Navy_Contracting_4

The answer to your question is No, you cannot receive money from  your prime under the guise of GFM.  GFM is material that is incorporated into the end product during the manufacturing process.  If your prime wants to furnish some money to you, what stands in the way of their doing it?  Why try to construct some kind of flimsy artifice?

On 5/15/2016 at 9:52 PM, here_2_help said:

Oh Navy -- there you go, scaring the small businesses!

Just to keep you on your toes, would you care to provide support for your assertion that a split-out of a Purchase Order to various contracts (and other cost objectives) must be "in reasonable proportion to the benefits received"? Where does that requirement come from and how does it get applied to direct material costs?

H2H

H2H,

Apologies for the delayed response.  I refer you to FAR 31.201-4(b).

The clause seems unambiguous - 

Quote

     (c) Subcontracts.  The Contractor shall include the substance of this clause, . . . in subcontracts . . . in which the subcontractor may have Federal contract information residing in or transiting through its information system.

There is no exception for foreign subcontractors.  If you want to exclude one or more foreign contractors from the application of this clause, approval of a deviation from the FAR would seem to be needed.  In today's environment, I think it unlikely that such an approval would be easy to obtain.

If you're unsure whether the "ITAR data that has been shared through State" meets the definition of "Federal contract information," ask your contracting officer.

Retread,

In response to your first question, no, that is not my interpretation, but I don't understand why CBAs are even part of this discussion.  In response to your second question, I don't know what the intent of (d)(2) was; I was merely thinking that for the CO to incorporate a new WD at the midpoint of the first performance year, there must be some authority, and the authority I came up with was the SCLS statute, and so I concluded that it would be incorporated into the contract by operation of law. I have since seen the error of my ways, though, and am now of the opinion that if the CO directs retroactive application, then the contractor should be entitled to an equitable adjustment, as you suggested originally.

Retread,

The predicate phrase you cite is only applicable to an adjustment pursuant to paragraph (d)(1) of FAR 52.222-43, while I was referring to an adjustment pursuant to paragraph (d)(2). 

On 5/12/2016 at 2:31 PM, Retreadfed said:

Todd, in regard to your last post, we need to start with the realization that the SCA adjustment is not an equitable adjustment under which a contractor gets a profit adjustment.  Instead, it is a cost adjustment.  The result is that if a new WD increases the contractor's costs, the profit margin will decrease when the SCA adjustment is made.

As concerns, the deprivation of increased profits through efficiencies if the SCA adjustment is based upon actual hours worked, here is how that works if I understand your adjustment methodology.  Let us assume that a contract is priced on the basis of 1,000 hours for a base period of one year and 1,000 for an option period.  The hourly rate is $20 in wages and $2 in profit.  This results in an annual price of $22,000.  If the contractor realizes an efficiency and performs the first year using 900 hours, the contractor still receives the $22,000 price and realizes an additional profit of $2,200 in addition to the anticipated $2,000.

For the option period, wages will increase $.20 and hour to $20.20.  This results in wages of $20,200 dollars if 1,000 hours is used for the adjustment and an adjusted price of $22,200, leaving the contractor with the same negotiated profit of $2,000.  However, if the contractor maintains the same efficiencies it did in the base year, it will avoid paying $2,020 in wages, thus realizing this amount as additional profit since it will be paid that $2,020 plus the original profit of $2,000.

On the other hand, if the adjustment is based on 900 hours, the anticipated wage costs for the option year would be $18,180.  Because this is less than the $20,000 for the base year, no adjustment is made for increased wages, instead a reduction of $1,820 would be made and the price for the option period would be $20,180.

Have I misinterpreted your position?

Retread,

I'm not sure if you misinterpreted Todd's position, but the adjustment that you discuss would not be in accordance with the clause.  The clause calls for an adjustment to reflect the Contractor’s actual increase or decrease in applicable wages and fringe benefits to the extent that the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of a new WD.  In your example when the contractor achieves efficiencies and performs for 900 hours in the base year, and expects to perform for 900 hours in the option period, the incorporation of a new WD with a $0.20/hr increase is going to cause him to incur additional costs of $180 (900 x $0.20) above what he would have if not for the new WD, so I would adjust the contract price to $22,180, preserving the contractor's profit position.  NOTE:  There would never be a price reduction in this circumstance, because the expected decrease in wages would not have been voluntarily made by the contractor as a result of the new WD.

On 5/10/2016 at 5:58 PM, Vern Edwards said:

. . . I see no sense in an SCA adjustment to a firm-fixed price than includes an adjustment based on hours actually worked or a new estimate of hours.

Vern,

You say the Navy’s “guidance makes no sense for firm-fixed-price contracts, is not consistent with the terms of FAR 52.222-43.”  Please explain the perceived inconsistency.  

FAR 52.222-43 says, in pertinent part:

Quote

 (d) The contract price . . . will be adjusted to reflect the Contractor’s actual increase or decrease in applicable wages and fringe benefits to the extent that the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of:

     (1) The Department of Labor wage determination applicable on the anniversary date of the multiple year contract, or at the beginning of the renewal option period.  [emphasis added.]

To illustrate, let’s assume the following scenario:

As proposed (the WD specifies $20/hr):

                Year 1                                                    Year 2

1,000 hrs @ $20/hr = $20,000                      1,000 hrs @ $20/hr = $20,000

At end of Year 1 (new WD specifies $21/hr):

                Year 1                                                    Year 2

1,100 hrs @ $20/hr = $22,000 (actual)      1,100 hrs @ $21/hr = $23,100 (projected)

So, I ask what is the contractor’s “actual increase…made to comply with” the new WD?  The answer is $1,100 (1,100 hrs x $1/hr increase), so my adjusted price for Year 2 would be $21,100.

What part of that doesn’t make sense to you, or is inconsistent with the clause?

On 6/15/2016 at 9:14 AM, Retreadfed said:

Navy, why would you make a price adjustment as described in 52.222-43?  The conditions for making such an adjustment are not present in this case.  Therefore, that clause does not apply.  It seems to me that what we have is a mistake in contract formation.  In that case, the contract should be adjusted to reflect the agreement the parties would have reached had the mistake not been made.

I'd suggest a price adjustment as described in FAR 52.222-43 because the new WD was "[a]n increased...wage determination...applied to the contract by operation of law," per paragraph (d)(2) of the clause. 

If I were the contractor, however, I would certainly make your argument.

Carl,

FAR 22.1015 may or may not apply.  It isn't clear what caused the CO to realize the original WD was incorrect, (it may have been the DoL who brought it to his/her attention).  Regardless, though, if the newly incorporated WD was in effect at the time of issuance of the order, and should have been incorporated into the basic order, but wasn't, then I expect the CO will advise that it should be made effective retroactively, from the date of award -- because the law required it -- and a price adjustment should be made as described in FAR 52.222-43.

(1) The modification incorporating the corrected WD should provide the answer to your first question.  Didn't it include a statement regarding the effectivity of the corrected WD?  If it didn't, you will definitely need some direction from the CO.  

(2) and (3)  Of course, you could modify your subcontract to incorporate the corrected WD in the same manner as the CO did with your prime contract, but then you'd be faced with the same question from the subcontractor as you have for the CO.  Until you find the answer to your first question, I would recommend you refrain from taking any action other than to provide the corrected WD to the subcontractor informally to get a sense of its potential impact, depending on whether the CO tells you that it is effective on the date of the modification or on the effective date of the contract. 

Don, if you're not going to be the "that's a deviation" guy, I will be.  A CPFF contract with an incentive arrangement sounds more than a little like an "incentive contract," and FAR 16.402-1(a) says:

Quote

  No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

Don't you think the arrangement Vern postulates deviates from this mandate?

jcb2k,

There is nothing inherently wrong with using percentages, but the percentages must be in reasonable proportion to the benefits received by each respective contract/project.  Also, FAR 31.201-2(d) states:

Quote

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

Do  you have documentation adequate to demonstrate that, for example, 42.5% of the cost for the 10 widgets is allocable to Contract C?  If not, you run the risk of the contracting officer disallowing those costs.

Worse than that, though, is if your company's accounting system doesn't maintain such documentation, there's a risk that you may be considered ineligible for award of cost-reimbursement contracts for failure to meet one of the limitations for award, i.e. FAR 16.301-3(a)3), which says:

Quote

(a)  A cost-reimbursement contract may be used only when  −

...

     (3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order;

On 4/8/2016 at 4:26 PM, Jamaal Valentine said:

I was thinking the same, but based on some of Don's latest posts I'm unsure. Curious to know how they reconcile FAR 1.401(e),1.401(f), and 1.404 requirements.

I think a reasonable argument can be made that the DoD SSP has a significant effect beyond the internal operating procedures of the agency or has a significant cost or administrative impact on contractors or offerors. 

I can only assume that someone in DOD consciously considered these sections before incorporating the Source Selection Procedures into DFARS PGI (see DFARS PGI 215.300.)  They must have concluded as Vern suggested, that the procedures are internal, and do not constitute a deviation.

19 hours ago, Don Mansfield said:

No, I don't say that. If "all the text in a contract, including the SOW or specification, CDRLs, etc." are terms or conditions that apply after contract award, then they would meet the definition of "contract clause".

Where is the term "clause" or "contract clause" being used in the FAR that would make the definition a problem? 

Perhaps the Order of Precedence clauses, FAR 52.214-29 and 52.215-8?

Wouldn't that depend on the terms of employment?  I'm not aware of any law in the Commonwealth of VA that addresses this specifically.

Retread,

Yes, I agree. Nevertheless, when presented with a question about a specific contract, my first inclination is to read the contract and see what it says (or doesn't say.)  I frequently find the answer right away.  In this case, though, it may not be determinative just to see that the CAS clause is included.  I wonder if the reverse is true - if the contract doesn't include any CAS clauses, can you conclude that the contract is exempt?  Or is it possible that if the contracting officer inadvertently omitted the CAS clauses, the Christian doctrine will read them in?

H2H,

FAR 52.230-2 starts out:

Quote

(a) Unless the contract is exempt under 48 CFR 9903.201-1 and 9903.201-2, the provisions of 48 CFR part 9903 are incorporated herein by reference and the Contractor, in connection with this contract, shall—...

The way I read that, if the contract IS exempt under 48 CFR 9903.201-1 and 9903.201-2, the provisions of 48 CFR part 9903 are NOT incorporated into the contract. Is it overly simplistic or an exaggeration to call that basically self-deleting?  

Retread,

I agree that there is no substitute for knowing what the rules are, and if you know the rules, you won't accept a contract that includes the CAS clauses if it's exempt.  But if you want to know if a contract is exempt or not, I still think looking to see if the CAS clauses are in the contract is a good place to start, even if it may not necessarily be the best place to finish.

I expect COs may include 52.230-2 because it's basically self-deleting when the contract meets one of the exemptions, but I'm not sure the others (52.230-3, -4 and -5) are quite so straightforward.  Are you seeing those others being included routinely?

Additionally, and possibly easier, you could look at the contract and see if it contains FAR 52.230-6 and one of 52.230-2, -3, -4 or -5.  If none of those clauses is in the contract, then it's probably exempt, assuming the contracting officer didn't overlook the requirement.

Vern,  

I suggest that the first sentence of paragraph (d) and the first sentence of paragraph (e) of FAR 52.232-7 [along with the first sentences of paragraphs (i)(2) and (i)(3) of FAR 52.212-4, Alternate I] make a T&M contract similar to a cost-reimbursement contract, because the former addresses the contractor's obligation to "use its best efforts to perform" within the ceiling price, and the latter addresses the fact that the contractor "shall not be obligated to continue performance if to do so would exceed the ceiling price . . . unless and until the Contracting Officer" increases the ceiling price.

DELETED.

It sounds to me like perhaps someone may be mistakenly interpreting the FAR 15.404-4(d)(1)(ii)(C) guidance to "treat time-and-materials . . . contracts as cost-plus-fixed-fee contracts" to call into effect the statutory limitation on fees for cost-plus-fixed-fee contracts of FAR 15.404-4(c)(4)(i)(C).  Such an interpretation is absolutely incorrect.  The guidance of FAR 15.404-4(d)(1)(ii)(C) applies only "in evaluating assumption of cost risk" in the overall scheme of profit analysis, in which contract cost risk is just one of seven factors to be considered.

I forgot to mention our product is a commercial item per FAR 2.101.

What "product" are you referring to? I thought this was for services. In any case, that portion of the contract that you're asking about (the cost-reimbursement portion) can't be commercial, can it?

Is it possible that the CO is concerned about potential unbalanced pricing (see FAR 15.404-1(g))? I note that 15.404-1(g)(2) and (3) say:

(2) All offers with separately priced line items or subline items shall be analyzed to determine if the prices are unbalanced. If cost or price analysis techniques indicate that an offer is unbalanced, the contracting officer shall—

(i) Consider the risks to the Government associated with the unbalanced pricing in determining the competitive range and in making the source selection decision; and

(ii) Consider whether award of the contract will result in paying unreasonably high prices for contract performance.

(3) An offer may be rejected if the contracting officer determines that the lack of balance poses an unacceptable risk to the Government.[emphasis added]

Is it possible that the CO isn't sure how else to comply with this mandate than to get some kind of cost buildup information?

You probably will not see a fund cite for the complete obligation that has been recorded for the contract, but will likely see a fund cite to cover the amount currently allotted to the contract.

In my experience, the total amount allotted to the contract is the same as the amount recorded as an obligation. This is consistent with the terms of the Limitation of Funds clause, paragraph ( of which reads, "The Contractor agrees to perform, or have performed, work on the contract up to the point at which the total amount paid and payable by the Government under the contract approximates but does not exceed the total amount actually allotted by the Government to the contract." The total amount payable by the Government would certainly include some fee. Thus, the contractor must reserve an amount on account of any fee "payable by the Government under the contract."

I have never seen any incrementally funded contract - CPFF, CPAF or otherwise - that has any amount recorded separately as an obligation to cover fee that might become payable in the event of termination.