By Vern Edwards on Friday, July 19, 2002 - 01:00 am:

Gang:

I have enjoyed all the comments posted here, but I don't think we can resolve our differences through discussion. I think that we are grouped into fundamentally different frames of reference and that discussion is to little or no avail.

Hopefully, Joel will get an attributable answer from someone at the FAR Council and then we'll know whether Dan can use a (take your choice): fixed-price contract with award fee, firm-fixed-price contract with award fee, or fixed-price-award-fee contract.

Have a nice weekend.

By Roy on Friday, July 19, 2002 - 04:52 am:

I believe Vern is right about the resolution of differences here.

Joel, to answer your two questions:

1) Yes, award fee is a form of incentive provision. All are listed in 16.4. I believe that was the only place the FAR Council could have placed this new language on fixed-price with award fee. That may have been the only comment they got on the proposed rule.

2) No, equitable adjustments can be made under certain provisions, and I guess other mutually agreeable changes can be made that would affect the final price paid, but that doesn't change the FFP nature of the contract.

My previous comment regarding "mistaken believe" was not addressed to anyone individual, and I apoligize if you took it personnaly. People use the term FFP contract out of context quite often. I see a lot of it when reviewing files. Just as an example, I have found language included in IDIQ contracts such as "this is a firm-fixed price contract for...". The contract may well be based on fixed unit prices, but it is far from being a firm-fixed price contract.

Good luck with the FAR Council.

Roy

By Vern Edwards on Friday, July 19, 2002 - 09:44 am:

Chuck:

Sorry I missed your July 18 at 1:44 p.m. comment. I wasn't ignoring you.

Here's where I'm coming from on the general use of award-fee: No one has ever produced a scrap of evidence that award-fee incentives actually work. All the claims of success are anecdotal and unverified.

I know that many persons believe that award-fee incentives have worked well for them. However, if we're being serious in performing research on policy effectiveness, then we must be suspicious of anecdotal claims.

In the April 2002 edition of NCMA's Contract Management magazine, Gregory A. Garrett claimed that a DOE contract with Lockheed at the Idaho National Environmental and Engineering Lab is an example of "best practices" in the use of incentives. He described the incentive plan as "effective." See: "Performance-Based Contracting Incentives: Myths, Best Practices, and Innovations." Upon checking, I learned that the DOE IG had reviewed that incentive and questioned 8 of the 13 elements in the plan and $11.3 million in fee awards, and that the DOE contracting office had generally concurred with the findings. See: Performance Incentives at the Idaho National Engineering and Environmental Laboratory, Audit Report No. WR-B-00-05, April 2000. Furthermore, the DOE contracting office, in its own report, had found that the contractor had not established "an underlying culture of rigor, discipline and sustaining leadership." See: The New York Times, "Suit Accuses Federal Contractors of Mishandling Cleanup at Nuclear Lab," by Jo Thomas, February 19, 2001. When DOE recompeted the contract the incumbent did not submit a proposal and was replaced, which tells you something. So much for "success stories."

An April 2001 paper out of the Air Command and Staff College, Air University, "Analysis of Air Force Award Fee and Award Term Contract Implementation," by Major Thomas J. Snyder, describes shortcomings in the use of award fee incentives. (You can find the paper on the internet by searching www.google.com.)

Major Snyder reports that industry interviewees said that award-fee incentives led them to do things to please the award fee board. However, Major Snyder concluded that contractors were performing services not required by the contract in order to earn award fees. Moreover, industry representatives told him that they would earn the same profit even without the award fees, by bidding higher initially. Major Snyder concludes, "The government believes the incentive works as advertised despite the above insight from industry. The reason for this belief is most likely training and advertising. Government training explains that incentives motivate contractors and therefore it is believed without challenge until proven otherwise," (pp. 29-30).

I believe that award fees can improve communications, which can lead to better contractual relationships, but I cannot say that they objectively improve contractor performance. Major Snyder concludes that "there are genuine disconnects in the implementation and administration of award fee contracts, and those disconnects prevent the contracts from working as originally intended."

Indeed, when advocates repond to criticisms of award fee incentives they often say that the concept is sound and that problems arise from poor implementation. I say: Maybe, but prove it. Moreover, I say that if we keep seeing the same problems with implementation, and we have, as Major Snyder shows, then maybe the concept isn't all that sound. In any event, when a workforce complains constantly that it is shorthanded and has too much to do, why use a device that requires more work but that hasn't been proved-out.

Chuck, I encourage you (and others) to find and read Major Snyder's paper. While I do not believe that it is the last word on the subject, it joins a long line of reports that have questioned the effectiveness of incentives in government contracts.

Vern

By Eric Ottinger on Friday, July 19, 2002 - 09:49 am:

I wouldn’t say that there is any big disagreement. We are just having a good discussion and kicking this issue around. I don’t really disagree with anything that Roy said.

I recognize that my approach is definitely in the category, “If it isn’t explicitly illegal, it may be legal.” Others may have a different view and they may very well be correct.

I noted that Dan isn’t under DoD. Nevertheless, if I were Dan, I would argue that the DFARS is a pretty good indication of what is legal, even if the DFARS language has not yet been incorporated into the FAR.

Joel,

Ralph was in Independent Review when I was at DOE. He is a wise head with a great sense of humor. Ralph may have an answer to your question, but I would not blame him if he chooses to duck.

Eric

By Dan Cronin on Friday, July 19, 2002 - 11:18 am:

Eric,

You are correct that I am not under DoD. And I believe that the DFARS can be another source of information. But I don't believe it addresses the legality of what I want to do.

I believe the law states a preference for FFP and FFP with EPA, but prohibits only cost-type contracts, when acquiring commercial items.

If I were to conclude that I could not use the contract type that I described I would base that conclusion on the FAR, not the law. And I would request an individual deviation consistent with FAR 1.402 and 1.403.

By Chuck Solloway on Friday, July 19, 2002 - 12:29 pm:

Vern,

The problem is not with the award fee concept it is how it is used.

In my opinion 13 award fee criterion would be way too much for a commercial service contract. One or two, emphasizing important issues, might do the trick. Fewer, more meaningful criteria is the key. I offer two examples:

I saw an AF contract for audio visual services with page after page of "deducts" and "rewards" including criterion such as how well contractor employees spoke english and how well they dressed.

I was privy to an Army contract with significant cost overruns. The award fee feature on cost rewarded the contractor not for cost control, but on the basis of whether cost reports were complete and submitted on time.

In these cases, the criteria seemed either excessive and/or ill designed.

Major Snyder's finding re: pleasing the award fee board fits right in with the concept of the award fee. When you pay award fees the contractor goal becomes customer satisfaction - the more you please the customer the more profit (fee) you make. If the award fee board is pleased by the wrong things, then the problem is with the board and not the concept. The contracting officer and the fee determining official ought to straighten them out. (I will look up the article as you suggested.)

It also appears to me from casual observation that award fee criteria that is not fairly applied (the contractor always wins or the contractor never wins) can become a demotivator.

Logically, it appears that giving a contractor money for exceeding contract requirements should motivate the contractor to exceed contract requirements. Proving this is another thing entirely, as you cannot feasibly have a single contractor under the same circumstances perform the identical services twice - once with award fee and once without award fee.

I also, as do some other commentors, wonder if the use of award fees/incentive fees for commercial services is widespread practice.

Nonetheless, it is government policy to use performance based service contracts with rewards (OFPP calls them "incentives") and deducts. The application of this guidance is left to the individual. The use of common sense seems essential to successful application. Sometimes, as you have noted, the regulations do not always seem to fit - but, as you again point out, they are the regulations and the game does have rules.

As you have suggested, it would be nice if someone from the FAR council would jump in and help clear up the confusion on all of the contract type issues in this thread.

By Anon19 on Friday, July 19, 2002 - 01:38 pm:

Dan's agency apparently wants to focus attention on service. We can assume a level of profit is built into the fixed price element. This award fee scheme is apparently "gravy" to be awarded at the discretion of the agency. All the other discussion and whether it fits within rules aside, I have to warn him to be very careful what you ask. I also have a nagging question that might be interesting to answer. We must assume the contractor has built expected profit into the fixed price and is fully at risk there. What will be the actual interplay between that internal profit line and the award fee in management decisions? How large will your dollar pool have to be to overcome internal profit maximizing decisions that you may not like? What might the actual profit be assuming good management and a pleased customer? Enough to make the evening news?

With some experience in award fee contracts I concur they encourage communication and responsiveness. This seems to be particularly true with fairly large programs where significant fee often gets top executive level attention. When the criteria are carefully tailored to performance they probably have general positive effect. At the least the contracting agency gets considerable attention focused on any issue touching on fee. A criterion dealing with management attentiveness to customer concerns is generally helpful.

All this is anecdotal. I believe it was good for our purpose. I also believe, again from some experience in reviewing award fee criteria from other contracts, that any study would show most to be ineffective, even counterproductive. The observation that the contractor may focus on fee criteria without direct tie to or even as diversions from the supposed deliverable is apt.

Our organization put about as much effort in establishing and maintaining five to ten fee criteria as we did in establishing selection criteria. We had people with long experience, excellent reference aids and highly skilled advisors. To say the least we were well funded, orders of magnitude beyond what most offices have, for contracting issues. The programs were large with high level oversight. We used great care and rigorously tied criteria to solid program objectives with the caveat they must have high probability of effecting performance. Doing this was not cheap and not considered trivial.

I was often disgusted after some years in this environment when I collected fee criteria from many sources in preparation for a new contract outside our normal experience. The triviality and questionable effectiveness of most was enough to make me wonder if these people were thinking or just collecting fee criteria to pile onto their contract. This seemed supported by the frequency of pages upon pages of "criteria" without apparent relation to any contract objective and even less to what the particular projects appeared to be about.

More than a few appeared counter productive as in Chuck's other example of form over substance (format and timeliness over actual cost control). From those observations I'd say that putting the award fee technique into the hands of the average contracting office is similar to putting a weapon into the hands of a ten year old. With much education (not just training) and some adult supervision (experienced and expert advisors) the results may be positive. The more frequent result is sad to see.

By Chuck Solloway on Friday, July 19, 2002 - 02:34 pm:

One additional thought. Maybe things would be less confusing if we did not include "services" in the definition for a commercial "item". Perhaps, it would be better if we had a separate definition for commercial services and separate rules when it came to contract type. For example, commericial item procurement would be limited to FFP or FFP/EPA, while commercial service procurment would be any contract type consistent with commercial practices and sound business judgement.

This would bring the GSA schedules and the OFPP Policy Ltrs in sync with the FAR.

By Roy on Friday, July 19, 2002 - 03:21 pm:

Dan and Joel and all,

Dan, reference your post of 11:18. Your logic is soo right regarding the law and the FAR implementing regulations. Sometimes the legislators leave flexibility in the language of the law leaving it to the regulation writers and the rule making process to decide, as long as the outcome does not conflict with the law. So it was with FASA and the prescription of types of contracts to be used with Commercial Item acquisitions. The final rule in the FAR was very specific in describing the types of contracts allowed. Some disagree with the final product, but until it is changed I guess we have to live with it.

A proposed rule is still out there (FAR Case 2003-13) addressing the use of type of contracts for commercial items. In fact,it addresses the same thing that is the subject of this thread, use of non-cost based award fee and performance or delivery incentives and also some limited use of Time and Material contracts. The latest status posted shows that the final rule has been drafted and is currently at OFPP for review.

Joel, not sure whats in the final rule language, but your logic on the firm-fixed price nature of such non-cost incentives is reflected in the proposed rule language. It states: "noncost-based award fee and performance or delivery incentives may be used in conjunction with FFP contracts and FP/EPA without changeing the FFP or FP/EPA nature of the contract" The language for the proposed rule was published in the Federal Register on December 29, 2000.

I really have to believe that the time and material part of this proposed rule came about as a result of the significant discussions by Vern Edwards and others on either this forum or the previous ARNET discussion thread.

You may not have to contact the FAR Council after all, since the clarification being sought is reflected in the proposed rule. Hope it gets published. OFPP may not like the Time and Material part of it.

Roy

By joel hoffman on Friday, July 19, 2002 - 03:31 pm:

Roy, thank you for responding to my questions. The reason I asked them is that I sensed from your earlier post that you believe "firm fixed-price" means absolutely and literally a carved in stone price, absent a change or other equitable adjustment. For example, a FFP contract awarded at $100,000 will result in payment of $100k to the contractor. I think your 4:52 AM post confirmed this. I sense that part of the reason that you say a FFP contract can't include an award fee provision is that the contract price can't be firm and fixed if there is any CLIN, which would allow a variable payment. Is that correct?

Roy, what type would you classify a contract for construction with one or more unit priced items, or one with numerous unit priced items, or one with all items unit priced? In each instance, the unit-priced items are based on a defined scope of work, using estimated quantities. The contract states that payment will be made for actual quantities performed. A "Variations in Estimated Quantities" clause is included in the contract.

I've looked through FAR 16 and cannot find a contract type called a unit-price contract for this type work. Would you classify it as a "Firm Fixed-Price" contract, simply a "Fixed-Price" contract, or something else?

Our construction contracts sometimes have minor CLINs for utility relocations or other incidental work items, that are "lump sum" items, but the contract calls for payment based on actual billings from a utility or railroad to the Contractor, with the final lump sum price to be adjusted, accordingly. What would this type contract be called? Is it a "Firm Fixed-Price", a "Fixed-Price with economic price adjustment", a "hybrid"? Can a FFP contract contain minor,incidental provisions, which aren't subject to adjustment? Thanks. happy sails! joel

By joel hoffman on Friday, July 19, 2002 - 03:34 pm:

Roy - just saw your last post. I'll look into the proposed rule! happy sails! joel

By Roy on Friday, July 19, 2002 - 03:37 pm:

Sorry, my FAR Case reference in the last post was incorrect. It should read 2000-013.

By Vern Edwards on Friday, July 19, 2002 - 04:01 pm:

Hold on, everybody, Roy just answered Dan's question!

On Dec. 29, 2000 the FAR Council issued a proposed rule that would authorize the use of award fees for the acquisition of commercial items. 65 Fed. Reg. 83291-83293. The rule has not yet been finalized. It would add subsections 12.207-1 and 12.207-2. FAR § 12.207-1(a) would read as follows:

"(a) Agencies must use, to the maximum extent practicable, firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial items. These contract types may be used in conjunction with an award fee incentive and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost (see 16.202-1 and 16.203-1)."

The background statement in the Federal Register says that the proposed rule would:

"[Revise] FAR 12.207 to--Authorize the use of noncost-based incentives such as award fees and performance or delivery incentives."

and

"Revise FAR 16.202 and 16.203 to indicate that noncost-based award fee and performance or delivery incentives may be used in conjunction with FFP contracts and FP/EPA without changing the FFP or FP/EPA nature of the contract."

Since the FAR Council believes that it must revise FAR to authorize the use of award fee incentives with FFP or FP with EPA, it follows that they do not feel such use is currently authorized.

Joel! I should have bet!

Vern

By Eric Ottinger on Friday, July 19, 2002 - 04:18 pm:

Vern,

Are you saying that the FAR Council is never allowed to revise the FAR for the purpose of clarifying a point.

As long as Joel intends to call Ralph DeStefano, he should ask.

Eric

By joel hoffman on Friday, July 19, 2002 - 04:56 pm:

Vern, I searched the Web for an hour, only to find the best explanation of FAR Case 2000-13 in the WIFCON Archives!

By the way, it was you that posted the information! Seems like you forget more than the rest of us know, sometimes! Please, hold your bet - we need to get to the bottom of the proposed rule. Was it clarification or new territory?

Our paralegal has gone home for the day, so I'll try later to read the Fed Register Notice - our legal office has a WestLaw account. I don't know what the hold-up is in issuing the final rule. In the archived discussion July 19, 2001 http://www.radix.net/~ambrose/forum228.htm

you said "The DAR Council sent a final draft of this rule to the Civilian Agency Acquisition Council on May 9, 2001. As of July 19, the two councils were still working to "resolve open issues."

This proposed rule is very poorly worded, especially 12.207-2(a). That paragraph clearly dodges the question of whether or not T&M and labor-hour contracts are among "the authorized contract types in 12.207-1." I suspect that the members of the councils can't agree among themselves about whether or not T&M and labor-hour contracts are "cost-type" contracts, and so they've written the rule to let each agency do what it likes.

What a way to run a procurement system!"

happy sails! joel

By joel hoffman on Friday, July 19, 2002 - 05:02 pm:

Roy - I need to correct the last sentence of my 3:31PM questions to you. I said:
"Can a FFP contract contain minor,incidental provisions, which aren't subject to adjustment?"

I meant: "Can a FFP contract contain minor,incidental provisions, which are subject to adjustment?

Thanks. happy sails! joel

By Roy on Friday, July 19, 2002 - 05:09 pm:

Joel, you need to read the proposed rule. It can be found simply by going to the Federal Register and use the browse for the year 2000 and click on December 29, 2000.

By joel hoffman on Friday, July 19, 2002 - 06:05 pm:

Thanks, Roy. I have now saved the Fed Register home page and search page as Favorites.

http://www.archives.gov/federal_register/the_federal_register/the_federal_register.html

http://www.gpo.gov/su_docs/aces/aces140.html

The Federal Register doesn't explain whether or not FFP contracts can already use non-cost based incentives. It simply says:

"-Revise FAR 16.202 and 16.203 to
indicate that noncost-based award fee
and performance or delivery incentives
may be used in conjunction with FFP
contracts and FP/EPA without changing
the FFP or FP/EPA nature of the
contract."

Note that other parts of the FAR are changed to "authorize" certain enhanced aspects of commercial commercial acquisition.

We can't tell from reading the Fed. Reg. whether FAR 16.202 is being clarified or whether there is additional authorization, regarding non-cost incentives and 16.202 (FFP) contracts.

I will add contacting Ms. Victoria Moss for clarification of content of FAR case 2000-13 to my "Do-List".

By Roy on Friday, July 19, 2002 - 06:54 pm:

Joel,

Vern said it correctly in his post. It ain't authorized now but this rule making process could very well authorize it.

It is now Miller time, you guys have a good weekend.

Roy

By joel hoffman on Friday, July 19, 2002 - 08:02 pm:

Roy, Vern stated his conclusion, not necessarily a fact. Let's see what the DAR Council reps say. Hoist a Miller, while I toast a Natural Light to you! Have a good weekend. happy sails! joel

By Vern Edwards on Sunday, July 21, 2002 - 04:57 pm:

Eric:

The FAR Council didn't say it proposed the rule to clarify. It said it proposed the rule to authorize. I take them at their word.

By joel hoffman on Monday, July 22, 2002 - 09:33 am:

Here is an intersting article by a regular Forum participant, which appears to indicate that a FFP contract may include an incentive bonus and that such a contract could be used for a Part 12, commercial acquisition (Note that the author does not advocate using such bonuses).

http://www.wifcon.com/analawapur.htm

happy sails! joel

By Roy on Monday, July 22, 2002 - 10:33 am:

I believe it is these types of articles, that identify/address good procurement practices, and which also provides discussion on possible conflicts in the regulations regarding the practice, is what starts the ball rolling on many regulatory changes. Bet this is what prompted the development of FAR Case 2000-013. Just my opinion.

Roy

By Devils Advocate on Monday, July 22, 2002 - 10:59 am:

Joel:

Heh, heh, heh. Yeah, I said it. And I actually believed it. I still do, kinda, sorta. But I like to argue both sides.

Anyway, the proposed rule of December 2000 indicates that I was wrong in June 2000. Oh well.

Good catch. I was wondering if anybody would remember.

Thanks for the backup, Roy.

Vern

By joel hoffman on Monday, July 22, 2002 - 03:00 pm:

Vern, It looks like the Deputy Under Secretary of Defense for Acquisition and Technology, Dr. Jacques Gansler, agreed with you in April 2000, that performance based service contracts could incorporate non-cost based incentives into commercial acquisitions, using FFP and FP-EPA contract types.

In your WIFCON Article, found at the above link, you said: "...Dr. Jaques Gansler directed the military departments and defense agencies to make 50 percent of their service contracts performance-based by the year 2005. An attachment to the memo said that performance-based contracting facilitates use of the commercial items procedures in FAR Part 12 and that incentives should be used on fixed-price contracts." (see: http://www.acq.osd.mil/ar/doc/ganslerpbsa.pdf )

Were both of you wrong? happy sails! joel

By Vern Edwards on Monday, July 22, 2002 - 03:29 pm:

Joel:

Who knows?

The FAR Council must have had some reason for issuing a proposed rule to "authorize" the use of non-cost incentives with FFP contracts under FAR Part 12. I'd bet that they had the same kind of discussion among themselves as we've been having here and that there were people on both sides of the argument.

Maybe they felt that such use was, in fact, authorized, but that the FAR was not sufficiently clear. However, in the past when they've sought to merely clarify something, rather than to make a policy change, they've said so. See, e.g., FAR 2001-02, 66 Fed. Reg. 65348, Supplementary Information Item V.

On the other hand, maybe they felt that it was not authorized and they needed to do something to cover Jacques' action. Personally, I like Roy's idea that they read my Wifcon piece and decided to make a change in response. I'm sure he's right; the piece was pretty visionary.

The proposed rule of December 2000 is a pretty damning piece of evidence against you guys who thought it was authorized all along, including me back in June 2000 and Jacques in April 2000. It was an official statement to the general public. I'm curious about what DeStefano will have to say, but if he says it was okay all along, then the FAR Council shouldn't have said the proposed rule would authorize it.

Maybe you can get him to let you see the case file.

Vern

By joel hoffman on Monday, July 22, 2002 - 05:56 pm:

Vern - I called Ralph DeStefano, to discuss the 1997 FAC 90-46 insertion of the award fee provisions in fixed-price contracts. He said he remembers that Case but wasn't familiar with FAR Case 2000-013 (the "clarifying" or "authorizing" language). I haven't been able to reach Victoria Moss, yet. She is the contact for that Case.

I asked Mr. DeStefano if 16.404 was intended to only apply to 16.4 fixed-price incentive contracts; does it also apply to 16.2 Fixed-price contract types, too? He said, no it's not limited to 16.4 contract types. That was just the most convenient place to include the coverage.

I then asked if FFP contracts, specifically, could use an award fee provision. He said, 'no, of course not'. He said that an FFP is "firm", which means that it doesn't have any provisions for total price adjustments or it wouldn't be "FFP." He backed off that statement a little, when I asked about unit-priced FFP contracts. Then he said that you can use an award fee provision, but the contract is then simply called a "fixed-price contract."

I replied that I couldn't find a specific contract type called a "fixed price contract" in 16.2; rather that term seems to refer to a category of contract types. Ralph said that you must read between the lines, that FAR allows use of contract type combinations.

So, I must contact Ms. Moss for her explanation of the background surrounding FAR Case 2000-13.

Now, it gets a little more interesting. Is Ralph's and some others' interpretation of an FFP contract type written down somewhere, perhaps in a case - or is it an oral definition? I began searching for a detailed definition of an FFP contract. EVERY definition I've found states that the amount of the compensation or contract price does not vary due to any variation in the contractor's actual cost experience nor "in the event of unforeseen contingencies."

I have yet to find a flat statement anywhere that the price of an FFP can't vary, period - e.g., for use with unit prices or award fee bonus provisions.

Through Nash and Cibinic's Formation of Government Contracts 3RD Edition, I found two GAO Decisions, which deal with contracts which are otherwise considered FFP, but include an award fee provision. According to Nash and Cibinic, pp. 1171-1172, the technique of using non-cost based award fee provisions was authorized prior to the 1997 FAR language (16.404). The DFARS, at 216.470, Other Applications of award fees, has been in DFARS since the 1980's. It does not restrict their use to Fixed-price incentive types.

One of the cases describes the contract type as a "fixed-price contract" with an award fee provision (Diversified Contract Servs., Inc., Comp. Gen. Dec. B-224152, 86-2 CPD, at 675 (I can't find the squiggle character), where an agency used a stand-alone award fee provision to motivate the contractor to increase the quality of the services being performed. The Comp. Gen. ruled that this was well within the power of the agency. The case decision did not mention the term firm "fixed-price contract." It simply refers to the contract as a "fixed-price contract", with an award fee provision.

However, the second decision referred to the contract as "a combination of a firm fixed-price contract with an award fee provision." This Decision is Technology Applications, Inc., Comp. Gen. Dec. B-238259, 90-1 CPD, at 451.

Now, I have found an example of an "FFP contract with an award fee" (and it is prior to the FAR 16.404 coverage).

Let's see what Ms. Moss says. happy sails! joel

By joel hoffman on Monday, July 22, 2002 - 11:11 pm:

From the ACC FAR Supplement:
"5316.202. Firm-Fixed-Price Contracts.

5316.202-1. Description.

An award fee may be included in a firm-fixed price contract when the contracting officer prepares a written determination supporting the basis for using an award fee. Wage rate increases, if applicable, shall not increase the award fee amount. This shall be explained in the solicitation." happy sails! joel

By Vern Edwards on Monday, July 22, 2002 - 11:49 pm:

Joel:

You know, if you ask enough people you'll find someone who agrees with you. It wasn't Ralph DeStefano, but maybe it will be Ms Moss. And if not her, then maybe somebody else. But what would that prove? If you tell us that she agrees with you, do you think that I'd concede the point? Do you really?

The FAR Council proposed a rule to "authorize" (not clarify) the use of noncost incentives with FFP contracts under FAR § 12.207, but they haven't finalized it. If they think they need to authorize it but haven't done so, then how can it be authorized? At this point, what difference does it make whether we're talking about a fixed-price contract with award fee provisions or a firm-fixed-price contract with award fees?

Two years ago I thought that you could use an FP contract with award fee provisions to buy commercial items. Now, in light of the FAR Council's comments accompanying the proposed rule, I think I was wrong. It doesn't bother me one bit. That's life in a world of complicated and unclear rules.

Vern

By joel hoffman on Tuesday, July 23, 2002 - 12:06 am:

From NORSHIPCO (Norfolk Shipbuilding & Drydock Corporation home page... (http://www.globalsecurity.org/military/facility/norshipco.htm)

"Contracts awarded during the year 1999 included a $20,880,064 firm-fixed-price, performance-fee contract for USS Philippine Sea (CG 58) regular overhaul which includes the planning and execution of depot-level maintenance, alterations, and modification which update and improve the ship's military and technical capabilities."

By joel hoffman on Tuesday, July 23, 2002 - 12:22 am:

The above GAO Decision, contract example and FAR Supplement merely point out that FFP with award fee contracts exist, and indeed are "authorized" in at least one AF Command's FAR Supplement. Can anyone find an official, written definition, interpretation, opinion or directive, which precludes the combination of FFP and Award fee? I can't find anything and am still looking. I just find examples of the opposite opinion. The FAR Case description is not definitive proof that such contracts aren't already authorized. That description is ambiguous - I'm trying to seek a clarification. happy sails! joel

By Roy on Tuesday, July 23, 2002 - 06:48 am:

Joel,

We have given you enough information, but it's obvious you do not want to accept it. This could go on forever. If the ACC FAR Supplement prescribed the use of an award fee in a commercial item procurement, this would not be consistent with the FAR and a deviation should have been processed. Given the current language in FAR Part 12, I don't believe it can be interpreted any other way.

By joel hoffman on Tuesday, July 23, 2002 - 06:59 am:

"We"? What's this "we? Roy, I don't remember you providing any "information", only your opinion. I fully understand the basis of Vern's position and respect that. Please provide the results of some of your research. I asked for some help. Have you done any?

Thanks. happy sails! joel

By Roy on Tuesday, July 23, 2002 - 07:29 am:

no comment

By Vern Edwards on Tuesday, July 23, 2002 - 08:59 am:

Joel:

Was the NORSHIPCO contract awarded under FAR Part 12? The article doesn't say so, unless I missed it.

I thought that the issue is whether or not you can use award fees with commercial items contracts. I don't doubt that it's okay to include award fee provisions in non-commercial item fixed-price contracts. People have been doing that since the 1980s, as was reported in Contract Management magazine in 1986 or 1987, and FAR Part 16 expressly authorizes such use.

The issue is whether or not FAR § 12.207 precludes the use of award fee provisions in commercial items contracts. My position is that an FFP contract with award fees is not the same as an FFP contract without award fees. The FAR Council thinks that the use of award fees in commercial items contracts must be authorized, and they have proposed to authorize it, but they haven't done so yet. They might do so at any time.

Vern

By joel hoffman on Tuesday, July 23, 2002 - 11:59 am:

Vern, Isn't the basic issue whether or not an FFP contract, as defined in FAR 16.202-1, can use an award fee?

I think you and Roy say no, it can no longer be an FFP contract, but is instead, a separate type "FP with award fee."

I think you conclude that because FP contracts with award fees are described in 16.404. I think you also conclude that because FAR Case 2000-013 proposes to authorize award fees in commercial items contracts, it flows that FFP contracts aren't already authorized to include award fee provisions. That is a good argument and I want to speak to someone about the FAR case. The case manager is out for the next two weeks. I'm trying to contact the DAR contact person to discuss.

My primary position is that FFP contracts with award fee provisions exist and are authorized. I believe an FFP with an award fee meets the definition of an FFP in FAR 16.202-1 and that I haven't been able to find any other definition of an FFP contract, which precludes the use of an award fee. I found some regulatory sources (DFARS and ACC FARS)which allow FFP with award fee provisions and at least one GAO Decision, long before 16.404 was ever in the FAR. I found a recently awarded contract which was called an FFP contract with award fee provisions.

If anyone can find a better definition of FFP contract than the one in FAR 16.202-1, please advise.

Here are some of the posts:

"Roy on Tuesday, July 16, 2002 - 08:26 am: A fixed-price with award fee is not a firm-fixed price contract, no matter how you cut it.

"joel hoffman on Tuesday, July 16, 2002 - 11:04 am: Anon, the question, which pertains to Dan's situation is this: "Can a firm fixed-price contract contain an award fee provision that isn't subject to the Contractor's cost experience?”

"Roy on Tuesday, July 16, 2002 - 03:40 pm: I don't believe you will find anything in the FAR that describes a "firm-fixed price award fee" contract. It just don't exist. "Fixed-Price with Award Fee" OK, but not Firm-Fixed Price with Award Fee.

"Vern Edwards on Tuesday, July 16, 2002 - 11:02 pm: I believethat FPAF is a distinct subspecies of FP contract and thus a different "type" than FFP. I believe that you cannot use an FPAF contract to buy commercial items because FAR § 12.207 says to use only an FFP or FP with EPA contract type when buying commercial items.
joel hoffman on Wednesday, July 17, 2002 - 11:47 am: “Specifically, when an award fee provision is used in a FFP contract, is it no longer a FFP contract, per FAR 16.202?”

"Vern Edwards on Wednesday, July 17, 2002 - 12:53 pm: I well understand that Dan's contract is FFP. That point is not going unheard, at least not by me. However, the contract described in FAR § 16.404 is also FFP. It does not provide for adjustment based on the contractor's cost experience. But I think that FAR treats it as distinct from the FFP contract described in § 16.202-1 by placing its coverage in Subpart 16.4, about incentive contracts. As Dave Barnett pointed out early on, FAR § 16.401(a) says that an incentive contract is appropriate when an FFP contract is not. Why do you think that the FAR Council placed the coverage of FP contracts with award fee in FAR Subpart 16.4?

Finally, your last post.

happy sails! joel

By Vern Edwards on Tuesday, July 23, 2002 - 12:30 pm:

Joel:

I guess we've been talking about different things.

To me, it's not all that important whether you say that a contract is FFP with award fee or FP with award fee. They're the same thing. Take a look at FAR § 16.404(a)(1). Either way, its (F)FP with award fee.

If you're not talking about FAR § 12.207, then I don't think the difference between us is significant. But if you are trying to say that FAR § 12.207 permits the use of an FFP contract with an award fee provision because the price is firm-fixed, then we disagree. And if you are talking about commercial items, then I say that while you are quoting a lot of things, especially me, you are rather steadfastly ignoring the background information in the FAR Council's proposed rule.

In any event, FAR terminology is screwed up. Is an award fee part of the "price" paid to a contractor for its work? If so, then there is no such thing as a firm-fixed-price contract with award fee. Even the term "fixed-price" incentive is kind of goofy; it's really a cost-reimbursement contract with a cap conversion.

I sense that you're getting a little worked up. Stay frosty, buddy, and have fun with this. It's not a critical issue and there probably is no "right" answer.

Vern

By joel hoffman on Tuesday, July 23, 2002 - 03:04 pm:

Vern, you're right - the FAR terms for fixed-price incentive contract types are goofy. Ralph DeStefano agreed with me on that, too - but said he wasn't around when they coined those terms.

I think the only reason they use the term "fixed-price incentive" is because, unlike a cost reimbursement contract, the contractor is obligated to complete the service within a cost ceiling, regardless if it exceeds the cost ceiling. Otherwise, compensation is based on "cost." It's like "half and half" dairy product. There are certainly better, less misleading terms for such contracts. The closest commercial contract type I can relate to a fixed-price incentive contract is called a "guaranteed maximum price" or "cost-reimbursement/with GMP" contract. This contract type is common, if not prevalent, in the commercial design-build industry (including the US Postal Service and some other non-FAR bound Federal entities).

By the way, I'm not ignoring the background information in the proposed rule for FAR Case 2000-013. I said "that is a good argument and I want to speak to someone about the FAR case." happy sails! joel

By anon2 on Wednesday, July 24, 2002 - 07:38 am:

Joel,

The initial question was whether a FFP with awared fee terms could be considered for use in a commercial item acquisition. I am not quoting verbatim, but that is my understanding of this thread. Roy and Vern's responses have been geared to the concept that FFP or FP with EPA is the only acceptable contract type according to the requirements of the FAR.

I know from my review and working with several agencies, people are doing every conceivable/sort of acquisition possible in the name of commercial contracting and abuse of the pricing structure for commercial acquisitions is the "biggest" problem. They are using LH, T&M, even CR, and because LH and T&M have fixed hourly rates calling them FP contracts or orders.

We go round and round with this discussion on what constitutes a Fixed price contract and the folks at my agency say LH and T&M are fixed price contracts. It's an agency mindset and it won't change it.

By joel hoffman on Wednesday, July 24, 2002 - 08:00 am:

Anon2, I agree with your take on the twisting of the FAR restrictions on commercial acquisition. The basic questions in this thread are whether an FFP can incorporate am award fee and still be called an FFP contract, pursuant to 16.202 - or is it an FPAF contract under 16.404, thus not allowed for commercial acquisition? There are two schools of thought.

Contracts called "FFP with award fee" as well as "FP with AF" have been used before there was a FAR and LONG before the authorization and the contract type "FP with AF" was incorporated into FAR in 1997. However, FFP with AF was probably not contemplated by the FAR Council as being authorized for commercial acquisition, in implementing FASA commercial acquisition procedures. happy sails! joel

By Roy on Wednesday, July 24, 2002 - 12:05 pm:

Anon2,

Don't let Joel Hoffman confuse you with his twisted interpretation of the question asked under this thread. It was correctly answered sometime ago. But, Mr. Hoffman doesn't want to accept the facts that have been presented, and is searching for something out there to support his position and to proove everyone else wrong about the stipulations in FAR 12.207. Unfortunately, he is creating a lot of confusion along the way, and I don't think he will find what he is looking for.

By the way, the person who asked the question, from what I have read of his posts, accepts the reasonable conclusions made by some, and agrees that an award fee provision is not authorized under FAR Part 12 procedures, as currently written. So he has his answer, but some want to go on and on and on..., into never land.

I doubt it very much if "FFP with award fee" and "FP with AF" were used "before there was a FAR". I haven't heard or seen any examples of it.

By joel hoffman on Wednesday, July 24, 2002 - 03:09 pm:

Roy - no comment.

Everyone else:

I just spoke with the DAR Council representative working FAR Case 2000-013. She hopes the final Rule will be issued in the next couple of weeks as a FAC. She expects to get it back from OFPP, in the next day or two, but hasn't seen it yet.

She said that the "new authorization" in the proposed rule was to authorize non-cost based incentives for commercial acquisition in FAR Part 12.207-1, as well as allowing limited use of labor-hour/T&M contract types under limited circumstances.

I pointed out that the background simply said "authorize the use of noncost-based incentives such as award fees and performance or delivery incentives." and "to add language discusses... time and material or labor -hour basis..." I said that the first sentence could be read to also mean that the Part 16 contract types are also being altered, revised or contain new authorizations.

She replied that this was strictly a commercial items case and not a change in contract types case. She stressed that two separate groups would have been involved, had the latter been the case. Only the commercial acquisition group was involved in this FAR Case. She said if it wasn't so late in the process, she could have added the words "...for commercial acquisition", or words to that effect to the background paragraph.

I also asked if the the FAR 16.202 and 16.203 revisions were intended to be clarifications or new authorization to use non cost-based/award fee incentives with FFP and FFP EPA contract types. She said that the revisions to 16.2 were strictly intended to be clarifications. She said "We aren't plowing any new territory there." I told her that there was some debate about whether award fee provisions were possible with a FFP contract or whether the proposed rule "authorized" such. I also stated that some people feel that had the rule intended to "clarify" 16.202 and 16.203, it would have so stated. Instead the background says that the rule "Revise(s) FAR 16.202 and 16.203 to indicate..." She said she didn't realize it could be read other than as a clarification. I said, yes it could. She said, again, if it weren't too late, she could have revised the wording from "to indicate" to "to clarify". She reiterated that another group would have been involved, if the intent were to add or alter contract types.

Anyway, the mechanics of rule making are very interesting and I can see how one group can write a rule, which affects other parts and interpretations of the FAR, without knowing it.

Apparently, the time and material-price/labor hour pricing mechanism in the proposed rule didn't make it to the final rule because OFPP has major concerns about opening the barn door to abuse of T&M/labot-hour contract types. As written, the intent of the rule was only to allow T&M/labor-hour where it is widely used in commercial world - like diagnostic efforts with home appliances, etc. OFPP feels like that limited aspect of authorized commercial T&M/labor-hour practices would be quickly ignored.

I also spoke with a CAAC representative, who indicated that he heard OFPP had concerns over both the T&M/labor-hour provisions, as well as the non cost-based incentive provisions for commercial acquisition. He advised me not to hold my breath waiting for the final rule to be issued. I spoke with him, before speaking to the DAR rep, plus he wasn't the CAAC rep directly working this case - so we'll see.

Bottom line is that T&M will most likely be dropped from the final rule and the rule should soon be out. Dan can wait for it, if he still wants to use an award fee and wants to be safe. happy sails! joel

By Eric Ottinger on Thursday, July 25, 2002 - 08:58 am:

Joel,

As posted in the Federal Register in 2000, FAR Case 2000-13 doesn't really authorize the use of any contract type for the order, distinct from the ordering vehicle, other than what is already approved in FAR 12.207-1.

It is a mechanism for using T&M rates to price orders which are other than T&M.

FAR Case 2000-013:

12.207-2 Commercial services available on a time-and-material or labor-hour basis.

"Some services are available in the commercial market on a time-and-material or labor-hour basis. Contracting officers may acquire these
types of services under part 12 by using the following pricing strategies when cost-effective and consistent with commercial practice:"

"(a) An indefinite-delivery contract with established fixed hourly rates that permit negotiating orders (including any required material) under one of the authorized contract types in 12.207-1."

"(b) Sequential contract actions that acquire the requirement in modular components using the authorized contract types in 12.207-1 (e.g., a
preliminary firm-fixed-price “diagnostic” effort allowing the contractor to understand the scope of work sufficiently to propose the large
requirement on a firm-fixed-price basis)."

Eric

By joel hoffman on Thursday, July 25, 2002 - 09:21 am:

Eric, at any rate, I don't think the proposed paragraph will be in the final rule. The DAR Council Rep hadn't seen the OFPP written objections or revisions to the Case, as of yesterday. happy sails! joel

By Eric Ottinger on Thursday, July 25, 2002 - 09:38 am:

Joel,

I would think this points to a simple workaround. If you treat the T&M rates as an agreement rather than a binding contract, you can get to the same result without breaking the existing rules.

Eric

By joel hoffman on Thursday, July 25, 2002 - 10:10 am:

Eric, I think what you are saying is that the actual ordering vehicle must be FFP or FFP/EPA. So one may incorporate the T&M rates into a lump sum or unit priced agreement, based on a known scope. Right?

happy sails! joel

By Eric Ottinger on Thursday, July 25, 2002 - 10:22 am:

Joel,

Exactly. Use the T&M rates as an FPRA (Forward Pricing Rate Agreement).

Negotiations can focus on the number of hours and the categories.

Eric

By anon2 on Thursday, July 25, 2002 - 12:39 pm:

Roy, Vern

Joel didn't sway my opinion. I still follow Part 12 using FFP or FP with EPA. But you can tell how far we have deviated in this thread from the original question.

By joel on Thursday, July 25, 2002 - 01:54 pm:

anon2, I don't disagree with you. Commercial acquisition must be FP or FP/EPA. I believe I indicated that Dan should to wait until the final FAR rule is issued before using the award fee provision. happy sails! joel

By Roy on Thursday, July 25, 2002 - 02:33 pm:

Thanks anon2. Your read of the FAR is the same as mine. Some try to read more into the language than is there. Use of award fee in a fixed-price contract was not authorized when the final rules implementing the FASA (and there were many of them) were published in the FAR. Even if it was a recognized type of fixed-price contract at the time, I doubt if it would have been included as one for use with a commercial item acquisition in FAR Part 12. About 5 years later, the FAR Council was convinced by someone, some group, or just a lot of discussions on the subject, that it was time to revisit the rule on types of contracts allowed for use with commercial items. And thus we have FAR Case 2000-013.

Not sure what the final language is, but if the language "to the maximum extent practicable" survives, without providing some more clarification in the final rule on what they mean be cost-type contracts, it will legitimize the use of Time and Material/Labor Hour contracts for commercial items. Sure hope that OFPP ensures that this is clarified when the final rule is implemented.

Roy

By Roy on Thursday, July 25, 2002 - 02:48 pm:

anon2,

I'm sure that was just a mistake in Joel's last post to you when he referred to "FP or FP/EPA". It's a common mistake. You see the FAR does not say that at all. I believe what he meant to say was "FFP or FP/EPA".

Roy

By Vern Edwards on Thursday, July 25, 2002 - 10:07 pm:

What this thread makes clear to me is that there is a lot of confusion about the concept of contract type.

If you add an award fee provision to a firm-fixed-price contract, is it still a firm-fixed-price contract or is it a new thing? Is a T&M contract a cost-type contract, a fixed-price type contract or something entirely distinct? How can a fixed-price-incentive contract with either firm or successive targets be a "fixed-price" contract? How can any contract be "fixed" price if it provides for a price adjustment for reasons other than specification or S.O.W. changes? And why are indefinite-delivery contracts, letter contracts, basic agreements, and basic ordering agreements included in a discussion of contract types that vary according to: "(1) The degree and timing of the responsibility assumed by the contractor for the costs of performance; and (2) The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals." [See FAR § 16.101(a).]

Maybe it's time to fix this goofy system of classification. How about a Part 16 rewrite?