Title to Residual Inventory under an FPIF contract

[TippHill]

Question: The Incentive Price Revision clause requires the contractor to submit a list of residual inventory and its estimated value. May the Government, at its discretion, acquire title to residual inventory under an FPIF contract? If so, it would seem that the value of the residual items would be deducted from the total incurred costs of the contractor. Does it matter if the total incurred costs exceed the ceiling value of the contract?

[Guest Vern Edwards]

Under a fixed-price contract, residual inventory belongs to the contractor after it has liquidated any financing payments. So under a fixed-price incentive contract you deduct the market value of residual inventory from the total incurred cost before applying the profit adjustment formula. See FAR 15.408, Table 15-2, III, "Formats for Submission of Line Item Summaries," C. "Price Revision/Redetermination," paragraph (7):

When residual inventory exists, the final costs established under fixed-price-incentive and fixed-price-redeterminable arrangements should be net of the fair market value of such inventory.

If you want to buy the residual inventory from the contractor, then if you include the cost of the purchase in the total incurred cost it would negatively affect the contractor's profit. And it would obviously matter to the contractor if the purchase would drive the total incurred cost over the ceiling price. You can avoid those problems by adding a firm-fixed-price residual inventory line item to contract for purposes of the purchase, thereby excluding the price you pay for the residual inventory from the total incurred cost of the FPI line item.

Keep in mind that if you buy it you either must ship and store it or pay the contractor to store it for you. If you ask the contractor to store it, the contractor might want to be paid for the storage and might demand that you indemnify them in case of any loss or damage. You could also try to negotiate an option to buy the stuff at a later time if you think you might have need for it and it won't be obsolete.

If you want to buy it you'd better inventory and inspect it before you pay for it.