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Unit-priced Options in FFP service contract

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My office primarily issues FFP service contracts and CTOs for environmental studies, plans, designs, remediation and associated services.

Because environmental remediation frequently results in situations where greater contamination is discovered after field work begins, our CTOs have often included Options for increased quantities of services such as excavation that read "Option for addl excavation at a unit price of $54 per cubic foot up to 5000 cubic feet" or "Option for up to 3 additional project meetings at a unit price of $500 per meeting."

Our office has recently come under new management and at a recent staff meeting, the new director informed us that these types of options were not appropriate in FFP contracts since they didn't identify a specific price; and that including them effectively converted our FFP contracts into "Time and Materials" contracts.

I thought that was wrong and said so and was assigned to research it. I sent him the language below from the FAR that I believe supports these options, but he wasn't fully convinced and has asked me to find examples from outside our command. Note: Part of the reason the issue came up was that some of our contracts incorrectly had options without specific limits (i.e. "additional excavation at $54 per cubic foot" with no maximum expressed) and the option was being treated as perpetually renewable by the customer.

Do you see anything wrong these types of option as long as the terms are specified? And are these types of options commonly used for any other types of work.

"17.204 Contracts.

(a) The contract SHALL specify limits on the purchase of additional ... services, or the overall duration of the term of the contract, including any extension.

(f) Contracts MAY express options for increased quantities of ... services in terms of --

    (1) Percentage of specific line items,

    (2) Increase in specific line items; or

    (3) Additional numbered line items identified as the option."

"17.207 Exercise of options.

(f) Before exercising an option, the contracting officer SHALL make a written determination ... that exercise is in accordance with the terms of the option, the requirements of [§17.207], and Part 6*. To satisfy ... full and open competition, the option MUST have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g. --

    (1) A specific dollar amount;

    (2) An amount to be determined by applying provisions (or a formula) provided in the basic contract, but NOT including renegotiation of the price for work in a fixed-price type contract;"

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It is common in construction contracts to have pay items with estimated quantities, where the contractor is paid only for work that is actually performed -- not as options, but as part of the base work -- well, options in construction contracts often include pay items with estimated quantities.

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Guest Vern Edwards

My office primarily issues FFP service contracts and CTOs for environmental studies, plans, designs, remediation and associated services.

Because environmental remediation frequently results in situations where greater contamination is discovered after field work begins, our CTOs have often included Options for increased quantities of services such as excavation that read "Option for addl excavation at a unit price of $54 per cubic foot up to 5000 cubic feet" or "Option for up to 3 additional project meetings at a unit price of $500 per meeting."

I presume that the contracts include some kind of government-furnished estimate of the amount of contamination that the contractor will encounter. If so, and if the contractor discovers that there is more, and if you don't have the options, then the contractor will be entitled to a price adjustment on the basis of impact due to constructive change arising out of defective specification or misleading information. In fact, I'm not sure that the option will protect the government from claims for additional amounts.

I'm not sure that options are the best way to handle the problem, but as long as they are unit-priced and evaluated I don't see why they would be improper. I'm not even sure that FAR Subpart 17.2 applies in your case. See FAR 17.200(B).

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Yes, the solicitation always includes the best information the government has for the site, but that information is never perfect in these types of projects. Until you get in the ground, its just a glorified SWAG.

Can you suggest a better way to handle these contingencies other than the unit-priced options we've been using? In years past, we used CPAF contracts for this type of work, but the policy pendulum has swung away from these and we're mandated to issue FFP PB contracts/CTOs for almost everything.

I saw FAR 17.200(B) too, but further down it states "However, it does not preclude the use of options in those contracts." The passage may just be poorly written, but it seems to be saying "you can use options in service, A-E and R&D contracts, but don't worry about any of these rules." I considered telling my boss that the FAR has no opinion on how we write our options, but somehow I don't think that would put a smile on his face.

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CSalt, can you explain why your director considers these types of options convert the contract into a T&M contract?

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It would only be speculation. I haven't worked with T&D before, and I assume he has.

Have you ever seen these types of options in FFP service contracts?

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Guest Vern Edwards

If you're worried about making your boss happy, then just do what he says. But I can tell you that he doesn't know what he's talking about if he says that the options you described convert the contract to T&M.

I don't know enough about your requirement to make any suggestions.

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Back in my day environmental remediation was always cost-reimbursement, for the very reason that CSalt posted. You never know what you're going to find until you get into the dirt. Plus, those pesky regulators keep changing their minds about "how clean is clean?"

For example, let's discuss INEL's "Pit 9"--

http://www.id.doe.gov/news/PressReleases/PR101130.htm

Hope this helps.

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My office primarily issues FFP service contracts and CTOs for environmental studies, plans, designs, remediation and associated services.

Because environmental remediation frequently results in situations where greater contamination is discovered after field work begins, our CTOs have often included Options for increased quantities of services such as excavation that read "Option for addl excavation at a unit price of $54 per cubic foot up to 5000 cubic feet" or "Option for up to 3 additional project meetings at a unit price of $500 per meeting."

Our office has recently come under new management and at a recent staff meeting, the new director informed us that these types of options were not appropriate in FFP contracts since they didn't identify a specific price; and that including them effectively converted our FFP contracts into "Time and Materials" contracts.

Do you see anything wrong these types of option as long as the terms are specified? And are these types of options commonly used for any other types of work.

I regularly used these type of "options" years ago in municipal and private contracting. They are common in the construction industry for such work as dewatering, rock excavation or other work that is impossible or difficult to fully define or quantify without further exploration during construction. I have also used them and seen them similarly used on construction contracts with the USACE. Sometimes there are alternative options, using mutually exclusive approaches or solutions), depending upon what conditions are actually encountered.

The unit prices you described are for defined tasks or quantities of work not for labor hours plus materials. Apparently, you have defined enough quantities to be able to make price comparisons during the competition stage or negotiations, if sole source methods are being used. How does that equate to time and materials? I don't see any problem with this. They are usually referred to as "extras", if found to be necessary during execution of the contract or called something similar.

Note: I assume that the proposer(s) is filling in the price, not the government? Am I correct?

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Joel,

Yes, the options are included in the solicitation and the offerors propose prices based on their costs. Thanks for your input. This is useful.

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FAR Subpart 17.2 is confusing and contradictory. In one part of FAR 17, it says you can use options for services, but then in another part it says you can’t use certain types of options for services. From the information that you included in your post, it appears to me that you are attempting to increase the quantity of the services purchased. As you stated, FAR 17.204 expressly allows options in services contracts. However, if you look at the prescriptions for the options that you may include in your contract at FAR Section 17.208, you have:

  • FAR 52.217-6, Option for Increased Quantity;
  • FAR 52.217-7, Option for Increased Quantity – Separately Priced Line Item;
  • FAR 52.217-8, Option to Extend Services; and
  • FAR 52.217-9, Option to Extend the Term of the Contract.

In your case, either Option for Increased Quantity clauses would appear to be a good fit, except for the prescription expressly stating that they cannot be used for services (emphasis added):

“Insert a clause substantially the same as…, in solicitations and contracts,
other than those for services
…”

Therefore, I would argue that your new management is correct in that options for increasing quantities are not appropriate in the FFP services contract you explained. Further, I understand your management’s position that the method you are using is tantamount to a T&M contract if neither party knows the actual amount of cubic feet required for excavation at time you place your modification. In a FFP arrangement, both parties agree on the contract price to perform the task prior to performance.

Per FAR Subsection 16.202-1, “[a] firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.” In your case, you and the Contractor only know the Government’s maximum obligation, but the actual contract price could be significantly less, or potentially more depending on the amount of excavation. You would only know the actual contract price after completion of performance. Joel’s argument is that this may not be a T&M contract in terms of time spent and materials used, and I agree, but I do not see the arrangement you mentioned as a FFP.

A creative contracting approach that I have seen where the Government rewrites its services requirement to be more supply-oriented to allow the use of FAR 52.217-6 or FAR 52.217-7. For example, instead of “Option for up to 3 additional Project Meetings,” you would make that a requirement for a certain deliverable, like a Project Meeting Report. As part of the requirement for the Project Meeting Report deliverable, the Contractor would need to provide those project meetings and detail the findings into the report. For your excavation requirement, rather than paying per cubic feet, you could require a Project Completion Report for Excavation Work up to 5,000 cubic feet. In order for this to be a FFP arrangement, if you exercised that option, the Contractor would be entitled to the unit price amount regardless of if he excavated 4,000 cubic feet or 5,000 cubic feet.

Your second “option” would be to use an Indefinite Quantity-type contract and place on order based upon services needs as they arise. However, keep in mind that you would not be issuing a FFP order if you were to continue to use a price per cubic feet arrangement without knowing the number of feet at the time you issue your order.

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.

Therefore, I would argue that your new management is correct in that options for increasing quantities are not appropriate in the FFP services contract you explained. Further, I understand your management’s position that the method you are using is tantamount to a T&M contract if neither party knows the actual amount of cubic feet required for excavation at time you place your modification. In a FFP arrangement, both parties agree on the contract price to perform the task prior to performance.

Per FAR Subsection 16.202-1, “[a] firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.” In your case, you and the Contractor only know the Government’s maximum obligation, but the actual contract price could be significantly less, or potentially more depending on the amount of excavation. You would only know the actual contract price after completion of performance. Joel’s argument is that this may not be a T&M contract in terms of time spent and materials used, and I agree, but I do not see the arrangement you mentioned as a FFP.

To say that a unit-priced item to perform a specific service is T&M is incorrect. A unit-priced contract may still be firm fixed price. The price per unit is a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. It looks like you think that a FFP arrangement means that the contract price must also be fixed without adjustment for actual quantities to be performed. Where is this requirement in Part 16?.

For your excavation requirement, rather than paying per cubic feet, you could require a Project Completion Report for Excavation Work up to 5,000 cubic feet. In order for this to be a FFP arrangement, if you exercised that option, the Contractor would be entitled to the unit price amount regardless of if he excavated 4,000 cubic feet or 5,000 cubic feet.

That is just plain wrong ! How do I say this nicely - Such thinking would be a huge waste of the taxpayers money! Establish a unit price and only pay for the work performed. Put controls in place to control the execution of any of the additional quantities. Look - I suggest speaking with the Omaha District, Corps of Engineers who are a Center of Expertise for environmental remediation and restoration contracts. Try this URL: http://www.nwo.usace.army.mil/Missions/Environmental.aspx

Your second “option” would be to use an Indefinite Quantity-type contract and place on order based upon services needs as they arise. However, keep in mind that you would not be issuing a FFP order if you were to continue to use a price per cubic feet arrangement without knowing the number of feet at the time you issue your order.

Again, you seem to think that unit-priced contracts or contracts with some unit-priced items cannot be FFP. You are wrong. See 36.207 for an explanation of FFP using lump sum and/or unit-priced contracts (the individual contract line item types can be mixed as necessary).

One must quit trying to apply service contract methods for routine services to environmental remediation contracts, which usually involve many unknowns and are often hybrids between construction and services.

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Joel, I agreed with you that the contract type was not T&M – we are talking per unit prices here, not a per hour price plus materials cost. I stated that I understood how CSalt’s management could interpret the contract type as T&M when neither party at time of exercising the option could estimate accurately the extent or duration of the work or anticipate costs with any reasonable degree of confidence (FAR Section 16.601). If you read what CSalt stated, while his contracts specified maximums on the amount of excavation work required, others did not include any maximums. They were using the option to increase quantities as an open-ended commitment for an unknown quantity of excavation services.

When I think of a firm-fixed price, I think of a contract that places the maximum financial risk on the Contractor to get the job done. If I tell the Contractor remediate land contaminated by an oil spill, but pay him by cubic feet of soil, the Government and the Contractor share substantial financial risk. The Contractor is removing both contaminated and uncontaminated soil for remediation, yet the Government pays for both. The Government will not know the actual cost of remediation effort until after completion, creating significant financial risk. The Government and Contractor sharing the financial risk and a firm-fixed price contract just seem mutually exclusive.

In CSalt’s example, he would purchase excavation services to a maximum of 5,000 cubic feet. Based upon this, it is my assumption that the Government has a reasonable confidence that it requires only a maximum of 5,000 cubic feet. Further, CSalt mentioned that the Contractor was able to propose a fixed-price per cubic feet, leading me to believe that there is some sort of historical basis for that price.

My recommendation, which you did not like, was to have a true firm-fixed price. If the Government had a reasonable confidence that the work was less than 5,000 cubic feet, it could have a line item for a maximum of 4,000 feet, or whatever historically those types remediation projects have required, and pay the Contractor a firm-fixed price. You may pay more than if you paid the Contractor only by the cubic foot, but you would not need multiple GS-14 Professional Dirt Watchers checking out how many cubic feet of soil the Contractor dug up. You would not need to spend the few hours working to modify your option modification to do the true-up. You could use that time saved to do more valuable tasks that us Contract Specialists have been reduced to, like checking first-tier subcontracts in FSRS; making sure your Contractor submitted its quarterly ARRA report; or making sure to fill out all fields in FPDS.

I appreciate the link to ACE Omaha District. It seems like interesting work for a Contracting Officer. The work that they do would probably be on a much larger scale than the incidental excavation work proposed here. I think I have an air conditioner unit that is rated to cool 5,000 cubic feet, about the size of a small bedroom. For the large-scale remediation that ACE Omaha does, I’d agree that paying a firm-fixed price regardless of the number of cubic feet does not make sense; in most cases, I would say that any fixed-price type contract would not make sense either.

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Guest Vern Edwards

Just a point: An FFP contract would be only as firm as the quality of the government's reasonably confident estimate. If the contract is written in terms of removal of a specified number of units, then the contractor can quit working when it has removed that number, whether or not all of the contamination has been removed. If the contract is written in terms of a job rather than a number of units, and if the description of the job is based on an estimate that turns out to be wrong because of failure to exercise due care, then the contractor might end up being entitled to a price adjustment and time extension. A firm fixed price is firm only to the extent that the job itself is firm.

As for terminology, fixed-price contracts based on an estimated number of units with fixed prices and subject to adjustment based on actual unit quantities are still called "firm-fixed-price" (even though they aren't, really). See FAR 36.207.

If you think about it, it's imprecise to say: "When I think of a firm-fixed price, I think of a contract that places the maximum financial risk on the Contractor to get the job done." Not even a true firm-fixed-price contract places all financial risk on the contractor. Such contracts contain several risk allocation clauses. So what do you mean by "maximum"?

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Thanks for chiming in Vern. I consider “maximum” financial risk to be the highest possible risk assigned when the Contractor and Government agreed upon the contract’s scope and complexity. The highest possible risk would be all of that risk. The quote you provided was paraphrased from FAR Subsection 16.202-1, “[t]his contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.” Financial risk mitigation clauses that you mentioned, for example FAR Clause 52.236-2, Differing Site Conditions, or FAR Clause 52.211-18, Variation in Estimated Quantities (VEQ), root from the understanding that contingencies happen that can change the scope or complexity of work originally envisioned. But if both the scope and complexity of work were exactly as both parties agreed, the Government would have zero financial risk.

I omitted FAR Section 36.207 in my previous response because it weakened my argument by labeling unit-price contracts as firm-fixed price. I think that a unit price contract could be a true firm-fixed price when used in conjunction with the VEQ clause and the Government provided reasonable estimates. Some agencies have cracked down on how the Government uses contracts under FAR Section 36.207 (October 2011 DOD Memo, “Contract Line Item Pricing Integrity”) because they were used improperly. I still routinely see fixed unit-price contracts used as a blank check (i.e. Purchase of Excavation Services @ $50 ft^3, Lump Sum NTE $300,000); the $300,000 is because the Government had that much money apportioned for the contract not because of a reasonable estimate. Or even scarier, a “FFP” unit-price contracts with the VEQ clause but with a bogus estimate; and the Government pays the fixed unit-price for a significant overrun. I wonder if the Government considered the contract type as a FFP in Foley Corporation CFC decision?

My overall point was entering into a contract without knowing the actual amount of work required, either with an arbitrary estimate or no estimates at all, does not lend itself to a firm-fixed price contract just because there are fixed unit prices. Performance uncertainties are allowable under a firm-fixed price contract, but the Government needs to be able to identify those uncertainties and reasonably estimate their cost impact (FAR 16.202-2).

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Guest Vern Edwards

But if both the scope and complexity of work were exactly as both parties agreed, the Government would have zero financial risk.

Well, yes, but that's because there is no risk associated with a completed event. Risk is associated with things that have not yet happened and may not happen. Since there is always some risk to the government associated with future events, and since FFP contracts contain many clauses that address contingencies, there is always some risk associated with an FFP contract. The contractor never takes all of the risk associated with all possible events during contract performance.

My overall point was entering into a contract without knowing the actual amount of work required, either with an arbitrary estimate or no estimates at all, does not lend itself to a firm-fixed price contract just because there are fixed unit prices. Performance uncertainties are allowable under a firm-fixed price contract, but the Government needs to be able to identify those uncertainties and reasonably estimate their cost impact (FAR 16.202-2).

In short, when the expected value of the risk is too great for the sound use of FFP, the parties should use a different pricing arrangement. I agree.

See DOE's Fixed-Price Cleanup Contracts: Why are costs still out of control? Hearing before the Subcommittee on Oversight and Investigations, Committee on Commerce, House of Representatives, 106th Cong., Second Session, June 22, 2000, Serial No. 106-137. See also Department of Energy's Project to Clean Up Pit 9 at Idaho Falls is Experiencing Problems, GAO Report RCED-97-180, June 28, 1997. At a Congressional hearing, Cong. Joe Barton of Texas said that Larry, Curly and Moe had negotiated the fixed-price Pit 9 contract. Finally, see this: http://www.agiweb.or...9proj.html#cong

The "Pit 9" project was a classic example of misuse of an FFP contract. For the ultimate laugh, see Lockheed Martin Idaho Technologies Co. v. Lockheed Martin Advanced Environmental Systems, Inc. and Lockheed Martin Corporation, No. Civ. 98-0316-E-BLW, Oct. 29, 2004, 2004 WL 2632926 (U.S. District Court, D. Idaho).

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