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Query

VECP

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I have a question concerning VECPs and accounting/paying for savings dollars in the contract.

Situation - I have VECPs that were cut-in to production in FY03. We paid the old price for the part in the FY03 - FY07 FFP contract, including fee on the old part. We have finally settled the amount of savings and now want to cut it into the contract. Let say the savings are $1,000. We calculated the $1,000 on cost only. So, I paid $1,000 more of cost than we should have. But, in reality I paid $1,000 of cost plus 10%(fee) more than I should of. Does my VECP savings spreadsheet then calculate $1,000 per unit and 10% credit for overpaid fee?

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I looked over my first posting and it is confusing.

Look over the following and let me know if I am correct in trying to recover the $1.50 of overpayment?

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VECP Discussion

ISSUES

1) We are doing this retroactivity

The correct way to institute this would be

FY09 the old unit is purchased and I paid the old price of $100

During FY09 the VECP is raised, technically accepted and negotiated

FY10 the new unit is purchased and I paid the new $90 price.

The way we have done this:

FY03 through FY07 the new unit is purchased/cut-in by contractor but, I pay the old unit price, because it is not on contract yet.

Scenario

Unit Cost Fee Fee on unit

$ 100.00 15% $ 15.00

$ 90.00 15% $ 13.50 $ 1.50 Credit

Savings $ 10.00 75% $ 7.50 Raytheon Share

Net $ 6.00

2) We are not reducing your profit

FAR Part 48 talks about ?

- 48.102 (e) ?talks to not considering VECP savings as part of the limitations under 15.404. We are not.

- 48.102 (f) ? talks to not reducing fee/profit on the contract ? which the scenario shows we are not. Also, it talk to Profit/fee shall be excluded when calculating savings, which we are not.

**********************************************

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Scenario

Unit Cost Fee Fee on unit

$ 100.00 15% $ 15.00

$ 90.00 15% $ 13.50 $ 1.50 Credit

Savings $ 10.00 75% $ 7.50 Raytheon Share

Net $ 6.00

Hi Query,

I hesitate to respond because VECP is not my area of particular expertise. So keep that in mind, okay?

That being said, I would want to understand

(1) the basis on which the original 15% fixed unit "fee" per unit was negotiated and put on contract. Is there a Fixed Price per Unit (fee included)? Is the costing truly per unit or (perhaps) per lot or production run?

(2) How did you allow the contractor to participate in the VECP savings? I see that you are saving 10 percent cost per unit. What does the contractor see? Does it see a piece of the 10 percent?

What I'm driving at in the above is you use the term "fee" which does not normally apply to vanilla Fixed-price contracts and implies a certain negotiability. If the profit rate was built into the contract price then I can certainly see the contractor balking at giving you a refund on prices already paid for units delivered ... unless you've incentivized said contractor elsewhere. (This is a good example lesson regarding negotiating price deltas at the price level not the cost level ...)

I would also ask how come it took so long to negotiate the savings to the taxpayer, but I'm afraid I can already guess the answer to that one.

I hope this helps but, as I said, not really my area. Best wishes!

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Scenario

Unit Cost Fee Fee on unit

$ 100.00 15% $ 15.00

$ 90.00 15% $ 13.50 $ 1.50 Credit

Savings $ 10.00 75% $ 7.50 Raytheon Share

Net $ 6.00

Hi Query,

I hesitate to respond because VECP is not my area of particular expertise. So keep that in mind, okay?

That being said, I would want to understand

(1) the basis on which the original 15% fixed unit "fee" per unit was negotiated and put on contract. Is there a Fixed Price per Unit (fee included)? Is the costing truly per unit or (perhaps) per lot or production run?

(2) How did you allow the contractor to participate in the VECP savings? I see that you are saving 10 percent cost per unit. What does the contractor see? Does it see a piece of the 10 percent?

What I'm driving at in the above is you use the term "fee" which does not normally apply to vanilla Fixed-price contracts and implies a certain negotiability. If the profit rate was built into the contract price then I can certainly see the contractor balking at giving you a refund on prices already paid for units delivered ... unless you've incentivized said contractor elsewhere. (This is a good example lesson regarding negotiating price deltas at the price level not the cost level ...)

I would also ask how come it took so long to negotiate the savings to the taxpayer, but I'm afraid I can already guess the answer to that one.

I hope this helps but, as I said, not really my area. Best wishes!

Thanks for looking this over - any help will be greatly appreciated. I am at a stop on this issue.

Let me provide information for #1 - These are Firm Fixed Price units - and the process to arrive at the price is a bundle of - Materials, labor, indirects then fee as a percent = FFP for the item.

#2 - The VECP is voluntary. The 10 in my scenario is $10dollars, which is a function of the Cost of Work Deleted + Cost of Work Added = Savings.

Yes, some of these units have been delivered with the VECP part. Execution - They have priced in the FFP the old part with the higher price but, executed by obtaining the cheaper part.

Why did it take so long - I am sure you are correct with your guess.

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Are you simply asking if you are entitled to a credit on units that were modified per the VECP after it was authorized or put on contract (by what means, I don't know) but before the unit price adjustment was determined?

I would think the answer is yes, unless the modification containing the price adjustment somehow closed the action without considering the undefinitized units. In that case, the incomeptence of the contracting officer or administrator would amaze me.

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Thanks for looking this over - any help will be greatly appreciated. I am at a stop on this issue.

Let me provide information for #1 - These are Firm Fixed Price units - and the process to arrive at the price is a bundle of - Materials, labor, indirects then fee as a percent = FFP for the item.

#2 - The VECP is voluntary. The 10 in my scenario is $10dollars, which is a function of the Cost of Work Deleted + Cost of Work Added = Savings.

Yes, some of these units have been delivered with the VECP part. Execution - They have priced in the FFP the old part with the higher price but, executed by obtaining the cheaper part.

Why did it take so long - I am sure you are correct with your guess.

Again, not my area but I would assume you would revisit profit calculations via weighted guidelines to see if perhaps the contractor was entitled to a higher profit rate via efficiency and innovation. Wish I could be more helpful.

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I really didn't want to get involved in this discussion. I don't think that Query has identified what clause is in the contract and what, if any, alternate paragraphs are included. The whole scenario is somewhat cryptic, because he/she hasn't explained how the VECP was accepted or directed by the government and if or how the action has been definitized, if the contractor has only proposed an adjustment to future units.

Why would profit or fee be adjusted? The adjustment to current contract units or future contract units is based upon cost savings. I see no mention of fee or profit adjustment in 52.248-1 (I am assuming that some form of this clause is in the contract but I may be wrong).

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I really didn't want to get involved in this discussion. I don't think that Query has identified what clause is in the contract and what, if any, alternate paragraphs are included. The whole scenario is somewhat cryptic, because he/she hasn't explained how the VECP was accepted or directed by the government and if or how the action has been definitized, if the contractor has only proposed an adjustment to future units.

Why would profit or fee be adjusted? The adjustment to current contract units or future contract units is based upon cost savings. I see no mention of fee or profit adjustment in 52.248-1 (I am assuming that some form of this clause is in the contract but I may be wrong).

I can see you agree with me that this is a tough one. Yes - 52.248-1 is in the contract. My problem is really the retroactive way my VECPs are being put into the contract. No - none of my VECPs have been definitized, and most of them started in FY03. I am trying to clean up a large mess. I not really adjusting profit - I'm trying to get back to somewhere closer to what my real FFP would be if we had brought the VECPs in at the proper time. We have been paying the old (higher) FFP for a number of years, mainly because VECPs were pushed behind more immediate issues.

I have not been able to find anything that says it is not allowed - so I was hoping for some guidance in maybe case law or......

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Please be clear. Did you accept the VE and tell the contractor to implement it with the price adjustment to follow on later? If you did, then a price adjustment is part of the deal and is necessary. It would be for all units produced after you directed implementation of the VECP, assuming that there isnt more to this story. Why do you need to rely on case law to understand that?

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Please be clear. Did you accept the VE and tell the contractor to implement it with the price adjustment to follow on later? If you did, then a price adjustment is part of the deal and is necessary. It would be for all units produced after you directed implementation of the VECP, assuming that there isnt more to this story. Why do you need to rely on case law to understand that?

This is a pretty muddy problem. We accepted the VE but, had no discussion about price adjustment or anything to do with pricing until just now. Of course, the Contractor is pushing back and doesn't want the price adjustment, on the grounds that it is not correct. I can nothing that talks to my situation.

Do you have a recommendation for another resource on VECPs?

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Sorry, apparently too complex a situation that you don't want or don't intend to fully explain how you accepted the VECP (the wording of the acceptance). Must be some type of annually funded production contract. Too many unknowns to help. Suggest you hire a lawyer then provide all the facts to him/her..

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Too "muddy" (= too cryptic)

To let something go 5 years smacks me as incompetence and an insult to the US taxpayers. Somehow a contractor was allowed to change a production item from some contract requirement since FY 03 - perhaps on an earlier contract. We don't know. We don't know how. This is a matter for agency counsel to aide the present administrator, not a forum. If you don't have access to counsel, I suggest hiring a lawyer.

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What probably happened and is all too common is the technical Leads 5 years ago did not document the price related to the VECP. I had a situation once with a Teaming Agreement and subsequent negotioations and discussions surrounding the TA that led to an understanding by one party and a completely different understanding by the other. I walked into the mess same as Query - when it came time to put them under a subcontract 2 some years later - we could not come to terms because senior management had discussions - without contractual representation present to document the agreements made. In my case, the two VP's from each company called each other a liar, in Query's case, I believe pricing factors and other economics can avoid arbitration if done by reasonable people.

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