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An agency is contemplating awarding CPAF and FPAF task orders on its multi-award contracts for A&E services. Over the course of 15 years, these contracts changed from CPFF to more recently CPFF and FFP. The % profit ranged from 8%-9% for CPFF and 10- to 12% for FFP. Under FPAF, the agency wants to allow 3% fixed profit with an award fee, and on CPAF is thinking of allowing a base fee of 3% with an award fee. The agency wants nearly all of the profit to be in the award fee. The Agency also wants nearly all of the orders to be FPAF. The services provided under both type orders are similar. The agency acknowledges that for FPAF, the fee they will probably offer will not be considered the regular fee, but says that is OK as long as it is in the award fee pool. Are there any guidelines on this approach? It seems that fees as low as 3% should be under a cost reimbursable type order.

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Guest Vern Edwards
The agency acknowledges that for FPAF, the fee they will probably offer will not be considered the regular fee, but says that is OK as long as it is in the award fee pool.

I do not understand that sentence.

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Guest Vern Edwards
Under FPAF, the agency wants to allow 3% fixed profit with an award fee... . The agency wants nearly all of the profit to be in the award fee... The agency acknowledges that the 3% fee they are considering is much lower than what they have offered in other contracts for the same services under FFP type orders. Are there any guidelines on this approach?

Let's sort out the terminology. When talking about an FPAF contract the proper terms are "normal profit" and "award fee." See FAR 16.404. (There is no "base fee" under an FPAF contract.) Normal profit is the difference between cost and selling price. While an agency can set a negotiation objective for normal profit, it ordinarily cannot control how much profit the contractor actually realizes, since that depends on what it really costs the contractor to perform. So the idea that you can limit a contractor's normal profit under a fixed-price order to 3 percent is problematical. In order to do so you would have to make the contract price renegotiable.

According to FAR 16.404(a)(1), under an FPAF contract the government pays the contract price, which includes normal profit, for "satisfactory contract performance." Satisfactory performance is performance that the government is satisfied with, performance that meets all requirements--no complaints. Award fee should kick in when performance is better than satisfactory.

The first question (compound) is: What is satisfactory contract performance and how much normal profit should a contractor earn for it? You used to negotiate "10 - 12 %." What was that for? Satisfactory performance? Better than satisfactory performance? If it was for satisfactory performance, do you now think 3 percent would be fair? If so, set that as your negotiation objective for normal profit, but keep in mind that the contractor might actually earn more or less than that.

The second (compound) question is: What kind of performance beyond satisfactory are you looking for and how much award fee should the contractor earn for it? That's up to you. Presumably, performance beyond satisfactory will make you exceedingly happy.

My advice: Don't try to write a clause that will limit the contractor's normal profit to 3 percent. If you did that you would not have a fixed-price order. Instead, you would have some kind of renegotiable order, and you would have to audit the contractor to discover what its costs actually were so that you could apply the profit limitation. That would mean understanding and applying the cost principles in FAR Subpart 31.2 in order to reach an agreement on the contractor's actual costs. Are you up for that? Moreover, if you aren't careful you might be accused of writing a cost-plus-a-percentage-of-cost contract. In any case, do you really want to do all that work, what with 1102s being so horribly overworked and understaffed? Is it worth it?

FAR does not provide much guidance about how to write an FPAF contract, and I think that's good. But stay with what guidance there is. You cannot limit a contractor's normal profit under an FPAF contract without going to a lot of trouble, and you can't pull it off unless you really really know what you're doing. It does not sound like your organization is especially knowledgeable, so my advice is to stay away from needlessly complicated contractual arrangements. Don't try to limit normal profit under an FPAF order to 3 percent or any other percent. Don't go there.

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Vern, I didn't totally undersyand your comment about renegotition. The contract or task order price, including an allowance for normal profit, must be negotiated up front. Is Kristine referring to some provision limiting negotiated fee to 3%, then including an award fee provision of some sort?

In my experience, negotiated normal fee rate (often referred to the "profit allowance") runs somewhere around 12-15 percent for our agency's FFP A-E contracts

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Guest Vern Edwards
Vern, I didn't totally undersyand your comment about renegotition. The contract or task order price, including an allowance for normal profit, must be negotiated up front. Is Kristine referring to some provision limiting negotiated fee to 3%, then including an award fee provision of some sort?

In my experience, negotiated normal fee rate (often referred to the "profit allowance") runs somewhere around 12-15 percent for our agency's FFP A-E contracts

She said that her organization wants to limit the "fixed profit" under an FPAF order to 3 percent, with the rest of the profit to be earned as award fee. I understood her to mean that her agency actually wants to limit the realized profit, rather then limit the government's profit negotiation objective. In other words, they want to treat the normal profit like base fee under a CPAF contract. There is no way to do that without determining actual cost after performance and then agreeing on the profit. In short, the only way to limit normal profit under an FPAF order would be to renegotiate the price, as in the days of the Renegotiation Act.

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She said that her organization wants to limit the "fixed profit" under an FPAF order to 3 percent, with the rest of the profit to be earned as award fee. I understood her to mean that her agency actually wants to limit the realized profit, rather then limit the government's profit negotiation objective. In other words, they want to treat the normal profit like base fee under a CPAF contract. There is no way to do that without determining actual cost after performance and then agreeing on the profit. In short, the only way to limit normal profit under an FPAF order would be to renegotiate the price, as in the days of the Renegotiation Act.

Kristine, please be clearer. Although it wasn't clear, I thought that you meant that the RFP would limit the allowable fee ("profit") during negotiations of the fixed price with the selected A-E firm to 3%. Then the government would also include some type of incentive or award fee arrangement. Is that correct?

Or is Vern's take on this correct (determine allowable costs, then allow 3% fee)? That doesn't seem to be a firm fixed-price type pricing arrangement.

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The RFP will set the profit as 3% as part of the FP, realizing that the bidder's actual profit experience may be more or less. The challenge is that regular profit for satisfactory work has been 10-12%, so to recognize this, the balance of the normal profit would be put in the award fee pool.

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There are no "bidders" on A-E contract task orders. I assume that this is a multiple award A-E, ID/IQ base contract. You are required by law to use qualifications based criteria to select the A-E firm for the task order, without regard to price. Then, you are supposed to negotiate the task order price, whether it be CPAF or FPAF..

One can specify that the negotiated fee is limited to 3% and include an award fee. Will the award fee be negotiated? I think that the last chemical weapons demilitarization plant systems contract (about 2 billion dollars, CPAF), that I worked on, which included a design task order, contained some similar provision capping the base fee at 3% and allowing an award fee.

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I won't specifically comment on the wisdom of treating both cost and fixed price tasks the same other than to say that FFP task orders carry a bigger risk for the A-E firm, so why treat them the same?

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So Joel, it will be OK to set the fixed fee at 3 percent, and the award fee at 7% for the task orders that will be issued? There is no award fee plan yet. The weighted profit analysis produced a profit objective of 10%. This is consistent with previous FFP contracts for the same work. Those contracts were awarded TOs at 10% fee. Offering a combined 10% (3 fixed profit and 7 award fee,) should be OK?

So there should not be an issue regarding whether or not we are compliant with FAR ..that calls for the fixed fee in FPAF to be the normal/regular fee?

There is no award fee plan yet. We can also use CPAF and FFP, but the push is to use FPAF on A&E performance based contracts.

I understand that more guidance regarding award fee will be in FAR in October. Does anybody know if there will be guidance specific to FPAF< or will the focus be CPAF.

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