Tuesday, April 02, 2002 - 08:30 am:
I have a CPFF Construction Contract. Invoices have come in
from a sub-subcontractor through the subcontractor and then from
the prime. My prime is asking for the fixed fee on the total
invoice from the sub which included a fee. The total amount
requested by the subcontractor includes an invoice from the
sub-subcontractor which also includes a fee. So I have an
invoice for fee on fee on fee. The prime contract was awarded as
a letter contract in Sept and we are in the process of
definitizing it. Where can I find the information of what I can
allow on fee from subs.
Vern Edwards on Tuesday, April 02, 2002 - 05:46 pm:
I don't understand what you mean when you say that your prime
is asking for "the fixed fee on the total invoice from the sub."
If you have a CPFF contract, then the fee should be a fixed
amount of money that is fully payable upon completion of the
work. The contract should include a clause that describes how
the contractor can invoice for portions of the fee as the work
progresses. The amount of the fee does not change with the cost
of the work--it is fixed, unless the contract is modified
to definitize a change or settle a claim.
Do you mean to say that the prime has received a claim from the
sub to a sub and is passing it on to you, asking for
additional fee for itself as well as for the subs.?
anon1 on Tuesday, April 02, 2002 - 07:52 pm:
Vern, having seen this situation many times before, it
appears that the sub-sub had a short period of performance and
may have submitted his invoice which included fee. It would
appear that jaweber is suggesting a situation that I used to
call pyramiding of fee. There's nothing wrong with that. Anybody
that provides a service is entitled to profit(FP)or fee(CP)
based on the services that they provided at any tier. May not be
cost efficient as opposed to direct hire but that's the way it
is. Like you said on one of your threads, fee has too often been
established on a percentage of cost(barring CPPC)(did I get that
right?) So unless there is a restriction in the contract that
says fee(if a CP contract)to the prime is structured such that
the fee cannot be applied against cost and fee to a subcontracor
at any tier, I don't see a problem, do you? Anytime, Joel.
joel hoffman on Tuesday, April 02, 2002 - 08:18 pm:
I believe I agree with you anon1. Were you asking?
Some keys in "controlling" multi-tiered subcontracting are fully
understanding the scope of work; preparing Government estimates,
including means and methods; performing technical analyses of
proposals, including what I call "make or buy" evaluations
(i.e., does it make better sense for the prime or first tier sub
to self-perform the work or to subcontract?); and communicating
with the Contractor early, before it commits to subcontracts and
second tier subcontracts. We regularly encounter this on both
cost and FFP construction contracts.
As to the fee question, contractors are normally allowed fee on
their subcontract costs. If one hasn't already established a
fixed fee, the amount of fee should certainly reflect the
various factors enumerated in the FAR/DFARS guidance for cost
contracts. I usually consider subcontracting less risky and
involving less capital investment than if the work is
self-performed. happy sails! joel
anon1 on Tuesday, April 02, 2002 - 10:03 pm:
Joel, yep, that was my invite. We've been down the same
paths, I see. Hope you find that place to sail again. I get to
visit California next month, maybe I'll try my longboard
Vern Edwards on Wednesday, April 03, 2002 - 07:01 am:
While I agree in principle that a contractor is entitled to
profit or fee recognition for subcontract management, I think
that there is more to jaweber's question than that.
He/she has an undefinitized letter contract. Payment prior to
definitization is governed by FAR 52.216-26, Payments of
Allowable Costs Before Definitization. That clause makes no
provision for payment of any profit or fee prior to
definitization. I don't think that FAR necessarily prohibits
payment of profit or fee prior to definitization, but if the
government is going to make such payments it needs to negotiate
an agreement with the contractor about how the profit or fee is
to be calculated, in order to avoid any possibility of a
prohibited cost-plus-percentage-of cost arrangement. Although
jaweber says the contractor has asked for a fixed amount, how
was that amount calculated?
Profit or fee is not a surcharge on costs, and while it may be
common practice to discuss and even negotiate profit or fee as a
percentage of cost, it is unwise and poor professional practice
to make a habit of doing so, especially prior to definitization
of a letter contract.
FAR 15.404-4(d)(1)(i) tells COs to develop profit or fee
negotiation objectives based on the difficulty of the work --
including the work of "material acquisition" -- not on how much
the work costs. So when a person asks if he or she can "allow"
fee "on" some cost, I wonder about what they are doing. One
simply shouldn't discuss profit or fee in terms of what is
allowable or allocable with reference to some cost.
(Although, see FAR 31.205-26(e).)
So I would still like to get more information from jaweber.
After all, we don't want to give him/her an Ask A Professor type
answer, do we?
joel hoffman on Wednesday, April 03, 2002 - 07:20 am:
Ah, yes. It appears that the question may concern payment of
fee on an undefinitized action, rather than the appropriateness
of multi-tiered subcontracting. Good point, Vern. I would also
agree that you are not bound to include fee, at this point, on
happy sails! joel
joel hoffman on Wednesday, April 03, 2002 - 07:28 am:
P.S., a good "professor" generally would contact the questioner
to clarify the question and discuss it, before responding. That
doesn't seem to work on Internet forums, as anonymous
questioners OFTEN drop off questions, then wait for days or
weeks to answer clarification requests, if ever. AAP questioners
identified themselves, with an e-mail address and phone number.
Unclear questions beget foggy answers and multiple responses
tend to stray from the original question. happy sails! joel
Vern Edwards on Wednesday, April 03, 2002 - 05:35 pm:
joel hoffman on Wednesday, April 03, 2002 - 09:33 pm:
jaweber at Newport Chemical Depot,
Mr. Vern Edwards - being a "good professor" - asked you to
clarify your question. Did he answer your question to your
Joel Hoffman, P.E.
Huntsville Chem Demil Directorate
anon1 on Wednesday, April 03, 2002 - 10:49 pm:
You turned around on me.
Vern: I agree with much of what you said and I think that
jaweber should provide more information, however,my response was
based on other theories somewhat related to FAR 52.216-26.(And
yes I understand the provisions) Mainly, if the sub-sub had a
short term FP contract and performed the services prior to
definitization (which can take awhile) should the sub-sub be
penalized(having had my own business and I was penalized or
considered it such) under prompt payment payment, etc. and have
to wait until definitization before I get paid for all my
services. I think the Prime should fight for that.
Spent 22 years in Federal Contracting before going to law school
at the ripe age of 48, so I look at legal theory applied to FAR
and wonder why certain changes can't be made. On another thread
I asked why couldn't the premise of estoppel be applied against
the limitation of funds clause. Got no takers. Bottom line, have
experienced situations where a company continuosly did work
beyond the LOF but the Feds, via e-mails, etc. promised to
reimburse and did. Bottom line, if you show history, can
estoppel trump LOF. This is a very good forum,but does anyone
want to challenge the old system and and move forward. The most
daring up-to-date response I have seen was a post by
"interested", he made a lot of sense and seems to be going where
I think we should strive to make logical changes. Lot of good
brains here, what do you think? Vern: I was considered a rebel
in "Nam"(apparently things have changed since I was there) and
as a cop, but why can't we change the system, that obviously we
see holes in. Sorry guys, burnt out , have a long day
Vern Edwards on Thursday, April 04, 2002 - 06:40 am:
Payment to the sub-sub is not the issue. No one is suggesting
that the sub-sub or the sub should suffer a delay in payment.
The issue is whether jaweber should give the prime fee "on" the
fee that the prime will (presumably) pay to the sub and that the
sub will (presumably) pay to the sub-sub.
There is no need to change any system or to rebel in any way.
The sub owes the sub-sub money and should pay. The prime owes
the sub money and should pay. But the prime has signed a letter
contract that may limit its entitlement at this time to only its
costs (which include the profit or fee paid to the sub
and the sub-sub), within limits, prior to definitization. Thus,
the question before us (and that jaweber asked) is how much fee,
if any, jaweber should pay to the prime for its subcontract
on Thursday, April 04, 2002 - 10:20 am:
Wouldn't a properly constructed cost-type letter contract have a
specific provision addressing interim billing and fee allocation
And if it didn't and the issue has now raised itself, wouldn't
it be prudent to modify the letter contract to add a mutually
As far as the issue of whether "fee on fee" is appropriate,
that's a negotiation issue not an allowability issue. When
developing your fee objective consider, along with complexity,
risk, etc. whether you will exclude subcontractor fee from the
cost base you use to crunch the numbers when developing your
negotiation fee objective. At the end of the day you negotiate a
fixed fee with the contractor that does not change, barring a
change in contract scope. Separate from the amount of the fixed
fee is how that fee will be allocated to periodic billing;
time-based, incurred-cost based, progress-based, etc. Arguing
over whether the prime is entitled to fee on fee is accepting a
premise that diverts you from the real issues.
Vern Edwards on Thursday, April 04, 2002 - 12:02 pm:
Bingo. I agree with everything you've said.