Jump to content
The Wifcon Forums and Blogs
Runner11

Firm Fixed Price Level of Effort

Recommended Posts

In response to a prime contractor's RFQ, I've been requested to submit a Firm Fixed Price Level of Effort proposal (as a subcontractor). The scope of work is not well defined, and could be classified as ongoing engineering/diving services. I have limited experience with contracts, and I'm most familiar with Time and Materials type contracts. The FAR is very stingy on detail for FFP-LOE contracts. I comprehend that I'm responsible for providing services for X amount of hours at Y category rates. In this scenario, how, if at all, would you price ODCs (the project would require intermittent continental travel, and a small amount of material/supplies)? The prime is well aware that I would need to be reimbursed for my travel expenses. If I'm not able to include them in my FFP-LOE proposal, how else would I be able to have the prime certify payment for my travel reimbursement? Also, the FAR states that the contract price must be $150k or below. My bid exceeds this threshold. Should I be concerned about this, and should I request additional clarification? Finally, are there any additional risks I should be aware of before entering a FFP-LOE agreement?

Any comments are greatly appreciated!

Share this post


Link to post
Share on other sites
Guest Vern Edwards

In general, a government FFP Level of Effort contract is not a rates-based contract. It does not call for the contractor to be paid at an hourly rate. It stipulates a firm-fixed-price for the delivery of a specified quantity of labor (usually, but not necessarily, a number of hours) that are to be devoted to the performance of a certain task, usually involving research and development. The contract does not require the completion of a task, only delivery of the level of effort. The contractor is entitled to payment of the firm-fixed-price upon completion of the level of effort. Many such contracts include provisions for price adjustment in the event that the contractor actually completes a task prior to delivery of the entire level of effort. The firm-fixed-price includes the cost of materials, labor, other direct costs, indirect costs, and profit.

In your case, where your customer is not the government, the contract will work as described in their RFQ. They may have developed their own variation of the FFP-LOE contract.

The dollar limitation in FAR 16.207-3(d) applies to use of the FFP-LOE contract by government contracting officers. It does not apply to use of the contract type by contractors. As a subcontractor, it is not a cause of concern to you.

Share this post


Link to post
Share on other sites

Thank you for your valuable input Vern. I'm still having difficulty grasping the concept of how to reasonably price the estimated travel effort (and the invoicing procedures). My concern is if I have estimated that I will need to travel to city A for two weeks, and back and forth from city B 7 times, how should I propose these costs, when it's not totally clear the amount of travel that will be needed? If it turns out that I need to travel twice as much as I estimated, am I still tied to the FFP amount that I submit? If this is the case, how would I reasonably markup the estimated travel costs to leave room for unanticipated costs? Finally, is the invoicing process negotiable? I picture something like- I expended 20 of the 300 hours for labor category X in month 1, please facilitate payment for these hours? As such, how would the travel be billed, actual cost plus G & A? Or would the entire contract be reimbursed based on a milestone/percent complete schedule? For instance if I propose 1,000 for travel, but only actually incur 200, is this considered profit? Now I'm really second guessing myself!

BTW- your FAR bootcamp sounds excellent. Any chance of scheduling a weekend session?

Share this post


Link to post
Share on other sites
Guest Vern Edwards

The contract will be firm-fixed-price, so you cannot make an open-ended commitment to travel "as needed." Here is what you can do:

1. Propose a specific number of trips of specified duration to specified locations.

2. Price them and include the cost in the firm-fixed-price.

3. Be clear that your obligation is limited to what you are proposing.

4. State that if additional or longer trips are necessary, the customer must modify the contract to accommodate them.

If your customer does not like that approach, the alternative is a cost-reimbursement (no fee) line item or for the customer's personnel to come to you when they want to meet. They will not like either approach, especially the latter, since they are always short of travel funds. But you must stand fast on this. Customer personnel can be rapacious about such things, but you must make your reasoning and your stand clear. If you don't, I promise you that they'll eventually demand more travel than you have included in your price and claim that you are obligated to travel as often as they require in order to fulfill your contractual obligations.

Your customer might complain that modifying the contract will take too long and be too much trouble. The method is awkward, I agree, but there is no other way for the subcontractor to protect itself against customer demands for this or that ad hoc meeting or assignment. Your own technical personnel may not like it either, since they typically want good customer relations and may not care about costs. That's an investment decision. If your company is willing to incur those costs at its own expense for the sake of customer relations and potential future business, then go ahead.

As for invoicing -- An FFP LOE contract usually (but not always) stipulates a lump sum price. Billing is not by the hour. You are entitled to the price when you complete the work, or you can make other progress-type or periodic payment arrangements. You must work that out with your customer. You can negotiate any method that is acceptable to both parties.

It's hard for me to provide much more advice, because I have not seen the RFQ. Keep in mind that I have not seen the SOW and that FFP LOE can take many forms and entail many types of procedures. You must negotiate a deal that works for both parties. There are no strict forms or rules.

Share this post


Link to post
Share on other sites
the alternative is a cost-reimbursement (no fee) line item

That's what I meant by

The FFPLOE refers to labor. There's no reason why travel can't be reimbursed on actual expenses

Clin 0001 FP LOE

Clin 0002 Cost reimburement travel

Share this post


Link to post
Share on other sites

Thank you everyone for the great insight. I'm torn whether to propose a FFP amount to include travel costs as anticipated, or a cost reimbursement CLIN as previously stated. I think proposing a FFP amount would be riskier, and less appealing as a contractor. Alternatively, if I propose a cost reimbursement CLIN, it really wouldn't be part of the FFP amount, correct? I would say, here's my FFPLOE amount, and anticipated travel costs for this effort are ____, which will all be reimbursed in accordance with FTR. I definitely want this to be crystal clear with the prime.

Share this post


Link to post
Share on other sites
As for invoicing -- An FFP LOE contract usually (but not always) stipulates a lump sum price. Billing is not by the hour. You are entitled to the price when you complete the work, or you can make other progress-type or periodic payment arrangements. You must work that out with your customer. You can negotiate any method that is acceptable to both parties.

Why can the billing not be by the hour?

Share this post


Link to post
Share on other sites
Guest Vern Edwards
Why can the billing not be by the hour?

A couple of reasons. First, see FAR 16.207-1:

A firm-fixed-price, level-of-effort term contract requires (a) the contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms and (B) the Government to pay the contractor a fixed dollar amount.

I interpret "fixed dollar amount" to be a lump sum, not an hourly rate. Next, see FAR 16.207-2:

A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.

Thus, as conceived and long-used, the FFP LOE is appropriate when there is a project so open-ended that you cannot state when it would be finished. For example, suppose that you want to study some new virus. You want to learn as much about it as you can, but you cannot say when, if ever, you will know everything you would like to know. The more you study, the more you learn. But the study cannot be open-ended, because you don't have all the money in the world. So you tell the contractor: Study this virus and learn all that you can. Spend 1,000 hours of scientist labor to study it and report all that you have learned.

You negotiate a firm-fixed-price ("fixed dollar amount") and a date by which the level of effort will have been expended and the report delivered. The study, up to the level of effort, is a single job. The contractor is entitled to payment only when the level of effort has been expended and the report delivered, and only if the job is completed on time. Each hour of study is not a separate deliverable to be separately inspected, accepted, and paid for.

Thus, payment by the hour would not be appropriate for an FFP LOE, because, unlike a T&M contract, the contractor must complete the job, i.e., deliver the level of effort on time, in order to be paid the fixed dollar amount. What if the contractor never delivers the study, or the study, when delivered, was not done in accordance with other contract terms, or is delivered late? Under a T&M the contractor would be paid by the hour, finished or not, but not so under an FFP LOE.

The use of this contract need not be limited to R&D and the level of effort need not be stated in terms of hours. You could use it for natural resource exploration, e.g.: Drill down 5,000 feet at location X in search of water (or oil, natural gas, or thermal energy), to be completed by DD MM YYYY.

In lieu of payment by hourly rate, the parties chould negotiate progress payments based on cost, but that is not likely for a contract valued at $150,000 or less. The parties might negotiate performance-based payments, but that is also unlikely for a small contract. Those types of payment terms would protect the government's interests in case the contractor fails to deliver the level of effort on time.

As in everything else in this business, I am sure that people have developed their own variations. I am not familiar with all of them and cannot comment on them. However, it seems to me that payment by the hour is inconsistent with the concept of FFP LOE as described in the FAR and in its predecessor regulations and as I have known it. (The first contract that I ever negotiated, as a GS-05 trainee, was a $100,000 FFP LOE R&D study contract with a company named Lulejian and Associates. We did it over the phone. I had two first-rate GS-12s (Hal Moore and Lurece Hunter) sitting beside me, passing me notes about what to do next, what move to make. The guy on the other end, I can't remember his name, was very gentle and understanding. I was scared to death, but had the time of my life.)

Share this post


Link to post
Share on other sites
As in everything else in this business, I am sure that people have developed their own variations. I am not familiar with all of them and cannot comment on them. However, it seems to me that payment by the hour is inconsistent with the concept of FFP LOE as described in the FAR and in its predecessor regulations and as I have known it. (The first contract that I ever negotiated, as a GS-05 trainee, was a $100,000 FFP LOE R&D study contract with a company named Lulejian and Associates. We did it over the phone. I had two first-rate GS-12s (Hal Moore and Lurece Hunter) sitting beside me, passing me notes about what to do next, what move to make. The guy on the other end, I can't remember his name, was very gentle and understanding. I was scared to death, but had the time of my life.)

I am not sure that contractors want to await completion of the expenditure of the LOE. So, FYI, I use this payment clause:

Invoices for payment of LOE identified in line Item 0005 shall be computed and paid as follows:

Monthly Payments: The contractor shall be paid based upon level of effort (LOE) expended, plus travel costs incurred. The amount of the payment for the monthly LOE expended shall be developed by multiplying the percentage the month's LOE represents of the total annual LOE times the firm fixed price.

Assuming the total firm fixed price is $1,000,000, the total annual LOE is 4,400 hours, and the monthly LOE expended is 300 hours, the monthly payment would be $68,181.82 plus any travel costs.

Monthly payment = [(monthly LOE / annual LOE) X firm fixed price] + travel costs.

Monthly payment = [(300/4,400) X $1,000,000] + travel costs Monthly payment = (.0682 X $1,000,000) + travel costs Monthly payment = $68,181.82 + travel costs

Share this post


Link to post
Share on other sites
Guest Vern Edwards

Well, that's a nice payment scheme, but it doesn't make payment conditional upon delivery of the entire level of effort within the period of performance. What if the contractor does not complete the LOE, or completes it late? Does the contractor get to keep what it has already been paid? Are you buying a job defined in part in terms of a level of effort, or are you buying severable hours? If the latter, then then you don't have an FFP LOE contract as described in FAR Subpart 16.2.

Share this post


Link to post
Share on other sites
Well, that's a nice payment scheme, but it doesn't make payment conditional upon delivery of the entire level of effort within the period of performance. What if the contractor does not complete the LOE, or completes it late? Does the contractor get to keep what it has already been paid? Are you buying a job defined in part in terms of a level of effort, or are you buying severable hours? If the latter, then then you don't have an FFP LOE contract as described in FAR Subpart 16.2.

I did not cut and paste the entire clause. FYI, here is the remainder:

Total Payments: The contractor shall be paid the entire firm fixed price only if the contractor expends the entire LOE. If the entire LOE is not expended, the total of monthly payments to the contractor shall be a percentage of the FFP equal to the total LOE expended divided by the total LOE.

Assuming the contractor expends 3,000 hours, the total payments to the contractor would be $681,181.18 plus any travel costs.

Total Payments = [(total LOE expended / total Section B LOE) X firm fixed price] + travel costs Total payments = [(3,000 / 4,400) X $1,000,000] + travel costs Total payments = (.6818 X $1,000,000) + travel costs Total payments = $681,181.18 + travel costs.

I think this payment mechanism is consistent with FAR 16.

16.207-2 -- Application.

A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort.

However, payment is based on the effort expended rather than on the results achieved.

Share this post


Link to post
Share on other sites

Napolik - Last week I ran across an article that Vern prepared a while back (2004 I believe) titled "The Time and Material Contract: The Time Has Come for a Long, Hard Look." I found it at Wifcon in the Reading Room, it has some excellent points. I realize that T&M contracts are not the only point of discussion in this thread, but I think its a great article and might lend some insight.

Share this post


Link to post
Share on other sites
Guest Vern Edwards

napolik:

Based on the definitions in FAR 32.001, do you consider the payments made under your clause to be invoice payments or contract financing payments?

Share this post


Link to post
Share on other sites

Hi all,

The payment/billing mechanism was not explicitly stated in the award document, so I am considering at this time that it is still up for negotiation. Monthly invoicing is requested, but states that vouchers shall be submitted upon achivement of the billing milestones (which are not identified) in the Task Order. The Order was bid with 5 discrete tasks, but at this point I am at a loss for how to propose billing for a 12 month POP. While I would be satisfied with the mechanism napolik suggesets, I think the prime may be troubled by that approach. To avoid billing like a T & M, I see the following options 1) invoice 12 equal payments (but what happens if all LOE is not expended) 2) invoice upon completion of the tasks bid in the proposal (once we've expended the LOE) 3) use napolik's approach which would require calculating the % effort for multiple labor categories, or 4) mimic T & M billing because it's unclear at this point whether the prime truly understands the correct mechanism needed. Any help is greatly appreciated, this is time sensitive.

Share this post


Link to post
Share on other sites
napolik:

Based on the definitions in FAR 32.001, do you consider the payments made under your clause to be invoice payments or contract financing payments?

Invoice payment.

Share this post


Link to post
Share on other sites
Guest
This topic is now closed to further replies.

×