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Calculating Fee in CPFF Task Orders


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Can any one think of a possible legal objection to the inclusion of specific fee calculation language in a cost plus fixed fee award (aside from the obvious FOIA concerns over proprietary information--this fee information would be redacted before release)? It appears the rationale to include this language in the award would be to better clarify interim fee invoicing practices.

If not, then the proposed fee calculations would be detailed in Section B under the usual CLINS for the particular Task Order.

Currently government auditors are opining that this additional language is warranted when interim invoicing is ongoing to clarify and assist in the proper auditing of invoices. Auditors are taking the position that if the contract fails to discuss detailed billing instructions regarding fee calculations then an interim fee percentage shall be calculated by "dividing fee by cost".

Currently Task Order awards contain only the following language regarding Computation of Fee. "The percentage of the fee applicable to orders will be the same as the percentage of the fee established in the contract. However, the total fee paid under the contract for a year of performance will not exceed the total fixed fee amount for the current year of performance."

BLUF, unless the Contracting Officer modifies each and every Task Order award to specifically state the following: Fee on Interim invoices will be invoiced using the variable rates proposed. Rates to be utilizied on interim invoices are:

X% Fee on Burdened Labor

X% Subcontractor Fee on Burdened Subcontractor Labor (see note)

X% Fee on Burdened Subcontractor Labor (see note)

X% Fee on ODC/Material

Note: For compliance with the "Fixed Fee Pool" requirement, a combined percentage of X% is applied when invoicing subcontractor labor.

then invoices calculated in any other manner will be rejected for payment. Any thoughts? Suggestions?

Thanks!

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My initial thought is: Why are you linking the payment of fee to incurred cost? Why aren't you linking the payment of fee to the percentage of completion (for a CPFF completion contract) or the percentage of the level of effort delivered (for a CPFF term contract)? You are setting yourself up for being in a position where you have paid out all of the fixed fee and either the contract is not complete or the level of effort has not been delivered. What if there will be an overrun and you decide not to provide additional funding? Are you going to request that the contractor pay back part of the fee?

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I'm always amazed at how theory learned/taught never jives with reality or practice in our acquisition community. Those very concerns you raised above were brought up during our discussions yesterday and I was politely informed "ceilings" here at this command are always increased. When I actually hinted that those "ceiling increases" were actually a direct result of cost-overruns, the silence was deafening. (So, you can safely assume, that will never be an issue.) They then repeated their question to me, which was, "Can this fee table be included in all future TO awards so that government auditors can then use this information during its audits?" I can't find or articulate a legal objection as to why this table should not be included (they claim that the table will clarify for all parties interim billing practices), this leaves me with no other choice, other than to approve the modification. BTW the contractor is pushing for this table to be included via a mod. Presumably the above proposed "table" was provided to the contractor by the audit agency during its audit.

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Just to echo Retreadfed's comment, there is nothing (of which I'm aware) that mandates that a subcontract's fixed fee percentage of costs must be the same as the prime contractor's fixed fee percentage of costs. The percentage fee on the subcontractor's costs is a matter of negotation between the prime and the sub.

That being said, there's nothing illegal about this approach. Don's comment articulates some concerns, but they are not based on law or regulation.

I'm constantly amazed at how the contracting folks let the auditors drive the bus, when the CO's are the ones with the warrants. I guess I need to get over it.

H2H

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I will caveat this by saying that I don't know what this contract is for. However, the monthly(?) fee payment scheme appears to me to disincentize reducing costs and appears to incentivize increasing costs of performance. The more costs incurred the earlier fee will be paid out. So, this isn't a legal objection, it is a management objection.

Is there a way to measure the value of performance provided? Can you base the interim payment of fee upon the value being provided? In a cost type construction contract, we can use earned value (budgeted cost of the work performed). Of course this requires that performance be managed...

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Guest Vern Edwards

My initial thought is: Why are you linking the payment of fee to incurred cost? Why aren't you linking the payment of fee to the percentage of completion (for a CPFF completion contract) or the percentage of the level of effort delivered (for a CPFF term contract)?

Don's comment articulates some concerns, but they are not based on law or regulation.

H2H

Actually, there is regulatory support for Don's concerns. See the termination clause for cost-reimbursement contracts, FAR 52.249-6. It provides that if the government terminates the contract and the parties cannot agree on a settlement, the fee settlement shall be determined as stated in paragraph (h)(4), which reads as follows:

(4) A portion of the fee payable under the contract, determined as follows:

(i) If the contract is terminated for the convenience of the Government, the settlement shall include a percentage of the fee equal to the percentage of completion of work contemplated under the contract, but excluding subcontract effort included in subcontractors’ termination proposals, less previous payments for fee.

(ii) If the contract is terminated for default, the total fee payable shall be such proportionate part of the fee as the total number of articles (or amount of services) delivered to and accepted by the Government is to the total number of articles (or amount of services) of a like kind required by the contract.

If the contractor is paid on the basis of percentage of costs and the government terminates the contract for convenience, and if the parties cannot agree on a fee settlement, then the percentage will be a percentage of completion, not a percentage of costs, and the government may have overpaid the contractor up to the point of termination.

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Vern,

Isn't that a rather speculative answer to what seems to be a nuts and bolts question? The question was not whether the government was increasing its risk of overpaying the contractor in the hypothetical situation you outlined; instead, the question was "can anyone think of a possible legal objection"? While Don (and you) have raised valid concerns about the government's risk of overpayment in the event of a T4C (assuming the parties cannot agree of a fee settlement), neither of you have raised what seems to me to be a valid legal objection.

Nobody is saying it's outstanding contractor management. But nobody is saying it's unlawful, either.

H2H

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Guest Vern Edwards

You're right. I agree. I see no illegality in paying fee on the basis of cost incurred instead of percentage of work complete. My intent was merely to point out that there is some regulatory foundation for Don's concern. I think it is pretty common to pay fee on the basis of costs incurred, if for no other reason that it's easier to determine than percentage of work complete. I don't think it's a good practice, but I understand the reasons for it and don't think it is prohibited by FAR.

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Let me try posting this again...don't know why the type came out as it did....

In a perfect world I would agree the Limitation of Cost clause would normally play into my scenario as would my Allowable Cost, Fixed Fee, and Payment clause, as well as the Limitation of Funds clause, and the Availability of Funds. Again, assuming the contractor after providing proper notice, did reach the ceiling and no further funding was forthcoming, one would expect as Vern has correctly pointed out the Contracting Officer would then ask for and recieve a reduction of fee at the time the funds run out before the work has been completed. This approach the CO would take based on provisions of the Termination clause.

H2H you were correct, that's not the problem here. I did see that Vern finally did come back around to addressing my concern. What we have here is that the contractor's CPFF interim billing practices have been directly called into question by the auditors. The auditors want the fee costs broken down in the award contract to help them, I presume, with current audits of this task order. The table of fees as broken down and presented by the contractor to the government for inclusion in a modification was approved by the auditors. The contractor was told if the contract wasn't modified and this table inserted into the contract, then all future fees requested for payment by this contractor would be subjected to interim fee percentage that would be calculated by dividing fee by cost. The power of these auditors and this suggested table language is such that ALL the COs are now considering amending ALL CPFF TO to other contractors to include a fee table in the CLIN structure (Schedule B).

My position on all of this is -----well, if inserting this table ensures proper payment of fee..where is the harm? Doesn't it clarify the fee payment for all to see and understand? The Contractor isn't objecting, the CO is willing to comply, and the auditors are pushing this modification to clarify the fee payments...then why would I object?Can it really be that simple of an issue? It seems so based on your answers, thanks for the help.

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Guest Vern Edwards

Can any one think of a possible legal objection to the inclusion of specific fee calculation language in a cost plus fixed fee award (aside from the obvious FOIA concerns over proprietary information--this fee information would be redacted before release)? It appears the rationale to include this language in the award would be to better clarify interim fee invoicing practices.

That was the original question. He then said:

Currently government auditors are opining that this additional language is warranted when interim invoicing is ongoing to clarify and assist in the proper auditing of invoices.

The auditors are right. See FAR 52.216-8, "Fixed Fee (JUN 2011)":

(a) The Government shall pay the Contractor for performing this contract the fixed fee specified in the Schedule.

(B) Payment of the fixed fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total fixed fee or $100,000, whichever is less, to protect the Government’s interest. The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of an adequate certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the Contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years’ settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor’s past performance related to the submission and settlement of final indirect cost rate proposals.

If the CO did not put appropriate language in the contract for task order fee calculations associated with interim payment, somebody should do something. I don't think the auditor is dictating anything to the CO. As to what the language should say about method, that should be up to the CO -- the same one who forgot to include it in the first place.

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