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The heck it doesn't! The total final price is the total final negotiated cost plus the adjusted profit . The wording of the clause seems to suggest that the total final negotiated cost is adjusted, but it's not. You adjust profit based on the difference between the total final negotiated cost and the target cost, then you add the adjusted profit to the total final negotiated cost in order to get the total final price. You don't change the total final negotiated cost.

That doesn't mean that wvanpup's statement about not adjusting profit to less than zero is true.

Well, the clause does say to subtract an amount from the total target profit, but without using the word "adjust." If you want to characterize that as adjusting, that's OK. No argument.

But, who said anything about "changing the total final negotiated cost"? Not I. The clause requires that an adjustment be applied to the total final negotiated cost, and that's what I stated.

"The wording of the clause seems to suggest that the total final negotiated cost is adjusted"? [emphasis added.] It clearly says "The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss..." [emphasis added.] I think it does more than seem to suggest.

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Guest Vern Edwards

Well, the clause does say to subtract an amount from the total target profit, but without using the word "adjust." If you want to characterize that as adjusting, that's OK. No argument.

Good.

Now, wvapup said "[i}ncentive contracts do not permit adjusting profit to less than zero." I see no express prohibition, so I don't agree. But does the FPI(F) arrangement as described in FAR contemplate or provide for adjusting profit to less than zero? Only after the contractor exceeds the ceiling price. I know of no reference to FPI(F) going back to 1962 that provides for a profit of less than zero at or below the ceiling price. In that regard, FAR 16.102(B) says:

Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4

The question is: Is that significant to the case at hand?

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I think that the FAR does allow for a profit of less than zero.

if you read 16.403-1 it discusses the application of the formula and states " or even a net loss" when using the formula to determine profit when final cost is more than target cost.

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I have enjoyed reading all of the posts. I am glad that I gave everyone something to think about. The share ratios are real.

The share ratios were recommended by an individual at USD AT&L about a year ago. Rather than an incentive, the arrangement was structured to remove the contractor's incentive to limit expenses in order to pocket additional profit which was a concern at the time when the RFP was issued. The CLIN with the applicable arrangement is an interim development (i.e. completion of PDR, CDR, etc.).

Regarding the CPIF math, my personal interpretation had previously matched that of wvanpup because I had believed that the adjustment to the target profit could not be less than zero. Additionally, an FPIF graphing tool from the former chief of our pricing office generated a graph which showed a final cost between target price and ceiling that resulted in the final price equalling the final cost.

Based on the conversations here and recent discussions with my current management, I am inclined to believe that I along with the grahing tool were wrong.

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Guest Vern Edwards

I think that the FAR does allow for a profit of less than zero.

if you read 16.403-1 it discusses the application of the formula and states " or even a net loss" when using the formula to determine profit when final cost is more than target cost.

Yeah, paragraph (a). But the next sentence says that the loss happens when the final negotiated cost exceeds the price ceiling.

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I have no specific authority for my statement that the clause does not allow adjusting profit to less than zero, just as there is no specific statement that profit can be adjusted to less than zero. The literal language, as Vern has demonstrated, results in subtracting -1, which mathematically means adding 1. I suppose you can take your pick -- apply the literal language or find something else that is not addressed specifically.

As for the comment about how to reconcile my statement with FAR 16.403-1(a) which states that when final cost is more than target cost the formula may result in a net loss, I read that as applying to the ceiling price. After the point of total assumption there is no profit, after the ceiling price there is a net loss. It does not mean reducing the final cost to create a loss when costs are below the price ceiling.

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...The literal language, as Vern has demonstrated, results in subtracting -1, which mathematically means adding 1. I suppose you can take your pick -- apply the literal language or find something else that is not addressed specifically.

Vern has said no such thing. As a matter of fact, here's a quote from his post #48 - "you add the adjusted profit to the total final negotiated cost in order to get the total final price." [emphasis added.]

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Guest Vern Edwards

Right on!

And it's not true that after the point of total assumption "there is no profit." The PTA is just the point at which the cost incurred plus the remaining profit equal the ceiling price, so that the share ratio becomes 0/100. In the example we've been discussing, however, the PTA is the target cost, but that cost plus the target profit do not equal the ceiling price, which is $ 70M. They equal $ 67M, which is $ 3M below the ceiling price. So the contractor starts taking a loss before it reaches the ceiling price.

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I disagree, the preceding sentence is discussing the application of the formula, if you read both sentences in context it discusses the application of the formula, and in this instance the formula would lead to a net loss prior prior to reaching the ceiling.

"When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss.

the next step is to determine if the final cost is greater than the ceiling price then the contractor absorbs the difference as a loss.

in this situation, with the contractor absorbing 100% of the overrun over $60M, then the likelihood of reaching the ceiling is extremely unlikely.

seems clear to me.

(will this make it page 4?)

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Guest Vern Edwards

With what or whom are you disagreeing?

"[T]he likelihood of reaching the ceiling is extremely unlikely." Huh? Hook up, airborne!

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right now disagreeing with the coffee maker,

my thoughts are with this share ratio, the contractor is on the hook for everything over 67M. that is why i dont think we will make the ceiling price.

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right now disagreeing with the coffee maker,

my thoughts are with this share ratio, the contractor is on the hook for everything over 67M. that is why i dont think we will make the ceiling price.

That sounds like a ceiling.

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Thank you, FAR Fetched. You're a first rate bailiff. Court is now back in session.

Don, the contractor's profit would increase up to the ceiling, but I'm not sure that would make the arrangement CPPC. It might. Let's suppose it does. What is your argument?

Vern,

My argument would be that 1) the contracting officer did not have the authority to agree to a CPPC arrangement, so the Government cannot be bound, and 2) the court can't enforce an illegal contract term.

Back to the contract clause, I don't think that you need to look outside the contract to conclude that "applying" at FAR 52.216-16( d )(2) means adding. This is because the contract specifies a target price, which is the sum of the target cost and the target profit. The subparagraph states:

The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

(i) If the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit.

(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less ______ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost exceeds the total target cost.

(iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus _____ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost is less than the total target cost.

By showing target price as the sum of target cost and target profit, it is clear that "the adjustment" referred to in ( d )(2)(i) is additive. Since ( d )(2)(ii) and (iii) use the same terminology (i.e., "the adjustment"), and there is no reason to believe that the meaning of "the adjustment" is different when used in ( d )(2)(ii) and (d)(2)(iii), then the only logical conclusion is that it means the same thing. As such, the formula:

Total Price = Total Cost + (Target Profit - (100% x (Total Cost - Target Cost)))

can be logically deduced from the contract.

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I thought court adjourned at the end of page two but it looks like this moved to the court of appeals quickly.

I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.

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Guest Vern Edwards

Don,

Where the heck have you been? We're all in agreement about the formula.

My argument would be that 1) the contracting officer did not have the authority to agree to a CPPC arrangement, so the Government cannot be bound, and 2) the court can't enforce an illegal contract term.

So is the contract void ab initio? If not, in what way is it enforceable?

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Don,

Where the heck have you been? We're all in agreement about the formula.

I know. My point was that you can get to the formula without resorting to extrinsic evidence.

So is the contract void ab initio? If not, in what way is it enforceable?

Ask an attorney.

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I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.q

It is a "fixed price, non-incentive,firm-target with a fictional cost ceiling". Whoever developed the formulas didn't work it through or didn't understand it and whatever contractor rep who agreed to it appears to not understand what they were agreeing to. The fact that the government is asking questions in this forum indicates confusion. I wonder what the actual intent of the parties was.

Making a contractor assume all risk for cost overruns with no corresponding incentive to reduce costs seems onerous to me. But both parties agreed to it. Maybe not knowing what they were seemingly agreeing to.

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I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.

Although identified as FPIF in the original post, in application it's CPFF below the target cost and FFP above the target cost.

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Guest Vern Edwards

Ask an attorney.

I'm asking you, Professor. You don't have to be an attorney to have a professional opinion. Anyway, very few attorneys know anything about that. Your opinion will be as good as most attorneys'. But I understand if you're not comfortable giving an answer.

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Guest Vern Edwards

Although identified as FPIF in the original post, in application it's CPFF below the target cost and FFP above the target cost.

Exactly, except that I would say it's FFP at the target cost.

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I'm asking you, Professor. You don't have to be an attorney to have a professional opinion. Anyway, very few attorneys know anything about that. Your opinion will be as good as most attorneys'. But I understand if you're not comfortable giving an answer.

I don't think it would necessarily void ab initio. I think that it would have to be proven that the illegal term went to the heart of the deal. Otherwise, I think a court could read an illegal term out of the contract and keep the rest intact.

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Vern

You asked why I thought the ambiguity is latent, not patent. I do not have the time to research this, so I am answering from what I think is a pretty good memory of the distinction. For the discussion I am going to assume that the Government created the ambiguous term.

A contract term is ambiguous if it is subject to two or more reasonable interpretations. The rule contra proferentum (sp?) says, in effect, that ambiguities are construed against the party that drafted the ambiguous term if the ambiguity is latent, but will be construed in favor of the Government if the ambiguity is patent. A patent ambiguity is one where the parties should realize, from examinging the terms of the contract, that there is an ambiguity. A contractor in such a situation has a duty to inquire as to the meaning of the term. A latent ambiguity is one where the parties reasonably do not recognize the other potential interpretations. In my judgment, it is reasonable for the contractor to believe that the FPIF formula says that profit may be reduced to zero, but not less than zero until the price ceiling is reached, and it is also reasonable to not realize that others might interpret the clause differently because a different interpretation could (in cases, like this, of very high contractor share ratios) render the price ceiling meaningless.

This is my judgment. I suppose reasonable minds can differ on what others may consider reasonable.

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And it's not true that after the point of total assumption "there is no profit."

You are, of course, correct. It is what happens when I try to respond in less than five minutes while heading out the door to a doctor appointment. Sloppy thinking, and even sloppier writing. What I should have written is: "As for the comment about how to reconcile my statement with FAR 16.403-1(a) which states that when final cost is more than target cost the formula may result in a net loss, I read that as applying to the ceiling price. After the point of total assumption the contractor's profit is reduced dollar for dollar by the cost overrun until the price ceiling, after which there is a net loss. It does not mean reducing the final cost to create a loss when costs are below the price ceiling."

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