Acceptable Accounting System

[KMY]

For a FFP/LOE contract in which billing and payment takes place monthly based on hours executed each month (this is the reality that exists) do you believe that a contractor must have an acceptable accounting system in accordance with the policy at DFARS 242.7502?

[Guest Vern Edwards]

FAR does not require that the contracting officer determine the adequacy of a contractor's accounting system for a firm-fixed-price contract the way that it does for a cost-reimbursement contract.

DFARS 242.7502 applies only to cost-reimbursement, incentive type, time-and-materials, and labor-hour contracts, and contracts that provide for progress payments based on costs or on percentage of completion.

An FFP LOE contract is not CR, T&M, or L-H, and it is not an incentive type. So unless it provides for progress payments based on costs or percentage of completion, DFARS does not require an acceptable accounting system.

Obviously, however, you must be able to demonstrate that you have delivered the level of effort.

[Retreadfed]

For a FFP/LOE contract in which billing and payment takes place monthly based on hours executed each month (this is the reality that exists) do you believe that a contractor must have an acceptable accounting system in accordance with the policy at DFARS 242.7502?

In addition to what Vern wrote, to be determined responsible, you will need to have an accounting system that is adequate for the contract type contemplated.

[KMY]

Thanks for your quick response.

My understanding of how a FFP/LOE contract should be executed is payment of a fixed price upon delivery of the specified LOE. The way that the FFP/LOE contracts I am referring to are executed are monthly payents based on hours worked, like a labor hour contract, the main difference being that labor categories, hours, and fixed rates are included in section B where a labor hour contract would only indicate the labor categories, fixed rates, and a labor ceiling. I believe that partial payments of the firm fixed price amount based on hours worked are essentially a form of progress payments based on a percentage of completion (of the LOE).

So if an acceptable accounting system is necessary for a labor hour contract, is an acceptable accounting system required for a FFP/LOE contract that is executed like a labor hour contract?

Just want to make sure I'm not out in left field.

[Guest Vern Edwards]

If the contract specifies a level of effort and if payment of the fixed-price is conditioned upon delivery of the total level of effort, then you have an FFP LOE. It sounds like the government is making partial payments on a monthly basis. If so, that fact does not, in and of itself, turn the contract into a labor hour contract.

Remember that a labor-hour contract does not require the contractor to complete any work or deliver any specific number of hours. It requires that the contractor work and invoice for the hours incurred in the performance of the work up to a ceiling price. A contract that requires the delivery of a specific number of hours as a condition of payment of a firm-fixed price is not a labor-hour contract.

Does your contract specify a single firm-fixed price and a number of hours, or does it specify only labor categories and rates? Are you calling it FFP because the labor rates are fixed?

[KMY]

The contract specifies labor categories, number of hours per category, fixed rates per hour, and a firm fixed price. If the contractor completes the tasking (say a development effort) and uses less that the specified LOE, then they are only paid for the LOE delivered.

I'm concerned about the contractor's ability to segregate the hours worked on my contract from another if they don't have an adequate time keepng system (which is part of an acceptable accounting system).

The FFP/LOE contract also has a cost reimbursement line item which is not significant in comparison to the FFP of the LOE. Example $20k Travel NTE compared to $50M for labor.

[Whynot]

I am not sure what contract type you have. FFP/LOE is defined under FAR 16.207. What FAR defines your contract type and is it a valid contract type? It sounds as though you have FFP contract that allows for incremental monthly billing based upon hours performed. I am not sure what happens if the incremental billings do not add up to the FFP contract amount. Is there a true up bill that bills to the final FFP contract amaount? If not, you have a price redeterminable fixed priced contract that looks a whole lot like a T&M/LH contract. That's a bigger problem than having an acceptable business system.

[Guest Vern Edwards]

KMY: If all you want is for the contractor to have and maintain an adequate time-keeping system, then make that a requirement of the contract and an evaluation factor in the source selection and quit worrying about DFARS 242.7500. It does not prohibit you from establishing such a requirement for whatever kind of contract you have. If you want it, ask for it, and quit worrying about whether you have to have it.

I don't know what type of contract you have. An FFP LOE contract calls for the delivery of a specified level of effort (hours) in the performance of specified work for a stipulated FFP. The LOE can be broken down into hours per labor category. You can provide that the government is entitled to a downward price adjustment if the contractor completes the work for less than the level of effort and you can have informational labor rates to provide a basis for such an adjustment and to make partial payments. But I sense something in your posts which suggests that you are paying the contractor by the hour for actual hours worked, and not for delivery of a level of effort. Are you going to tell us next that you issue task orders?

[KMY]

I like the suggestion of requiring the offerors to provide evidence of an adequate time keeping system.

You sense correctly in that the contractor is paid by the hour for the actual hours worked and yes, in fact, there are task orders issued.

[Whynot]

A FFP/LOE contract type has specefic limitations and applications - primarily the contract must be less than $100K and is for work that can not otherwise be clearly defined such as research and development.

[KMY]

Per FAR 16.207-3(d) the FFP/LOE contract type may only be used when "The contract price is $150,000 or less, unless approved by the chief of the contracting office.

[Guest Vern Edwards]

I like the suggestion of requiring the offerors to provide evidence of an adequate time keeping system.

You sense correctly in that the contractor is paid by the hour for the actual hours worked and yes, in fact, there are task orders issued.

Your contract sounds to me like a definite-quantity task order contract with payment by labor hour, not an FFP LOE. Does it include a clause FAR 52.232-something? If so, which one(s)?

[Whynot]

I think the intent of a FFP LOE contract is to expend a certain level of effort and provide a deliverable from that effort. For example you have a FFP LOE based on 100 hours. The contractor spends 90 hours on the investigation and 10 hours writing a report of their findings. The deliverable is the LOE not the quality of the results. In fact they may not be any results at all.

Payment is based on the effort expended rather than on the results achieved.

A FFP LOE is not intended to work the other way around, where the contract specifies completion of a deliverable and payment is based upon how many hours were used to complete that deliverable. It can not be used in this way, hence the limitations and restricted applications.

[KMY]

On the front page of the SF26, it states it is a FFP Contract. In section B it states "The contractor agrees to provide the total level of effort specified below in performance of the work described herein." CLIN 0001 then lists 13 labor categories, hours per category. fixed rates per category, and then a NTE per category. There is also a travel NTE and material NTE amount listed in Section B. The payment clause is 52.232-01.

[Guest Vern Edwards]

Okay, so you've got the payment clause for fixed-price contracts, 52.232-1, not the T&M or L-H clause. The contract says that the contract must deliver the "total level of effort." You pay by the month based on hours performed, which sounds like you are making "partial payments" as provided for in the payment clause. You order work by issuance of task orders.

Hmmmm. I suggested such a contract in the June 1995 issue of The Nash & Cibinic Report as a way to get around the rules for task order contracting in FAR 16.504 and 16.505. See "The New Rules for Multiple Award Task Order Contracting", 9 N&CR ? 35:

[O]ne way to avoid the task order contracting policy is to describe the contractor's performance obligation in terms of a level of effort (i.e., a firm quantity of labor hours, work units, or standard tasks) instead of in terms of minimum and maximum quantities. Such a contract would be a definite-quantity contract--not an indefinite-quantity contract--and would not fall under the task order policy coverage, which only applies to requirements contracts and indefinite-quantity contracts.

A contract could stipulate a single level of effort for the entire contract and empower the agency to issue orders for whatever labor-hour mix it needs within that level of effort, or it could stipulate a separate level of effort for each labor category, work unit, or standard task. A ?Variation in Quantity? clause or partial convenience termination could provide for equitable adjustments to unit prices if the agency finds that it needs to purchase less than the specified level of effort, and the contract could be written to include options for increased quantities of hours in the event the agency wanted to be able to increase the level of effort.

Good lord! Could it be that some actually read that article?! Or was the contract awarded by another cagey old timer from the 1970s?

Sounds like an FFP LOE contract to me.

[KMY]

When you arrived at the conclusion that it sounds like a FFP/LOE contract to you, how do you resolve the fact that there are cost reimbursable NTE pools for Material and Travel or was your answer just associated with the labor component?

[Guest Vern Edwards]

Negotiated contracts can be of any type or combination of types. Your contract is comprised of two types. The main component of your contract is, in my opinion, FFP LOE. The secondary component is CR for materials and travel.

Have you received a satisfactory response to your original question? If so...

[KMY]

So I believe the answer to my question specific to the example contract cited is that an acceptable accounting system is required because of the CR portion of the contract, but if it were a pure FFP/LOE then an acceptable accounting system would not be required.

[here_2_help]

So I believe the answer to my question specific to the example contract cited is that an acceptable accounting system is required because of the CR portion of the contract, but if it were a pure FFP/LOE then an acceptable accounting system would not be required.

Meaning no disrespect to you, KMY, but this is a great example of the problems with the current acquisition approach used by many agencies. Here we see a FP-type contract with a miniscule CR line item. The government's risk of mischarging is effectively zero, because there's a NTE on the CR line item. Yet, you would have the contractor invest in policies, procedures and practices to the same extent as it would for a multi-million dollar cost-type contract. You would ask DCAA to review the contractor's accounting system to the same level of adequacy as it would apply to a major defense contractor. And (potentially) the contractor would not receive a contract if its accounting system didn't jump through all DCAA hurdles. All for a minor CR line item with an NTE ceiling that (potentially) could have been priced on an FP basis if the parties tried a bit harder to do so.

Taxpayers wonder why government contracts cost so much in comparison to similar commercial items/services. Agencies wonder why contractor overhead keeps going up. Well, here's one good reason why that would be the case....

Again, my rant isn't directed at you, KMY, but at the system that creates this type of situation.

H2H