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Determining Incentive Fee


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I am evaluating target costs vs actual costs to determine if the contractor earned any incentive fee. The contract requires that the contractor collect money on behalf of the Govt. The monies collected by the contractor are included a a credit on the public vouchers wtih a total net costs billed on the voucher.

Should the net amount of the voucher (including the credit) as the amount to be used in my incentive fee evaluation?

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Target Fee was calculated at 2.5% of Target Costs. Target Costs included cost recoveries (net). Based on this my initial thought was that I should include cost recoveries in the actual cost amount used in the Incentive Fee Evaluation. However, the incentive fee clause (52.216-10) references the use of total allowable cost and cost recoveries (credits) are not allowable costs.

It depends on how the target fee was calculated. Was the costs net or gross?
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The contract incorporates 52.216-10.

A local Incentive Fee clause is also included that states fee payable shall be the target fee increased by .20 cents for every dollar that the toal total allowable cost is less than the target cost, or decreased by .20 cents for every dollar the total allowable cost exceeds the target cost.

The key here being allowable cost.

What does the contract say about the calculation of fee?
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  • 2 weeks later...
It depends on how the target fee was calculated. Was the costs net or gross?

Sorry my response is so late - I am still struggling with this issue.

The Target Fee was calculated based on the Target Cost, and the Target Cost did include cost recoveries. Based on this, I feel that including the cost recoveries in the Incentive Fee Evaluation (specifially the allowable cost element) woudl be appropriate.

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Target Fee was calculated at 2.5% of Target Costs. Target Costs included cost recoveries (net). Based on this my initial thought was that I should include cost recoveries in the actual cost amount used in the Incentive Fee Evaluation. However, the incentive fee clause (52.216-10) references the use of total allowable cost and cost recoveries (credits) are not allowable costs.

Why do you say that the cost recoveries are not allowable costs? What FAR cost principle or contract provision makes those recoveries unallowable?

Credits, per se, are allowable costs. They act to reduce billings, as do unallowable costs, but they are not the same thing.

Hope this helps.

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Guest Vern Edwards

Is this how it works?

Contractor incurs costs of $1,000,000.

Contractor collects $100,000 owed to Government by others.

Contractor invoices for $1,000,000, keeps the $100,000 and credits the Government in that amount, and seeks payment of balance of $900,000.

Is that it? If that is it, then calculate the incentive fee based on the incurred cost of $1,000,000.

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Guest Vern Edwards

here_2-help:

I don't see how it makes any sense to call a credit an allowable cost. Credits are neither allowable nor unallowsable. In the terminology of government contracting credits are not costs, they are offsets to costs, and are either allocable or not allocable. Credits are not comparable to unallowable costs in their effect on billings. Unallowable costs do not reduce billings.

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Vern,

If NptAcq is the person Bob posted the question for, it sounds like $900,000 should be used to calculate the fee.

He said "Target Fee was calculated at 2.5% of Target Costs. Target Costs included cost recoveries (net)."

So wouldn't you use the same method for actuals?

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here_2-help:

I don't see how it makes any sense to call a credit an allowable cost. Credits are neither allowable nor unallowsable. In the terminology of government contracting credits are not costs, they are offsets to costs, and are either allocable or not allocable. Credits are not comparable to unallowable costs in their effect on billings. Unallowable costs do not reduce billings.

Vern, you are correct. Credits are neither allowable nor unallowable. I was trying to move NptAcq off the belief that credits are unallowable costs, and in my attempt to communicate with that poster, I erred on the technical side.

That said, from the contractor's perspective, unallowable costs and credits both do the same thing on a cost-type contract. They both reduce otherwise billable cost amounts. They both reduce project margins from what they would have been, had the costs been otherwise allowable or had the credits not been allocated to the contract.

Example: Cost plus Fixed Fee contract type. Fixed Fee is 10% of estimated costs, contractor is currently within cost/funding limitations.

A. Contractor incurs $1,000,000 in total costs, fully allowable, and submits an invoice for $1,100,000 to the Government (total allowable cost plus 10%).

B. Contractor incurs $1,000,000 in total costs of which $100,000 is unallowable. Contractor submits an invoice for $990.000 (total allowable cost plus 10%). From the contractor's perspective, reduction in billings is equal to $1,100,000 less $990,000 or $110,000.

C. Contractor incurs $1,000,000 in costs but there is a credit allocated to the contract in the amount of $100,000, so total cost is equal to $900,000. Contractor submits an invoice for $990,000 (total allowable cost plus 10%). From the contractor's perspective, reduction in billings is again $110,000.

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Guest Vern Edwards

help:

Unallowable costs do not "reduce" billable cost amounts. They do not "reduce" billing cost amounts because they may not be included in billings in the first place. See FAR 31.201-6(a), first sentence. Moreover, your B and C examples are not at all comparable.

formerfed:

I don't know what "Target Costs included cost recoveries (net)" means. It would have made more sense if he'd said that credits were excluded from target costs and are not be considered in the calculation of final costs. But he doesn't seem to be sure about that.

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Why do you say that the cost recoveries are not allowable costs? What FAR cost principle or contract provision makes those recoveries unallowable?

Credits, per se, are allowable costs. They act to reduce billings, as do unallowable costs, but they are not the same thing.

Hope this helps.

Thank you for the response. And, you are correct. I did further research and found that credits are allowable costs.

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help:

Unallowable costs do not "reduce" billable cost amounts. They do not "reduce" billing cost amounts because they may not be included in billings in the first place. See FAR 31.201-6(a), first sentence. Moreover, your B and C examples are not at all comparable.

formerfed:

I don't know what "Target Costs included cost recoveries (net)" means. It would have made more sense if he'd said that credits were excluded from target costs and are not be considered in the calculation of final costs. But he doesn't seem to be sure about that.

The composition of total cost (FAR 31.201-1) includes allocable credits. The credit (or cost recoveries) are directly related to the performance of this contract. So I disagree that the credit is an unallowable cost.

The Target Cost negotiated for this contract was calculated based on adding all costs and deducting cost recoveries. The resulting amount is the Target Cost.

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Is this how it works?

Contractor incurs costs of $1,000,000.

Contractor collects $100,000 owed to Government by others.

Contractor invoices for $1,000,000, keeps the $100,000 and credits the Government in that amount, and seeks payment of balance of $900,000.

Is that it? If that is it, then calculate the incentive fee based on the incurred cost of $1,000,000.

Yes the above is the way it works. But incentive fee is calculated based on the net amount ($900,000 based on your above scenario). Credits are included in the composition of total costs (FAR 31.201-1) so the credit is included in the incentive fee evaluation.

I would like to incorporate a local clause that specifically excludes the credits for the purpose of evaluating the Incentive Fee. To be fair I would also adjust the Target Cost to to remove the cost recoveries, but the target cost would only be adjusted for the purpose of evaluating the Incentive Fee. This would be an "apples to apples" comparison/evaluation.

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here_2-help:

I don't see how it makes any sense to call a credit an allowable cost. Credits are neither allowable nor unallowsable. In the terminology of government contracting credits are not costs, they are offsets to costs, and are either allocable or not allocable. Credits are not comparable to unallowable costs in their effect on billings. Unallowable costs do not reduce billings.

In my situation (right or wrong) the invoice amount is clearly off-set (reduced) by the credits. The credits represent the monies collected on behalf of the Govt. FAR 31.205 seems to relate credits directly to allocable costs. The credits in scenario are related to the cost of performing the contract.

In retrospect the credits/cost recoveries should not have been included in the Target Cost. Given that the credits/cost recoveries are included in the Target Cost its seems appropriate to include the credits/cost recoveries in the costs incurred/allowable cost amount.

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Guest Vern Edwards

NptAcq:

What a lot of confusion.

Credits are not allowable costs. The composition of total cost, as specified by FAR 31.201-1, does not "include" credits, it excludes ("less") credits.

The contract in question is apparently CPIF. I cannot judge the wisdom of the collection/credit/incentive arrangement you have made. I don't know the source of the collections that the contractor makes on behalf of the government, but it appears that the government has told the contractor to collect money that it is owed by others and to keep all or part of the amounts collected to offset allowable costs that the government would otherwise have to pay. Since the collection is used to offset allowable costs, it appears that the higher the contractor's allowable costs the more of the collection that it gets to keep. Thus, the collection/credit/incentive arrangement would appear to weaken the force of the incentive, because it weakens the motivation to avoid costs, especially in light of the fact that the amount of the credit is excluded from the "total allowable costs" against which the standard incentive formula applies.

It appears to me that the collections are not truly credits, i.e., income, rebates, or refunds received by the contractor. The government isn't being credited anything, as the term credit is used in FAR. The government is reimbursing the contractor's allowable costs by letting it keep the collection of amounts owed to the government. Thus, the "credit" does not reduce the government's cost liability, like a true credit, it just liquidates that liability in an unusual way. Deducting the amount of the "credit" from the amount used to calculate incentive fee thus deviates from the terms of FAR 52.216-10, Incentive Fee, because that clause requires the fee to be calculated on the basis of the difference between target cost and "total allowable cost" and because the "credit" is used to reimburse part of the contractor's total allowable cost.

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