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A contractor is requesting contracting officer approval to cap his cost rates on a cost plus fixed fee contract he has with the Navy.

If his actual cost rates are in excess of pre-established ceilings, the Gov't only pays the ceiling rates. If his costs are less than the ceilings, the Gov't pays the actuals. Sounds like a great deal for the Gov't.

Questions:

1. Can the Gov't agree to this?

2. If we agree, is there a FAR provision which permits this?

3. Do we need to address the cap in relation to the CPFF clauses in the contract by changing "contractor will be paid allowable and allocable costs" to "contractor will be paid allowable and allocable costs up to the maximums specified in mod WHATEVER".

4. Am I missing something clever he's doing since the contract he's under is up for re-compete in the next six months? I'm thinking about when I do his cost realism and use his ceiling rates if his actuals are higher, or his actuals if they're lower than his ceiling.

Appreciate any thoughts or ideas.

Tx,

NavyKGuy

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NavyKGuy,

What's unusual about this is that the contractor is requesting it. Normally, the government requests that the contractor agree to a rate cap. This typically happens when the CO receives an audit report finding that the contractor's rates used in its cost proposal to establish estimated costs are significantly lower than its historical rates. Thus, to reduce the risk of downstream overruns from higher than estimated rates, the government requests that the contractor agree to cap its rates for the contract, if awarded. If the contractor declines, then the proposed rates are adjusted upwards in the evaluation.

So the answer to Q1 is yes. The answer to Q4 is "competitive advantage" where the contractor is seeking to lock in low bid rates. Why the contractor would think that applying rate caps to its existing contract (rather than to its proposed costs) is a competitive advantage escapes me.

I'll let others respond to your Questions 2 and 3.

Hope this helps.

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Guest Vern Edwards

I suspect that what you mean is that an offeror has proposed capping its rates.

Yes, you can do it. See FAR 31.109. It's not unusual. However, there is no standard contract clause. You'll have to write one.

The clause should begin with something like: "Notwithstanding the Allowable Cost and Payment clause and any other clause in this contract pertaining to accounting and cost reimbursement, the contractor shall be reimbursed at the lesser of the ceiling rates set forth in this contract or the allowable rates incurred, whichever are less..." etc., etc. You must expressly provide that any costs incurred in excess of amounts calculable based on the ceiling rates are mutually agreed to be unallowable and shall be accounted for in accordance with FAR 31.201-6.

You must have someone who knows what he or she is doing write the clause. That is not a task for amateurs.

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A possible reason why: The contractor knows its incurred costs are high, unreasonably high, and doesn't want its Govenrment cost-reimbursement customer to go looking elsewhere for a more reasonable price, so it willingly agrees to cap its cost reimbursement at a reasonable amount and swallows the difference. That could be a good business step.

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Maybe this will help, it's a NAVSEA clause used to cap indirect rates for ship repair contracts...

LIMITATIONS ON INDIRECT COST RATES (NAVSEA) (OCT 1990)

(a) Pursuant to FAR 42.707, an indirect cost rate ceiling is incorporated into the contract. "Indirect cost" is defined as set

forth at FAR 31.001 and 31.203. "Indirect cost rate" is defined as set forth at FAR 42.701.

( b ) Notwithstanding the clause of this contract entitled "ALLOWABLE COST AND PAYMENT" (FAR 52.216-7), the

allowable indirect cost under this contract shall be obtained by applying limitations on indirect cost rates to bases agreed

upon by the parties, as specified below.

( c ) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with FAR

Subpart 31.2 in effect on the date of this contract, as limited by the indirect cost rates established by this requirement.

(d) For the first three Contractor fiscal years, the indirect cost rates contained in the Contractor's accepted contract

proposal shall be incorporated into the contract schedule as limitations on indirect cost rates for each Contractor fiscal

year of contract performance. The bases to which the indirect cost rates apply shall be those contained in the Contractor's

accepted contract proposal and hereby, incorporated into the contract schedule, in accordance with the Contractor's

accounting system upon which its proposal was based.

(e) After the first three Contractor fiscal years, the Contracting Officer and Contractor shall negotiate the limitations on

indirect cost rates for subsequent Contractor fiscal years (unless the parties agree to a different period) and execute a

written indirect cost rate limitation agreement setting forth the results. The agreement shall specify (1) the agreed-upon

indirect cost rates, (2) the bases to which the rates apply, (3) the fiscal year (unless the parties agree to a different period)

for which the rate applies, and (4) the specific items treated as direct costs or any change in the items previously agreed to

be direct costs. The agreement is incorporated into this contract upon execution.

(f) Pending establishment of indirect cost rates for any subsequent Contractor fiscal year (or other period agreed to by the

parties), the Contractor shall be reimbursed either at the rates fixed for the previous fiscal year or at billing rates

acceptable to the Contracting Officer, subject to appropriate adjustment when the final indirect cost rates for that period

are established.

(g) The Government will not be obligated to pay any additional amount should any final indirect cost rates for any

Contractor fiscal year (or for any different period agreed to by the parties) after the first three fiscal years) of contract

performance exceed the indirect rates incorporated into the contract schedule. In the event any of the Contractor's final

indirect cost rates are less than the indirect cost rates incorporated into the contract schedule, the incorporated rates shall

be reduced to conform with the lower rates.

(h) The limitations on indirect cost rate shall not change any monetary ceiling, contract obligation, or specific cost

allowance or disallowance provided for in this contract. If facilities capital cost of money is proposed as an allowable

cost, the rates proposed shall be subject to the limitations imposed by this requirement.

(i) The limitations on the indirect cost rate shall apply to all work performed under the contract, and to all change orders

and supplemental agreements, including changes due to growth, supplemental, emergent and new work.

(j) Notwithstanding any of the terms of this requirement, should the Contractor initiate a change to its accounting

systems which would alter the composition of any overhead base or pool effected by this requirement, the Contracting

Officer and Contractor shall negotiate to determine the rate ceilings to be applied to the new overhead pools, provided

that no agreement shall be made which would increase the costs paid by the United States under this contract.

(k) The limitation on indirect cost rates specified in the Contractor's cost proposal shall be the rates used to compute the

costs in the Contractor's cost proposal upon which the award is based.

(End of Clause)

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Would the rate caps apply if the contract is terminated for convenience?

No, since the expected base did not materialize.

Of course, that's just one person's opinion.

H2H

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