CPIF Fee Settlement

[Guest Vern Edwards]

Here is a question:

Scenario:

The Government awarded a fully-funded cost-plus incentive-fee contract with the following terms:

Target Cost $20,000,000

Target Fee $ 2,000,000

Share ratio 50/50

Max Fee $ 4,000,000

Min Fee $ 0

(The Target Cost was used as the Estimated Cost in the Limitation of Cost clause, FAR 52.232-20.)

The contractor has completed 60 percent of the work and has been reimbursed for allowable incurred costs of $19,500,000, which is 97.5 percent of the target cost. The parties agree that the estimated cost at completion is now $30,000,000. The contractor has stopped working at the Government’s direction. There are no pending requests for additional reimbursement or for equitable adjustment.

The contract includes the clause at FAR 52.216-10, Incentive Fee (JUN 2011). A special contract clause provides for interim fee payments equal to the percentage of the estimated cost incurred, less amounts already paid and withholding. Since 97.5 percent of the estimated cost has been incurred, the CO has approved interim fee payments of 97.5 percent of the target fee — $1,950,000. Pursuant to paragraph ( c ) of the Incentive Fee clause, the CO has withheld $100,000 to protect the Government's interests.

The CO has notified the contractor that the Government will not fund the contract beyond the target cost and is terminating the contract for convenience pursuant to the clause at FAR 52.249-6, Termination (MAY 2004). The CO presently anticipates that the contractor's termination settlement proposal will be for $500,000, of which $100,000 will be for subcontractor effort included in subcontractor termination settlement proposals.

Questions:

1. For purposes of the termination settlement, based on the foregoing facts, how much fee has the contractor earned in total?

2. Does the contractor owe the Government a refund, or does the Government owe the contractor more fee?

3. How much must the contractor refund, or how much does the Government owe?

Please provide a brief explanation of your answers.

This scenario is not based on any board or court decision, but it is based on a real contract.

[wvanpup]

1. For purposes of the termination settlement, based on the foregoing facts, how much fee has the contractor earned in total?

The target fee is $2,000,000. The fee earned will be 60%, or $1,200,000. Rationale is:

• 52.216-10(e)(3) provides: "If this contract is terminated in its entirety, the portion of the target fee payable shall not be subject to an increase or decrease as provided in this paragraph. The termination shall be accomplished in accordance with other applicable clauses of this contract."
• The fee due at termination will be determined IAW 52.249-6(h)(4)(i), which provides: "If the contract is terminated for the convenience of the Government, the settlement shall include a percentage of the fee equal to the percentage of completion of work contemplated under the contract, but excluding subcontract effort included in subcontractors' termination proposals, less previous payments for fee."

Thus, whether the contractor is overrunning or underrunning, fee is based on percent complete, which is stipulated at 60%.

2. Does the contractor owe the Government a refund, or does the Government owe the contractor more fee?

The contractor owes a partial refund ($650,000) of the fee that has been paid. As described above, the fee earned is $1,200,000. The contractor has been paid $1,850,000 in fee, which is $650,000 more than it earned. Rationale is:

• 52.249-6(h) is the method of determining how much is due the contractor, and includes fee based on percentage of work completed
• 52.249-6(m)(2) provides that if "total payments exceed the amount finally determined to be due, the Contractor shall repay the excess to the Government upon demand"

3. How much must the contractor refund, or how much does the Government owe?

The total amount due the contractor will be $19,500,000 for costs incurred, $500,000 for termination settlement, and $1,200,000 for fee, a total of $21,200,000. The contractor has been paid $19,500,000 for costs incurred plus $1,850,000 for fee, a total of $21,350,000. The contractor should refund $150,000.

(The Target Cost was used as the Estimated Cost in the Limitation of Cost clause, FAR 52.232-20.)

I do not know if this is part of the question, but I do not believe payments are limited by the Limitation of Cost clause. Inasmuch as payments, including fee, total more than the estimated cost, I assume additional funds were obligated to cover payment of fee.

[wvanpup]

Vern

It has been a couple of days since you asked the question. I am curious ..... what did I miss (if it is related to the "$100,000 will be for subcontractor effort included in subcontractor termination settlement proposals," I did not see how that is related to the percent complete)?

[Guest Vern Edwards]

wvanpup:

Your answer makes sense to me.

Vern