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Govt Provided Estimates


NptAcq

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During the RFP stage the Govt provided estimates for travel, material and other costs. I prefer not to elaborate on what the "other" costs represent, but the "other" costs are for a specific item that is necessary for contract performance.

Contract type is CPIF - cost performance is evaluated. The contractor term has the potential to extend to 15 years (because there are also award term provisions).

In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP.

The contractor has done a great job of managing costs and this increase will not require an increase to the Target Cost. The contractor will be able to perform within the target cost while absorbing this cost increase.

Is it appropriate to revisit estimates provided by the Govt at RFP stage and adjust the contractor's target cost accordingly?

I not inclined to make any adjustment given that I am not changing any contract terms or requirements, and this will not impact the target cost. I am not re-visiting other estimates that were provided (such as travel) so why should I re-visit only the estimate that has increased?

Any comments on this are appreciated.

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During the RFP stage the Govt provided estimates for travel, material and other costs. I prefer not to elaborate on what the "other" costs represent, but the "other" costs are for a specific item that is necessary for contract performance.

Contract type is CPIF - cost performance is evaluated. The contractor term has the potential to extend to 15 years (because there are also award term provisions).

In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP.

Any comments on this are appreciated.

I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?

If it learned of the defective estimate prior to negotiating the target cost and incentive fee values, did it have an obligation under the "good faith and fair dealing" standard to inform the successful offeror at that time?

Was the offeror aware that the Government's estimate was subject to some uncertainty but chose to submit a bid anyway, using its known limited knowledge to price as accurately as it could, or could the situation be called a mutual mistake, wherein both parties thought the estimate was accurate, but it turned out not to be?

I should think the answers to the above questions would help to frame the proper course of action.

Hope this helps.

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Guest Vern Edwards

So, you, or somebody, entered into a CPIF contract under which the target cost included a government-furnished cost estimate for some "other" elements of cost. Is that right?

And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right?

And you did not negotiate a contract provision to exclude the cost of those elements from the calculation of total allowable costs under the Incentive Fee clause of the contract, FAR 52.216-10 (MAR 1997). Right?

Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?

So, you want to know whether you should recalculate the target cost and target fee so that the contractor won't be "penalized" for the government's "estimating error." Right?

Do I have all of that right?

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Vern asked: "...And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right??

Vern, NptAcq said: "The contractor has done a great job of managing costs and this increase will not require an increase to the Target Cost. The contractor will be able to perform within the target cost while absorbing this cost increase."

here_to_help asked: "I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?"

here, NptAcq said: "In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP."

Vern, also noted: "Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?"

Of course NptAcq hasn't answered, but Vern has probably identified the possible motivation for requesting an adjustment to the target cost base. It appears that the contractor has been able to manage those costs over which it had control of and which it proposed in establish the contract target cost. The contractor may or may not have had control over the amount established for travel and "other" costs, we don't know.

Contractor has apparently raised the issue 5 years after the contract started. It agreed to the target prices and line item prices when it signed the contract. However, we here don't know how long the Government or Contractor knew that the contract price for this line item was too low.

How about some feedback to everyone's questions above, NptAcq? You want some advice and we are curious.

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Vern asked: "...And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right??

Vern, NptAcq said: "The contractor has done a great job of managing costs and this increase will not require an increase to the Target Cost. The contractor will be able to perform within the target cost while absorbing this cost increase."

here_to_help asked: "I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?"

here, NptAcq said: "In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP."

Vern, also noted: "Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?"

Of course NptAcq hasn't answered, but Vern has probably identified the possible motivation for requesting an adjustment to the target cost base. It appears that the contractor has been able to manage those costs over which it had control of and which it proposed in establish the contract target cost. The contractor may or may not have had control over the amount established for travel and "other" costs, we don't know.

Contractor has apparently raised the issue 5 years after the contract started. It agreed to the target prices and line item prices when it signed the contract. However, we here don't know how long the Government or Contractor knew that the contract price for this line item was too low.

How about some feedback to everyone's questions above, NptAcq? You want some advice and we are curious.

Joel,

I agree that it would be nice if our interlocutor came back to see what feedback the initial question generated.

I must say, however, that I can't fully agree with your interpretation of the situation. It's not clear to me when the contractor discovered the faulty government estimate, or when the government knew its estimate was inaccurate. The government could have known anytime between issuance of the RFP and time now, while the contractor could have discovered the problem anytime between price negotiation and time now. The problem is, neither you nor I nor Vern know how "time now" correlates to the contract. Is time now contract year 1, year 5, or sometime in beween? Budgets and EACs get revised frequently; it does not necessarily follow that the contractor would discover the overrun only after it was incurred.

Hope this helps.

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Guest Vern Edwards

I'd like to point out that a cost estimate is not "defective" or "faulty" just because there is a variance between the estimate and the actual cost outcome. Moreover, although people do it all the time, it makes little sense to refer to an estimate as accurate or inaccurate. One must judge an estimate on the basis of the information available at the time it was made and on the process used to make it.

An estimate is a deductive inference, and it may be valid even if reality turns out differently.

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I'd like to point out that a cost estimate is not "defective" or "faulty" just because there is a variance between the estimate and the actual cost outcome. Moreover, although people do it all the time, it makes little sense to refer to an estimate as accurate or inaccurate. One must judge an estimate on the basis of the information available at the time it was made and on the process used to make it.

An estimate is a deductive inference, and it may be valid even if reality turns out differently.

Vern, I agree my language was imprecise. I still feel, however, that my questions are valid. It would be nice if we had some continuation.

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I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?

If it learned of the defective estimate prior to negotiating the target cost and incentive fee values, did it have an obligation under the "good faith and fair dealing" standard to inform the successful offeror at that time?

Was the offeror aware that the Government's estimate was subject to some uncertainty but chose to submit a bid anyway, using its known limited knowledge to price as accurately as it could, or could the situation be called a mutual mistake, wherein both parties thought the estimate was accurate, but it turned out not to be?

I should think the answers to the above questions would help to frame the proper course of action.

Hope this helps.

Here are some answers to you questions:

The Government did not realize that the estimate was defective until well after the contract was awarded. The contract has a potential performance period of up to 15 years. The estimates were provided on a year by year basis. The estimate for years 1 through 4 were valid, but in Year 5 the estimate proved defective. The defective estimate is for contract years 6 through 15.

I believe the offeror should have been aware that the estimate was subject to some uncertainty - but the offeror chose to submit a bid anyway. Given this, it could be considered a mutual mistake. Both parties, Govt and offeror felt that at the time the estimate was provided it was a good/valid estimate.

Thanks for your comments.

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So, you, or somebody, entered into a CPIF contract under which the target cost included a government-furnished cost estimate for some "other" elements of cost. Is that right?

And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right?

And you did not negotiate a contract provision to exclude the cost of those elements from the calculation of total allowable costs under the Incentive Fee clause of the contract, FAR 52.216-10 (MAR 1997). Right?

Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?

So, you want to know whether you should recalculate the target cost and target fee so that the contractor won't be "penalized" for the government's "estimating error." Right?

Do I have all of that right?

Yes - you have everything correct. Please comment further.

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Vern asked: "...And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right??

Vern, NptAcq said: "The contractor has done a great job of managing costs and this increase will not require an increase to the Target Cost. The contractor will be able to perform within the target cost while absorbing this cost increase."

here_to_help asked: "I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?"

here, NptAcq said: "In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP."

Vern, also noted: "Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?"

Of course NptAcq hasn't answered, but Vern has probably identified the possible motivation for requesting an adjustment to the target cost base. It appears that the contractor has been able to manage those costs over which it had control of and which it proposed in establish the contract target cost. The contractor may or may not have had control over the amount established for travel and "other" costs, we don't know.

Contractor has apparently raised the issue 5 years after the contract started. It agreed to the target prices and line item prices when it signed the contract. However, we here don't know how long the Government or Contractor knew that the contract price for this line item was too low.

How about some feedback to everyone's questions above, NptAcq? You want some advice and we are curious.

Just responded to "Here to Help" and Vern.

The contractor raised the issue 5 years after because the estimate was broken down for each year of the contract - years 1 to 15. The estimate for years 1 - 4 is valid, but the estiimate for years 6 to 15 is not valid.

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Joel,

I agree that it would be nice if our interlocutor came back to see what feedback the initial question generated.

I must say, however, that I can't fully agree with your interpretation of the situation. It's not clear to me when the contractor discovered the faulty government estimate, or when the government knew its estimate was inaccurate. The government could have known anytime between issuance of the RFP and time now, while the contractor could have discovered the problem anytime between price negotiation and time now. The problem is, neither you nor I nor Vern know how "time now" correlates to the contract. Is time now contract year 1, year 5, or sometime in beween? Budgets and EACs get revised frequently; it does not necessarily follow that the contractor would discover the overrun only after it was incurred.

Hope this helps.

My apologies for not getting back to everyone sooner. I value the comments. I provided some response and will check back soon to respond to anymore comments.

The contractor and the Government just discovered the estimates for contract years 5/6 through 15, was faulty. We are currently in year 5 of the contract, so starting now through the end of the contract, the estimates are faulty. Although these costs represent an increase it will not result in a cost overrun as the contractor has succesfully managed the contract costs. The additional costs have not been incurred yet, but will begin in the next month or two.

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My apologies for not getting back to everyone sooner. I value the comments. I provided some response and will check back soon to respond to anymore comments.

The contractor and the Government just discovered the estimates for contract years 5/6 through 15, was faulty. We are currently in year 5 of the contract, so starting now through the end of the contract, the estimates are faulty. Although these costs represent an increase it will not result in a cost overrun as the contractor has succesfully managed the contract costs. The additional costs have not been incurred yet, but will begin in the next month or two.

NptAcq,

Why do you say that the estimates were faulty? Did the estimator fail to consider reasonably available information when making the estimates? Did they miscalculate something? Or is it more accurate to say that the costs turned out to be higher than what the Government reasonably expected them to be when they made the estimate?

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NptAcq,

Why do you say that the estimates were faulty? Did the estimator fail to consider reasonably available information when making the estimates? Did they miscalculate something? Or is it more accurate to say that the costs turned out to be higher than what the Government reasonably expected them to be when they made the estimate?

Maybe "faulty" is the wrong term.

The Government provided estimates were broken down by the contract year of performance and contract performance extends out 15 years. The estimate considered all the information available at the time and was an "estimate". The actual costs (on the previous contract) were escalated to calculate the estimate for the outyears - it appears a yearly increase of approximately 3% was applied to the actual costs. The calculations were correct. I do not have any information relating or supporing the use of a 3% yearly escalation.

You are correct the costs turned out to be higher than what the Govt expected.

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