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To Contents	Controlling Costs on a CPFF
By acquisitionmission on Thursday, April 17, 2003 - 04:47 pm: I shall pose this question by first providing some lengthy background, to explain how my agency got into such a messy situation. My agency is heavily involved in research and development contracting. One particular area of research has been dominated by a single contractor for some time now, to the extent that only one offer was received on our most recent RFP. Said RFP was issued in August of 2002, and one response was received from Contractor X. The RFP closed in September 2002. The contract was awarded to contractor X in December 2002. So what's the problem? Contractor X proposed a 5 year (1 base plus four option years) IDIQ contract. We will ignore the issue of nonsensical options on an IDIQ (I didn't write the contract) and leave this for another time. In any case, this contractor proposed direct labor rates for key personnel for each of the five years, with projected escalation of 3%-4% annually for each of the four out-years. Now, as I said above, the proposal was received in September 2002 and the award was made in December 2002. Contractor X gave its technical employees an across the board, out-of-cycle pay increase on the order of 7% in November 2002 (ostensibly to bring employee pay up "to the market average"), and did not disclose this to us. Because contractor X was the only offeror, discussions were not conducted and the award was made without knowledge of this increase. Additionally, indirect rates were adjusted such that while several categories of labor moved into the direct-labor arena, overhead and G&A both increased. DCAA audits of these changes produced no negative findings. Thus, we issued several task orders with these higher rates. More recently, in March 2002, contractor X disclosed that this year's escalation would not be in the 3%-4% range, but instead would be around 7%. So now we are facing prices approximately 15% higher than they were 4 months ago. There apparently are no other contractors with the specific knowledge and skills to perform this task at this time. Further, the contractor seems to have adopted a rather cavalier attitude towards my office that because they are aware of their unique qualifications, they can freely charge the Government what they wish. They are, of course, limited by cost and fee ceilings, which raises the issue of failure to meet program objectives due to budget shortfall. My question is this: short of not issuing task orders, what can we do to limit their labor costs? Is there a way to cap direct labor rates like is possible with indirect rates? Did the contractor do anything wrong by not disclosing the out-of-cycle increase to us? Are they doing anything wrong by awarding annual merit increases (escalation) on an order of magnitude higher than proposed? If there were other offerors, and contractor X won this award on the basis of cost, would this situation be protestable? Any suggestions are appreciated. By Carol Elliott on Friday, April 18, 2003 - 11:00 am: The easiest approach and the best approach in the long run is to spend serious efforts in reviewing/revising the requirements, conducting market research, and finding a way to move back into a competitive situation. You may be surprised if you do a through market research. Often the lack of competition is not because no one else can do the work, but because the potential competitors believe they are wasting their time and resouces competing. Once you identify potential competitors and/or modifications to the requirements that would improve competition, stop exercising the options and recompete. If you are lucky the incumbent will see that your organization is unhappy with the situation and become more reasonable in the interim. Even if this happens, I advise you to continue to develop competition. Otherwise, your office will soon find itself in the same situation once again. As to your specific questions. You can cap direct rates, but it requires a bilateral modification. I'm not sure what you would use as leverage to get the contractor to agree. As to whether the contractor was wrong to not disclose the Nov. increase depends on whether certified cost and pricing data was required and if so, what was the date on the certificate. The proposed escalation rate is an estimate, if the actual increase to maintain their work force is higher, it is reasonable for the company to pay higher salaries. Inflation is not the only factor to consider. A few years back, inflation was low, but in the IT field demand was extremely high. Salary increases regularly exceeded inflation just to reduce the high turnover rate. In R&D, the experience and quality of the researchers/engineering staff is key to the quality of the product. If salaries are capped below the going rate, your project is likely to lose key personnel and the quality of the product will suffer. If you believe the 7% annual increases are not because of market factors, but solely because the government is footing the bill you can disallow all or a portion of the increase. FAR 31.201-3 and 31.205-6 address the determination of reasonableness of professional salaries. As someone who has been down this road, I will warn you it is diffcult to define what salary is reasonable and what is unreasonable. Some of the factors to consider are: (1) Did the entire workforce receive the same pay increase or just those working on your project? (2) How much of the workforce is working under Federal cost reimbursement contracts, what percentage is fixed price, and what's commercial? (3) What is the market average for these skills in that locality? You said DCAA performed an audit. Before deciding whether or not to disallow the increases as unreasonable, I would speak with DCAA and see whether or not they looked at this issue and what was their basis for agreeing with the increase. They may not have looked at salaries, but if they did and determined they were reasonable, it will be tough to issue a CO determination that the salaries are unreasonable. By Vern Edwards on Friday, April 18, 2003 - 11:13 am: Carol: That was a good answer. In fact, that was a great answer. Where have you been? Why aren't you answering questions at Ask A Professor? I would add only that you can negotiate caps to indirect cost rates, as well as direct labor rates. Vern By Carol Elliott on Friday, April 18, 2003 - 11:42 am: Thanks for the compliment. I've been hanging around following discussions for a while. Often by the time I get to a discussion you, Joel, FormerFed and others usually have already responded with as much or more wisdom and research than I can offer. I will continue to hang out in the background and promise to jump in when I think I can add something to the discussion.

Controlling Costs on a CPFF

By acquisitionmission on Thursday, April 17, 2003 - 04:47 pm:

I shall pose this question by first providing some lengthy background, to explain how my agency got into such a messy situation.

My agency is heavily involved in research and development contracting. One particular area of research has been dominated by a single contractor for some time now, to the extent that only one offer was received on our most recent RFP. Said RFP was issued in August of 2002, and one response was received from Contractor X. The RFP closed in September 2002. The contract was awarded to contractor X in December 2002. So what's the problem?

Contractor X proposed a 5 year (1 base plus four option years) IDIQ contract. We will ignore the issue of nonsensical options on an IDIQ (I didn't write the contract) and leave this for another time. In any case, this contractor proposed direct labor rates for key personnel for each of the five years, with projected escalation of 3%-4% annually for each of the four out-years. Now, as I said above, the proposal was received in September 2002 and the award was made in December 2002. Contractor X gave its technical employees an across the board, out-of-cycle pay increase on the order of 7% in November 2002 (ostensibly to bring employee pay up "to the market average"), and did not disclose this to us. Because contractor X was the only offeror, discussions were not conducted and the award was made without knowledge of this increase. Additionally, indirect rates were adjusted such that while several categories of labor moved into the direct-labor arena, overhead and G&A both increased. DCAA audits of these changes produced no negative findings.

Thus, we issued several task orders with these higher rates. More recently, in March 2002, contractor X disclosed that this year's escalation would not be in the 3%-4% range, but instead would be around 7%. So now we are facing prices approximately 15% higher than they were 4 months ago. There apparently are no other contractors with the specific knowledge and skills to perform this task at this time. Further, the contractor seems to have adopted a rather cavalier attitude towards my office that because they are aware of their unique qualifications, they can freely charge the Government what they wish. They are, of course, limited by cost and fee ceilings, which raises the issue of failure to meet program objectives due to budget shortfall.

My question is this: short of not issuing task orders, what can we do to limit their labor costs? Is there a way to cap direct labor rates like is possible with indirect rates? Did the contractor do anything wrong by not disclosing the out-of-cycle increase to us? Are they doing anything wrong by awarding annual merit increases (escalation) on an order of magnitude higher than proposed? If there were other offerors, and contractor X won this award on the basis of cost, would this situation be protestable? Any suggestions are appreciated.

By Carol Elliott on Friday, April 18, 2003 - 11:00 am:

The easiest approach and the best approach in the long run is to spend serious efforts in reviewing/revising the requirements, conducting market research, and finding a way to move back into a competitive situation. You may be surprised if you do a through market research. Often the lack of competition is not because no one else can do the work, but because the potential competitors believe they are wasting their time and resouces competing. Once you identify potential competitors and/or modifications to the requirements that would improve competition, stop exercising the options and recompete.

If you are lucky the incumbent will see that your organization is unhappy with the situation and become more reasonable in the interim. Even if this happens, I advise you to continue to develop competition. Otherwise, your office will soon find itself in the same situation once again.

As to your specific questions. You can cap direct rates, but it requires a bilateral modification. I'm not sure what you would use as leverage to get the contractor to agree. As to whether the contractor was wrong to not disclose the Nov. increase depends on whether certified cost and pricing data was required and if so, what was the date on the certificate.

The proposed escalation rate is an estimate, if the actual increase to maintain their work force is higher, it is reasonable for the company to pay higher salaries. Inflation is not the only factor to consider. A few years back, inflation was low, but in the IT field demand was extremely high. Salary increases regularly exceeded inflation just to reduce the high turnover rate. In R&D, the experience and quality of the researchers/engineering staff is key to the quality of the product. If salaries are capped below the going rate, your project is likely to lose key personnel and the quality of the product will suffer.

If you believe the 7% annual increases are not because of market factors, but solely because the government is footing the bill you can disallow all or a portion of the increase. FAR 31.201-3 and 31.205-6 address the determination of reasonableness of professional salaries.

As someone who has been down this road, I will warn you it is diffcult to define what salary is reasonable and what is unreasonable. Some of the factors to consider are: (1) Did the entire workforce receive the same pay increase or just those working on your project? (2) How much of the workforce is working under Federal cost reimbursement contracts, what percentage is fixed price, and what's commercial? (3) What is the market average for these skills in that locality?

You said DCAA performed an audit. Before deciding whether or not to disallow the increases as unreasonable, I would speak with DCAA and see whether or not they looked at this issue and what was their basis for agreeing with the increase. They may not have looked at salaries, but if they did and determined they were reasonable, it will be tough to issue a CO determination that the salaries are unreasonable.

By Vern Edwards on Friday, April 18, 2003 - 11:13 am:

Carol:

That was a good answer. In fact, that was a great answer. Where have you been? Why aren't you answering questions at Ask A Professor?

I would add only that you can negotiate caps to indirect cost rates, as well as direct labor rates.

Vern

By Carol Elliott on Friday, April 18, 2003 - 11:42 am:

Thanks for the compliment.

I've been hanging around following discussions for a while. Often by the time I get to a discussion you, Joel, FormerFed and others usually have already responded with as much or more wisdom and research than I can offer.

I will continue to hang out in the background and promise to jump in when I think I can add something to the discussion.