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simplemiz

Buying-In Case: FFP Subcontractors using higher rates on Growth actions?

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Our prime (on CPIF/CPAF contract) insists that since their subs are FFP, we cannot look at their rates if competitively bid, which I agree 100%. However, a lot of our actions (in ship repair) are open & inspects, (then repair) that can grow significantly. In our initial RFP, I added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened). One of the subs that won are using their bid rates but are now adding 30% G&A and 10% profit into their growth pricing, their initial bid did not include these rates. If I were to recalculate their bids and add those rates into their basic bid, they would have lost the basic bid. However, the prime insists that since they are FFP, they have the right to add these additional rates into the growth (calling it "common practice"). I’m arguing that this is a “buying-in” case but I cannot find anything on GAO that can support my argument. I would like the sub to use ONLY their basic bid rate in any and all growths since other FFP subs that bid in the basic also included their G&As and Profit rates. Am I wrong to question a sub’s growth rate and insist on them using their bid rate?

Your help is appreciated.

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In our initial RFP, I added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened). One of the subs that won are using their bid rates but are now adding 30% G&A and 10% profit into their growth pricing, their initial bid did not include these rates.

If the RFP instructed the offerors to propose loaded rates, and if the contractor did not put you on notice that the rate that they proposed for their sub was not loaded, then why are you debating this with them? You should reject the add-ons and tell the contractor that if it won't accept your rejection they should submit a claim, so you can write a final decision rejecting the add-ons, so they can appeal to the BCA or the COFC.

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If the RFP instructed the offerors to propose loaded rates, and if the contractor did not put you on notice that the rate that they proposed for their sub was not loaded, then why are you debating this with them? You should reject the add-ons and tell the contractor that if it won't accept your rejection they should submit a claim, so you can write a final decision rejecting the add-ons, so they can appeal to the BCA or the COFC.

I agree with Vern. "In (your) initial RFP (you) added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened)." Why are you even debating the sub???

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I just wanted to make sure I've got all my bases covered. They argued that since the subs are FFP, we essentially cannot look at their rates, just the bottom line price. However, since we all knew the requirements would grow, I wanted to make sure the issue on growth rates were ironed out in the beginning. We've had issues before where we didn't have the growth rates specified and the KTRs would use "internal" forward pricing agreements (agreements between the prime & the subs) as justification for proposing at higher rates on growth work. So now they are using "common practice" as justification which I told them were insufficient justification.

I wanted to make sure that before I issue a unilateral mod, that I actually am right in my assessment about the sub's bid rates.

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Look, either what you said is in the contract or it isn't. All you needed to do was to remind the prime (and sub if your are in communication with them) what is in the contract. I don't understand why you would tell them that they provided "insufficient justification". That leaves the impression that the issue is still open and that you might not enforce what is already a contract requirement.

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You don't need to look at the sub's rates. If the contract provides that additional work will be priced at the rates in the contract, and if the RFP said that the rates were to be loaded, and if the prime did not put you on notice prior to contract award that they were not, then you should not allow the prime to add G&A and profit to the rates. Quit asking to verify that the sub's rates do not include G&A and profit. You should not care if the do or not, since the deal is that they will be paid for what you are calling "growth" at the contractually stipulated rates.

Do you understand what we're saying? Do you understand our reasoning?

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We're not in pre-award environment, we're in post-award and I'm administering a multi-option contract. The prime uses an approved forward pricing rate agreement but the subs are competed and selected when an option is exercised. There are no contractually stipulated rates for the subs.

The reason I had the title as "buying-in" is because we noticed (through previous exercised options) that some subs' final price if calculated, does not equate to the rate proposed in the basic multiplied by the labor hours being proposed to accomplish the growth work. That's when it was revealed that the delta comes from the Profit and G&A being added in growth work, it isn't just the straight calculation of labor hours x rate anymore as quoted during competition. The Prime insists that it's the risk the subs take as FFP contractors since growth work, is not always guaranteed. However, as mentioned above, the subs rates were not contractually stipulated in the basic contract or when the option was exercised. And since work had already started (ie open & inspect then report the issue, then repair), it became more costly to leave an equipment unrepaired to argue a point. It was more prudent to settle the matter and allow the contractors to complete the work.

So, I understand your reasoning, however, with the additional information provided, do you still think the government should quit asking the prime to verify the sub's rate?

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simplemiz,

Here's my take (FWIW), from a non-contracts person who's done some audit work in this area.

Your prime has obtained a lower price for the basic work by awarding to a subcontractor who has apparently "bought-in" by not bidding G&A and Profit. That lowered price was passed on to you through the cost-reimbursement nature of the prime contract. So far, so good.

Now the subcontractor is submitting change order pricing that includes the G&A and profit components, and you are wondering if that practice is prohibited (under FAR 3.501, I assume). As we probably all know, buying-in is prohibited only if the contractor intends to get well through submitting "artificially high prices to recover losses incurred on the buy-in contract." My take on it is that the G&A component is not an "artificial" or "artificially high" cost -- it is the subcontractor's real cost and should be allowed on the growth work. Including G&A does not help the subcontractor get well, but it does end the hemorraging of red ink.

The Profit component, on the other hand, should be negotiated by the Prime with the understanding that 10% is too high because there's little risk on the growth work. Simply accepting the 10% Profit rate smacks of allowing the subcontractor to get well because, had 10% been bid on the basic work, the contractor may not have won.

Speaking of Prime/Subcontractor management, does your prime have an approved Purchasing System? If not, I would put them on the list for a visit by the DCMA functional specialists.

Hope this helps.

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simplemiz,

I was a contracting officer in the ship repair world and I experienced the same type of thing when awarding prime contracts (i.e., an offeror would win with a low price and "get well" on changes). Did you ever see that picture of the yacht named "Change Order" with the little dinghy named "Original Contract" next to it? That was probably one of our contractors.

I was discussing this situation with one of the disappointed offerors and I got an idea. I would create a line item for "Over and Above Work" with an estimated number of hours. Besides proposing a price for the specified work (open and inspect), the offerors would propose a binding rate for the over and above work that would be used to price the over and above work (what you are calling growth work). To evaluate a proposed price, I would add the proposed price for the specified work and the proposed price for the over and above work (proposed rate x estimated number of hours). The result was that we received more realistic pricing for the specified work and the incentive to seek changes during contract performance was reduced.

As you can imagine, I was quite impressed with myself when I came up with this. That was until I found out that a lot of other agencies do the same thing when contracting for all types of repair and have been doing it that way for a long time. In any case, your contractor may want to consider doing something similar to mitigate what they experiencing with their subcontractors' prices.

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[A] lot of our actions (in ship repair) are open & inspects, (then repair) that can grow significantly. In our initial RFP, I added a verbiage that bid rates will be the rates used for growths....

What is a "growth"? Is "growth" ship repair jargon for change? Is a growth something that is covered by the changes clause? Or is a growth like a differing site condition?

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In my experience, "growth" meant additional work within the scope of the contract. "Growth" is the opposite of "new work" (additional work outside the scope of the contract). Navy ship repair contracts use both terms extensively, but do not define them.

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So, growth is work the government wants the contractor to do that is not required by the contract as awarded. It is additional work within the scope of the contract. It is a change to the contract. The government can order the contractor to do it pursuant to the changes clause.

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You said in post #1 that "In our initial RFP I added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened)." Let me ask another way - Is the "growth" covered under the contract's "initial bid rates"?

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Our prime (on CPIF/CPAF contract) insists that since their subs are FFP, we cannot look at their rates if competitively bid, which I agree 100%.

Let's start with the basics: Your deal is with the prime contractor, not with the subs. The prime is entitled to its allowable costs. Every cost is subject to the five tests of allowability as set forth in FAR 31.201-2.

However, a lot of our actions (in ship repair) are open [and] inspects, (then repair) that can grow significantly.

Okay. I take your word for it. I have no idea how this worked under the contract. Does the contract require the contractor to (1) open, (2) estimate cost to repair, and (3) proceed with repair or wait for further instructions? Something else? Is the actual repair priced on a cost-reimbursement basis?

In our initial RFP, I added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened).

I have no idea what that means.

1. What "bid rates"? The prime's? The sub's, as included in the prime's proposal?

2. What did the "verbiage" say? Was the "verbiage" inserted in the contract?

3. In Post #8 you said, "There are no contractually stipulated rates for the subs." So what does the "verbiage" have to do with anything? It's this "verbiage" business that led Joel and me off track. We thought there was some kind of contractual advance agreement.

One of the subs that won are using their bid rates but are now adding 30% G [and] A and 10% profit into their growth pricing, their initial bid did not include these rates. If I were to recalculate their bids and add those rates into their basic bid, they would have lost the basic bid.

Okay. So the sub is billing the prime at a rate plus G [and] A and profit. That bothers you because you think the sub's rate was supposed to be fully burdened. Why do you think that? And why does it matter if there is no contractually specified rate for the sub? (And please, be careful with your use of pronouns. Sometimes it is not clear what the antecedent is to all your "they"s and "their"s. The prime? The sub?)

However, the prime insists that since they are FFP, they have the right to add these additional rates into the growth (calling it "common practice").

I assume when you say "they" are FFP, you mean the sub's supposedly burdened rates, and when you say "they" have a right, you mean the sub. The issue is not what the sub has a right to do. The issue is the allowability of the cost.

I’m arguing that this is a “buying-in” case but I cannot find anything on GAO that can support my argument. I would like the sub to use ONLY their basic bid rate in any and all growths since other FFP subs that bid in the basic also included their G [and] As and Profit rates.

Wait a minute! You don't know that the subs included G and A and profit in their rates. I thought that's why you asked the prime to show you the breakdown of the sub's rates. You did ask for that, didn't you? You expected that the rates would include G and A and profit, but now you're either being told that they did not or that the prime and its subs won't tell you. If you do know, and if the subs did include the G and A and profit, then why are we having this discussion? It's a cost-reimbursement contract. Disallow the G and A and profit if the prime has not proved that they are reasonable inclusions. If you don't know, and believe that the rates should have included G and A and profit, and if the prime and its subs won't show you, then disallow the G and A and profit.

Am I wrong to question a sub’s growth rate and insist on them using their bid rate?

You are not wrong to question the sub's charges to the prime. Whether you are wrong on insisting that the prime use what you call "bid rates" without adding G and A and profit depends on what the contract says, and you said that the contract does not stipulate a rate for the sub. That being the case, on what contractual grounds do you insist that the prime use the bid rate?

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You said in post #1 that "In our initial RFP I added a verbiage that bid rates will be the rates used for growths (so it should be fully burdened)." Let me ask another way - Is the "growth" covered under the contract's "initial bid rates"?

Yes.

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