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

By 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.

By CMERCY on Thursday, November 29, 2001 - 08:45 am:

What is the award fee based on?

By 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.

By 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.

By 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

By Anonymous 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 not legal.

By 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 poor performance.

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 appreciated.

Thanks for you help.

By Vern Edwards on Tuesday, December 04, 2001 - 10:03 am:

Okay--

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?

By AnonX on Tuesday, December 04, 2001 - 11:17 am:

Vern,

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.

AnonX

By Anonymous 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.

By 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

By Vern Edwards on Wednesday, December 05, 2001 - 04:16 am:

AnonX:

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?

By AnonX on Wednesday, December 05, 2001 - 07:45 am:

Vern,

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?

AnonX

By formerfed on Wednesday, December 05, 2001 - 08:00 am:

AnonX,

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)

By Vern Edwards on Wednesday, December 05, 2001 - 09:44 am:

AnonX:

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 post.

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?

By Anonymous 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 argument.

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.

By Vern Edwards on Thursday, December 06, 2001 - 03:06 am:

Anonymous:

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 schedule.

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.

By faruk on Thursday, December 06, 2001 - 10:22 am:

AnonX

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 determination.

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 delay.

Not much new here, just a different person saying it.

By Anonymous 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 particular game.

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 contracts.

By 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 negotiations....

AnonX

By Eric Ottinger on Thursday, December 06, 2001 - 04:31 pm:

All,

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.

Vern,

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 this constraint.
I would not direct what parts of the work to stop (or whom to lay off).

Anon 1:06,

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.

Vern,

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.

AnonX,

Good luck in negotiations.

Eric

By 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.

AnonX

By 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

By Vern Edwards on Friday, December 07, 2001 - 03:11 am:

Eric:

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.

By joel hoffman 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
! joel

By Eric Ottinger on Friday, December 07, 2001 - 01:23 pm:

Vern,

As I understand the problem, BOTH parties want the contractor to keep working at a slower pace.

Perhaps AnonX could clarify this point.

Eric

By 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.

By 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.

By Eric Ottinger on Friday, December 07, 2001 - 04:44 pm:

John,

Neither you nor Vern have cited a case to support your argument.

Personal opinion. Indeed.

Eric

By 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 sails! joel

By Vern Edwards on Saturday, December 08, 2001 - 08:20 pm:

Eric:

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.

By Vern Edwards on Saturday, December 08, 2001 - 08:30 pm:

Joel:

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 contemplated.

(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 and development.

(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 modified-commercial items."

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 contracts.

By 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

By 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

By Vern Edwards on Sunday, December 09, 2001 - 08:03 pm:

Joel:

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 performance.

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 contract.

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 schedule.

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 date."

Italics added. While that paragraph clearly allows the parties to negotiate a deal, it does not preclude additional fee.

By 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 regulations.

By 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

By 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 clause.

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

By Vern Edwards on Wednesday, December 12, 2001 - 05:59 am:

Joel:

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."

By 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 in.

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 equitable adjustment.

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

By AnonX on Wednesday, December 12, 2001 - 01:03 pm:

Joel wrote:

"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."

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 thread.

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.

By 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

By Charlie Dan on Wednesday, December 12, 2001 - 02:30 pm:

Joel:

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 accordingly."

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 negotiated fee.

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.

By les on Wednesday, December 12, 2001 - 02:54 pm:

Joel:

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.

By Anonymous on Wednesday, December 12, 2001 - 03:07 pm:

You got my vote. Nice and simple.

By Vern Edwards on Wednesday, December 12, 2001 - 03:59 pm:

Joel:

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.

By 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 additional costs.

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 situation.

9. However, AnonX also goes on to say: "He does not need the schedule extension. This is driven primarily by the funding profile problem."

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 additional costs.

12. I don't think that is unreasonable...
happy sails! joel

By 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 disagreement.

Vern

By 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.

By 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 to happen.

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 this case.

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.

By Vern Edwards on Wednesday, March 27, 2002 - 04:52 pm:

AnonX:

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 to you.

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.

By 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

By Vern Edwards on Wednesday, March 27, 2002 - 06:10 pm:

AnonX:

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 fee adjustment.

("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 contractor.

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.

Vern

By AnonX on Thursday, March 28, 2002 - 09:04 am:

Vern,

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.

By Vern Edwards on Thursday, March 28, 2002 - 09:06 am:

AnonX:

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 additional indirects.

I couldn't help myself.

Vern

By Vern Edwards on Thursday, March 28, 2002 - 09:28 am:

AnonX:

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 adjustment." Right.

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

By Vern Edwards on Thursday, March 28, 2002 - 09:44 am:

Oops! The FAR reference should be 15.404-4(a)(3).

By Smokey on Thursday, March 28, 2002 - 05:02 pm:

AnonX..Vern...

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!

cheers....

By 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.

By Vern Edwards on Friday, March 29, 2002 - 09:59 am:

anon1:

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... twice... "

By 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 different......

By AnonYmus on Monday, April 01, 2002 - 09:53 am:

Can I just add another perspective here?

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 money.

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 can).

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 contract performance."

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 government.

By Vern Edwards on Monday, April 01, 2002 - 11:37 am:

AnonYmus:

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 profit.