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CPFF Term Contract and Fulfilling PWS Requirements

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My company was awarded (competitively) a CPFF Term Contract based on a mandated LOE. Award criteria was LPTA. We've been performing for about 6 months and cost control has been a significant challenge for us. Primary reason is, the Govt's LOE excluded several labor categories that are necessary to complete the requirements of the PWS, however the addition of these LCATs is driving our costs up significantly and our burn rate is running very high. So much so, the USG had to exercise the OY early to avoid a work stoppage. I have tried (unsuccessfully) to remind the Contracting Officer that this is a Term type contract and the Contractor is only required to deliver the LOE (provided by the USG) which we were required to bid to. Most recently, the KO has threatened to issue us a cure notice if we don't fulfill a particular requirement within the PWS which will require us to bring on a subcontractor who is quite expensive. This SubK is the only company with the necessary experience to complete this very specialized work, but their performance will only make our cost control problems even worse.

My question is, how do I get my point across that the Gov't is setting up the Contractor for a cost overrun as they continue to insist we hire additional (and more expensive) personnel to do this work? They continuously disregard the flaws in the LOE and keep telling me LCATs were not incorporated in the contract so they don't want to hear our excuses that the cost ceiling was set too low. In their mind, if the work requires the higher skilled personnel, then we have to provide them and live with the consequences of a significant cost overrun.

Any help or guidance the group can provide would be greatly appreciated.

Thanks!

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My question is, how do I get my point across that the Gov't is setting up the Contractor for a cost overrun as they continue to insist we hire additional (and more expensive) personnel to do this work? They continuously disregard the flaws in the LOE and keep telling me LCATs were not incorporated in the contract so they don't want to hear our excuses that the cost ceiling was set too low. In their mind, if the work requires the higher skilled personnel, then we have to provide them and live with the consequences of a significant cost overrun.

Any help or guidance the group can provide would be greatly appreciated.

You probably want to get your point across without aggravating your customer. Well, you can't.

Here is what you can do: Submit a claim pursuant to the contract Disputes clause, FAR 52.233-1, asking for an interpretation of the contract. State that your interpretation of the contract is that you are not obligated to do work that requires the use of labor categories that are not expressly specified in the contract. (If that is your interpretation.) Request the CO's interpretation of your obligation, whether he concurs with your interpretation or interprets the contract differently. Ask him to state his interpretation iin clear terms. Word your claim carefully to articulate exactly what you think the Government is doing that violates the terms of the contract. Request that the contracting officer give you a final decision within 60 days of his receipt of your claim. This will be a non-monetary claim, so you will not have to certify it, and you will qualify for a decision within 60 days.

If the CO decides against you, you can decide whether to appeal to the cognizant board of contract appeals or to the Federal Circuit. It would not be a bad idea to consult an attorney to help you confirm your interpretation of the contract and state your claim. This is hard ball, but it appears that the CO has not left you with much choice.

If you do this, you will aggravate your customer. If you don't, your customer will continue to trample on your rights as you interpret them. It's just that simple. You should either move decisively and quickly, or decide to continue to suffer. It's your call.

If you get a favorable CO decision or win on appeal, you can them file a claim for additional fee on the grounds that the CO's insistence that you use other labor categories was a constructive change.

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This statement is confusing. Please clarify:

Primary reason is, the Govt's LOE excluded several labor categories that are necessary to complete the requirements of the PWS, however the addition of these LCATs is driving our costs up significantly and our burn rate is running very high.

So in the solicitation the CO would not allow use of certain labor cats (higher rates) in proposed solutions. Thus, you proposed solution excluding said labor cats allowing for a lower total cost. The labor cats were not included in the contract, just the LOE in terms of total hours. During performance you utilized these exluded labor cats to accomplish the PWS as those mandated were unable to satisfy the requirements (is this true)? This caused the $ burn to increase? You discussed this issue with the CO and they stated the labor mix was not included in the contract and to get the job done with whatever labor cats and within the cost ceiling.

There are a few ways forward. Obv. you do not want to fail in terms of performance, so a claim (see post #2) seems the most logical way forward.

I assume the government lives with the risk of a cost overrun in this scenario, CPFF? You'll receive the FF up to the ceiling the government will have to authorize and fund above the ceiling if it gets to that...you won't receive fee on overrun. You'd perform IAW the terms of the contract but would have to use higher labor cats and would burn through funds quickly but it is an alternate way forward...just brainstorming.

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Yes, everything you stated in your first paragraph is true. It is a CPFF contract. I just feel I should be entitled to an upward adjustment in the FF and not forced to accept a cost overrun.

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I agree with you, upward adjustment seems reasonable. The information in the solicitation that mandated the use of certain labor cats that were not translated into the contract would be of importance should the government not process the upward adjustment and you request a claim. Maybe it's not of importance but def. caused the cost ceiling to be reduced to a level not achievable based on the requirements. Hopefully, others with more experience could weigh in on how this solicitation info is handled wrt a claim. Not sure if you want to go this route but you're getting railroaded in my opinion.

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Most recently, the KO has threatened to issue us a cure notice if we don't fulfill a particular requirement within the PWS which will require us to bring on a subcontractor who is quite expensive.

That does not make sense if the contract is CPFF LOE Term. What's the requirement?

This is a pretty goofy procurement. A CPFF contract awarded by LPTA and including a PWS. Interesting.

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you state that the labor categories were not incorporated into the contract, What is the level of effort that they are holding you to? How was the level of effort determined at the onset?

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The requirement is aviation-related. Pilot services, logistical support, maintenance of aircraft.

The LOE is on total hours, not by LCATs. Though the LCAT mix was provided in the RFP and all offerors were required to bid that exact skill mix for the basis of establishing a ceiling.

Our problem now is the USG completely disregards the fact that the LOE was mandated and it set the cost ceiling too low. They are constantly reminding us that we must perform the requirements of the PWS and if it costs more then that's an overrun and we're not entitled to any additional fee.

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Most recently, the KO has threatened to issue us a cure notice if we don't fulfill a particular requirement within the PWS which will require us to bring on a subcontractor who is quite expensive. This SubK is the only company with the necessary experience to complete this very specialized work, but their performance will only make our cost control problems even worse.

I'm confused.... was the work that required the subcontractor in the PWS at solicitation? If your company knew that the expensive specialized subcontractor was required for the work in the PWS, why didn't you propose that subcontractor?

Was the mandated LOE mandated in your contract? Or was it provided with the solicitation for evaluation purposes? Did you question the accuracy of the LOE at solicitation?

The additional and more expensive personnel, are they more expensive because you're using different labor categories than the mandated LOE or because the rates for labor categories are higher than what you proposed?

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I take back my recommendation to submit a claim. I was hasty.

You have not provided a clear and complete description of the contract, and I have no confidence in your description of your obligation. There are too many peculiar elements to your story. You say "[the government] set the cost ceiling too low," but earlier you said it was an LPTA competition, which indicates that you proposed the estimated cost and fee and won as the acceptable offeror with the lowest price. The government did not "set" the ceiling, it accepted your proposal. Frankly, it sounds like your company did not know what it was doing when it entered into the contract, and now it sounds like your only issue is that you want more fee. I can't be sure from the information that you have provided that you are entitled to more fee.

Save yourself and us a lot of frustration. Hire a lawyer.

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That does not make sense if the contract is CPFF LOE Term. What's the requirement?

This is a pretty goofy procurement. A CPFF contract awarded by LPTA and including a PWS. Interesting.

I don't think it's that goofy. If the Government is asking for personnel to augment a Government staff and can only define the work in terms of tasks but do not dictate how the tasks need to completed and don't know how long the tasks will take or how many tasks will be completed, then CPFF sounds right.

LPTA is just the methodology used to find best vale.

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It's goofy to enter into a cost-reimbursement contract on the basis of LPTA. Why? Because it encourages what's called "adverse selection" and "moral hazard": the contractor can propose an unrealistically low estimated cost without taking a risk, thereby virtually ensuring an overrun, and the government takes all the cost risk. The contractor may sacrifice some fee, but it might be able to improve its fee in time.

It's legal to use LPTA in a cost-reimbursement procurement, but it does not make sense.

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I know I'll get my head chewed off but I disagree. I think people fear LPTA when it is a great tool and should be used more often when a customer can't define what they are willing to pay a premium on. The definition of acceptable or unacceptable should have the same definition whether it's trade off or LPTA.

Unrealistically low prices can happen on trade off. It's all dependent on the offeror's approach. That's what cost realism is used for.

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I won't chew you out, even though your thinking is not sound and you essentially made a brief pro-LPTA speech. But what you've alluded to is not LPTA, it's LRCTA (lowest-realistic-cost-technically acceptable), which is very different. LPTA is described in FAR 15.101-2 and does not (in fact, cannot) include adjustment of proposed prices for realism. LRCTA probably falls within the "best value continuum" discussed in FAR 15.101. I think it's legal, if problematic, and it has been discussed among some people, but I don't know of any actual use, except in the award of a task order contract which permitted issuance of fixed-price and cost-reimbursement orders, but I don't understand how that one was supposed to work.. Do you know of any actual use of LPTA or LRCTA with a cost-reimbursement contract?

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I see a problem with not including the labor cats in the resultant contract. If the labor cats are proposed an offeror is disqualified eventhough use of excluded labor cats may be necessary to perform the work. If not proposed, then you end up with the situation in post #1.

I see this as a symptom of the lower Agency budgets. Programs are given less funds to work with and are forced to procure the same solution with smaller budgets. Thus, they generate an IGCE based on use of lower level labor cats to ensure the budget is not exceeded and then mandate these labor cats in the solicitation. Post award, the mandated labor mix is not included in the contract, the cost ceiling is unachievably low, and the awardee must figure out how to make it work. The total hours are what remain. It's a trap and I wouldn't propose.

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Why can't it? Where does LPTA say it can't be used for cost type contracts? Price is defined in FAR 15.4. “Price” means cost plus any fee or profit applicable to the contract type. Additionally,

15.101-2(a) says "...technically acceptable proposal with the lowest EVALUATED price" and (B) also says "evaluated" it doesn't say proposed price, it says evaluated which assumes it would allow for adjustments?

And yes, I know of many LPTA cost-reimbursement contracts that are very successful. And has been the practiced for the last 4 years.

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FAR does not say that LPTA can't be used for cost-type contracts, and I did not say that it does. See my Post # 12. What I said was that LPTA cannot include adjustment of price for realism. See FAR 15.404-1(d)(3), which, the definition in FAR 15.401 notwithstanding, makes a distinction between cost and price. And that's why I call what you're talking about LRCTA. It's always helpful to give different species different names.

Look, Steward, I'm not going to argue with you about this. I think using LPTA or even LRCTA with cost-reimbursement contracts is STUPID for what I think are obvious reasons. If you don't, you don't. I don't care.

Now, if you (or anyone else) want to provide me with details of the "many" successful LPTA-awarded cost-reimbursement contracts, I'd be very interested. Otherwise, you have made an unsupported assertion and I'll ignore it.

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Steward,

I need to correct you on one point. The definition of "price" at FAR 15.401 is preceded by "As used in this subpart--". Thus, that definition only has that meaning when used in FAR subpart 15.4. The definition is not applicable to the word "price" as it is used at FAR 15.101-2( a ).

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Thanks, Don. I should have caught that.

Steward:

I am not saying that you cannot use "LPTA" for cost-reimbursement acquisitions. I have already said that you can. My point is that you should not call it "LPTA" but "LRCTA" in order to be clear about what you're doing. Do you really want to spend time arguing about that? Really?

The bigger point is that to award a cost-reimbursement contract based on the lowest cost proposed, adjusted for realism, only encourages unrealistically low proposed estimated costs. I don't think you will find many people, other than yourself, who will disagree with that proposition. Is the proposition true? I have no data to prove that it is. I say only that it makes a certain amount of sense.

Now, are you going to tell me about those "many" successful LPTA cost-reimbursement procurements or not? Let's just get that on the table. Because if you have good data, you might change my mind. If you have strong beliefs, prove your point.

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Don, What other definition of price do you suggest we use?

Vern,

I don't disagree with you that awarding a cost-reimbursement contract based on lowest cost proposed can encourage unrealistically low prices. But that is why the customer has to set their minimums appropriately and why you have to complete a through cost-realism analysis.

For examples, you should look at the Army Contracting Command.

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FAR 1.108(a) says that when there is no applicable official definition you are to use a common dictionary definition. But, realistically, the acquisition community generally uses the word price to refer to the amount charged for a deliverable under a fixed-price contract. Cost is a dollar amount incurred or estimates to be incurred for labor, capital, or expenses. Thus, fixed-price, estimated cost, ceiling price, target cost and target price, etc. But that's not really worth discussing in the context of what we're talking about.

You could not legally award a cost-reimbursement contract based on lowest proposed cost. That would violate FAR 15.404-1(d)(2) and GAO case law. You would have to award it based on lowest realistic cost (hence, LRCTA). Either way, I think you would be encouraging unrealistically low cost estimates. It's a matter of asymmetric information, adverse selection, and moral hazard.

I'll look around for some examples. "Army Contracting Command" is pretty non-specific.

Take care.

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What does case law have to do with this? I'm talking about professional judgement. Stupid is not illegal. And what do you mean by "successfully"?

Why do you keep coming back to legality? That seems to be your point: It's legal, so we should do it. You said enough when you wrote: "I don't disagree with you that awarding a cost-reimbursement contract based on lowest cost proposed can encourage unrealistically low prices." That's my point.

Since you like to cite FAR, how about this: FAR 16.301-2:

(a) The contracting officer shall use cost-reimbursement contracts only when—(1) Circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract (see 7.105); or (2) Uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

So,,, you're going to award on the basis of the lowest "realistic" cost estimate and take all the risk?

​Now, if the government is good at determining cost realism, why do so many cost-reimbursement contracts overrun? Why does it happen? (And by the way, if the contractor estimates the cost at $5,000,000, and the government determines the realistic cost to be $6,000,000, which amount do you put on the contract?)

So, here's the concept, I guess: We're going to take all the cost risk, and even though we can't define requirements or can't be sure what it's going to cost, and overruns are bad for budgets and reputations, we're going to award on the basis of the lowest "realistic" cost estimate, which is clearly designed to encourage offerors to submit the lowest estimate they think they can get away with since we're taking all the cost risk. Even though we don't know enough to estimate with enough accuracy to permit fixed-price contracting and probably don't have as much information about cost as the offerors.

Brilliant. But, then again, since we're likely to have an overrun any way, what difference does it make? LPTA is simpler and faster than best value. If I have learned anything over the course of my career, it's that we work in an increasingly unlearned and unprincipled profession. We'll do anything for administrative convenience.

Give us some guidance. Tell us, what are your criteria for using LPTA to award a cost-reimbursement contract? When does it make sense?

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I'm questioning case law because you said LPTA CPFF violates case law in your posts. Where does it violate case law?

By successful, I mean without sustained protests, without cost overruns, with successful performance and satisfied customers, to name a few.

Because it's a cost type contract, we automatically take on risk. We eliminate that risk by completing a thorough cost realism analysis and closely administering the contractors to target costs. This is not a contract type that is chosen for convenience, quite the opposite. Nothing about cost contracts is an administrative convenience but maybe that's why these other people have the overruns you're mentioning and we haven't had them.

LPTA is a form of best value per the FAR.

Our criteria for LPTA is when the customer is not willing to pay a premium above what they define as acceptable which would be the point at which we begin trading off if were a best value tradeoff.

I don't want to confuse source selection procedures with contract type.

The key in this arguement is ensuring the cost realism is done correctly and that the Government manages the contractor to the proposed target costs post award. The argument isn't if you can or can't do LPTA on a cost-reimbursement because you can and it does work.

You're assuming that these cost overruns are because of LPTA. I've never had one overrun. If you can provide fact as to why LPTA cost reimbursement does not work or actually results in overruns more than tradeoff, I'd be glad to change my mind. For now, I'll go off the facts I know and the extensive experience I have.

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