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BZMANINTEXAS

CPFF Commercial Contract - - FY Deob of "excess" funds

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Here is the scenario - - CPFF commercial services contract ($200M max per year) All actions issued by negotiated task order.

Task order A issued for FY, expires at end of Gov FY. Estimated cost $5M with a Fixed-Fee of $275k.

All work is of course nearing completion, contractor notified CO in August that it would underrun estimate by about $250k. Under run attributed better than normal deliveries from subcontractors, negotiated rates with subs at better than estimated costs, all work issued under the TO will be completed, no reduction in scope. KTR offered to do additional "in-scope" work to enhance certain items/ssytems with the under run.

CO notified KTR that they wish to deobligate excess funds of $200k (leaving room for any audit adjustments) and as such is requesting fee be reduced commensurate with reduction in estimated cost. CO is viewing fee as a percentage of cost for the reduction, even though fee is fixed and scope has not decreased.

KTR is viewing the cost savings (underrun) as part of providing superior services and since scope has not decreased, fee should remain fixed.

I am all ears to thoughts on this scenario.

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Unless this is a level-of-effort contract, with the underrun being due to the contractor having provided less tha the full level-of-effort, I tend to support the contactor's argument. What does the contract say about how the contractor earns fee?

By the way, how can you have a CPFF commercial services contract? I thought FAR 12.207 limited commercial contracts to FFP or FP-EPA type of contracts (or T&M/LH in specified circumstances.)

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Hit the send to quick - - It is not level of effort based, we provide cost proposals for stated projects that have defined deliverables or defined services, however on this TO we just got there quicker and negotiated better than expected...thus the underrun.

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CPFF. The fee is fixed, and is not changed solely because of cost underuns or overruns. Tell your contracting officer he or she is attempting to turn this into a cost-plus-percentage-of-cost contract, which is strictly prohibited.

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Well it is an inherited one - - CPFF Requirements for commercial services under full CAS

As a second question, how can you have a CAS covered contract for commercial services? Regardless of what the CAS Board's rules state, the CAS statute exempts all contracts for commercial items from the CAS.

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@ji20874 - We attempted to fully explain and show that all work would be completed and that fee is fixed, with exception of descoping or an error in estimating that reduced the amount, fee should remain as stated. CO response, well if we increased the amount of funds available, you would want more fee, so if we reduce funds we should get a reduced fee. *&$%^ frustrated...

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Guest Vern Edwards

Begin with the text of the contract, namely, the clause at FAR 52.216-8, "Fixed Fee" which is required for use in all CPFF contracts.

The fee is payable "for performing this contract." Did the contractor perform the contract? Is the contract a completion form or a level-of-effort term form? See FAR 16.306(d). If it's a completion form and the work has been done, then the CO is wrong and the government is not entitled to a fee reduction. If it's a level-of-effort term form and you did not deliver the complete level of effort, then the government should seek a reduction in fee proportional to the percentage of effort that was not delivered.

I don't know why you say that the contract was for "commercial services." If the services meet the definition of "commercial items" in FAR 2.101, then someone violated FAR 12.102 by awarding a CPFF contract. But it's too late to worry about that now.

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@Retreadfed - - I am assuming he was referring to increased scope in that conversation, to which we would have replied, yes, more work added, more fee negotiated. Totally understand the overrun which goes to contractor responsibility and that increase in fee is not allowable.

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@Vern,

I read that portion of the FAR, unfortunately neither the contract nor the task order states specifically level of effort or term. The TO was written for a term (POP) with defined services that were to be performed during the POP.

As to the comment from Retreadfed on CAS, I guess I am assuming any contract written for CPFF that has to have an accountinc system that follows both Public Law 87-653 and CAS PL 100-679 in supporting our contract pricing proposals is one that must be CAS compliant. We recieve an annual audit from DCAA, submit annual ICE docs, and follow all cost requirements of 48CFR9904 for Cost Accounting Standards. Therefore, based on those actions which are written into the contract, I am assuming we are required to be CAS compliant. Maybe the use of "commercial" was misstated, however the entire nature of what we do is commercially available to all people, however written under FAR 15 with no reference to FAR 12.

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Guest Vern Edwards

Public Law (PL) 87-653 is the Truth in Negotiations Act (TINA), which requires the CO to obtain certified cost or pricing data from contractors under certain circumstances. There is no relationship between that law and applicability of CAS. Two separate requirements. What you apparently have is a CPFF contract that has been subject to both TINA and CAS. Neither of those rules has anything to do with the fee issue. I suggest that you ask the CO to explain his thinking.

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BIZMANINTEXAS,

Just thought I'd chime in here about the CAS coverage thingee. If you have a cost reimbursement contract then you need an adequate cost accounting system. DCAA and reasonably informed people might differ about what "adequacy" means, but at a minimum it means that the contractor can check "YES" on every box of the SF 1408, and be able to support the check marks. At the maximum, it means that the contractor can prove to DCAA that it meets the accounting system adequacy criteria found at DFARS 252.242-7006. Under either standard, a contractor is only required to comply with Cost Accounting Standards if applicable.

Is your CPFF contract CAS-covered? I don't know, but I certainly wouldn't assume so, especially if you don't have many government contracts.

Hope this helps.

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Vern, in your post #8, you said "I don't know why you say that the contract was for "commercial services." If the services meet the definition of "commercial items" in FAR 2.101, then someone violated FAR 12.102 by awarding a CPFF contract. But it's too late to worry about that now." If the services truly were commercial services and someone did violate FAR 12.102 and the statutory prohibition on the use of cost reimbursement contracts to acquire commercial items, what would be your view of the validity and enforceability of that contract if the contractor wanted to challenge it?

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Retreadfed,

In what venue do you see such a challenge taking place? And what do you think the chalenge could possibly consist of, particularly since the contractor is a party to the agreement?

I've had a contractor go to court asking for a fixed price contract to be converted to cost-reimbursement. He was losing too much money, so at least he could claim that he was unfairly harmed. It isn't intuitively obvious what harm a cost-reimbursement contractor can claim.

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Navy, there are many ways in which the contractor could raise a challenge to the contract. Let's take one potential situation. After contradct award, the contractor realizes that a CPFF contract should not have been used to award a contract for commercial items. The contractor could then file a claim requesting an interpretation or adjustment of contract terms seeking to have the contract reformed or rescinded. If the contracting officer denies the claim, the contractor could appeal to the appropriat BCA or the Court of Federal Claims.

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To follow up on Retreadfed's post,

Suppose the contractor is required to make investments to develop an "adequate" accounting system, to submit a proposal for final billing rates (IAW 52.216-7), to hire people to support DCAA audits related to its incurred costs, and/or to do a myriad other administrative tasks required for cost reimbursement contracting, that would otherwise not be required for a FFP type contract for a commercial item. The contractor attempts to allocate all those costs to the contract because, after all, the only reason they were incurred was to benefit that single cost-type contract, and no other contract required them.

The CO objects to paying for such costs, asserting that they are properly overhead (indirect) costs of performance.

Now you have a nice dispute. The contractor has incurred costs that (in my hypothetical) it didn't expect to incur, costs that it would not have incurred, but for the choice of the wrong contract type. If the customer won't reimburse those costs, then the contractor has been financially harmed.

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Guest Vern Edwards

Retread:

You asked:

Vern, in your post #8, you said "I don't know why you say that the contract was for "commercial services." If the services meet the definition of "commercial items" in FAR 2.101, then someone violated FAR 12.102 by awarding a CPFF contract. But it's too late to worry about that now." If the services truly were commercial services and someone did violate FAR 12.102 and the statutory prohibition on the use of cost reimbursement contracts to acquire commercial items, what would be your view of the validity and enforceability of that contract if the contractor wanted to challenge it?

A decision as to whether a service is a commercial item is largely discretionary on the part of a CO and will stand unless shown to be unreasonable. Even if the decision is found to be unreasonable, I think that there is little chance of persuading a board or court to reform the contract or to rule that the contract is unenforceable ("void ab initio", "void", "invalid", "illegal") after it has been performed. Merely showing that a violation has occurred would not be enough. The reasons for my belief are many, but rather than give them here let me refer you to Formation of Government Contracts, 4th ed., pp. 72 - 75, which addresses the question of contract avoidance as a result of unauthorized departures from statute or regulation. See also Madden et al., " Analysis of Significant Federal Circuit Government Contracts Decisions," in Public Contract Law Journal, Summer 2007, pp. 487 - 488 (under "Contract That Violates Statute Is Not Necessarily Void Ab Initio").

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Navy,

Actually, my scenario is not uncommon. It happens more often than one might think. I see it frequently as a contractor transitions (or tries to transition) from SBIR Phase 1 to SBIR Phase 2.

H2H

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Navy,

To be honest, in the majority fo the cases to which I've been an interested observer, the small business does not get awarded the Phase 2 contract because it cannot satisfy DCAA that its accounting system is adequate. I call that the "lose/lose scenario" because the buying activity loses out on whatever innovative idea the small business had developed in Phase 1, and the small business loses out on the revenue it had been counting on.

In a few instances, the Contracting Officer expresses a post-award concern about a specific transaction or cost element to the auditors. This leads to some sort of financial penalty, which serves a a wake-up call to the contractor. In such cases, the contractor is more willing to "eat" the cost of coming into compliance, so as to avoid more financial harm.

Here's one example. In this one instance -- which may be an outlier -- the government awarded a FPP contract whose price was determined to be fair & reasonable under some complicated rationale (I won't reveal the details). So a pre-award accounting system review was never performed. BUT the contract contained a cost-reimbursable line item. During performance the CO had an issue with the costs being invoiced under that CLIN, called in DCAA, and subsequently learned that the contractor's accounting system could not pass DCAA muster. Now both parties had a problem and I was called in to assist the contractor. My costs are recovered in the contractor's overhead, because the contractor does not want to upset the cognizant CO any more.

In another instance, a contractor was awarded a $500 million fully CAS-covered contract (not by DOD), when its only previous government contract activity had been with GSA. Fortunately, that contractor was smart enough to hold off on its invoices until it could figure out its costs under the required government methodology. Had they not been that smart, the contractor would certainly have been exposed to allegations of submitting false claims. For one thing, when it was awarded the contract, it had no idea how to calculate indirect cost rates for billing rate purposes under 52.216-7. (How did it ever get awarded the contract? That's a story for another day; one I can't discuss.) Anyway if I remember correctly, compliance costs were collected in a special overhead pool and allocated only to government contracts ...of which there was only one at the time. So the contract ended-up paying for the required investment but there were no direct costs involved. I assume that made everybody happy, as I never heard that the CO or DCAA had a problem with that method.

Hope this helps.

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