Jump to content

Recommended Posts

I've been assigned to my first CPFF subcontract and need some advice. My company is first tier sub to the prime. We have been told the government is questioning one of our cost estimates. Let's say we submitted a cost estimate for $130,000 plus $7,000 fee. We performed the SOW, the period of performance has expired. However, we didn't use as many labor hours as we proposed/anticipated, and our actuals were only about 15% of the total cost estimate. IAW the subcontract, we billed the fee at monthly fixed amounts over the course of the period of performance. So, we received the entire fixed fee amount. Now, there has been talk that the government wants to get some of the fee back since we were significantly under our cost estimate. I referenced FAR 16.306, which states ?The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract.? My colleagues and I have two perspectives on what our position should be: 1) the work has been performed, and the government can?t request for us to give part of the fee. Our Client may ask us to provide justification as to why the costs came in less; however our Client can?t remove or ask for fee back. They can ask for the cost funding back but not the fee funding; and 2) due to the significant disparity between what we proposed and what was performed, our Client could have the right to request a refund of a certain amount of the fee. My goal is to provide the appropriate advice to my team on what our position should be if this request becomes "official." Thanks for any insight.

Link to comment
Share on other sites

My thinking is that the book answer is from FAR 16.306, as you noted. Some other initial thoughts:

Your contract is with the prime, not the government. The government should be guided by FAR 15.404-3, Subcontract Pricing Considerations. Although that portion of the FAR is normally not included in prime or subcontracts, primes and subs should be aware of the rules that apply to the government and should take all relevant factors into account when making business decisions.

In addition, the government will be looking at FAR 15.404-4, Profit. More specifically, 15.404 ( c ) ( 4 ) ( i ) reads, "The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306( d ) and 41 U.S.C. 254( b ):" After ( A ) and ( B ) dealing with R&D and A&E work, respectively, the applicable part here would appear to be from ( C ): "For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contract?s estimated cost, excluding fee." Note this is guidance for negotiation, not after-the-fact renegotiation of a fixed fee, but it tells you something about the way the government people are trained and where they are coming from.

No doubt there are other portions of the FAR, and other government guidance documents that others on this forum might be more familiar with, that influence the government's thinking on this, and result in government pressure on the prime, which of course flows downhill.

These considerations are all based on the book and may not, on their own, provide a firm basis for a subcontractor's business decision. Customer relations with the prime and potentially also with the government would be another consideration.

My $0.02 worth from a contractor perspective in the trenches.

Link to comment
Share on other sites

Thank you cajuncharlie...Another challenge I have is remembering I'm one step removed from the government. My experience has always been as the prime. I appreciate the insight from where the government is coming. And I certainly agree with the client relationship being a part of the equation. Given back a couple thousand in fee on a project of this magnitude may not be worth the fight if it cast bad light on us as a subcontractor, and soils what is now a great working relationship. Thanks again!

My thinking is that the book answer is from FAR 16.306, as you noted. Some other initial thoughts:

Your contract is with the prime, not the government. The government should be guided by FAR 15.404-3, Subcontract Pricing Considerations. Although that portion of the FAR is normally not included in prime or subcontracts, primes and subs should be aware of the rules that apply to the government and should take all relevant factors into account when making business decisions.

In addition, the government will be looking at FAR 15.404-4, Profit. More specifically, 15.404 ( c ) ( 4 ) ( i ) reads, "The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations, imposed by 10 U.S.C. 2306( d ) and 41 U.S.C. 254( b ):" After ( A ) and ( B ) dealing with R&D and A&E work, respectively, the applicable part here would appear to be from ( C ): "For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contract?s estimated cost, excluding fee." Note this is guidance for negotiation, not after-the-fact renegotiation of a fixed fee, but it tells you something about the way the government people are trained and where they are coming from.

No doubt there are other portions of the FAR, and other government guidance documents that others on this forum might be more familiar with, that influence the government's thinking on this, and result in government pressure on the prime, which of course flows downhill.

These considerations are all based on the book and may not, on their own, provide a firm basis for a subcontractor's business decision. Customer relations with the prime and potentially also with the government would be another consideration.

My $0.02 worth from a contractor perspective in the trenches.

Link to comment
Share on other sites

Based upon the original post, if I were the Government PCO and became aware that the subcontractor's actual cost ended up being 15% of the amount that was orignally estimated, then I might be be concerned that there was defective pricing if the SOW did not change. As the sub, I recommend that you review your cost proposal that you provided to the prime to see if the factual data surrounding your estimate at the time that you certified was current, accurate, and complete.

You might want to take a look at Volume 4 Chapter 5 of the Contract Pricing Reference Guide: https://acc.dau.mil/CommunityBrowser.aspx?id=379610

On the issue of fee, if the contract type was fixed fee rather than incentive fee, I don't see how there could be a legal requirement for you to return fee if defective pricing is not at issue and your subcontract SOW did not change.

Good luck!

Link to comment
Share on other sites

1. My company is first tier sub to the prime.

2. We have been told the government is questioning one of our cost estimates.

3. We performed the SOW, the period of performance has expired.

4. IAW the subcontract, we billed the fee at monthly fixed [FEE] amounts over the course of the period of performance. So, we received the entire fixed fee amount. Now, there has been talk that the government wants to get some of the fee back since we were significantly under our cost estimate.

Your prime customer is lying to you.

My support:

a. The price has been negotiated. Absent "defective pricing" (already mentioned by another poster) or an alleged CAS noncompiance related to the cost accounting practices used in the cost estimate, there is no legal authority that would compel price renegotiation after performance. It may be that the prime failed to obtain advance consent from the contracting officer, and is having trouble in that area, but that is not your concern.

b. As has already been posted, the government customer has no recourse to force a repricing of your subcontract. At most, the government can decline to reimburse the prime contractor for the costs it pays you. That does not affect your reimbursement from the prime. And even if defective pricing is alleged, then the government still has to come after the prime, who would then have a cause of action against you as subcontractor.

c. Fixed fee is fixed. Absent some contract clause to the contrary, if somebody wants you to give fixed fee back based on incurrence of costs, then what you have is an illegal cost-plus-percentage-of-cost contract type.

d. In any case, since your contract type is CPFF, when you incurred less costs, then your prime (and its government customer) also paid less. So they have received all the benefit to which they are entitled.

So I conclude that your prime has budgetary pressure and is trying to get well by taking back some of your fixed fee. If you believe that the subcontract was accurately priced and the actual costs were properly calculated, I would tell the prime to go pound sand.

Hope this helps.

Link to comment
Share on other sites

Guest Vern Edwards

Actual cost was only 15 percent of estimated cost. Is that right? That's a pretty big underrun. Hopefully, there is a rational explanation for it. If we're really talking about only $7,000, then there should be no big deal. But if we're talking about significantly more, then that might be different. If the subcontract was large enough it might prompt the kind of interest that could bring unwelcome attention from somebody.

here_2_help is generally right, except for his comment about cost-plus-percentage-of-cost. Negotiation of a reduction in fee in response to the size of the underrun would not turn the CPFF contract into CPPC.

I would draw no conclusions about the prime's motive. And I would not say that the prime is lying, either. I can imagine a government contract specialist asking about your fee. I can imagine a government contract specialist doing almost anything.

Link to comment
Share on other sites

Thanks for the perspective Vern. All this dialogue has been helpful in expanding my knowledge and gaining a broader picture about this issue. I have to admit I was surprised the FAR didn't address this type of circumstance. Although I wasn't involved in the contract when the estimate was submitted and negotiated, I firmly believe there is an explanation and that the estimate was based on the data available at the time and our understanding of the SOW. I do find it curious though, if there was any question about our interpretation of the SOW and or our basis of estimate being overstated, our customer should have addressed that in negotiations. But, that wasn't the case. Then, it turned out not to be as labor intensive as we thought.

I truly appreciate all the comments! This is my first time posting on wifcon, and the experience has been inspiring. A friend/co-worker has been trying to get me on here for years. Now I know why. I'm sure I will be posting more in the future! I look forward to learning much, much more from wifcon feedback. Thank you!

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
 Share

×
×
  • Create New...