Joel, I would agree it can be an item of negotiation. Whatever is reached as the agreement should be stipulated in the subsequent contract. Both customer and contractor should know before the contract is signed what will be expected and what are the deliverables. The contract should be able to be read without such a substantial issue being in question. In this case there definitely seems to be a breakdown in the communication process.

The contract in question, being some kind of Requirements or Indefinite Delivery contract, I am guessing already has labor categories and rates so the negotiation probably consists of reaching an agreement on labor mix and labor hours plus materials. The government, at that point, has the obligation of telling the contractor what materials it will negotiate and what materials it won't. If it pays for materials it expects to be delivered, other than in the end product, it should establish a CLIN
and ensure the proper clauses are included. If the basic contract doesn't provide for delivery of CAP it could be argued it is outside the scope. Especially on this type of contract where the orders are suppose to be issued unilaterally by the customer with the basic contract controlling the scope.

I do believe it unreasonable of the contractor to think he could continue to propose the same tools 
over and over again representing them as a new purchase in their cost proposal. What can be
done is handle their cost as a capital depreciation indirect cost to an overhead accout which is perfectly acceptable. This could have easily been explained to him by the contracting officer during their fact-finding or negotiation. It seems rather odd such a basic issue continued to fester through multiple orders.

It is difficult to fathom that when a five year business relationship is entered into that communication between the parties is so terrible. You find yourself in Option Year 2 and communications have totally broken down. When you have a small business in an 8(a) program I would expect the government to facilitate and educate rather than become an obstacle to better understanding. Let us all hope this isn't the typical business relationship between government contracting officers and their contractor
business partners. Maybe it is....what do you think?

Steve

By joel hoffman on Monday, February 14, 2000 - 04:01 pm:

Steve Cohen,

As I stated in my January 13 post, I believe the issue is more related to the reasonableness of the proposed cost for formwork and other supplies. I believe that "1 time use" of forms, saw blades, etc. are being proposed for each wall and that the Government negotiator disagrees - feels that they can be re-used.

However, if the Contractor insists on the Government paying for 100% new forms and supplies for each wall, with zero salvage value to the Contractor, I see nothing wrong with the negotiator insisting that the Contractor agree to turn over all the scrap forms and supplies to the Government. Shouldn't be a problem if this is the truth.

FYI - When I worked for the COE in Saudi Arabia, back in the 80's, I required contractors to turn in a sand wash plant as well as pre-cast paver molds, after discovering that the Government paid full purchase price with zero salvage value for this construction equipment in a couple of changes. It wasn't an unreasonable request and they did.... Happy Sails! Joel

By Steve Cohen on Friday, February 11, 2000 - 10:48 am:

Steve,

Just an idea, since you are an 8(a) contractor and "can't make any money" on your contract, you may want to discuss your predicament with SBA SADBUS or SBA contracting officer. They may be able to help you by better defining your contract requirement which could lead to more accurate cost proposals and greater profit opportunity.  They could also act as an intermediary between your company and the end user Contracting Officer.

Also, under a fixed price arrangement, unless there is a deliverable line item for "residual materials" or any other item, you are only required to deliver the end item which are the walls, minus any materials, equipment, tools, etc. (known as Contractor Acquired Property or CAP if to be delivered to the government), to manufature them. I agree with you concerning the SOW "Technical Description" which is a typical government "boiler plate" statement placed in their construction contracts that
requires the contractor to provide this, that, and the other thing (all the material, tools, equipment) to complete the SOW requirement. It has nothing to do with delivering those items under the contract. Good Luck!

Another Steve

By Vern Edwards on Thursday, January 13, 2000 - 07:31 pm:

Joel:

I agree entirely with your great analysis.

Vern

By joel hoffman on Thursday, January 13, 2000 - 04:12 pm:

Vern, based on my experience, I perceive this to be a price negotiating problem, not a contract interpretation issue. I think the solution lies in each party trying to understand and meet the other's needs. Happy Sails! Joel

By Steve Welch on Thursday, January 13, 2000 - 04:10 pm:

Joel,
Right on. I believe your last post is very close to what is going on. I believe that the difference is that we do not put in 100% of the material that might be used each time but some, I believe, reasonable %.

Again I think the solution is to agree on what that pecentage each time and define material disposition before hand.

By joel hoffman on Thursday, January 13, 2000 - 03:37 pm:

Steve, I believe I understand the problem(s). I perceive this:

The Government negotiators want a detailed proposal from you for proposal analysis and negotiations.

The Government negotiators balk at contingincies in any proposals to cover minor items you might overlook or to cover normal contingencies.

If you aren't allowed to identify a cost as a "contingency", you feel you must cover yourself other ways, e.g. by including enough for new formwork, etc.

The negotiators note that you and they have previously negotiated prices on the basis of "one-time use", rather than "x" times for formwork, etc.

The negotiators then noticed that you have been reusing some of the formwork, etc. Therefore, they feel that one-time use pricing is no longer valid. They don't want to continue to negotiate "one time use" prices and want the benefit of the re-usable supplies on future task orders.

While I would probably agree with you that you still own the supplies, I would agree with the Government negotiator that they shouldn't have to pay for all new supplies on subsequent tasks if that isn't your actual, usual practice.

This is because forward pricing of non-competitive task orders or changes are supposed determined on the basis of the Contractor's probable COST, not necessarily market prices or "market value". I would qualify this to say that small task order proposals need not necessarily be analyzed using extensive "cost analysis" techniques.

However, a good Government negotiator would still use judgement based on his or her knowledge of your actual practice in negotiations. I would probably agree with them that it is unreasonable for you to insist on including pricing for non-representative costs in your proposals.

The Government's insistence that you list every nut and bolt in the proposal to justify costs might or might not be reasonable. If we are talking about small task orders, 1) it is a lot of paperwork, 2) you ought to be able to negotiate agreed unit prices for repetitive work items, then use them in future proposals to save needless effort and expense on both sides and 3) small tasks inherently involve higher risks in accurately pricing the work - you miss a few details and lose money, small delays or cost overruns will cause a loss, etc. The Government negotiator probably ought to recognize this "risk" and allow some flexibility in areas within the proposal - such as allowing a higher allowance for profit and/or allowing lower productivity rates to cover the hiccups which inevitably occur. Most published productivity rates are based on large quantities.

Anyway, I would agree with not paying for one time use of forms and supplies when you can use them several times - I would try to negotiate some reasonable factor with you. I would also try to be responsive to your other concerns, so you don't have to bear an unreasonable risk or be buried in paperwork for repetitive tasks, which could make use of agreed unit pricing techniques.

I used to negotiate agreed pricing for repetitive work, keep it in a book and my contractor would use it in his proposals, too. Saved us both a lot of work and we were both comfortable with the rates.

Is my understanding of the problems somewhere near the actual situation? Happy Sails! Joel

By Vern Edwards on Thursday, January 13, 2000 - 02:29 pm:

This thread is a big heads up to all who enter into fixed-price task order contracts under which materials costs may be significant.

If there is any possibility that individual orders may produce significant and useful residual inventory (materials, parts, tooling, etc.) that could be used on future orders, then the contract (or individual orders under the contract) should address the issue of ownership and disposition.

By Steve Welch on Thursday, January 13, 2000 - 12:28 pm:

Vern,
You are very close to the truth. I was not here during the previous contract (which was a cost plus fixed fee). I hear that it was abused by both parties and the CO determined that the new contract would be much different. I do not believe that I am adding to each task the full amount of each of these items and then using some large subset of the residual materials and pruchasing a small subset of new materials.

It always seems that no matter how detailed we make our technical evaluation, we forget to include enough labor and materials. We feel we are in a lose lose situation, we are obligated to provide the product, but we can't make any money.

It seems that the solution is to define exactly what we are to deliver to the customer. We were under the impression that we were to deliver exactly what is stated in the SOW, no more no less, for the amount of money listed in the order for supplies and services.

Where is it stated in the FAR that material not incorporated into the final product becomes the property of the customer? There is no line item for saw blades, drill bits, form stakes, etc. in the contract, I only mentioned them in the technical description to get a better estimate of our costs. If we put in X amount of $ for misc. mat'l then we have to define misc.

Clearly the relationship is more valuable than the material. I guess that we should just submit to the CO wishes and press on.

By Vern on Thursday, January 13, 2000 - 11:34 am:

Steve:

Let me speculate about something:

It sounds like your contract is a task order (or job order) contract for construction services.

Maybe the government has noticed that you are including the costs of materials for formwork and walls in each order proposal, but that you are using residual materials (sometimes called "residual inventory") from previous jobs to get the work done. They figure that they've already paid for those materials once and shouldn't have to pay twice if you're going to reuse them. So now they are claiming that the residual materials belong to them and that you must reuse them when possible in order to cut project costs. You figure that the stuff belongs to you and that you have every right to do what you want with it.

You include the costs of the materials for the formwork and the walls in each order proposal because they are true costs of doing the work. Then you economize by using any useful residual materials on the job.

Am I right about this?

If I'm right, that would explain why they are specifying the job in such detail and claiming that the residual materials belong to them. They write the specifications in detail in order to ensure that you use the residual materials, and their claim means that they do not intend to pay twice for the same stuff.

If I'm right, you have a problem that the government probably should have anticipated when they were planning the contract. They should have included a residual materials or residual inventory clause in the contract.

I generally agree with Joel's analysis, but I don't know how the construction payment clause is to be interpreted in your situation (assuming that I'm right about your situation).

If I have speculated correctly, then despite any legal interpretations you have a customer relations issue. Surely you can understand why the customer feels the way it does. What kind of relationship do you have with the customer? Is the value of the materials greater than the value of the relationship?

If my speculation is off base, and it very well may be, then I'm not sure what's going on.

Vern

By Steve Welch on Thursday, January 13, 2000 - 10:07 am:

Hey guys, thanks for the responses. I will try to make my case more clear. We are in option year 2 of our contract. The contract is for one basic year with 4 one year options. We are not in default. This issue with materials just came up and was not an issue several months ago. I do not know what prompted the governemnt to seize our material.

A little more detail. We build structures that will be tested using energetic materials (explosives). We receive an SOW that details the structure to be built. Lets say, a 10 foot high 40 foot long 1 foot thick 5000psi concrete wall with associated footings and rebar. Lets also say that a plywood sheathed 2x4 wall of the same length and height also needs to be built.

The concrete is GFM and the concrete transit mixer trucks are GFE. Our company must produce the concrete and plywood walls. After we receive the statement of work (SOW) we have 10 days to prepare a cost proposal and deliver it to the government. The CO then usually requires a breakdown of our costs so that the construction engineers can better evaluate our proposal. Over the past few years the cost proposals have become more and more detailed in order to reduce the number of iterations of re-detailing the the cost proposal.

We don't believe that the CO can tell us how to build the walls, if that is not specifically called out for in the SOW. We believe that the form stakes, saw blades, drill bits, 2x4s and plywood purchased for the formwork for the concrete wall remains our property and the 2x4s and plywood purchased for the plywood walls becomes the property of the government once delivered to the site or incorporated into the wall.
Progresss payments are and have been made for rebar delivered to the site and for a percentage of work completed for that month.

I believe that the idea of a firm fixed price job has been perverted by having to detail each and every subtask, nail, 2x4 etc. required to produce the end product, a concrete wall and a plywood wall. I could understand if the SOW required us to purchase concrete form work and then pass ownership of the formwork over to the government. But this is not the case. Even if our cost proposal said that we were going to buy 2x4s and plywood for forming the wall and we later decide that it would be more cost effective to rent forms this should be of no concern to the CO if the end product is of equal quality and produced on time.

I hope I have not confused this issue even more. Again thanks for your comments.

By joel hoffman on Wednesday, January 12, 2000 - 11:53 pm:

Having re-examined your post, Steve, are you stating that the contract includes separately priced line items for saws, tools, supplies, form work, etc. in the line item payment schedule? I did not clearly understand your description of the problem.

Of course, if this concerns a "default", the Government may seize and use your tools, supplies, equipment, etc. to complete a defaulted task order. Happy Sails! Joel

By joel Hoffman on Wednesday, January 12, 2000 - 11:43 pm:

Steve and Vern,

On the off-hand chance that we are dealing with a default situation here - under the terms of the contract - the Government has the right to seize your on-site supplies, tools, equipment as well as on-site materials to be incorporated into the work. The Government may use them to complete the contract work. The Government doesn't obtain title to the tools, supplies and equipment but CAN hold them and use them.

Otherwise, only materials to be incorporated into the permanent work become the Government's property. There should be no separate progress payments for anything but satisfactory, in-place permanent work and for "stored materials" (to be incorporated). The Government has the right to require proper storage of, safe use of, housekeeping,etc. for supplies, tools, and equipment while on Government property. But the Government has no ownership rights, per se. Happy sails! Joel

By Vern Edwards on Wednesday, January 12, 2000 - 09:38 pm:

Steve:

Has the contracting officer claimed that specific materials belong to the government? If so, ask him/her what the basis is for that claim. See if the CO can cite a clause or some other term of the contract in support of the claim. Then read the clause or other term and decide if you think that the CO's claim has merit.

I haven't seen your contract and don't know what it says, but the CO has to base his/her claim on the terms of the contract.

Vern

By Steve Welch on Wednesday, January 12, 2000 - 07:15 pm:

I think that one of our problems is that the Statement of Work does not include the materials. The materials are only listed in a technical description that justifies cost. The technical description lists all nuts, bolts, rental equipment, rented concrete forms, saw blades and other expendables, labor hours for each sub task etc. We consider this description as an evaluation tool only, not as a list of equipment and materials that are to become the property of the government.
We believe that the end product is what we owe the government not the tools, materials, and equipment that it took to deliver that end product. An example might be that in order to provide a concrete wall we will need to either rent concrete forms or build forms on site. Once the concrete is placed into the forms, the forms are removed and returned to the rental agency or the job built forms are removed and stored for use on other jobs. Whether that next job is for that government agency or some private concern.

By Vern Edwards on Wednesday, January 12, 2000 - 06:13 pm:

However, one caveat concerning my last post. The construction contract payment clause at FAR 52.232-5(f), says that material covered by progress payments become the "sole property" of the government.

Your question didn't mention progress payments, and construction progress payments usually don't include materials unless they have been delivered to the construction site, although the CO is allowed to include the costs of other materials, as well.

So, if you have received progress payments that included coverage of the materials in question, then those materials belong to the government. If you have received progress payments, hopefully you have records for which materials were included and which were not.

By Vern Edwards on Wednesday, January 12, 2000 - 06:06 pm:

I agree with you. Unless the contract expressly provides otherwise, material that is purchased by the contractor during the performance of a firm-fixed-price construction contract and that is not incorporated into the contract work belongs to the contractor.

By Steve Welch on Wednesday, January 12, 2000 - 02:29 pm:

I manage a small construction company with an 8a set-aside firm-fixed-price delivery order type contract. My question is regarding materials purchased by the contractor (us) during the construction of the object of the delivery order. These materials are not the final product but are necessary for the construction of the final product. Some of these items include but are not limited to form stakes, 2x4s and plywood used to make forms for the placement of concrete, etc. It is our contention that these materials belong to the us and not the government. What say you?