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Patrick Mathern

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Posts posted by Patrick Mathern

  1. 1 hour ago, Vern Edwards said:

    I thought we were talking about the weighted guidelines. The fee limitation on non-R&D CPFF is 10 percent, not 15 percent, of estimated cost, and it is statutory per 10 USC 2306(d) and 41 USC 3905.

    So are we talking about WGL or statute?

    Typo.  Should have said:

    What if we all focused on one piece of the puzzle:  Why does a limitation of 10% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 10% come from?

    OP talked about the "original ranges" - this conversation is about statute, but not in a vacuum.  WGL is a very widely-utilized tool with a foundation in statute.

  2. 1 hour ago, Vern Edwards said:

    That's wrong. Way off base. A lot of analysis and theory went into the development of the WGL. 

    I'll gladly walk back my editorial commentary, Vern, but haven't yet seen anything that leads me any closer to the "analysis and theory" that went into the WGL.

     

    15 minutes ago, Vern Edwards said:

    I have found the LMI study at the Haithi Trust: https://babel.hathitrust.org/cgi/pt?id=uc1.l0050759224&view=page&seq=7&skin=2021

    Unfortunately, you cannot download or print it. You can only read it online. Good luck reaching anyone at LMI. Apparently, they are all working from home. Covid-19 appears to have finally put an end to business communication by telephone.

    This is a great study, but does not provide insight into "how the original ranges" were developed.  This article simply explains the WGL development as a tool that fits profit within the range limits set forth by the FAR.  It appears their point is that KO's weren't using consistent logic in analyzing profit, so they set out to create something and voila!  Weighted Guildelines was born.  Thus, the study appears to support an idea that "there appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish)."

    What if we all focused on one piece of the puzzle:  Why does a limitation of 15% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 15% come from?

  3. You asked the right question on the right day.  I have been researching this very topic recently as part of a DARPA-funded initiative and below is a raw dump of what I've found.  I'd be happy to talk through this more.

    Spoiler Alert:  There appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish).  It's just a house of cards that appears unrelated to the market-based profit rates earned in the private sector. (My editorial opinion.)

    The Dump: 

    August 1942, Limitation of War Profits, Edward Stimson (https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9271&context=penn_law_review) 

    “The large profits by manufacturers of war materials…are in sharp contrast to the wages of men in our armed forces.  The resulting pressure on Congress for some limitation upon war profits has resulted in a number of proposals and several bills.” 

    • March 27, 1934, Vinson-Trammel Act 

    Secretary of the Navy should not let contracts >$10K unless contractor agreed to pay all profit in excess of 10% (profit after tax) 

    • June 25, 1936, amendment to Vinson-Trammel to make the excess payable in the year in which the contract was completed 

    • Merchant Marine Act of 1936:  Added a clause that no salary over $25K/year should be considered a part of the calculation for excess profits.  Suggested reviewing costs to make sure they were fair, just, and not in excess of reasonable market prices 

    • Act of April 3, 1939 – extended Vinson-trammel to Army aircraft…increased profit from 10% to 12% 

    • March 16, 1942:  The Smith Bill 

    Requires “every naval contractor” whose fiscal year contracts completed exceed $10K to limit profit to 6% of total contract cost (does not allow taxes to be calculated out) 

    Opposition:  “Limitation based on the cost of completing the contract would leave a profit which would in many cases bear no reasonable relation to capital invested.  Total cost of completion of contracts completed in any one year might be a fraction of the invested capital or several times the amount of invested capital.  If the total cost of completing the contracts completed in one year was one-third of the invested capital, then the profit would only be two percent.  If the total cost was four times the invested capital, then the permitted profit would be twenty-four precent of the capital. 

    Permits profit as a percent of cost.   

    Only applies to war contracts…incentivizes companies to work with commercial customers over the government. 

    Did not apply to subs 

    High cost of auditing 

    They felt that an excess profits tax would be a better remedy.  It was suggested that a tax of 75% of profits in excess of $500K would work well. 

     

    Impact of the Weighted Guidelines Profit System on Defense Contract Fees 

    April 8, 1970, The Rand Corporation (https://apps.dtic.mil/sti/pdfs/AD0703274.pdf) 

    • WWI:  introduction of various excess profit taxes.   

    • From 1911 to 1913, a tax was applied to any profit in excess of the average of the period 1911-1913, or profit in excess of 10% on invested capital, whichever was greater. 

    • This was the last time rate of return on investment was figured into profit policy 

    • After WWI, production returned to government facilities. 

    • 1930’s:  Government increasingly turned to commercial entities for production; contracts were negotiated one by one without a framework for looking at profit overall. 

    • WWII:  Instead of excess profit taxes, new statutes emerged that had renegotiation clauses.  At end of the contract, the actual costs were inspected and re-evaluated for fairness. 

    • 1944 amendments contained wording that implied intent to create a broader standard for profit 

    • Included looking at pre-war earnings, risk, contractor efficiency, extent and type of subcontracting, turnover rate, capital employed, and contractor’s net worth 

    • During this time and throughout the 1950’s, there was an aversion to creating a formula to determine profits.  All profit analysis was done on a case-by-case basis. 

    • Armed services procurement act of 1947:  Forbids cost-plus-percentage-of-cost contracting and CPFF cannot exceed 10%, unless it’s R&D, then it’s 15% 

    • “With cost-based procurement prices, the appropriate fee is a part of the problem of determining a price; but determining an appropriate profit is also a problem in determining the rate of return on investment capital, which is required to make defense production attractive to a sufficient number of producers.  The former problem has received great attention from officials ever since the start of WWII.  The later problem is recognized in principle, but has been largely avoided in practice.  

     

  4. Hi Caitlin -

    If you've allowed the sub to include G&A on travel, then it's the sub's G&A rate that would be applied.  This is the cost to you, the Prime, which is what is then passed to the government.

    Applying the sub's G&A to travel does not impact whether or not you need to submit an incurred cost submission.  However, I'm not familiar with the specifics of your contract, so you will want to get clear with your contracting officer to understand whether you have ICS requirements on the travel line or not.  My guess is that they would have structured the contract in such a way to avoid an ICS on this piece, but you'll want to clarify.

  5. I am attempting to research the negotiated fee % paid by DoD (DARPA, more specifically) on CPFF contracts.  I've searched records on FPDS and SAM - I don't see anywhere that I can obtain the fee data as a percent of cost.  This leads me to believe my only path forward is a FOIA request.  Does anyone have insight into...

    1.  Whether this data already exists somewhere

    2.  Whether this is a valid FOIA request 

    3.  What agency this should be directed to

     

  6. @Retreadfed and @Vern Edwards:  Thanks for that input - are you saying that firms were open to R&D contracts as a way to bring in revenue in lean times?  Or what did the contractors get out of the deal that made it attractive?  Were these firms in question new to government contracting, or was having ongoing government work part of their strategy?

  7. 1 hour ago, Vern Edwards said:

    Some people, like you and Patrick, think that profits on government contracts are too low, and that all  would be better if they were higher.

    To take a step back and clarify, I'm specifically talking about profit as a tool to increase interest in DoD R&D efforts.  Increasing profit is likely to increase that interest, but I'm not saying it's the only lever or that it's the even most impactful lever.  You mentioned data rights, Vern, and I agree that this is a big factor in whether a firm decides to work with the government or not.  There are other factors as well.

    Where the WGL comes into play is how contractors and contracting officers view it as being directly related to the effort required.  Does it ask the right questions and produce the answer expected given the situation?  Small businesses surely don't believe that to be the case.  Who else might feel slighted and why?  That's where I would like to go.

    Have thoughts on this?  This group absolutely has the depth of knowledge to shed light on this.

  8. On 9/25/2021 at 9:52 AM, WifWaf said:

     If a motive is needed here, does the DFARS 215.404-71-3(b)(8) limit of 4 percent make sense from an industry perspective?  Interested to hear your thoughts here @Patrick Mathern, and any basis for a different percent of contract costs.

    I can’t speak for “Industry” as a whole at this point. This is exactly what we hope to ascertain in the near future. We are designing a survey that hopes to get some insight into this and other considerations regarding profit that results from WGL. 
     

    “Alternate approaches” to the WGL have been mentioned a few times in this thread, but I’ve yet to see specific examples presented that meet FAR/DFARS requirements.  Anybody have one they could share?

  9. 4 hours ago, Vern Edwards said:

    Or do you think that, as a general proposition, setting high(er) contract prices or fixed-fees during contract negotiation will motivate contractors to do better during contract performance than they otherwise would?

    I appreciate this perspective, but I think there’s a different incentive that the DoD is currently concerned with that this comment doesn’t consider: Current profit levels attract current offerors. Raising profit levels could inspire new entrants to the DoD marketplace (specifically in R&D scenarios). I don’t have hard evidence to support this, Vern, but basic economic theory holds that if you offer more money to do a job, it will be more interesting to a larger group of potential workers. 

  10. 14 minutes ago, here_2_help said:

    It's been pointed out to me before that the Weighted Guidelines don't incentivize early delivery. A contractor that can deliver a satisfactory product six months early is not entitled to receive any more profit than a contractor that promises to deliver on time.

    So much for "speed of relevance"

    Good point - what are some other areas that the WGLs miss the mark, especially in the case where the government is trying to entice new commercial entities to take on CPFFs?

  11. SpendLogic has received an award from DARPA to research the government's calculation and application of profit objectives, as they relate to R&D contracts.  Currently, this is accomplished using the Weighted Guidelines.  In industry, the Weighted Guidelines is generally regarded as a game - a subjective set of rules that have little or no bearing on reality.  Similarly, in a conversation with one Contract Specialist recently, it was noted that the WGL "uses magic to come up with a profit value."  This comment was tongue-in-cheek, but the point made aligned with the position of Industry:  The values resulting from a Weighted Guidelines analysis are generally arbitrary and mysterious with little or no obvious relation to the work being completed.

    I'm looking for anyone that might have knowledge on how the WGL calculations came to be.  For example, WHY is the standard value for performance risk 5%?  Why not 4.72% or 6.39%?  I'm familiar with the regulatory history, but would like to know more about the origins of the calculations themselves.

    Anybody have this knowledge or source material tucked away somewhere?

  12. Regarding this...

    28 minutes ago, WifWaf said:

    I suggest putting all my cards on the table, and just sending my weighted guidelines.

    I would never recommend sending your weighted guidelines.  There are too many pitfalls and a good negotiator will be able to shoot down your points without much effort.

    This is subjective, but here's my two cents based on experience:  Save profit for last and be prepared to start talking bottom-line pricing before too long.  It's not the norm to come to full agreement on all elements of cost and profit.  Bottom-line negotiations allows each side to get what they need out of the agreement and show whatever profit they want.

  13. 16 minutes ago, Freyr said:

    IMy thought process: If someone accepted a job for $30/hr and finds out the work is way more involved after their start date, they may ask for $50/hr or quit. Especially if historical data shows the incumbent personnel made $50/hr, I'd say that even though they accepted $30/hr there's a high risk that rate may go up and therefore may not be realistic. On the other side of it, if someone accepted a job for $300/hr that might be realistic but likely it's not going to be fair to the Government or reasonable if other data shows that the position is normally accomplished at $80/hr.

    Is certified cost or pricing data (CCOPD) required in this situation?

    At the very least, this is a poor explanation.  If no CCOPD requirement applies, then as Joel notes, the author should at least provide an explanation of the data that they used to arrive at this conclusion.  Same applies if CCOPD is required, but the requirement for supporting data is greater. 

    As for the details above, you may be going too deep for what's required.  If the author can cite and provide the supporting data (and any calculations) that led to their stated conclusion, that should be sufficient.  

  14. The DCMA CIG Handbook does cite "uses same production line as commercial items" as support for an assertion of commerciality, but it is not an acceptable basis in and of itself for claiming commerciality.

    Your first big hurdle is to be able to draw a connection between the item and a commercial market for this or similar items.  If you can't do this, the likelihood of withstanding scrutiny of "the customarily used by non-government..." part of the definition is extremely low and it's likely to be rejected as invalid.  The supplier should walk through each phrase of the definition they're claiming and provide support on how they meet each.

  15. If your Prime is FFP, use the same with your subs and leave it to them to figure out their indirects and profit.  Your budget is what it is...they can either do the job for that price or they can't.  Their rates are irrelevant as long as they provide the contractual deliverable.  No need to get hung up on "mandating" rates...they are under no obligation to do the job if it loses money for them. 

  16. So the short answer is "likely yes."

    If you determine that it's subject to Certified Cost or Pricing Data (exceeds $2M and is not otherwise exempt based on flowdown or exemptions listed in 15.403-1 shown here) then you'll need to write a cost analysis.  That analysis covers each cost element separately as well as profit.

    Taking it one step further, if you need training on cost analysis or want to outsource this effort, this is something we do regularly on behalf of DoD Primes and would be happy to do so for your company as well.

    Patrick

     

  17. Question:  Why would you WANT to reduce G&A?

    If the answer is that you want your price to be competitive with other bidders, then simply reduce your fee.  Avoid screwing around with how you collect and report your costs.  G&A costs are real dollars.  Reducing the G&A rate means those costs have to be covered somewhere else.

    Also, if this Prime is eligible for cost-reimbursable work, it likely means that they have an accounting system that has been determined adequate.  You don't want to mess that up by playing games with costs.

     

  18. Hey there Gonzo -

    If I'm understanding correctly, you're looking to get to the point where you show up on the radar...you haven't been notified by the DCMA of a CPSR yet, correct?

    If that's the case, don't spend your time shoring up what's already been done, just fix things going forward.  CPSR's typically cover a 12 month period that ends as close as is practical to the date the CPSR happens.

    Time estimates are difficult to determine.  You could burn 500 hours just on policies and procedures if you're starting from scratch.  In a nutshell, you need to shore up your policies and procedures, implement new templates, and then train everyone on all of the above.  Your incremental effort will lie in the policy/procedure/template development as well as training and implementation time.

    My recommendation:  find a consultant that can sell you pre-packaged policies and procedures, then use in-house labor to implement tools that will get your folks up to speed (plug SpendLogic *here*) and train to the procedures and tools that you've implemented.

  19. Lots of good detail in the replies here. For the short and sweet (and actionable) version, here you go:

    The only way to “justify” this in a PAR is to get additional fact-based information from the supplier and to include these in the price analysis. It’s common to be directed by management to justify a price...but it’s hard to do. I’ve been there and don’t envy you.

    If these costs truly turn out to be contingency costs (which amounts to profit if they don’t come to fruition,) you’re going to have findings if this package is pulled in a CPSR. In this case, your best bet is to have a price adjustment clause in both your negotiated subcontract as well as your negotiated Prime contract. 

    One last option if these are contingent costs is to write the PAR on the price you truly believe to be fair and reasonable (excluding contingent costs) and then having Management provide an authorization to agree to the price offered. Cite it as “best obtainable” and get a Management signature from someone with sufficient authority to make this call. It’s a CYA game at that point, but will generally be accepted in a CPSR. 

    Patrick

  20. 1 minute ago, joel hoffman said:

    A cost realism analysis is discussed under 15.404-1 (c) as one form of COST analysis. 

    Take another look, Joel.  While it's discussed in 15.404-1(c), it's actually set forth specifically in 15.404-1(d) and is separate from either cost or price analysis.

    Having said that, and to your point Joel, it most closely resembles cost analysis in that you're evaluating separate elements of cost.  My original response aimed at avoiding confusing cost realism with cost analysis of certified cost or pricing data.

  21. Neil, in reference to...

    On 5/21/2019 at 7:04 PM, Neil Roberts said:

    As to the business practice, I still believe that all cost reimbursement contracts are essentially negotiated and therefore "adequate price competition" has no place in those awards whether there are one or more bidders. Therefore, certified cost or pricing data should be required when over the threshold. I could perhaps be persuaded  with a well reasoned case or interpretation otherwise.

    ...the purpose of competition is to motivate sellers to set forth a proposal based on the stated award criteria.  "Adequate competition" simply requires two or more bidders to respond with responsive and viable offers.  If that criteria is met, the bidders are relieved of the requirement for certified cost or pricing data.

    Hurdles:

    • 2 bidders (self explanatory and objectively determined)
    • Responsive offers (self explanatory and objectively determined based on comparison of proposal with RFP)
    • Viable offers (this is where cost realism comes into play)

    If the viable offers hurdle wasn't cleared, I would work with the bidder(s) to come to terms on that point.  They will likely be motivated to participate when given a choice between cost realism and submitting certified cost or pricing data.

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