Creative incentive?

[Guest Vern Edwards]

RFP for tradeoff process source selection for firm-fixed-price services says offerors will be evaluated on relative merits of proposed performance incentive. Offeror X proposes price of $0.00 with proposed incentive that it be paid a stipulated amount upon 100 percent successful performance. Agency thinks its a great idea and assigns extra credit.

Thoughts?

[formerfed]

Assuming that the proposed incentive is a "stretch" and provides benefits over acceptable performance, it is a creative approach especially if price is a significant part of the source selection process.

[Jacques]

It is certainly interesting. Assuming the RFP made it clear how price would be evaluated (e.g., evaluated price would be base price without incentive), assuming there isn't any language in the RFP that would lead a reasonable offeror to believe that there would be any evaluation of realism, and assuming the RFP was just as generic as Vern describes in how evaluation credit would be applied to the performance incentive, it seems defensible on its face.

[ContractPriceAnalyst]

RFP for tradeoff process source selection for firm-fixed-price services says offerors will be evaluated on relative merits of proposed performance incentive. Offeror X proposes price of $0.00 with proposed incentive that it be paid a stipulated amount upon 100 percent successful performance. Agency thinks its a great idea and assigns extra credit.

Thoughts?

100% successful performance of what? Sucessful performance of the contractual requirements or sucessful performance of the contractual requirements and the performance incentive? Shoudn't Section M of the RFP describe what would constitute a merit-worthy performance incentive?

[Whynot]

Not sure it meets the defintion of a contract. The consideration is vague. I would change the $0 to $1, this way the government doesn't have to pay fair market value for the contractor's work if the incentive is not awarded.

[Guest Seeker]

How is it different from a firm fixed price contract? I think the $0.00 is a sham. Under a firm fixed price contract the contractor gets the stated price in return for completely acceptable performance. It would be the same under the proposed incentive.

[ContractPriceAnalyst]

When I first read the post, I thought that $0.00 refered to some specific dollar amount in which the amount was irrelevant to the discussion. If the amount is really $0.00 then the incentive is not really an incentive. Also, as someone mentioned, consideration becomes an issue as the Government cannot accept volunteer services.

It is hard to believe that really happened

[formerfed]

Seeker,

$0.00 may not be a sham. Let's say the contract is for call center support where the contractor's staff has to answer 90% of incoming calls within four rings and the agency is will to pay a premimum for better service. In this case, an Offeror is proposing to answer 98% of the calls within the same time frame for no additional amount over the fixed price.

[Jacques]

None of the comments so far have explained why the promise of the incentive, conditioned upon meeting the heightened performance requirements, is not consideration. I understood this is an incentive fee, not an award fee. If preventing the contractor from meeting the condition (here, heightened performance) is not something within the government's control, then the promise isn't illusory. The contract as a whole has to be supported by consideration. There is no requirement that each and every obligation under a contract be supported by separate and divisible consideration.

[Guest Seeker]

Of course there is consideration. The company is promising to perform 100 percent of what is required in return for a promise to pay a stated amount. That's a firm fixed price contract There is no more incentive in that offer than in any other firm fixed price contract. Some of you are falling for a trick play. formerfed==I don't know where you got your "Let's say" example. Vern didn't describe any such deal.

[Jacques]

The company is promising to perform 100 percent of what is required in return for a promise to pay a stated amount. That's a firm fixed price contract.

Seeker,

I'm not sure where you're headed. This is not an alternate proposal. The contractor agrees to be bound to the terms and conditions of the basic contract. If the contractor meets the base requirements of the contract (without meeting the heightened requirements), the government would pay nothing, and there would be no need for a termination for default, etc. Only if the contractor both meets the base and the heightened requirements, would the contractor receive any funds. This is an incentive arrangement.

[formerfed]

Jacques,

I think the way Seeker interprets the issue is the contractor is not proposing heightened requirements - "Offeror X proposes price of $0.00 with proposed incentive that it be paid a stipulated amount upon 100 percent successful performance." The contractor is paid for successful work and completion.

[Guest Vern Edwards]

Jacques:

I did not say anything about heightened requirements. Where did you get that idea? I said, quite clearly: "Offeror X proposes price of $0.00 with proposed incentive that it be paid a stipulated amount upon 100 percent successful performance." By "100 percent successful performance" I meant that the offeror proposed to do everything required by the statement of work. That's it. And when did anyone say anything about an alternate proposal?

[Jacques]

I did not say anything about heightened requirements. Where did you get that idea?

Regrets, Vern. I read too much into your language, "proposed performance incentive." What I took from your scenario was a FFP contract with performance incentives, where the FFP is $0, and the performance incentive is the offeror's proposed price. I suppose what was driving me to read into your post is language in FAR 16.401( regarding targets that exceed minimum requirements. It remains unclear to me what is being incentivized, if anything, so I'll stop speculating.

[JTAYLOR]

I'm with Seeker. It sounds to me like the offeror is graciously willing to accept 100% payment for 100% performance of the contract requirements. In other words, it's a FFP contract.

[Guest Vern Edwards]

Jacques,

No problem. The question is: What kind of incentive is it to offer to charge nothing unless the job gets done, the incentive being payment upon acceptable performance? The agency thought it was a great incentive.

Another question would be: Would the award of the contract constitute an obligation of appropriated funds? Would the CO have to record an obligation by putting a fund cite on the contract document? Or would the award be only a contingent liability?

[TAP]

It's no incentive at all to offer to charge nothing unless the job gets done.

Award of the contract would constitute an obligation of appropriated funds, and the CO would have to record an obligation by putting a fund cite on the contract document, otherwise you wouldn't have a valid contract. It's not like 100% completion was an option to be exercised later.

TAP

[Whynot]

I still think that the consideration issue, whether it exists or not, can be avoided by making the price $1 instead of $0. For consideration to be good (sufficient)consideration, it must be of some value, even if it is minimal value, otherwise the contract is illusory.

I wonder if some of the threshold triggers in FAR are impacted by this pricing arrangement, such as TINA?

[napolik]

I wonder if some of the threshold triggers in FAR are impacted by this pricing arrangement, such as TINA?

See paragraph ( c ) of FAR 1.108 ? FAR Conventions.

Quote

( c ) Dollar thresholds. Unless otherwise specified, a specific dollar threshold for the purpose of applicability is the final anticipated dollar value of the action, including the dollar value of all options. If the action establishes a maximum quantity of supplies or services to be acquired or establishes a ceiling price or establishes the final price to be based on future events, the final anticipated dollar value must be the highest final priced alternative to the Government, including the dollar value of all options.

Unquote

[Jacques]

Ignore my initial posts, as I misunderstood the scenario.

The proposal appears to contemplate requiring perfect tender (rather than substantial performance), eliminating the normal remedies for default, and imposing what effectively amounts to liquidated damages equal to the total contract price. Even assuming you could get all the required deviations required for such an approach, the allocation of risk to the contractor is so high that I'm not confident the parties' intention would be enforced. I worry the Board or Court would either find the language of the exculpatory clause inadequate or they would find the clause unconscionable.

[Guest Vern Edwards]

Jacques:

I don't understand your analysis. Some questions for you:

1. In what way would the proposal eliminate the "normal" remedies for default?

2. In what sense would liquidated damages be involved? Nonpayment for default is not liquidated damages.

3. What deviations do you think would be required?

4. Why would the risk be greater than for a firm-fixed-price contract?

5. In what way would the agreement be unconscionable?

[Darby8001]

I am with Seeker on this one as well. It is just a FFP contract with some fancy language to trick people in to think they are getting some new great idea.

Suppose you had a FFP service contract to move a couch from one building to the next at a rate of $100. Until you satisfied the SOW and moved the couch you are not due any money but once you moved that couch successfully, as required by the SOW, then you would be due $100.

In Vern?s question ?Offeror X proposes price of $0.00 with proposed incentive that it be paid a stipulated amount upon 100 percent successful performance." For sake of comparison let?s say that the stipulated amount is $100. Until Offeror X meets the requirement of the SOW and moves the couch he is owed nothing. Once he does, then 100% of $100 is owed.

The two scenarios are the same just framed in different words. Also this scenario meets the FAR?s description of FFP

See FAR 16.202-1 A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor?s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.

Vern, you also asked:

?Another question would be: Would the award of the contract constitute an obligation of appropriated funds? Would the CO have to record an obligation by putting a fund cite on the contract document? Or would the award be only a contingent liability??

I would say the CO would need to address how this contract is described. Since I have already stated that I believed it is nothing more than a regular FFP then yes it would constitute an obligation of APF and the CO would need record the obligation accordingly.

In the end I believe the agency was incorrect in assigning any extra credit.

[Guest Vern Edwards]

I still think that the consideration issue, whether it exists or not, can be avoided by making the price $1 instead of $0. For consideration to be good (sufficient)consideration, it must be of some value, even if it is minimal value, otherwise the contract is illusory.

The promise to pay the "incentive" upon successful completion is sufficient consideration. The price need not be set at $1. There is no consideration issue.

[Whynot]

I was wondering about the default issue as well. Is it possible to be in default for failing to pass a pass/fail incentive? How can an incentive be a contract requirment that one can default on?

The $0 dollar is for minimum performance - failed or no performance. I guess you get what you pay for. If I invoice you $0 am I in default?

The incentive is for maximum performance - passed or acceptable performance.

Can an incentive even be pass/fail, all-or-none basis or must it be for surpassing a level/target of performance.

What kind of contract is this in FAR Part 16 - nothing really fits.

[Jacques]

Jacques: I don't understand your analysis. Some questions for you:...

All good questions, which to answer would require that I make a bunch of additional assumptions about the requirement, which would invariably end up being incorrect. Rather than engage further, I'd rather folks treat my post as a suggestion for further inquiry should they find themselves facing a scenario similar to your's.

Vern, if you are satisfied based on the facts as you--and only you--know them that these aren't legitimate concerns, I'm quite confident you're right.