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Some Thoughts On "FPIF Math"




As we all know, federal agency budgets are being cut. Those cuts will work their way into contracting programs. Of course, that made me think about the abuse of the fixed-price incentive firm target (FPIF) contract. Almost a decade ago, I posted an article I titled The Fixed-Price Incentive Firm Target Contract: Not As Firm As the Name Suggests. The abuse I mention there requires a special skill and an understanding of what can be done with the FPIF. These skills were at their peak in the 1970s. I've always wondered if the skills would be repeated under similar circumstances.

Recently, I was introduced to a contract type that was claimed to be an FPIF. The particulars of this contract type are laid out in the first post on FPIF Math on the discussion forum. I think Joel Hoffman came closest to my view of the contract type when he called the it a fixed price, non-incentive, firm-target with a fictional cost ceiling (post #69). I recommend reading the entire thread because it includes a discussion of contract clauses, formulas, and legal issues. I'll exclude all three and only look at part of the pricing structure below the target cost. The FPIF Math thread does a good job of looking at it above the target cost.

In this contract, target cost is $60 million and the share ratio is 100/0 (government share/contractor share). That means that the government gets any savings the contractor might achieve below $60 million. In effect, there is no incentive to lower costs. The lack of any incentive to reduce costs was explained as "Rather than an incentive, the arrangement was structured to remove the contractor's incentive to limit expenses in order to pocket additional profit which was a concern at the time when the RFP was issued (post #55)."

Let's think about that for a moment. The government didn't use a firm fixed-price contract, in which a contractor has an incentive to lower its costs to increase its profit. Instead, the government used an incentive contract and inserted a non-sharing ratio into the formula to dissuade the contractor from saving money below the target cost and pocketing those savings for itself. I cannot pull any hair out of the top of my head since I don't have enough up there now. What bothers me is that I understand why they did it. In a perverse way, it seems to do what was wanted. Pardon me while I take my high blood pressure pills.

Someone mentioned that below the target price it was a cost plus fixed fee contract (CPFF). Is there any incentive to control costs in a CPFF contract? Depending on the contractor, there are! Years ago, I was sitting in a class with government and industry contracting types. The government-types were criticizing extensions used to spend the money left in the government's account for the contract work. I was on the side of the government-types. All of a sudden, some frustrated industry-types complained that they did not like these extensions either. As costs but no fee were added to their CPFF contracts, the fee, or profit rate decreased. These industry-types were being rated by their company on profit rates and as funds were added to the contract, they saw their ratings decrease. If they could lower the costs on the CPFF, their profit rate went up and their ratings would be higher.

Getting back to the FPIF contract. In the thread, FPIF Math, the initial poster--later in the thread--explained that a graphing tool was used but it didn't work as expected (post 55). Well, I can see using a graphing tool as an assistant. However, an FPIF is a living contract type that will live until the contract is closed out. If you don't feel that way, don't use it! If you don't know what is in the proposed contract price, don't use it! If you don't know the company within an industry or the industry itself, don't use it! I can think of more don'ts than I can think of dos. Finally, if you are going to use an FPIF to eliminate a contractor's incentive to cut costs, don't do it! Use something else!



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