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mrsbadexample

Firm-fixed-price, level-of-effort contract for commercial item?

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We are considering bidding on a solicitation that was just released as an RFQ. The presolicitation indicated that a cost-reimbursement type contract was anticipated. The posting in FBO for the solicitation, however, states "Upon further review and market research, it is determined that it is in the Government's best interest to release the solicitation under FAR 12, Commercial Items."

The solicitation document states, under the "Structure of Contract" section "This Level-of-Effort contract will consist of two parts:" and then goes on to describe the number of employees that are "currently needed to maintain all essential functions" within the program. No total number of hours was provided, but the number of full time personnel is listed. The solicitation includes 52.212-1, 52.212-2, 52.212-3, 52.212-4, and 52.212-5 (curiously, with no applicable clauses marked).

When we called the CO for clarification of the contract type, she stated that they were issuing it as a firm-fixed-price, level-of-effort contract because the agency is no longer issuing T&M contracts.

I have a couple of questions regarding this contract type (and many more that we need to ask the CO).

1. Is it possible to have a firm-fixed-price, level-of-effort contract for a commercial item? Per FAR Part 12:

12.207 Contract type.

(a) Except as provided in paragraph (

B) of this section, agencies shall use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial items.

(

B)

(1) A time-and-materials contract or labor-hour contract (see

Subpart 16.6) may be used for the acquisition of commercial services when—...

Even though FFP-LOE is a type of fixed-price contract, I was under the impression that it was not allowed under Part 12, since this clause does specifically list two types of FFP contracts described in FAR 16.2, but it does not include FFP-LOE.

2. FAR 16.207-3 states that this contract type may only be used when "The contract price is $150,000 or less, unless approved by the chief of the contracting office." This contract will be for several million dollars. I know it is possible that this has been approved by the chief of the contracting office, but I'm wondering if this is a common occurrence. Is anyone aware of the frequency of exceptions being made to this clause?

3. This contact will also include numerous different types of non-labor costs that would be billed as materials if this were a T&M contract. Not all of them could be accurately estimated and included in the fixed price. I don't have any experience with FFP-LOE contracts, so I'm wondering how those costs would typically be handled. A separate cost reimbursement line item might make sense, except that this is being done under FAR Part 12. A separate T&M line item seems like a ridiculous thing to suggest, since they are trying to avoid a T&M contract in the first place. This may be a moot point, depending on the answer to Question 1.


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Guest Vern Edwards
1. Is it possible to have a firm-fixed-price, level-of-effort contract for a commercial item? Per FAR Part 12[?]

Answer: Apparently so.

[2] Is anyone aware of the frequency of exceptions being made to this clause?

I don't, and I doubt that anyone else does. Approval by chief of the contracting office is very low-level. I doubt that anyone is tracking.

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Answer: Apparently so.

Perhaps I should rephrase:

Is it possible to have a firm-fixed-price, level-of-effort contract for a commercial item that is in compliance with FAR Part 12?

Of course, it is possible to have all kinds of contracts that are not in compliance with the FAR, so I"m not sure if your response was alluding to that or suggesting that my interpretation was incorrect.

Thanks for your response to #2. That's what I figured, but I was just curious. The $150K limit seems very low if exceptions are going to regularly be made for multi-million dollar contracts.

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Guest Vern Edwards
Is it possible to have a firm-fixed-price, level-of-effort contract for a commercial item that is in compliance with FAR Part 12?

Yes. Sure. Why not? It's a firm-fixed-price contract, isn't it? I don't see how the "level-of-effort" makes a difference. Anyway, what are you going to do -- complain to the CO that he's using an illegal contract type? Protest that it's not legal?

Why not just make a bid/no bid decision and then go for it or don't. Would you be happier if they went for an FFP-LOE noncommercial item contract?

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Yes. Sure. Why not? It's a firm-fixed-price contract, isn't it? I don't see how the "level-of-effort" makes a difference. Anyway, what are you going to do -- complain to the CO that he's using an illegal contract type? Protest that it's not legal?

Why not just make a bid/no bid decision and then go for it or don't. Would you be happier if they went for an FFP-LOE noncommercial item contract?

Yes, it is a fixed price contract, but as 12.207 specifically references two types of fixed-price contracts (i.e., those described in 16.202 and 16.203), I assumed that other types of fixed-price contracts (i.e., those described in 16.204, 16.205, 16.206, and 16.207) would not be allowed.

I would be happier if they went for a commercial item T&M contract. But you're right, I'm not going to file a protest, and I'm hoping that nobody else does after we win the contract. :) Even if I do nothing with regards to this solicitation with the information, I still like to try to understand the FAR and its application (including when it is being applied incorrectly) as much as possible. Surely you won't fault a contractor for trying to be well-informed? So few of us make the effort...

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Guest Vern Edwards

I don't fault you. But here's a hint: I don't know what the "right" answer is, and I don't assume. I'm not sure there is a "right" answer.

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Guest Vern Edwards

Well, since you want to understand the FAR better, what you interpreted was not a "clause." It was paragraph (a) in FAR section 12.207. Clauses are what go into contracts, and they appear only in FAR Subpart 52.2.

Think of it this way: FFP is a class of which FFP-LOE is a species. Since FAR permits use of the class, and since the class includes all of its species, it follows that FAR permits use of FFP-LOE in the acquisition of commercial items.

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Got me! I knew that, but I am guilty of using this word in accordance with the general definitions from Merriam Webster, rather than in accordance with the definition in 2.101.

1
:
a group of words containing a subject and predicate and functioning as a member of a complex or compound sentence

2
:
a separate section of a discourse or writing;
specifically
:
a distinct article in a formal document

I know I should refrain from this usage when discussing the FAR, but it is a hard habit to break.

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Think of it this way: FFP is a class of which FFP-LOE is a species. Since FAR permits use of the class, and since the class includes all of its species, it follows that FAR permits use of FFP-LOE in the acquisition of commercial items.

I understand your logic, but I'm not sure I agree that FFP is the "class" in this case. FAR permits use of "firm-fixed-price contracts or fixed-price contracts with economic price adjustment" for commercial items. These both fall under "Subpart 16.2—Fixed-Price Contracts" (specifically in 16.202 and 16.203), and "Firm-fixed-price, level-of-effort term contracts" also fall under "Subpart 16.2—Fixed-Price Contracts" (specifically in 16.207). But note that Subpart 16.2 (what I was considering the "class") is "Fixed-Price Contracts", not "Firm-Fixed-Price Contracts". In this Part, "Firm-Fixed-Price contracts" seem to be a species under "Fixed-Price Contracts".

Subpart 16.2—Fixed-Price Contracts

16.201 General.

(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances. The contracting officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items, except as provided in 12.207(B).

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Since we are on the topic, something that has always puzzled me:

What exactly does the government have to buy in an FFP LOE contract?

I don't have statistics, mrsbadexample, but I certainly have seen a lot of agencies issuing FFP LOE contracts to get around a proscription on T&M.

Giving an LOE of FTE's, not hours. With a requirement, however, to show hours and rates in the cost proposal.

Suppose my cost proposal says I will staff a maintenance shop with 10 FTE's, at 20800 hours per year at a total cost of $500K. I state in my cost proposal that the "specified level of effort is 10 FTE's for one year."

Without a contract modification:

Can the government "order" fewer than 20800 hours or is the government obligated to order the full amount?

If so, can it pay me less than $500K, say, $24 per hour for the hours "ordered"?

Several agencies have answered yes to both of the above questions, and that doesn't seem like a reasonable interpretation of an FFP LOE contract to me.

I am sure everyone knows what happens to contractor's quoted price when the government does this.

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Guest Vern Edwards

A "true" FFP LOE contract requires the contractor to deliver a level of effort in the performance of specified work. The contractor's obligation is fulfilled by doing the specified work and delivering the level of effort, which can be stated in terms of hours or other units of "effort," within the period of performance. (A level of effort can be stipulated in terms of FTEs.) The level of effort and the nature of the work to be done establish the scope of the contract. The work is non-severalbe. The contractor is not paid by the hour. The contractor is paid a lump sum for delivering the level of effort. The contract can provide for progress payments based on cost or performance-based payments. Hours are not separately deliverable and acceptable units of performance.

For example, the task might be to deliver a level of effort of 1,000 hours of scientific and/or engineering labor in the investigation of a natural or man-made phenomenon and to find out as much about it as possible and deliver a report of the findings by a specified date. The contractor is obligated to deliver the level of effort and submit the report by the due date. Failure to deliver the level of effort and/or submit a report by the due date would be a breach of contract. Payment of the fixed-price is due upon timely completion.

An FFP LOE contract can stipulate hourly labor rates, but only for purposes of price adjustment, not payment.

Contracts that provide for payment by the hour are not "true" level of effort contracts.

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I understand your logic, but I'm not sure I agree that FFP is the "class" in this case. FAR permits use of "firm-fixed-price contracts or fixed-price contracts with economic price adjustment" for commercial items. These both fall under "Subpart 16.2—Fixed-Price Contracts" (specifically in 16.202 and 16.203), and "Firm-fixed-price, level-of-effort term contracts" also fall under "Subpart 16.2—Fixed-Price Contracts" (specifically in 16.207). But note that Subpart 16.2 (what I was considering the "class") is "Fixed-Price Contracts", not "Firm-Fixed-Price Contracts". In this Part, "Firm-Fixed-Price contracts" seem to be a species under "Fixed-Price Contracts".

mrsbadexample,

I think you are reading too much into the structure of the FAR Subpart 16.2. I read it like Vern. Fixed-price is the family, firm-fixed-price is the genus, and FFP/LOE is the species.

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Vern,

Thanks for the reply. So perhaps a CO asserting a right to "order hours" could issue a change order per 52.243-1 Changes—Fixed-Price, and the contractor could request an EA?

Thanks,

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Guest Vern Edwards

:o Huh?! You cannot use the changes clause at FAR 52.243-1 to order hours! Read the clause. It says what a CO can do with a change order. Where does it say anything about being able to issue a change order to order hours?

Really, contractor100, read the clauses. :angry:

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P.S. You can write an FFP LOE contract that requires a contractor to perform a certain kind of work, such as building maintenance or software maintenance, for a certain period of time, say, one year. You can specify the level of effort in terms of categories of labor and numbers of FTE per category. You can write it to allow you to exercise an option to buy additional level of effort and/or additional tasks. However, you have to negotiate a price for the level of effort for the entire period and obligate funds to cover it. Those kinds of contracts were used long ago and are almost certainly still in use in some places, but they are problematical in a number of ways that I don't have time to go into now. Many organizations dropped them for CPFF or CPAF contracts, which are now out of favor.

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Guest Infoseeker

FFP-LOE, sounds like the good ole T&M is the best contract for that situation.

I remember in the past when most knew what they were doing in the Buying offices and there were three contract types, Cost plus, FFP, and T&M. No hybrids, no fancy jargon, no exotic contract that only work in a classroom environment (FPIF, etc). or vague issues. Oh well, I retire soon - you youngsters have to deal with this craziness.

I remember a while back I asked what was the basis for the 'attack' on T&M. The only answer I received I believe was simply, "Shay Assad had a bad experience with them." For such a sweeping statement that wiped out the wonderful T&M (which all of private industry use) and created the incredible confusion that I see today all around me from the buying offices, I wish someone could have challenged that vague statement.

Does anyone know what was the deal was with wiping-out the wonderful T&Ms?

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Guest Vern Edwards

The deal was that the T&M contract is absolutely the worst pricing arrangement a person could use. That's because unlike any of the other types, the T&M contract gives a contractor a positive incentive to be inefficient since (1) there is no obligation to complete any task and (2) every additional hour delivered carries an increment of profit. For a more detailed analysis, see The Time-and-Materials Contract: The Time Has Come For A Long Hard Look, which you can find on this web page: http://www.wifcon.com/reading.html. In one paragraph the article says:

Hourly rate pricing should enable a contractor to recover the cost of an hour of labor and to earn a profit at the cost-volume-profit breakeven point, but it cannot guarantee that the customer will receive value commensurate with its investment. Worse, it puts the contractor in the business of selling hours to make a profit without having to complete any task or deliver any work product, and cost-volume-profit analysis shows that after reaching the breakeven point a contractor will increase its profit with each additional hour that it sells and that after selling a certain number of hours the contractor could actually increase its rate of profit. Since a time-and-materials contract demands only a contractor’s “best efforts” and rewards it for inefficiency, hourly rate pricing is highly risky to the customer. Any assertion that a time-and-materials contract is less risky than a cost-reimbursement contract because the hourly rates are fixed simply will not bear scrutiny.

Footnote omitted.

I don't know how long you have been around, so I don't know how far back the "past" is for you, but I've been around for just shy of 40 years, and the FFP LOE contract was a well-established type when I got started. It is neither a hybrid nor is it exotic. It is a good contract type when used for the right reasons. The very first contract I negotiated was a $100,000 FFP LOE research contract. The contractor fired little glass beads at very high velocities at the carbon-carbon material used to coat reentry vehicles to simulate strikes of atmospheric dust and ice in order to see what the effect would be on the ablative capacity of the material. I negotiated over the phone, with two experienced GS-12s at my elbows coaching me through it. The contractor's rep knew I was a rookie, and I swear I could hear him smiling at the other end of the line.

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mrsbadexample, I think you are reading too much into the structure of the FAR Subpart 16.2. I read it like Vern. Fixed-price is the family, firm-fixed-price is the genus, and FFP/LOE is the species.

Thanks for both of your perspectives on this. That may well have been their intention when drafting FAR Subpart 16.2. If I were writing it with that intention, I wouldn't have structured it in this manner. But there are many parts of the FAR that I would have written differently...

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A "true" FFP LOE contract requires the contractor to deliver a level of effort in the performance of specified work. The contractor's obligation is fulfilled by doing the specified work and delivering the level of effort, which can be stated in terms of hours or other units of "effort," within the period of performance. (A level of effort can be stipulated in terms of FTEs.) The level of effort and the nature of the work to be done establish the scope of the contract. The work is non-severalbe. The contractor is not paid by the hour. The contractor is paid a lump sum for delivering the level of effort. The contract can provide for progress payments based on cost or performance-based payments. Hours are not separately deliverable and acceptable units of performance.

For example, the task might be to deliver a level of effort of 1,000 hours of scientific and/or engineering labor in the investigation of a natural or man-made phenomenon and to find out as much about it as possible and deliver a report of the findings by a specified date. The contractor is obligated to deliver the level of effort and submit the report by the due date. Failure to deliver the level of effort and/or submit a report by the due date would be a breach of contract. Payment of the fixed-price is due upon timely completion.

An FFP LOE contract can stipulate hourly labor rates, but only for purposes of price adjustment, not payment.

Contracts that provide for payment by the hour are not "true" level of effort contracts.

It sounds like the problem is that some agencies/COs seem to be executing FFP-LOE contracts as a substitute for the now-out-of-favor T&M contracts, and they seem to be trying to structure them so that they are more or less the same (billing by the hour). As you suggest, this is not a "true" level of effort contract. I'm not sure what would be the advantage to the government of this contract type vs. a T&M contract, other than that it doesn't seem to violate the agencies' ban on T&M contracts.

Thanks for the link to the article, Vern. I look forward to reading it when I'm not working 13 hour days.

Does anyone have any insight into how non-labor costs would properly be invoiced in a FP-LOE contract for commercial items, assuming that they cannot be accurately estimated at the time of contract award and built into the firm fixed price?

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Guest Vern Edwards

mrsbadexample:

You are confusing regulation writing with systematics. The contract types are the products of 200+ years of experimentation and experience, not intelligent design. The people who wrote FAR Part 16 did not develop a set of contract types and variations. They merely described the arrangements that they found and grouped them based on certain similarities. Don and I are trying to refine the groupings in a way that makes sense.

As for there being parts of the FAR that you and other people would write differently, well...

Thirteen hour days. Is that all?

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Guest Infoseeker

Vern, let's agree to disagree. I think your two points (which I have seen before) are not what is indicative of a T&M contract. Those two points describe the situation where the government contracts for all things that are not clearly defined (in other words, when cost type and T&M are appropriate). So it is not that T&M causes those conditions, it is the government contracting environment for unique services and products that causes those conditions. In my mind, the "T&Ms are bad" argument is the tail wagging the dog.

So I go back to the point that I think T&M and Cost type are great for when the government does not know exactly what it wants.

When the government knows what it wants and it can scope it very closely, then FFP is good.

If you are in a situation where it is somewhat of a toss-up between FP LOE and T&M, well, with T&Ms you can compare the bidders to the vast GSA site and DoL for comparable rates. Which is a huge tool for comparability.

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mrsbadexample:

You are confusing regulation writing with systematics. The contract types are the products of 200+ years of experimentation and experience, not intelligent design. The people who wrote FAR Part 16 did not develop a set of contract types and variations. They merely described the arrangements that they found and grouped them based on certain similarities. Don and I are trying to refine the groupings in a way that makes sense.

Understood. Your and Don's way does make more sense. I was suggesting a different grouping if that was the intention, that's all. There's nothing to say that the Part (or the whole FAR) couldn't be revised to be more logical and eliminate ambiguity and conflicting passages. I wish that you and Don could rewrite it...

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