can obligate the required funds, and if that increases the
contractor's costs, then I think that you'll have to give the
contractor an equitable adjustment, including additional fee.
I'm under some pressure here and I'm writing in haste, so I'd
like to have some more time to think this over, but I feel that
I'm right. Anybody got a different idea?
on Wednesday, December 05, 2001 - 12:15 pm:
Let's see if I understand the
argument in favor of fee:
The contractor is 10% over the proposed cost, the basis for fee
in an award fee contract. The contractor is not claiming
fee on that overage. A cost contract does not require the cost
estimate be met. Cost control and meeting the estimated cost is
a performance measure upon which the fee is measured. The
award nature of that fee means the government's judgement is
final within bounds of not being arbitrary and/or capricious.
The government has no immediate reserve to cover the increased
cost, a shortsighted move in a CPAF contract where 10-15%
government reserve is often recommended. I might concede this
poor planning is a point in the contractor's favor in the
The government's lack of adequate, reasonable reserve forces it
to stretch into out year funding for completion. Time is money
so this stretch forces an additional overage to bring the total
to 15% above the estimated cost and fee basis. The stretch is a
negotiated modification to the original schedule so the
contractor is| claiming fee for the extra 5%.
I base my previous arguments in favor of stern, perhaps even
harsh, reaction to these events on a view that cost contracts
must not be an excuse for over runs. Mr. Hoffman's observation
of "an average 30-35% overrun (a 20 year average, according to
my EVMS instructor)" shows why cost contracting has often been
tainted in reputation despite its validity as a contracting
method in certain situations.
We all recognize that costing these contracts is an art and
science. Unfortunately, we also see a constant trend to let
contractors off the hook the contract envisions. Profit control
is the method of discipline in cost contracts. Discipline rests
very heavily in the government's discretion in award fee
contracts. Lack of real use of that discipline has placed the
CPAF method itself in question. The government does assume
predominant risk under the CPAF. The result of its lack of
effective disciplinary fee action has been undue removal of even
minimal risk from the contractor. Nearly any failure is excused
with token fee hits. We rarely seem to see a fee equivalent of
the two-by-four between the mule's eyes.
Despite the government's failure to maintain adequate reserves
to cover the overage without schedule slips the contractor's
failure to control costs within his proposed costs and to
provide early warning and mitigation is proximate cause of the
entire difficulty. I disagree that there should be any profit on
the subsequent additions directly resulting from that failure
despite the negotiated nature of the rightward shift.
I would also argue that denial of fee as the overage becomes
evident should become part of the funding for the overage
itself. It is one reason for making the cost and schedule
criteria a very heavy, even a trump, hitter in award fee plans.
Again, the government's discretion is pertinent. For example, if
the contractor's performance in cost and schedule control has
been valiant and generally effective the government can decide
to have that reflected in a minor hit. If the contractor has not
taken aggressive control actions, delivers surprises, or has
otherwise been lax, the hit can be a message of zero with full
knowledge this will bring corporate attention and a change in
project management. Ability to get corporate attention and send
such messages is one of the purposes of award fee schemes.
I've argued that this becomes and effective cost plus percentage
of cost contract. The lawyers can dance about this, but in
reality, I believe it does. Under this precedent all a
contractor has to do to effectively convert to such an illegal
contract is to drag schedule or fail to control cost until the
government is driven into a similar situation. Then the
contractor claims fee on the resulting costs that are beyond the
original fee basis. Perhaps there is a legal loophole. In
effect, the contractor is getting fee on a percentage of cost,
not cost basis. Loophole or not, that must be discouraged.
Vern Edwards on
Thursday, December 06, 2001 - 03:06 am:
The argument in favor of additional fee is this: the
government's proposed response to the cost overrun is to modify
the delivery schedule in order to slow the rate at which costs
are incurred. It wants to do this in order to accomodate its own
funding situation. In order to meet the government's needs the
contractor may have to change its methods or manner of
performance. If so, and if the change increases the contractor's
costs, then then the contractor is entitled to an equitable
adjustment to increase the estimated cost of the contract, and
equitable adjustments generally include fee.
The increase in costs that I'm talking about is not the cost
overrun that necessitated this change; the contractor is not
entitled to additional fee on the overrun amounts. The
contractor is entitled to fee only for the increased effort
associated with the changes in the methods or manner of
performance that are necessary in response to the new delivery
Another thing: unless you can extend the delivery schedule
unilaterally pursuant to some contract clause, then you must get
the contractor to agree to the change in the delivery schedule.
If the contractor wants additional fee as a precondition to
agreement, what are you going to do?
Finally, when the government enters into a cost-reimbursement
contract it should do so with the understanding that there is a
real chance that actual costs will exceed estimated costs. FAR
16.301-2 says, "Cost-reimbursement contracts are suitable for
use only when uncertainties involved in contract performance do
not permit costs to be estimated with sufficient accuracy to use
any type of fixed-price contract." You say, "Unfortunately, we
also see a constant trend to let contractors off the hook the
contract envisions." What hook are you talking about? There is
no hook. The contractor promises only its best efforts. If you
determine that the contractor is not making its best effort then
the appropriate response is to terminate the contract in order
to stop the waste of money. But if an overrun occurs despite the
contractor's best efforts, then that's the risk that the
government took; the government has no reason to be mad at the
contractor. At best, it's naive to enter into a
cost-reimbursement contract and then profess to be shocked,
SHOCKED, at the occurence of an overrun.
faruk on Thursday, December 06, 2001 - 10:22 am:
You claim that that cost increase was due to contractor
performance. That is not supported in your statements. What did
the contractor do wrong? Or was it associated with the
uncertainties of the work? With that information, the award fee
determining official can evalute the situation for the award fee
If the program does not have the funds to pay for the work it
wants and wants to delay performance, it is a government caused
delay. Any change in work to reflect that government caused
delay, deserves fee. If the program has no hope of funding the
entire set of deliveries, do not let the program stretch
deliveries and hope for a miracle. Have them delete deliveries
to reflect the money they realistically will have. Ask the
program for new cost estimates for the work and have them
support it. If you do not have the program delete items to
reflect their lack of funds, you will be doing the same thing in
future years. It will not go away.
You may have done some of this already but I will state my
thoughts. I would request a cost proposal and ask for two things
from the contractor. First, I would want to see the increase in
cost for the work in the original contract and the reasons for
the increase. Second, I would want to see the proposal for the
government caused delay. You should ask for the cost proposal
after the program supports realistic future requirements.
Once you have done that, you can negotiate the (1) added cost
for the original work and (2) cost and fee for the government
Not much new here, just a different person saying it.
on Thursday, December 06, 2001 - 01:06 pm:
Shocked is not quite accurate,
but I am probably letting some old prejudices color things here.
I also realize we do not have all the information. In particular
we do not know whether the over run was due to the normal
uncertainties of cost contracting or some lack in management. I
include government most definitely in cost contract management.
First, I am somewhat shocked that the government went into a
cost contract without the reserves to handle a 10% cost problem
for exactly the reasons being noted by several here. The fact
cost cannot be accurately predetermined is the very reason a
cost contract is chosen. Why anyone would enter this arena so
constrained that an entirely possible, even likely, small
variance can cause such difficulty amazes me. Yes, yes, money is
tight. Still, if you do not have the bankroll don't play at this
I think what is getting under my skin here is the statement Joel
Hoffman made ("the typical cost contract experiences an average
30-35% overrun") and the bad reputation cost contracts have
gotten in the eyes of many managers. Unless something else is
going on one would expect a more random scattering of actual
against proposed cost at completion. Instead, we apparently do
have a consistent record of over run. Is the driving factor a
tendency to underestimate by the contractors and underplay cost
realism by government evaluators? Is it lack of expertise in
managing the uncertainties of cost contracts? I do not know.
I do know intense and cooperative management of the
uncertainties can mitigate the cost impacts. It is not
easy and requires nearly day-to-day joint management of issues.
I have witnessed the joint management style that brings a
contract in on target through intense and smart trade-offs on
nearly a daily basis. When cost went up in one area early,
cooperative and smart work by both parties enabled
savings elsewhere that kept the total line on track. In many
cases this required government to reconsider some requirement
and make a reasonable modification. As just one example, one
"sacrifice" was giving up a large number of printed manuals for
a digital copy with savings that helped offset increases in
software costs. The result was an unexpected technology jump --
on line manuals before these were common. Sometimes things
actually can be win-win-win.
I have also seen cost contracts get into serious trouble because
the contractor, government or both were unwilling or unable to
maintain these levels of smart management. There will be times
where no amount of cooperative management can resolve some true
uncertainty issue. One stands no chance without such management.
Perhaps I have jumped to the conclusion the contractor did not
manage well enough. I definitely feel the government did not due
to the lack of a reasonable reserve to cover an entirely
predictable contingency. My reaction is certainly one of some
frustration with what seems all too casual entry into these
AnonX on Thursday, December 06, 2001 - 04:14 pm:
As a point of clarification, the
10% and 5% figures do not accurately represent the amount of the
contractor over-run or the cost increase associated with the
schedule shift. These were for demonstration purposes only.
I thank all of you for your inputs. Now it's off to
Eric Ottinger on
Thursday, December 06, 2001 - 04:31 pm:
Contracts overrun and stretch out frequently. Nobody has cited a
case to demonstrate that the contractor is entitled to more fee,
merely because the contract was stretched out when the
government didn’t immediately have funds to cover an overrun.
Most of the people that I have worked with or worked for would
recommend telling the contractor where to disposition this
argument. Some would be more polite than others.
If I were at the negotiating table with Vern, I would give him a
5.9 for creativity and tell him that the answer is “No”. This is
a tenuous and highly speculative argument, and I doubt he has
any precedent to back it up.
(I’ve checked for the precedents. If you put “overrun “ and
“additional fee” into a search, very little comes up.)
Vern’s logic is perfectly good, but it cuts both ways. Just as
the Government had to assume that inherent risks might result in
an overrun, the contractor had to assume that the potential
overrun might stretch out the period of performance. The
government never has money in the budget to fund all potential
cost growth. The contractor has no reasonable basis to assume
that additional funds would immediately be available to fund an
overrun. Hence, nothing has happened that the parties could not
have anticipated at the time that the contract was negotiated.
Vern is correct in saying that the choice of a cost type
contract implies that the parties expected some risk. However,
the fact that the contract was known to have significant risk at
the outset is not a reason to conclude that an overrun was or
was not due to poor performance on the part of the contractor.
The government should be able to judge, on the basis of the
actual performance, whether this was a situation where the
contractor was performing well, but some known unknowns (or
unknown unknowns, affectionately known as unkunk’s) drove the
overrun; or, alternatively, whether the cost overrun was driven
by some poor performance on the contractor’s part.
Perhaps the employees assigned to the project were not the most
capable. Perhaps some problems were ignored until very late, at
which point it was expensive to fix the problems.
The fact that there was an overrun doesn’t per se demonstrate
that the contractor has performed badly. However, the fact that
the parties anticipated the possibility of an overrun doesn’t
demonstrate anything regarding the contractor’s performance.
Anon 6:56 is correct to suggest that a contract which provides
more fee for increased cost of is noxious for the same reason
that CPPC is noxious. Award fee can never be CPPC, but an
arrangement that works like CPPC should invite criticism.
To understand award fee, it is useful to view the potential
award fee on the contract as a pool of dollars, not as a
percentage. In my experience, (largely because of the CPPC
concern) the award fee pool amounts are tied to periods or
milestones, never to cost.
Regarding your 5 Dec 4:16 post. I would simply tell the
contractor what funding is available or reemphasize that only
the planned funding is available.
It is up to the contractor to determine how to manage within
I would not direct what parts of the work to stop (or whom to
It would be a great reform if we kept more money in a management
reserve, started fewer projects and avoided stretching contracts
out. I think almost everybody agrees on that point. But that is
not the way the game is played. Although it would be a good
thing if the government had sufficient money in a management
reserve for this kind of contingency, it doesn’t follow that the
contractor has an entitlement to such hypothetical money.
As far as I can tell the phrase “method or manner of
performance” is used only in the 52.243-4 “Changes” clause for
construction. I have no idea whether a change to the completion
date would be a change to the “method or manner of performance”.
Do you have a citation to address this point?
Generally, there shouldn’t be any more fee on a cost type
contract unless there is a change to scope. Scope is a question
of what the parties reasonably anticipated at the outset of the
contract. I would have a hard time being convinced that a
routine overrun with the usual impacts was somehow a change in
scope requiring additional fee.
As usual, this is just my personal opinion, and I don’t
represent my agency, etc. etc. Additional facts could easily
change my position. Perhaps the government contributed to the
problems, which resulted in the overrun. Perhaps the contractor
was given some kind of assurance that the additional funds would
be available to cover a 10% overrun.
Good luck in negotiations.
AnonX on Thursday, December 06, 2001 - 05:08 pm:
What happens when a contract is
restructured? Aren't the parties essentially starting over at
some point, with a new contract where all costs become fee
bearing? I've never been through a restructure - but maybe I am
now and don't know it.
joel hoffman on Thursday, December 06, 2001 - 09:10 pm:
AnonX - When we restructured our
contract from FFP to CPAF, the Contractor agreed to zero fee on
the remaining work. No, you can negotiate the revised fee base.
The 10% increased impact costs due to the Contractor's overrun
isn't fee bearing.
I reviewed the various FAR delay clauses for FFP construction,
FFP services and cost reimbursement contracts. For FFP
contracts, it is clear that adjustments for cost impacts due to
Government delays do not provide for fee or profit.
However, all I could find for cost contracts is the clause at
52.242-15 "Stop-Work Order". Surprising to me, this clause
provides for an equitable adjustment, including profit/fee for
impacts due to Government stop work orders on cost contracts.
Does this clause cover adjustments due to constructive delays,
such as the extra 5% cost due to the funding limitation,
discussed above? I am in DC, this week, and don't have access to
my Nash and Cibinic series. The topic of constructive delays on
cost contracts might be covered in those references(?)
happy sails! joel
Vern Edwards on
Friday, December 07, 2001 - 03:11 am:
Under a cost-reimbursement contract the contractor can stop
working when the government runs out of money. The government
cannot require the contractor to stand by until additional funds
become available unless it issues a stop work order. As I
understand the problem, AnonX wants the contractor to keep
working, but at a slower pace, until more money becomes
available in later funding periods. The contractor is required
and entitled to deliver at the completion date. A CO cannot
require a contractor to deliver at a later date without issuing
a stop work order or modifying the contract in some way.
The only ways that I know of that a CO can "stretch out" the
contract delivery schedule under a cost-reimbursement contract
would be to (a) issue a stop work order under the stop work
order clause, FAR 52.242-15, Alt. I, (b) issue a change order to
the spec or SOW that effectively increases the time required to
perform or otherwise slows the rate of cost incurrence, or (c)
negotiate a supplemental agreement to change the delivery
schedule. There may be a way to do it under some other clause,
but I can't think of one off hand.
The courts have long held that an equitable adjustment includes
profit or fee. Paragraph (b) of the stop work order clause
expressly states that if the stop work order increases the cost
properly allocable to the performance of the contract the
contracting officer shall make an equitable adjustment to the
estimated cost and fee. The changes clause also expressly
requires an equitable adjustment to fee. If the contracting
officer negotiates a supplemental agreement the contractor can
certainly seek additional fee.
A CO may be able to talk the CO into stretching out the delivery
schedule without additional fee, but the contractor is entitled
to it under the stop work order clause and the changes clause
and is certainly within its rights to ask for it in a
negotiation to change the delivery schedule.
You said, "Generally, there shouldn’t be any more fee on a cost
type contract unless there is a change to scope." That's flat
out wrong; the changes clause requires an equitable adjustment
to fee for within-scope changes. However, it is true that a
contractor is not entitled to additional fee on the amount of an
overrun, a point I made in my last post.
AnonX: If by restructure you mean modify the delivery date, then
you can do so by supplemental agreement. I would not consider
that a new contract. The contractor is entitled to perform in
accordance with the specified delivery schedule. If you don't
have enough money to cover the overrun within that schedule,
then the contractor is entitled to stop working or continue to
perform at its own risk. If you decide to fund the overrun you
do not have to give the contractor additional fee. But if you
decide to issue a stop work order or a change order that
increases that contractor's costs over and above the cost
overrun, then you will have to cough up additional fee. If you
decide to negotiate a new delivery schedule the contractor is
entitled to ask for more fee.
on Friday, December 07, 2001 - 09:59 am:
Vern, you confirmed one
difference between FFP and cost contracts. Under FFP, the
adjustment for a Government delay which would decelerate
performance with associated delay costs, theoretically would
only cover the delay costs, without fee or profit.
(P.S., Bob, the recently changed FAR link in the Wifcon
Regulations page seems to be very inefficient. It takes forever
to get to a clause "next page" after "next page". In addition, I
couldn't get to the Part 53 forms. I tried a backdoor route, but
the hotel's Internet computer wouldn't display them. Is this
supposed to be an "improvement" over the previous electronic
FAR?) happy sails
Eric Ottinger on
Friday, December 07, 2001 - 01:23 pm:
As I understand the problem, BOTH parties want the contractor to
keep working at a slower pace.
Perhaps AnonX could clarify this point.
Anon 1:06 on Friday, December 07, 2001 - 03:32 pm:
It "would be a great reform if we
kept more money in a management reserve"? It is a pretty sound
rule. Some agencies accomplish this by planning and hard work
before they come to the table.
I guess the ones Eric is thinking of are like the poker player
who comes to the table having misjudged whether the game was too
rich for him. He soon finds he cannot survive the raises even if
his hands are not all that bad.
In pure R&D one must establish the goal and know when to fold.
We recognize in advance that in that game the fold may become
before a win and one must settle for a good run. Nobody will be
too disturbed if there is nothing except a good try. That does
not hold for those outside pure R&D. Expectations include more
than knowledge that this direction is a dead end. It is vital,
where cost contracting is used outside strict R&D, that planning
before development of the RFP package includes careful
consideration and estimates of the stakes involved.
That must include cost drills and requirements scrubs. When
those show costs from $4M - $20M one should know more work is
required to tighten things and lower risks. Then a reserve and
contingency plans are established. Only then should anything hit
the street. Anything else is as reckless as strolling into a
Vegas poker game not knowing the stakes.
John Ford on Friday, December 07, 2001 - 04:26 pm:
What's all the fuss about? As
contracting professionals shouldn't our first step be to find
out what the contract says? By addressing the standard clauses
found in a cost-type contract Vern has come closest to doing
that. While the result he comes up with may offend some, I think
it is the right result based on the clauses he references.
Unless someone can come up with a provision in the contract that
calls for a different result, I will stick with Vern. Eric
admits his position is based on a "personal opinion" which is a
poor basis upon which to address a question of contract
interpretation. Personal opinion and cries of what the result
should be based on shock, outrage or other emotion do not take
the place of sound contract analysis.
Eric Ottinger on
Friday, December 07, 2001 - 04:44 pm:
Neither you nor Vern have cited a case to support your argument.
Personal opinion. Indeed.
joel hoffman on Friday, December 07, 2001 - 05:01 pm:
John, of course, you are correct.
When in doubt, read the contract and apply the appropriate
clause. I assumed that no profit is allowed on a Government
delay, based on my FFP experience. I admit that I discovered
that the clauses I assumed were applicable, aren't. Apparently,
they are only applicable to FFP contracts.
On a cost contract, which "standard clause" covers a
constructive delay or Government direction to decelerate? Does
the Stop Work clause cover such delay or is the Changes clause
used to decelerate contract performance, or something else?
Either of those clauses would allow profit on the 5% impact
cost, as a result of funding limitations.
If this were a FFP, construction or services contract, the
Suspension of Work or Government Delay of Work, respectively
would apply - no profit.
Can one of you cost contract experts answer this question? John,
I think you are an attorney. Am I correct? Can you advise us as
to which standard clause covers this situation? Thanks. happy
Vern Edwards on
Saturday, December 08, 2001 - 08:20 pm:
Cite a case? For what? I've cited a clause, two clauses.
If I were negotiating with you I would give you a 0 for knowing
your contract and keeping your promises.
Vern Edwards on Saturday, December 08, 2001 - 08:30 pm:
You don't need an attorney to determine which clauses apply.
Here's FAR 42.1305:
"42.1305 Contract clauses.
(a) The contracting officer shall insert the clause at 52.242
14, Suspension of Work, in solicitations and contracts when a
fixed-price construction or architect-engineer contract is
(b)(1) The contracting officer may, when contracting by
negotiation, insert the clause at 52.242-15, Stop-Work Order, in
solicitations and contracts for supplies, services, or research
(2) If a cost-reimbursement contract is contemplated, the
contracting officer shall use the clause with its Alternate I.
(c) The contracting officer shall insert the clause at
52.242-16, Stop-Work Order-Facilities, in solicitations and
contracts when a facilities acquisition contract or a
consolidated facilities contract is contemplated.
(d) The contracting officer shall insert the clause at 52.242
17, Government Delay of Work, in solicitations and contracts
when a fixed-price contract is contemplated for supplies other
than commercial or modified-commercial items. The clause use is
optional when a fixed-price contract is contemplated for
services, or for supplies that are commercial or
As you can see, the suspension of work and government delay of
work clauses apply only to fixed-price contracts. The stop work
order clause applies to both fixed-price and cost-reimbursement
joel hoffman on Sunday, December 09, 2001 - 01:42 pm:
Yes, I understand. My question
relates to whether a deceleration order would be a
"constructive" stop order on a cost contract, pursuant to that
clause. The Government couldn't fund the normal activity level,
do performance will be slowed to stay within funds. The impact
is a 5% increase in costs. happy sails! joel
joel hoffman on Sunday, December 09, 2001 - 02:37 pm:
As I tried to explain earlier,
the FFP clauses 52.242-17 Government Delay of Work, 52.242-14
Suspension of Work recognize constructive delays, due to
Government action or inaction, while the Cost contract clause,
52.242-15 Stop-Work Order, appears to only address directed
suspensions. There is no wording which addresses directed or
constructive slowdown delays in the latter clause.
My question remains, "What clause covers a price adjustment for
a DELAY (a deceleration, not a stoppage or suspension of work)
on a cost reimbursement contract?" happy sails! joel
Vern Edwards on
Sunday, December 09, 2001 - 08:03 pm:
There is no single FAR clause for cost-reimbursement contracts
that is analogous to the Government-caused delay clause for
fixed-price contracts. At least three FAR clauses expressly
address government-caused delays under cost-reimbursement
contracts: (1) the stop work order clause, (2) the changes
clause, and (3) the government property clause. The first two
address delays arising out of CO "orders"; the third addresses
inadvertent delays. All three provide for an "equitable
adjustment" in the event that the government delays contractor
To the extent that the government causes a delay for which no
contract clause provides a remedy, I presume that the delay
claim would be handled as a breach of contract claim, i.e., a
claim "related to" the contract as opposed to a claim "arising
under" the contract. A contractor would be entitled to an
equitable adjustment (compensatory damages) for a breach of
I don't know of any FAR clause for cost-reimbursement contracts
that allows a CO to unilaterally postpone a delivery date in
order to meet a need of the government. The stop work order
clause allows the CO to order the contractor to stop work for 90
days. If the contractor needs an extension of the delivery date
due to the work stoppage, then the CO must equitably adjust the
The limitation of funds clause does not empower the CO to order
the contractor to "decelerate" its performance in order to keep
the contract alive until the agency receives its next allotment
of funds. However, paragraph (e) of that clause says:
"If, after notification, additional funds are not allotted by
the end of the period specified in the Schedule or another
agreed-upon date, upon the Contractor's written request the
Contracting Officer will terminate this contract on that date in
accordance with the provisions of the Termination clause of this
contract. If the Contractor estimates that the funds available
will allow it to continue to discharge its obligations beyond
that date, it may specify a later date in its request, and the
Contracting Officer may terminate this contract on that later
Italics added. While that paragraph clearly allows the parties
to negotiate a deal, it does not preclude additional fee.
John Ford on Monday, December 10, 2001 - 03:55 pm:
Joel, perhaps the first question
should be what clause allows the CO to require a deceleration?
As Vern has indicated, while the parties may be able to
negotiate a deceleration, I am not aware of a standard FAR or
DFARS clause that permits the government to require one. The
closest one I can come up with is the Stop Work clause. Clearly
a fee adjustment is authorized under that clause.
If the deceleration is the result of the "mutual agreement of
the parties," seems like the contractor could insist upon
receiving fee as a requirement for its agreement to doing
something it is not required to do. While neither Vern nor I
have cited a case to support our position, I would be mortified
if the people contributing to this thread were not aware that
fee or profit is a part of the equitable adjustment allowed
under the Changes clause and the Stop Work clause. For those who
continue to advocate no fee, what clause or provision of the
contract are they relying upon for that position? As you
indicated before, when all else fails read the contract and
determine the bargain the government made. If the result called
for by application of the relevant clauses offends anyone,
remember, it is the government that writes the FAR and its
joel hoffman on Monday, December 10, 2001 - 05:02 pm
There is some discussion on this
in Nash and Cibinic's "Cost Reimbursement Contracting" (pages
995 - 997), including cases, both ways - fee or no fee on delay
costs. Apparently, for the Contractor to earn fee on the delay
costs, the Stop Work Order Clause or some other remedial clause
which specifically grants entitlement to fee for Government
delays must be in the contract, and the Contractor must prove
that the Government's action caused the unreasonable delay or
that the delay was for the convenience of the Government.
I suggest that Anon consult his/her attorney for review and
analysis before deciding whether or not to allow fee on the time
related impact cost from the Contractor's cost overrun. The
overrun would have resulted in the Contractor's costs exceeding
the incremental funding limitation, at sustain cost burn rates.
This is an interesting question, because one must determine the
root cause of the delay. Was it the Contractor's overrun or the
inability of the Government to fully fund the resulting
increased costs, within the funds available? happy sails! joel
joel hoffman on Tuesday, December 11, 2001 - 10:52 pm:
Eric, I believe that when Vern
said "Generally, there shouldn’t be any more fee on a cost type
contract unless there is a change to scope," he was referring to
a change in the current scope of work(in-scope or out-of scope
changes are both "changes to scope").
I didn't get a chance to research the N&C case citations, yet.
But the point made in the book is that both a clause authorizing
fee adjustment and Government responsibility for the cost
increase must be present for increased fee. If the Contractor is
considered to be responsible for the "mess", there is no fee. If
the Government is responsible, there is fee allowed.
I think there is a rough comparison between this principle and
the common law precept that once a party takes an action which
starts a chain of events, it is responsible for the
consequences, whether each consequence was intentional or not.
Regarding an authorizing clause, I mentioned that, unlike the
FFP clauses, the C+ "Clause Stop Work Order" doesn't include
language concerning constructive delays; it only discusses
directed work stoppages. I don't think it is the operative
The cost reimbursement changes clause might cover this
situation, however the issue of causation must still be
overcome. After all, had the Contractor controlled costs within
the target ceiling, the action would not have been necessary. I
don't know the answer to this question...
happy sails! joel
Vern Edwards on
Wednesday, December 12, 2001 - 05:59 am:
Under an incrementally-funded cost-reimbursement contract, if
the government sees that it's going to run out of money before
its next allotment of funds its choices are to (1) end the
contract, (2) issue a stop work order, (3) issue a change order
that effectively delays performance in some way, or (4)
negotiate a new delivery schedule in order to stretchout the
work, because once the money is gone the contractor is not
obligated to continue performance. If the contracting officer
chooses (2) or (3), then the clauses say that the contractor is
entitled to an adjustment to fee if the stop work order or
change order increases its costs or time required to perform. If
the contracting officer chooses (4), then the contractor is
entitled to ask for more fee as a condition of agreement. If the
contractor wants to proceed at its own risk and without
additional fee that is its choice.
FAR 32.704(c), which Eric did not quote, says: "Government
personnel encouraging a contractor to continue work in the
absence of funds will incur a violation of Revised Statutes
section 3679 (31 U.S.C. 1341) that may subject the violator to
civil or criminal penalties."
joel hoffman on Wednesday, December 12, 2001 - 12:52 pm:
Oops, sorry for attributing
quotes to the wrong people. I'll stay out of that, from here on
I still intend to check out the cases concerning who shot whom,
regarding the issue of causation. It's a matter of available
time. I was hoping someone else could do some on-line legal
research, including Shepardizing or other cross-reference tools.
I would agree that directing the contractor to stretch
performance to match the budget could be a change under the
"Changes" Clause. I don't categorically agree that fee is
automatically due the Contractor for every change involving
increased costs, regardless of what the clause says.
The various clauses apparently do not automatically entitle the
Contractor to fee, if the Contractor initiated the problem
requiring the deceleration. Otherwise, there wouldn't be
discussion about non-entitlement to fee, in N&C. The N&C
discussion concerns stop work delays without entitlement to fee,
even though the clause indicates that fee is part of the
Simply because a mod is issued pursuant to the authority of a
"changes" clause does not guarantee fee, when the Contractor is
responsible for the condition requiring a change.
Examples are adjustment of specifications,or adjustment of
specifications and schedule, to accept non-conforming work, in
lieu of tear-out, when in the best interests of the Government.
If the non-conforming work costs more than the specified work, I
certainly wouldn't pay fee, nor would I even pay extra costs on
a FFP contract.
Before you say, whoa, "why write a mod?", some contracts under
configuration management, subject to RCRA, NRC, or other
oversight, must be formally modified to incorporate ECP's and to
maintain configuration mangement, regardless of whether there is
a price adjustment. happy sails! joel
AnonX on Wednesday, December 12, 2001 - 01:03 pm:
"I think there is a rough comparison between this principle and
the common law precept that once a party takes an action which
starts a chain of events, it is responsible for the
consequences, whether each consequence was intentional or
Is this true? I've never heard of such a thing - but it brings
up interesting possibilities. Like making Adam and Eve
responsible for the over-run. Or making me responsible for
taking up so many gigabytes on Bob's computer for starting this
Anyway, there is a lot of intresting comments here, but I tend
to side with Vern on this one. I believe his stance is more
supportable even though the opposing opinions (and that's all
they are - opinions) were consistent with my initial thinking.
My thanks to everyone who contributed.
joel hoffman on Wednesday, December 12, 2001 - 02:21 pm:
I researched several cases
related to delays and changes,over lunch. None were directly on
point. However, I described the situation to one of my contract
attorneys. His opinion was that the Contractor's overrun is the
proximate cause of the ultimate delay; without the overrun,
there would have been no Government directed deceleration. His
opinion is that the time related costs are not fee bearing.
However, if you're insistent on paying fee, I'm not going to
argue with you. I'd justify it as a directed change in the
manner of performance, to cover the documentation for paying it.
happy sails! joel
Charlie Dan on
Wednesday, December 12, 2001 - 02:30 pm:
I agree with you that under some circumstances, there should be
no increase in fee for a legitimate contract change. The Changes
-- Cost Reimbursement clause, FAR 52.243-2, says:
"If any such change causes an increase or decrease in the
estimated cost of, or the time required for, performance of any
part of the work under this contract, whether or not changed by
the order, or otherwise affects any other terms and conditions
of this contract, the Contracting Officer shall make an
equitable adjustment in the-
"(1) Estimated cost, delivery or completion schedule, or both;
"(2) Amount of any fixed fee; and
"(3) Other affected terms and shall modify the contract
Sometimes what is equitable is an adjustment of zero.
At my office we've been having a lot of discussions about
situations that might call for "reverse equitable adjustments."
In other words, a change that reduces the contractor's costs or
risks, and therefore merits a decrease in fee. To me, equitable
is a "neutral" term, and indicates fairness to both parties. You
seek to negotiate an adjustment that puts the contractor in the
same relative situation regarding its ability to earn the
As to the other points and arguments in this thread, I think
Vern's analysis is the most well-supported. An overrun on a
cost-reimbursement contract is not, in and of itself, an
indictment of the contractor's performance. In my experience,
the Government has been equally at fault when a contract
overruns -- either through poor statements of work, or
assumptions associated with the SOW, or by selecting an obvious
low-ball bidder. If there is evidence that the contractor has
caused the overrun through mismanagement, I would try to
negotiate a zero or very low additional fee on the modification
extending the performance period.
les on Wednesday,
December 12, 2001 - 02:54 pm:
I have really been impressed with the comments that you and Vern
have made on many subjects across this site and NCMA. Your
contract attorney's statement, however, sort of sounds like some
of my law school professors statements did way back when-short
and concise The"but fors" included. Got to side with
Vern,however, as far as his reasoning goes,seems like the
Government was short-sighted on its funding expectations and
that the contractor is making a concerted effort on mitigating
fee requests he/she may be entitled to.
on Wednesday, December 12, 2001 - 03:07 pm:
You got my vote. Nice and simple.
Vern Edwards on
Wednesday, December 12, 2001 - 03:59 pm:
You've got to make a distinction between a delay and AnonX's
situation. In AnonX's situation there hasn't been any delay.
AnonX wants the contractor to perform differently than the
contract requires in order to accomodate his agency's temporary
funding shortfall and avoid the consequences of the Limitation
of Funds clause if the government runs out of money before the
government's next allotment of funds.
I don't agree with your attorney's argument that the overrun is
a cause of delay in this case. The contract makes express
provision for the possibility of an overrun--the government must
either obtain more money in time for the contractor to continue
to perform as originally scheduled, negotiate a new schedule, or
terminate the contract at the contractor's request. It does not
matter why the overrun happened. In order to claim that the
contractor has delayed its own performance the government would
have to argue that the contractor is obligated to continue to
perform despite the fact that the government has run out of
money. I don't think so.
And what does your lawyer mean by "time related" costs? If the
contractor's only costs were unabsorbed overhead, then I would
not pay additional fee. But a stretchout may entail temporary
demobilization or production shutdown, reassignment and
rescheduling of labor and facilities, temporary packaging and
storage of materials and equipment, modification of subcontracts
and considerable other work. Does your lawyer say that such
changes do not warrant an adjustment to fee?
Do not confuse delay claims with the situation in AnonX's case.
joel hoffman on Wednesday, December 12, 2001 - 06:02 pm:
1. I believe there will be a
delay in completing the contract.
On Wednesday, November 28, 2001 - 01:12 pm, Anon X said: "In
order to minimize the funding pressure in FY '02 we are
considering deferring some deliveries in '02 as well as in each
of the subsequent calendar years. Although this relieves funding
pressure in FY '02, this change in schedule increases the
contractors' over-run from 10% to 15%."
2. This may be a supply contract. The term "time related costs",
which I referred to, was my description to my attorney.
According to Anon X on Monday, December 03, 2001 - 12:36 pm:
"The schedule slip does not entail more work, simply more time
to do it - thus the additional 5% cost growth."
That is why I assumed that the costs were "time related."
3. Vern is correct that the 5% increase in costs could be due to
several factors, although, per Anon X, none are a result of
"more work". They do directly result from a delay (delay =
defer) in allowing deliveries.
4. If it is a service contract, I interpret the situation as:
The Government is considering some action to reduce the burn
rate of expenses to keep within available funds, resulting in a
stretched out delivery schedule, thus a delayed completion.
5. If it is a construction contract, actions which delay
completion are "delays to completion."
6. Regardless of which of the above types of contract, my point,
which has either been totally lost, or is apparently too whacko
to be logical, is this.
If the extra costs will be an ultimate result of the
Contractor's overrun, the Contractor is not due fee on the
7. I believe this is consistent with Nash and Cibinic's
discussion, throughout the Chapter on changes, delays, technical
direction, etc. The CONCEPT of no fee on extra costs that the
Contractor is responsible for is well established. What I, or
anyone else, can apparently NOT find is a direct, on point case,
where the Government has no choice but to react in a way which
will further affect costs.
8. According to Anon X on Monday, December 03, 2001 - 12:36 pm:
"The Contractor caused the 10% over-run..." This should not be
in question, yet a few respondents keep trying to muddy the
9. However, AnonX also goes on to say: "He does not need the
schedule extension. This is driven primarily by the funding
10. My ultimate questions are:
"What caused the increased costs associated with the delay in
completing the contract, beyond the 10% overrun?"
"Which party is ultimately responsible for causing the
additional 5% cost overrun?"
11. My opinion is that the 5% increase in cost is a logical
extension of the original overrun. If the Contractor wouldn't
have overrun the funds available in the contract for the
scheduled number of deliveries, the Government wouldn't be put
in the position of having to defer (delay) deliveries. Using the
argument that no fee is due on cost overruns which the
Contractor is responsible for causing, if I want the same number
of articles, I'm willing to pay the extra 15%, but I'm not
willing to allow the Contractor to profit from any of the
12. I don't think that is unreasonable...
happy sails! joel
Vern Edwards on
Wednesday, December 12, 2001 - 07:52 pm:
Well, Joel, that's an interesting
analysis. Unfortunately, I don't find it persuasive. Since I've
been unable to persuade you, let's just part in amicable
joel hoffman on Wednesday, December 12, 2001 - 10:56 pm:
Sounds like a great idea, Vern.
Its been an interesting debate and I'll admit that I didn't find
a definitive answer, myself. I need some information on another
topic, so will start a new thread. Hope you and anyone one else
can help me out on it. happy sails! joel
NOTE: The follosing is from a
new thread on the same subject added here to save space.
AnonX on Wednesday, March 27, 2002 - 01:54 pm:
When last we left this
controversial thread, I agreed with Vern that my contractor was
entitled to fee on those estimated costs associated with
Government-imposed changes to the delivery schedule. Our
approach was going to be fairly simple: Negotiate the estimated
cost for the new program (actuals to date plus ETC), then we
would subtract the agreed-to EAC (cost only) of the old program
which reflected the contractor's cost growth, and then apply fee
to the difference. The contractor suggests that this may not be
a fair approach based on the following logic:
A large portion of the contractor's estimated cost growth under
the old program was attributable to an increase in his forward
pricing rates (overhead, G&A, etc.). The contractor is arguing
that now that we have restructured the program, the estimated
cost growth associated with increased forward pricing rates
under the old program is irrelevant. That program is not going
We don't agree. We believe that the "but for" doctrine that
states, something to the effect that, "The contractor should not
be in a better or worse position but for the change", governs in
What are your thoughts? Is the contractor correct? Should we
disregard the estimated cost growth asociated with his increased
rates in determing which costs in the new program are
fee-bearing? To be honest, there is a little apples to oranges
substance to his argument.
Vern Edwards on Wednesday, March 27, 2002 - 04:52 pm:
There is nothing wrong with seeking advice at Wifcon Chat, as
long as you recognize it for what it is -- someone's opinion, in
many cases, someone you don't know and whose credentials are
unknown to you.
Furthermore, you shouldn't approach this as an issue for lawyers
or that requires resort to case law. What you have now is a
business problem, not a legal problem. The issue is how much
additional fee should you agree to pay the contractor as a
consequence of the change. At this point you're talking about
quantum, not entitlement, and lawyers and judges don't know
any more about that than you or I do. (Courts and boards don't
like to deal with quantum issues, especially when it
comes to profit or fee.)
Now, I think your question about costs is complicated and hard
to follow. When I read it I find that there are at least two or
three ways to interpret your meaning. So let me suggest a
different approach to the problem:
Separate the discussion of fee from the discussion of costs. You
already have a negotiated fee, so approach the problem from this
angle: You have required the contractor to do more work, or to
do work that was more difficult than you originally planned, or
both. Thus, you should give the contractor more fee. How much
more? Analyze it from the standpoint of the extent of new work
or the increase in the degree of difficulty. Then offer an
increase over the original fee that seems proportional and fair
If you get bogged down in a cost-based approach to fee
negotiation you're going to get hung-up, as perhaps you are now,
discussing what costs to include or exclude from the baseline.
In my experience, that path leads to deadlock. Offer what you
think is fair, or a little less, then bargain.
joel on Wednesday, March 27, 2002 - 04:55 pm:
sorry, AnonX. I've been up since
0330, turkey hunting, and didn't understand your question at
first reading. I am too tired, today, to ask for a
clarification. Maybe, I can look closer, tomorrow - but will be
out of town till next week - SORRY, again. happy sails! joel
Vern Edwards on Wednesday, March 27, 2002 - 06:10 pm:
Whatever is going on in your negotiation, I will tell you this:
I don't respect the tendency among some contracting folks to go
running to a lawyer when things bog down in a negotiation. I
might talk to a lawyer if a contractor raises a legal issue,
but I'm sure as heck not going to a lawyer when all we're doing
is discussing how much to adjust a fee.
A contracting officer who can't negotiate the amount of a fee
adjustment without talking to a lawyer isn't worth a d--- as far
as I'm concerned. And a contracting officer who asks a
contractor to show him an "on point case" to justify the amount
of fee that it's asking for isn't worth anything at all.
Your contractor is bargaining on a "what's fair" basis. He's
trying to get as much as he can and I don't blame him. If he
could get you to buy his argument, more power to him. But you
didn't say that the contractor had pointed a lawyer at you. (To
quote that great sage, Danny DeVito: "Lawyers are like nuclear
weapons. The other guy has them, so I've got to have them, too.
But if you use them you screw everything up.") If I were the
contractor, I would think that you were "an ass and a fool, and
a prating coxcombe" (to quote Captain Fluellen) if you asked me
for an "on point case" during a discussion about the amount of a
("Cases? Cases? We don't got no cases! We don't gotta show you
no stinkin' cases!" With apologies to the famous "federale" in
"The Treasure of the Sierra Madre.")
I don't really understand your contractor's argument, so I
cannot say whether it is a good one or a bad one. I have
suggested to you a way to negotiate a fair settlement that I
must have used a hundred times and that worked well for me. As
far as I'm concerned, that's the best advice that I can give
you. I'm sure as heck not going to tell you to start searching
court cases in order to determine how much more fee to give a
No lawyers, AnonX! And no cases! Get back in there and bargain
hard! Offer what you think is fair and not a penny more.
Airborne! Garry Owen!
And have fun with this.
AnonX on Thursday, March 28, 2002 - 09:04 am:
You ARE a kick! I have never considered negotiations with a
contractor a "Us vs. Them" event. I pride myself on being
open-minded, listening to a contractor's argument, and trying to
arrive at a fair settlement. I have to admit though, that it is
difficult for me to move a way from the concept of cost-based
fee negotiations but I will give it a try. I think both parties
will end looking at what the fee percentage will be against
total costs - but since there are no limitations (min or max) on
CPAF contracts why does it matter? Just expectations driven by
habit I guess. In any event, this is why I posted this question
to the site. Just to promote dialogue and help get me thinking
out of the box.
Vern Edwards on Thursday, March 28, 2002 - 09:06 am:
Of course, if the contractor had a really good lawyer, or me,
working for him when you asked for a case on point, he would
cite: Kemmons-Wilson, Inc., ASBCA No. 16167, 72-2 BCA ¶
9689 (1972). In that case government changes extended the
contractor's performance time. The contractor sought an increase
in price for indirect costs during the extended period and
profit on the indirects. The Army argued that no profit should
be allowed on the indirect costs, citing a famous case,
Laburnum Construction Corp. v. United States, 163 Ct. Cl.
339 (1963). The ASBCA expressly rejected the Army's argument,
saying that Laburnum does not apply to equitable
adjustments, and gave the contractor 10 percent profit on the
I couldn't help myself.
Vern Edwards on Thursday, March 28, 2002 - 09:28 am:
Re: Your comment of March 28 at 9:04am -- I have long taught my
students not to fall into the trap of negotiating profit or fee
on the basis of percentages, because that invariably leads to
arguments about costs.
Suppose the original estimated cost was $10M and the fee was $1M
-- 10 percent of costs. Suppose the extended performance
increased the estimated costs by $250K to a new estimate of
$10,250,000, due to some planning revisions, rescheduling, and
subcontract modifications. It would be natural for the
contractor to ask for an additional 10 percent -- $25K. "Let's
just keep it simple and use the same fee percentage for the
I would say, "Hey, wait a minute. I acknowledge that you had to
do some work to make adjustments and I'm willing to give you
some fee for that work, but not at the same rate as the original
contract. All you have to do is some administrative stuff to
accomodate the new schedule; the basic work hasn't changed
substantially. The additional work doesn't entail any
significant risk, or even inconvenience you too badly. But I'm
feeling generous today, so I'll offer you $5,000?"
I'm serious. The amount of the fee increase should reflect the
difficulty and risk of the additional work. It should not
necessarily be proportional to the increase in cost.
They can hear him howl at the South Pole. I would howl if I were
him. But if I were him I would also know that the game is up on
cost-based profit negotiations, because I would have read FAR
14.404-4(a)(3), especially the part about use of historical
averages and application of predetermined percentages.
Negotiation is a kick, isn't it. What fun! I envy you.
Vern Edwards on Thursday, March 28, 2002 - 09:44 am:
Oops! The FAR reference should be
Smokey on Thursday, March 28, 2002 - 05:02 pm:
I agree, I agree and I agree. The advice and opinions I have
read here FAR outweigh what I have rec'd through-out my career
from any lawyer(in most cases).
Negotiation is the best part of my job...and I certainly don't
consider it "Us vs Them", more like....will this past the
Washington Post test??? If my Negotiation Memorandum suddenly
appeared on the front page, could I support my decision? After
all....it's their money!
anon1 on Friday, March 29, 2002 - 09:24 am:
Ah but Vern:
I being the contractor would argue FAR 15.404-(6)(did I cite
that right?)and say that the mix was the same.
Vern Edwards on Friday, March 29, 2002 - 09:59 am:
There is no FAR 15.404-(6). Do you mean FAR 15.404-4(c)(6)?
If so, I would smile at you and say, "Well, that passage tells
me what I "may" do when setting my prenegotiation objective,
which is something that I really shouldn't discuss with you.
However, in the interest of openness, I will tell you that I
considered that guidance, but rejected it in this case because
the additional work is not of the same type and mix of work as
the basic contract work. It is essentially administrative and
much, much less complex and risky.
"Therefore, unless you have a better argument for why the added
work merits more than $5,000, then $5,000 -- going once...
anon1 on Friday, March 29, 2002 - 10:59 am:
Vern, thanks for correcting my
cite, too early this morning with one eye open-----okay, since
you put it that way---I'll take it! But if circumstances were
AnonYmus on Monday, April 01, 2002 - 09:53 am:
Can I just add another
Vern, I respect your negotiating skills and fully agree that
your approach is feasible. My question is, is it right?
Contractors have to deal with something called the "cost of
capital" (not "cost of money" as defined in FAR Part 31, but the
actual cost of borrowing capital). Cost of capital is roughly
the prime interest rate, plus or minus a point or two -- say
about 3 to 5 percent right now. Remember that DFAS is now
typically taking more than 60 days to pay contractors. So not
only are we talking about increased cost due to government
delay, but we are also talking about an additional period of
time to collect on the invoices submitted. If a contractor's
profit doesn't at least cover its cost of capital then it is
effectively losing money.
Also there is the additional cost associated with unallowable
costs -- normal and necessary business expenses made
non-reimbursable because of statute or regulation. One example
-- interest expense. Typically unallowable costs run 2 - 3
percent of total costs. So a contractor needs to get another
point or two to cover such costs -- otherwise, it is losing
Basically, if a contractor can't get at least 5 percent on its
costs, it's better off selling to the commercial sector (if it
And even if you are dealing with a captive contractor, I believe
that the health of the industrial base should be a concern to
all accquisition professionals. I believe it's that concern that
led to the language in FAR 15.404-4(a)(2) and (a)(3). I am
especially struck by the policy language that states
"Negotiations, aimed merely at reducing prices by reducing
profit, without proper recognition of the function of profit,
are not in the Government's interest. Negotiation of extremely
low profit ... do not provide the proper motivation for optimum
As I say, your method is sound and feasible -- I am just
wondering if it is really in the best long-term interest of the
Vern Edwards on Monday, April 01, 2002 - 11:37 am:
You've asked me about my method, which is to divorce the
negotiation of profit or fee from costs. So my answer is, yes, I
think it is in the long-term interest of the government, for two
reasons: first, because it is more consistent with government
profit policy than cost-based negotiation, and second, because
my method is not intended to keep profits low and does not
necessarily produce unreasonably low profit objectives.
Otherwise, I agree with much of what you say about contractor