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  1. I need to find a fixed price incentive contract or similar cost incentive contract type that is allowable under the existing FAR for federal Design-Build contracting that provides for reimbursement of allowable costs, not to exceed a ceiling price or "Guaranteed Maximum Price" (GMP). The contract will provide for shared savings on the project if the actual costs are less than the ceiling price/GMP, through contract provisions for sharing of savings. In this scenario, the goal is to control costs within the target cost that is established at the price ceiling (GMP). The Question: Is there enough flexibility under the FAR in Parts 16.2 and 16.4, to use a fixed price incentive with Firm Target (FPIF) or similar contract type for a federal design-build construction project but with the "target price" plus the "target profit" in an FPI with "Firm Target" (FPIF) equal to the ceiling price? In other words, does the FAR specifically require separate "target" (cost plus profit) and "ceiling" (where ceiling price = cost plus profit)? Background : I'm presently working to develop guidance for federal agencies to use design-build with a “Guaranteed Maximum Price”, similar to the industry model described below. My goal is to be able to find a way to implement it consistent with the current federal statutes and the current FAR, without having to change either to implement it. D-B Industry Application: The Design-Build industry, e.g., Design-Build Institute of America (DBIA), Associated General Contractors (AGC), and the Engineers Joint Contracts Committee (EJCDC), have contract formats appropriate for design-build contracting. Their formats include, in addition to firm fixed price (the D-B industry term is "lump sum"), a form of "Cost-Plus with Guaranteed Maximum Price (Cost-Plus/GMP). This is a hybrid, combining the cost reimbursement features of a cost-plus contract with the cost certainty of a lump sum contract. The owner benefits by paying only the actual reimbursable costs of the work for the design-builder's performance and by knowing that its project will not exceed a pre-established price (adjusted, of course, for changes made by the owner or for other authorized adjustments under the contract). The GMP also offers both the owner and the design-builder the opportunity to realize savings on the project if the actual costs are less than the GMP, through contract provisions for sharing of savings. In commercial industry design-build practice, the use of a GMP contract structure is often used where the owner’s program is not defined well enough in scope and/or functional or technical requirements to be able to develop a budget or for the owner and industry to agree to a firm fixed price (FFP) for the project. Industry refers to FFP as “lump sum” pricing. The design-build contractor might be selected through some type of competitive best value process or through a qualifications-based selection (“QBS”) process. The owner and design-builder might work together to define the program more completely. The initial effort might be priced on a lump sum or cost-plus basis. The parties should establish a GMP for the project when the program is sufficiently established to make the GMP number realistic and meaningful. Federal Application: For federal design-build acquisition, design-build acquisition processes generally do not allow the use of QBS of the design-build contractor. The design-build contractor is normally selected using a competitively negotiated, best-value selection procedure, considering qualifications, usually design excellence, and price. Generally, federal government design-build build contracts are awarded as FFP contracts. In some instances, federal design-build with GMP contract approach may be more appropriate than the FFP pricing method, when there is already a defined programmatic scope and programmed amount of funding, but with only nominal design development and it is too early to be able to establish a firm fixed-price (FFP) without having to include considerable contingencies or risk in the FFP. It may be well suited for projects that are complex and difficult to adequately define a FFP at the outset and/or for projects that involve unusually high contingencies due to risks or unknown conditions, prior to considerable design development. Rather than paying a FFP for the full estimated contingencies, the GMP method can result in the government paying only for those actually encountered. Plus it incentivizes the design-builder to minimize, manage or avoid costs for such contingencies. Compressed time schedules available for RFP development, awarding and executing design-build contracts for large, complex projects are also a consideration for using design-build with GMP in lieu of FFP award. To be able to negotiate and establish a realistic GMP at the outset, the government must define its performance requirements for scope and quality up front, using a parametric/conceptual cost estimate. The design-build teams would also have to be able to conceptually estimate costs within that performance based requirements RFP format to develop their proposals. Is There an Applicable FAR Contract Type(s)? I have found that the federal “Fixed Price Incentive” contract types under FAR 16.403 (FPIF and FPIS) most closely resemble the industry Cost-Plus/GMP approach. The industry model is described in the DBIA Manual of Practice, in Document Number 510, Design- Build Contracting Guide, Chapter 5, “Lump Sum versus Cost-Plus/Guaranteed Maximum Price”. Both the industry Cost-Plus/GMP and the Federal design-build with GMP using the FPI approach require the design-builder to perform and complete the contracted scope within the contractually agreed maximum price, within the agreed time. Both provide for reimbursement of certain, allowable costs. The Challenge: The current challenge in adapting the FPI for federal design-build with GMP is to be able to use a single target cost/profit and ceiling price – not a lower target within a HIGHER ceiling. I think so, but need some advice or definitive support for my position. The classic FPIF with a lower target doesn't align with the industry model. It encourages a lower quality target design and construction level and may penalize the contractor for encountering unknowns or other non-controllable contingencies, rather than providing positive incentives to the contractor for mitigating, managing or avoiding risks and NOT consuming the contingency allowance. It is also much more cumbersome to manage and administer than a simple GMP ceiling. The industry has already demonstrated a willingness to accept the risk for exceeding the GMP/ceiling, using its existing GMP contract type. The design-builder is the single point of responsibility for design and construction. When D-B is properly used with government furnished performance criteria for means, methods, functional and technical design requirements, the D-B contractor has more ability to control the cost of work in design-build to meet the owner's quality, scope and functional requirements. The classic FPI model with separate target and ceiling price may be appropriate for complex, dynamic government developmental manufacturing programs (like developing and initial production or prototype production of airplanes, ships, missiles, etc.). It may also be appropriate for hiring a construction contractor during development of government furnished design for a complex facility, such as a hospital, etc. It isn't necessarily appropriate for Design-Build construction with a single source for both design and construction. Applicable FAR coverage: I found several pertinent FAR references for FPI contracts under: 16.201(a ); 16.204 (Fixed-price incentive contracts); 16.401 (General), 16.402, 16.403, 16.403-1, "Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.": A fixed price incentive with a single target/price ceiling (GMP) is consistent with the following: With a target equaling the ceiling price (the GMP), the profit is automatically affected when the contractor's actual cost exceeds the target: When the target and ceiling are the same (the GMP), they are within the constraints of the ceiling price. The government doesn't pay any more than what it bargained for and the contractor absorbs any cost overrun, affecting its profit: The GMP method meets this: The GMP method meets this : Paragraph d. (2) (ii) is the only paragraph in contract clause 52.216-16 Incentive Price Revision—Firm Target that would require some tailoring for the GMP with the target cost plus target profit equal to the ceiling GMP. Inasmuch as the paragraph provides for KO fill in anyway, it would be relatively simple to say something like "No adjustment - the target cost plus target profit equals the price ceiling." ______________________________________________________________________________________________ Note: [FAR Cost Reimbursement Incentive Type is not the Same as Industry Cost-Plus/GMP As a matter of semantics, the cost reimbursement incentive contract types under the Federal Acquisition Regulations have a different meaning than an industry “Cost-Plus/GMP” contract. The federal cost-plus (referred to as “cost reimbursement”) FAR contract types also provide for reimbursement of contractually allowable costs. However, the cost ceiling limitation is initially established as an estimate to complete the contract scope of work effort. The contractor is expected to make its best effort to complete the work within the cost ceiling. The government will not reimburse allowable costs that exceed the cost ceiling limitation. If the contractor cannot or does not complete the work within the cost ceiling limitation, the government would have to decide whether to provide additional funding to proceed beyond the cost limitation There are also legal and regulatory restrictions or prohibitions against the use of a federal Cost-Plus contract type for DoD Military construction and for some other Federal construction contracts.]
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