A few threads ago, Vern , stated that there were no fee limitations on a CPIF contract. Looking at the US code and the relevant FAR section, it appears that, as far as Cost Plus discussion goes, reference is only made to the Statute imitations on CPFF contracts. In the area of a CPIF contract, has anyone started out with a 15% target (Research/Dev)come in lower than the target cost and achieved a relative higher percentage (higher than 15%)? If so what was the reaction, i.e. was there a challenge by anyone. Can't seem to find anything on point regarding this-Tks

By AnonX on Wednesday, February 27, 2002 - 04:17 pm:

I can't see why that would be any different than negotiating a 15% fixed fee on a CPFF contract; then under-running such that the fee realized was greater than 15%. Not that it happens that often, but the opportunity is there.

By anon1 on Wednesday, February 27, 2002 - 05:03 pm:

Good point anonX,

By John Ford on Thursday, February 28, 2002 - 11:12 am:

It is unlikely that you would find something on point regarding this issue for several reasons. First, it would be rare for a contractor toget the max fee as a target fee. Second, the entities who would most likely raise an issue over this are the gency IG and the GAO. They would only get involved is they examined the particular contract or someone raised the question of the propriety of agreeing to a higher maximum incentive fee than is allowed by the FAR.
As to whether there is a limit on incentive fees, my take on FAR 15.404-4(c)(4)(i) is that the language which states that the "contracting officer shall not negotiate a price or fee that exceeds the following" means that the CO could not agree to a max fee called for by FAR 52.216-10 that exceeds the limits set out there.

By Vern Edwards on Thursday, February 28, 2002 - 11:52 am:

Anon1:

If I understand your question correctly, you are asking whether there is a statutorily-imposed 15 percent limit on fee under a CPIF R&D contract. If so, the answer is no.

There used to be a FAR-imposed limit on such fees--i.e., the FAR extended the statutory limit to CPIF contracts as well as CPFF contracts--but the FAR Council discarded that limit some time ago. I'm not at home now and cannot access my annotated FAR, so I cannot tell you the FAC number, but if you're interested just say so and I'll provide here tomorrow.

If your question was really different, please clarify for me.

By Anon1 on Thursday, February 28, 2002 - 12:50 pm:

Vern, as usual on-point. My scenario is that I am going into a very difficult CPIF contract and am planning my fee scenario. This is an extremely difficult development contract with a aggressive delivery schedule. I had planned on going in with a 15% factor as a target fee (if there was a statutory limitation)If somehow, and it would take an act of God, we come in under the target cost and my share ratio was such that the total fee exceeded an overall 15% does anyone really care? In the realm of the minimum fee, would that be guaranteed no matter what my costs turn out to be? Would appreciate the FAC number-Thank you

By AnonX on Thursday, February 28, 2002 - 01:53 pm:

Anon1,

While Vern does your research for you, let me ask a question. Have you considered a different contract type? Under a CPIF contract, the contractor is being told to prioritize cost control over performance. You say that "this is an extremely difficult development contract with an aggressive delivery schedule." With this description, I would think you would want the emphasis to be, at least in part, on contract performance. Have you considered a CPAF or combined CPIF/AF contract?

AnonX

By anon1 on Thursday, February 28, 2002 - 02:07 pm:

anonx:

Funny you should mention that because this is exactly the type of contract the Gov't has sent me for review. Some CLINS IF and some AF. Is going to be a real kick to administer. My PM and I will become siamese twins!

By Vern Edwards on Thursday, February 28, 2002 - 09:10 pm:

Anon1:

Okay, here's the skinny. For the benefit of others who may be interested, I'm going to provide more background than you probably need.

The FAR Councils dropped the application of fee limitations to CPIF contracts in FAC 97-02, 62 FR 51224, which was published on September 30, 1997 and took effect on January 1, 1998. What follows is the history of this policy change.

The statutory limitations on fee appear in 10 U.S.C. 2306(d) and 41 U.S.C. 254(b) and are implemented at FAR 15.404-4(c)(4)(i). The two statutes contain the same restrictions, but they are worded a little differently. The wording in Title 10 is as follows:

"The fee for performing a cost-plus-a-fixed-fee contract for experimental, developmental, or research work may not be more than 15 percent of the estimated cost of the contract, not including the fee. The fee for performing a cost-plus-a-fixed-fee contract for architectural or engineering services for a public work or utility plus the cost of those services to the contractor may not be more than 6 percent of the estimated cost of that work or project, not including fees. The fee for performing any other cost-plus-a-fixed-fee contract may not be more than 10 percent of the estimated cost of the contract, not including the fee. Determinations under this subsection of the estimated costs of a contract or project shall be made by the head of the agency at the time the contract is made."

Here's the wording from Title 41:

"The cost-plus-a-percentage-of-cost system of contracting shall not be used, and in the case of a cost-plus-a-fixed-fee contract the fee shall not exceed 10 percent of the estimated cost of the contract, exclusive of the fee, as determined by the agency head at the time of entering into such contract (except that a fee not in excess of 15 percent of such estimated cost is authorized in any such contract for experimental, developmental, or research work and that a fee inclusive of the contractor's costs and not in excess of 6 percent of the estimated cost, exclusive of fees, as determined by the agency head at the time of entering into the contract, of the project to which such fee is applicable is authorized in contracts for architectural or engineering services relating to any public works or utility project)."

Note that the statutes apply the limitations to "a cost-plus-a-fixed-fee contract," and make no mention of cost-plus-incentive-fee (CPIF) contracts.

However, for many years--since the days of the old ASPR Committee--the regulators had applied the limits to CPIF and cost-plus-award-fee (CPAF) contracts as well as to cost-plus-fixed-fee contracts. Prior to FAC 97-02 the fee limitations had appeared in FAR 15.903(d), which read as follows:

"(d)(1) The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b):

(i) For experimental, developmental, or research work performed under a cost-plus-fixed-fee contract, the fee shall not exceed 15 percent of the contract's estimated cost, excluding fee.

(ii) For architect-engineering services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6 percent of the estimated cost of construction of the public work or utility, excluding fees.

(iii) For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contract's estimated cost, excluding fee.

(2) The limitations in subdivisions (d)(1)(i) and (iii) of this subsection shall apply also to the maximum fees on cost-plus-incentive-fee and cost-plus-award-fee contracts. However, a deviation to the maximum-fee limitation for a specific cost-plus-incentive-fee or cost-plus-award-fee contract may be authorized in accordance with Subpart 1.4."

On May 14, 1997, the FAR Councils issued a proposed rule (62 FR 26640) during the process which we know as the "FAR Part 15 Rewrite." In the explanatory statement of that proposed rule, on page 26641, under the heading, "Fee Limitations," the Councils said:

"[T]he fee limitations at 15.809-3(d) have been strictly aligned with statute[.]"

Well, there were no fee limitations at FAR paragraph 15.809-3(d), because there was no paragraph 15.809-3(d) and, as far as I can tell, there never had been. In 1997, FAR section 15.809 dealt with forward pricing rate agreements and there was no subsection 15.809-3. The reference was a typo; they meant 15.903(d). The proposed rule included the language that appears today in FAR 15.404-4(c)(4)(i), and which reads as follows:

"(4)(i) The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b):

(A) For experimental, developmental, or research work performed under a cost-plus-fixed-fee contract, the fee shall not exceed 15 percent of the contract's estimated cost, excluding fee.

(B) For architect-engineer services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6 percent of the estimated cost of construction of the public work or utility, excluding fees.

(C) For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contract's estimated cost, excluding fee."

Note that the application of the limitation to CPIF and CPAF contracts, which before FAC 97-02 had appeared in FAR 15.903(d)(2), has been dropped. That's how the FAR Council "strictly aligned" the fee limitations with the statutes. Thus, the limitations no longer apply to CPIF or CPAF contracts.

Negotiate away!

However, I'm with AnonX--I wouldn't negotiate a CPIF contract. They're a nuisance and research indicates that they are not effective. Combining a CPIF arrangement with a CPAF arrangement only further undermines its effectiveness.

By anon1 on Friday, March 01, 2002 - 09:12 am:

Vern, thanks for your information, much appreciated. Id rather not negotiate the CPIF but kind of under the gun on this one. I note that under the CPIF there is a provision for a minimum fee. I suppose this should be guaranteed no matter what the cost. I just hope my technical people truly recognize changes and keep me posted-Thanks for your assistance.

By Vern Edwards on Friday, March 01, 2002 - 09:24 am:

Anon1:

Some agencies have negotiated a minimum fee of $0. In the past, some Air Force offices used to negotiate a "negative" minimum fee, which meant that the contractor could actually take a loss on a cost-reimbursement contract, but I notice that their FAR supplement no longer makes mention of that, so I'm not sure if they still do it.

CPIF contracting can make contract administration more complicated. A key issue in CPIF contracting is maintaining incentive effectiveness when negotiating equitable adjustments. For example, when negotiating an equitable adjustment you may have to adjust target cost, max fee, min fee, and share ratio, instead of just estimated cost and fixed fee, or estimated cost, base fee and award fee pool.