Joel and all,

I thought the following Washington Post story provides an interesting real world situation to illustrate some of the issues that we were discussing.

http://www.washingtonpost.com/wp-dyn/articles/A45748-2000May21.html

It is interesting and encouraging that some of the workers had enough of a sense of right and wrong to blow a whistle.

Eric

By Vern Edwards on Thursday, April 27, 2000 - 09:29 am:

Eric:

Thanks for the response.

Vern

By Eric Ottinger on Wednesday, April 26, 2000 - 04:46 pm:

Vern,

To answer the question that you asked.

Q: “Now guys, I didn't ask for a criticism of firm-fixed-unit-price contracts; I merely asked for a taxonomic analysis of the type based on pricing arrangement. Because if they can be considered "firm-fixed-price," then DLM may be able to buy tariff services under FAR Part 12.”

A: Yes. Probably. I think you can have FFP with some adjustment provisions. See what your lawyer thinks.

Bob,

Great analysis.

Joel,

I don’t think there will be a big problem paying for the dirt by the yard for “cultural” reasons. Construction workers are hard working and lazy. They will work very hard until they get the job done, at which point it is Miller Time or at least time for a break. I doubt any construction worker would want to keep digging just to make a bigger hole, and I doubt that any sane supervisor would ask him to. (Lawyers on the other hand will be beavering away at 2:00 o’clock in the morning, running up those “billable hours,” if you let them.)

Correct me if I am wrong.

Regards to all,

Eric

By Vern Edwards on Wednesday, April 26, 2000 - 02:29 pm:

Joel:

I agree with you. I used a bad example.

Vern

By Vern Edwards on Wednesday, April 26, 2000 - 02:12 pm:

Bob:

What a thoughtful, logical analysis! Thankyou.

Vern

By joel hoffman on Wednesday, April 26, 2000 - 01:34 pm:

Bob, et al:

Actually, if the excavation for the hole can be reasonably estimated, it should and probably would normally be priced on a lump sum basis, not unit priced. I forgot to mention this earlier. Happy Sails!

By bob antonio on Wednesday, April 26, 2000 - 11:57 am:

Vern:

Approaching this from a bidder's perspective, I have a hole to dig. I expect the subject material to be consistent with the geography or with the description provided by the agency. I have 100 days, the measurements of the project, and the agency's estimate of cubic yards to be moved. I am also aware of the variations in FAR 11.702. These are the parameters with which I will build my bid.

Assume my on-site analysis affirms the agency's estimate of cubic yards. I calculate my costs and desired profit for the project based on the agency's estimate but I am congnizant of FAR 11.702. Since the project will be bid on a cubic yard basis, I convert my project bid to this format. However, my unit price is my desired project price.

Now for FAR 16.202-1. There are four key items in it. These are: (1) a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the work; (2) contractor has maximum risk and full responsibility for all costs and resulting profit or loss; (3) provides maximum incentive for the contractor to control costs and perform effectively; and (4) imposes a minimum administrative burden upon both parties.

Looking at your example, I consider the first three parts of FAR 16.202-1--as I expressed them-- to be satisfied. However, we have an administrative burden. What is a "minimum" burden? Should it be the same administrative burden related to the acquisition of a computer at a firm-fixed price? There are firm-fixed price construction contracts that require a great deal of monitoring but they are firm-fixed price. So I would look at the minimum administrative burden related to the industry for this work. If the agency and contractor agree to the minimum administrative burden for the industry in determining how to measure the cubic yards moved, I consider the contract to be a firm-fixed price contract using the description in FAR 16.202-1.

In your second scenario, my opinion is the same.

In your third scenario, I feel the first three items that I set forth in FAR 16.202-1 would not be met and it could not be called a firm-fixed price contract.

By Vern Edwards on Wednesday, April 26, 2000 - 09:55 am:

Rose:

I don't think you're being sarcastic. Thanks for your opinion.

Vern

Vern, I don't mean to be sarcastic but what is firm in your FFP unit price contract? Since you have fixed prices but not a firm requirement, I still think that a Requirements type contract would be better. If you can't establish a firm requirement for a portion of the overall effort, then a hybrid contract with some FFP items and some Requirements type items seems appropriate. In the past, I have seen Fixed Priced Requirements contracts done as commercial item contracts, while Fixed Price with Award Fee contracts for services are not done as commercial items due to the FFP constraint; I agree that the FFP constraint is a problem.

Just an aside. I have often seen individual CLINS within FFP contracts which provide a pre-determined "dummy" amount for the item, such as "utilities" or "gasline connection by the XX Gas Company."

The CLIN description and technical specification provide that the Contractor will arrange with XX Gas Co. to make the connection. The Government will pay the actual cost to the Contractor under the "Changes" clause. Although not exactly the same as a tariff adjustment, the concept is similar. Assuming that adjustable CLIN is a minor item in the overall FFP contract, I don't see why DLM can't use a FFP contract type with a minor CLIN, subject to economic adjustment or whatever. In fact, I've seen time and material and FP, Level of Effort CLINS within an overall FFP contract type. Not a problem. Is there a prohibtion against mixing contract types? The only one I am aware of is Part 36 not allowing Cost Reimbursible and FFP types to be intermingled, due to the impracticality of separating costs between them.

Also one of my reasons for not awarding a totally separate contract to dig a basement, using unit priced CLIN, for the building being constructed under a FFP, lump sum basis. Happy Sails!

By Vern Edwards on Tuesday, April 25, 2000 - 07:35 pm:

Eric and Rose:

Keep in mind that requirements, definite-quantity, and indefinite-quantity are not "types" in the sense of pricing arrangements. To draw a contrast between an FFP arrangement and an IDIQ or requirements arrangement is like drawing a contrast between "a human being" and "a swift biped." There is no either-or issue; a creature can be both.

The issue here is the pricing arrangement.

Firm-fixed-unit-price contracts are used when it is difficult or impossible to predict the amount of work that the contractor will have to do. They are an alternative to cost-reimbursement contracts and are similar to a labor hour pricing arrangement except that payments are based on units of output (e.g. cubic yards of excavation), rather than units of input (e.g., labor hours). These kinds of contracts are very standard in both government and the private construction sector.

A firm-fixed-unit-price contract does not compensate the contractor on the basis of its "cost experience." The contractor's cost experience is not relevant to the payment determination. It compensates the contractor for its production.

Eric, a firm-fixed-unit-price contract does provide an incentive to control costs. I have seen construction supervisors raise all kinds of hell with equipment operators for inefficient production. (I'll bet Joel has, too.) The company is getting paid per unit of production, not per hour, and heavy equipment rental is expensive. The contractor cannot control how many units he has to produce, but he can and must control how much input he uses to produce those units, or he'll go broke. However, firm-fixed-unit-price contracts are administratively more burdensome than lump sum contracts.

Now guys, I didn't ask for a criticism of firm-fixed-unit-price contracts; I merely asked for a taxonomic analysis of the type based on pricing arrangement. Because if they can be considered "firm-fixed-price," then DLM may be able to buy tariff services under FAR Part 12.

Hey, Eric. I told you we construction types like to keep you off balance! Seriously, if quantities can be estimated with certainty and there is little likelihood of adjustments to the scope of work - we are supposed to use lump sum CLINS to price the work.

Unit priced items are discouraged unless we can't reasonably pin down the actual quantity. Otherwise, contractors would place large contingincies in their bids. Thus, (FFP) unit prices with estimated quantities are established to protect the contractor and to reduce contingent pricing to the owner.

Although estimated quantities are "specified" they are based on reasonable but often not precise estimates due to variables likely to be encountered. The 'specified' quantities are subject to measurement and payment provisions based on actual quantities within the defined pay limits for the defined scope of work.

So, reading the entire 36.207 (36.207(a)is explicit; the rest is implicit), it is clear to me that unit priced work can be FFP. Happy Sails!

By Eric Ottinger on Tuesday, April 25, 2000 - 05:44 pm:

Joel and Vern,

Since I have admitted that I know nothing about construction contracting and I started off saying, “However, if someone wants to call it a firm-fixed price for each cubic yard, I wouldn’t waste time arguing with them.” I would say that I have done such a good job of waffling that there is no possibility of a substantial disagreement with anybody.

The arrangement that you describe is not one which, “provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.”

But you might argue that every other arrangement would be even worse from the point of view of the “administrative burden,” and I might agree with you.

It could be an “adjustment on the basis of the contractor’s cost experience in performing the contract” However, this would only apply if you are buying the hole in the ground rather than dirt by the yard.

If we are serious about doing a taxonomy, we should look at the mechanisms and ignore the labels. In this light, I would still say the closest kin is an ID/IQ with a small range between the minimum and the maximum.

I get cranky when something is described as FFP and it is obvious that the contractor isn’t accepting the degree of risk that you would normally expect for a FFP. Otherwise, suit yourself.

Eric

By Vern Edwards on Tuesday, April 25, 2000 - 05:44 pm:

I asked the question because of something posted to the thread "Commercial telecom."

Someone named DLM wrote that Ask A Professor had said not to buy telecom services under FAR Part 12 because they are tariff-priced and "tariffs are not considered fixed price."

FAR 12.207 says that acquisitions under Part 12 must be FFP or FFP with economic price adjustment.

As I recall, tariff prices are rates or unit prices set by law or regulation. The tariff fixes the unit prices for the service, but what the buyer pays depends on actual usage. That's why I wanted to get some opinions about whether firm-fixed unit-price contracts under which payments depend on performance quantities to be determined after award could be considered "firm-fixed-price contracts." If firm-fixed unit-price contracts can be considered "firm-fixed-price," then perhaps DLM could use Part 12 to buy commercial telecom after all.

I'm not criticizing Ask A Professor in this case, because I haven't seen the actual question and answer. Ask A Professor may have had very good reasons for telling DLM that tariffs are not fixed-prices.

I just wanted to see what others thought about this.

Frankly, I'm not sure myself. I have used sealed bidding many times to award unit-priced construction contracts with quantity estimates, and FAR Part 14 restricts the use of sealed bidding to contracts that will be FFP or FFP with economic price adjustment.

However, FAR 36.207(a), which describes firm-fixed-price "lump sum" and "unit-price" contracts, says that unit-price contracts must have a "specified" quantity of work units. I'm not sure that an "estimated" quantity is the same as a "specified" quantity.

I'm inclined to call firm-fixed unit-price contracts "firm-fixed-price contracts," but I'm not sure that's right.

Vern didn't ask whether a FFP unit priced contract was the best method. He asked if such a contract COULD BE a FFP contract. I say it can be.

I would do the basement or other excavation in the sample cited as a FFP, unit priced contract. In fact, it may be part of a larger contract to construct the building.

Vern just happened to cite what appears to be a poorly written contract. One simply describes the required cross-section for construction with tolerances for overexcavation and establishes limits for payment on the contractor, so if he excavates outside the pay lines, it is at the contractor's expense. That is not particularly difficult to do.

Your method doesn't appear to me to offer any advantage over mine, if my scope of work is properly written. You still have to have someone verify by measuring that the quantity you ordered was actually performed in order to make payment. I can include this work in an overall contract for the building construction. Yours is a separate contract I have to administer and coordinate with the general contractor and its subs for the building contract.

Just my opinion. Happy Sails!

Joel, We don't have a need to adjust unit prices in Vern's scenario, we need to adjust quantities, therefore I don't think a FFP contract is appropriate. I would issue a Fixed Price Requirements type contract and provide authority for an on-site Govt rep to issue oral orders specifying the areas/yards to be excavated; since the Govt rep is on-site, firm quantities can immediately be ordered and the confirming written order will reflect actual quantities at the fixed prices contained in the basic contract.

Eric - hint, see FAR 36.207 and 11.702

(FAR 16.202-1 refers to unit prices not total contract price or estimated quantities. UNIT PRICES are generally not subject to adjustment due to the contractor's cost experience.)

BUT - - Far 16.202-1 is technically incorrect. See Far 11.702 where an adjustment in unit PRICES is allowable on a FFP construction contract. We construction types like to keep 1102's off balance, you know........ (see VEQ Clause at 52.211-18) Happy Sails!

By Vern Edwards on Tuesday, April 25, 2000 - 03:08 pm:

Eric:

Please explain the relevance of FAR 16.202-1 to the questions.

Also, what is your answer to the questions?

By Eric Ottinger on Tuesday, April 25, 2000 - 02:54 pm:

Not really disagreeing with anybody. I certainly don't know anything about construction contracting.

I am always amazed to see how 1102's debate these issues without reference to Part 16.

See: FAR 16.202-1 Description.

A firm-fixed-price contract provides for a price that is not subject to ANY adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.

Eric

Oops, sorry to answer your question to Rose. It popped up while I was typing my answer to your initial question.

We seldom use ceiling caps - suppose we should have, though. We administratively added funding from contingencies to cover progress payments to cover overruns. We used management techniques to keep up with funding overruns. Technically, that's wrong.

But, I guess the answer is yes, it is FFP, even without a stated price ceiling - because we did it for years and years. Happy Sails!

By joel hoffman on Tuesday, April 25, 2000 - 02:36 pm:

Yep, its a FFP contract. Of course, we try to include various controls such as "pay lines" which are physical limits of payment - over excavation outside those limits is uncompensated; Government making the actual pay calculations; defined scopes of work with, no carte blank open scopes of work, use of Variation in Estimated Quantity clauses, etc.

A few years ago, after 100 years or so of doing things the same way, we were told to process admin mods to make the books even out at the end of the job - and at any time before final payment when progress payments exceed 100% of the estimated contract amount - looks bad to see progress reported at "106%" - especially if they are still working! The final quantities and contract price had to match the book price and published contract amount. Okay, sounds good.

The contracts are self operating concerning what the contractor will be paid for. Therefore, to simply adjust the contract price and individual estimated CLIN quantities to match the actual payment quantites ought to involve an admin mod (assuming there is no ceiling price specified or if specified, not exceeded, in overall obligations). Why? Because the rights of either party are unchanged. Hey, no problem!

Interestingly, the Army contracting software system, "SAACONS" (and I believe the new replacement - "SPS") has big problems dealing with contracts containing unit prices and estimated quantities.

Well, SAACONS wouldn't accept an "Admin Mod" which revised the final contract price - whether it be up or down! Then, Army refused to re-program SAACONS for this quirk. I'd bet a few beers that SPS doesn't either.

Catch 22 - there is no contract clause to cover such an adjustment, since it isn't a "change" in anything other than the administrative adjustment of estimated unit priced CLINS and the contract price. The contractor was already entitled to payment for actual quantities of work performed.

So, they came back and said to cite the mod as an "adminstrative adjustment of unit quantities, pursuant to the Variation in Estimated Quantity Clause" on the SF30. This was so that SAACONS could process the mod!!!!!

The VEQ clause has no provision and was never intended to cover simple adjustments to estimated quantities. In fact, the clause already says we will pay for actual quantities within the authorized scope of work! The VEQ clause ONLY provides for adjustments to unit PRICES, provided certain criteria are met - not estimated quantities.

The tail often wags the dog in Government contracting..... Happy Sails! Joel

By Vern Edwards on Tuesday, April 25, 2000 - 02:18 pm:

Rose:

So, what's your answer? Is the contract that I described a firm-fixed-price contract or not?

Let me give you an additional fact: the contract requires the contractor to complete the work within 100 calendar days after issuance of a notice to proceed.

By Vern Edwards on Tuesday, April 25, 2000 - 01:51 pm:

Eric:

The example that I described is a very common approach to pricing construction contracts, used by both the government and the private sector.

There's a tendency to get sloppy with terminology and refer to fixed price contracts as firm fixed price (FFP) contracts. The difference between the two is that all FFP contracts have fixed prices but not all fixed price contracts have firm delivery dates and/or quantities.

By Eric Ottinger on Tuesday, April 25, 2000 - 11:57 am:

I’m not quite sure what you are getting at Vern. However, the folks who keep advocating something like a T&M and calling it "Firm Priced" give me gas.

What you have described is more like an indefinite quantify contract.

However, if someone wants to call it a firm-fixed price for each cubic yard, I wouldn’t waste time arguing with them.

Of course, if there is an opportunity for the contractor to move dirt, just to move dirt, this contract would create a perverse incentive. "Firm fixed price" should give the contractor the maximum incentive to be efficient.

Eric

By Vern Edwards on Tuesday, April 25, 2000 - 11:04 am:

If a contract stipulates firm-fixed unit prices for work and states that the contractor will be paid on the basis of the actual quantity of units delivered or performed, is it a "firm-fixed-price contract" as described by FAR 16.202-1?

For example, suppose that a contract requires the contractor to excavate a building site and stipulates that the contractor will be paid the firm-fixed unit price for every cubic yard of material that it excavates. The contract includes an estimate of the number of cubic yards that the contractor will have to excavate and a ceiling price. The contract requires the contractor to measure and document the number of cubic yards that it excavates and states that the contractor's measurement is subject to review and approval by the owner's site supervisor. Assume that the contractor does not exercise any control over the number of units to be excavated.

Can such a contract be considered a "firm-fixed-price contract"?

Would your answer be different if the contract did not include a ceiling price?

Would your answer be different if the contractor exercised some control over the number of units to be delivered or performed?