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Incentive Fee Structure for Software Maintenance IDIQ MAC contracts

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We are trying to determine the incentive fee structure for our MAC IDIQ software maintenance contract. We are looking to incentivize cost and schedule, considering a 2 % target for both and 2 % incentive fee for both, for a total of 8% fee possible vice a 6% on our CPFF CLINS. This would be a reduction in total fee on both our CPIF and CPFF clins from our previous contracts. Does this incentive fee structure make sense for software maintenance contracts? Does this sound consistent with current Industry practices? With upcoming budgets cuts we are looking to cut down on fee while still incentivizing the Contractor. Any help would be great. If anyone knows of any current software maintenance CPIF contracts that would be good to look at, please let us know. Thanks so much for your help!

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I don't know much about software maintenance contracts...

Two thoughts--

(1) Are your incentive fee objectives to be measured objectively or subjectively?

(2) Reducing contractor fee objectives for no other reason than to meet budget reductions may be false economy -- I commend your recognition of the need to do some market research, and wish you well.

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Is your contract for ongoing maintenance of multiple tasks for a specified period, or for completion of a specific maintenance task by a specified date?

You are looking at CPIF, right? You are setting up two fees: (1) cost and (2) schedule, right?

Are you are setting a "target" fee of 2 percent of cost for each or a minimum fee of 2 percent for each? If those are your targets, what is your minimum?

Your maximum fee for each is 4 percent, for a total maximum fee of 8 percent, right?

What is the share ratio?

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You might want to check that your plan to "cut down on fee" is the right way to go about this. DoD, at least, has announced that it is not targeting contractor's profits as a means to reduce costs. See, for example, this statement by Shay Assad:

"Some people have misinterpreted what better buying power is all about. There are people that want to believe this is an attack on profitability, and that's not the case at all," he said. "What we're telling our contracting officers is that they need to use profitability as means to incentivize industry to reduce their costs."

http://www.federalnewsradio.com/394/2846488/DoD-faces-struggles-on-path-toward-better-buying-power

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Thank you too all for your comments.

Specifically to answer Vern's questions.

Is your contract for ongoing maintenance of multiple tasks for a specified period, or for completion of a specific maintenance task by a specified date?

---The contract is for completion of specific maintenance tasks by a specified date.

You are looking at CPIF, right? You are setting up two fees: (1) cost and (2) schedule, right?

--Yes, looking at CPIF and are setting up 2 fees, cost and schedule.

Are you are setting a "target" fee of 2 percent of cost for each or a minimum fee of 2 percent for each? If those are your targets, what is your minimum?

--we're thinking about setting a target fee of 2% of cost for each (cost and schedule). Our minimum would be 0% for both.

Your maximum fee for each is 4 percent, for a total maximum fee of 8 percent, right?

--correct

What is the share ratio?

--share ratios: overrun 40/60, under run 60/40

Thanks so much!

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It is difficult to assess a formula incentive without more information about the cost estimate, the allotment of completion time, and the probability distributions for cost and completion time, but here is my reaction:

1. The target fees are very low, although that depends in part on where you set the target cost along the range of cost possibilities and the target delivery along the range of schedule possibilities.

For the cost incentive, the fall from 2 percent to 0 is not very far, especially with a 60 percent contractor share over target. The incentive might stop being effective pretty quickly. A higher target fee coupled with a reasonable target cost would make the incentive more forceful and, presumably, more effective. (Keep in mind that the statutory fee limitations recited in FAR 15.404-4( c)(4)(i)(A) and ( C) do not apply to CPIF contracts.)

2. Zero minimum fee is actually a loss for some contractors, since some legitimate business costs are not allowable costs under FAR Subpart 31.2. I don't have a problem with 0 min fee in principle, but it should be used judiciously and with some understanding of the industry's cost composition.

3. Share ratios are hard to assess without information about the cost probability distribution. 40/60, assuming that 40 is the government's share, is tough, especially with only a 2 percent target fee and a zero minimum fee, but that depends in part upon where you set the target along the range of cost possibilities. Giving the government the lion's share of any underrun reduces contractor motivation from what it could be if the contractor is given a higher share. With such a small target fee and a 0 min fee, why not give the contractor the lion's share, or at least split it 50/50?

I probably would not find your incentive to be attractive to me as a contractor. It strikes me as driving too hard a bargain. (However, in my experience it won't keep companies from competing for the contract.) But I can't say for certain without more information.

Good luck!

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