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Chip13

Establishing fixed fee percentage on IDIQ

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Previous training has always emphasized that when negotiating CPFF contracts, we are negotiating fixed fee dollars vs. fixed fee percentage. That makes complete sense since we are agreeing to fixed fee dollars that are not subject to change based on the cost of performance. However, when establishing the terms and conditions for an IDIQ under which CPFF Task Orders will be issued, can the IDIQ establish a fixed fee percentage (based upon the Weighted Guidelines) that will be used to establish the fixed fee dollars that will be placed on the Task Orders once agreement on cost is reached? That would seem to fall under DFAR 215.404-4(D) although it refers to establishing a basic "profit" rate vs "fee". The conditions affecting fee for the work to be performed under the CPFF Task Orders is not expected to change.

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The Governments use of "weighted guidelines" in the standard approach is to develop a negotiating position, not set a fixed fee percentage for profit to be used throughout a contract. Fixed fee is just that, Fixed no matter what the final cost actually turns out to be (absent of any subsequent modification). The actual profit earned may be more or less than what the Governments weighted guideline negotiated percentage was based on actual cost.

In addition, setting a fixed percentage fee, who is the Government to say what risks the contractor has from task order to task order? Anticipated vendors, market conditions, material costs, etc. - - there are a myriad of risks that can change after signing a contract, setting a fixed-fee percentage is even a risk.

What is the purpose of such a contract? What type of service does the Government propose to do this on?

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BZMANINTEXAS, thanks for the response. I understand the distinction between profit and fixed fee in that the fee is fixed no matter what the costs turn out to be while the amount of profit actually earned is fully dependent upon the costs incurred....cost more than estimated, less profit is realized and vice versa. I don't necessarily disgree with any of your statements. Our CO is proposing setting the contract up as I described and I am not aware of anything that specifically prohibits it.

The government won't be unilaterally establishing a fixed fee percentage. The contractor will have opportunity to make their case that the risk may vary significantly from task order to task order and not agree to a fixed fee percentage at the IDIQ level. Let's say, hypothetically, that both parties agree that the nature of the work is such that they don't expect much to change from Task Order to Task order. Is there anything that precludes the establishment of a fixed fee percentage at the IDIQ level?

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Wouldn't establishing a cost contract with a pre-determined fixed-fee percentage be a cost plus percentage of cost contract? or will the fee truly be fixed upon issuance of the task order no matter what final costs are at completion of LOE or Term?

16.102 Policies. (a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

(B ) Contracts negotiated under Part 15 may be of any type or combination of types that will promote the Government’s interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 254(a)). Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4.

(c ) The cost-plus-a-percentage-of-cost system of contracting shall not be used (see 10 U.S.C. 2306(a) and 41 U.S.C. 254(B )). Prime contracts (including letter contracts) other than firm-fixed-price contracts shall, by an appropriate clause, prohibit cost-plus-a-percentage-of-cost subcontracts (see clauses prescribed in Subpart 44.2 for cost-reimbursement contracts and Subparts 16.2 and 16.4 for fixed-price contracts).

(d) No contract may be awarded before the execution of any determination and findings (D&F’s) required by this part. Minimum requirements for the content of D&F’s required by this part are specified in 1.704.

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It's okay to say in the contract that fee for orders will be set at X percent of estimated cost. That would not violate the CPPC prohibition. I don't think it's wise to do so, for what I hope are obvious reasons, but it's not "illegal".

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Thanks all. I do not think it is a violation of the CPPC prohibition because the costs will be negotiated and the fixed fee dollars will be established prior to any costs being incurred under a completion or LOE task order. I agree that it is not wise to do so but many decisions are impacted more lately by schedule concerns vs. making the best business decisions. Decisions on acquisiton and contract strategy are made at much higher levels than are easily influenced so I am researching in order to brief all of the pros and cons of such an arrangement. Other than changes to the treasury rate which can impact the fee objective when FCCM is proposed, anticipated vendors changing, market conditions changing, material costs fluctuating, etc, which can all be addressed when negotiating the Task Order cost, but obviously have an impact on performance risk as well, any other "obvious" reasons that I haven't addressed would be much appreciated.

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It's okay to say in the contract that fee for orders will be set at X percent of estimated cost. That would not violate the CPPC prohibition. I don't think it's wise to do so, for what I hope are obvious reasons, but it's not "illegal".

I agree with this assessment.

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I agree with both Vern and Joel as to a "non-violation" - - however from my view the "obvious" reason a contractor would not want to entertain this type of agreement is because of "profit" and what the contractor has a potential to make.

If you think the market is so "stable" that your concerns can be met on all the areas "during the negotiations" in this environment, then why would you not press negotiating "fixed-price" task orders?

Just wondering - - but not knowing what type of service it may not be a viable path.

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I do not think it is a violation of the CPPC prohibition because the costs will be negotiated and the fixed fee dollars will be established prior to any costs being incurred under a completion or LOE task order.

It's sounds like everything is on-the-level here. What I'm taking from your statement is that each task order under the IDIQ contract will be negotiated on a fixed fee (not a percentage fee) basis. That said, the GOV and the KTR have an "understanding" (probably NOT captured in the contract) of what the basis of the fixed fee might be (as a percentage) in most reasonably expected circumstances under the contract. Negotiations on each task-order will justify IF the circumstances of that particular order warrant more or less than what was "reasonably expected".

Regulations aside for just a moment (I'll leave that to the experts here), that sounds like a reasonable approach and very helpful to the government to be able to anticipate what to expect in advance of issuing a task order. Also, I don't see it as a violation of the CPPC prohibition, because (if I understand the quote) you are only using the percentage as a guideline and are ultimately executing each Task Order on a CPFF basis.

The only caution I would have (especially if this is a multi-year IDIQ) is; how do you capture this information as contracting officers and contractor project managers change, possibly several times, over the years?

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Ohno

I think you are misunderstanding what is being proposed. There will be no "understanding" between the government and the contractor. The basic IDIQ contract will have a clause similar to "The parties agree that for all CPFF orders issued under this contract, the fixed fee that will apply to the order will be X% of the negotiated estimated cost of the order." (Those more familiar with IDIQ contracts can pretty up the language.) I would (probably) never recommend using an "understanding" in such a situation for the reasons you mention; different government contracting officers, different contractor contracting officers, one side or the other doesn't like the agreed percentage when applied to an order.

Also, it is not a violation of the CPPC rule because the fee is fixed at time of award and does not vary with the contractor's actual cost experience.

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I agree that it is not wise to do so but many decisions are impacted more lately by schedule concerns vs. making the best business decisions. Decisions on acquisiton and contract strategy are made at much higher levels than are easily influenced so I am researching in order to brief all of the pros and cons of such an arrangement... [A]ny other "obvious" reasons that I haven't addressed would be much appreciated.

Two obvious reasons are:

1. See FAR 15.404-4(d)(1)(i) and (ii). Profit policy is to base profit or fee primarily on contractor effort and cost risk, the more difficult and riskier the undertaking, the higher the profit. A pre-fixed fee rate for CPFF orders either ignores that profit policy or assumes that all tasks will be equally difficult and risky, which might or might not be the case.

2. A pre-fixed fee rate will encourage contractors to inflate their cost estimates, because the higher the estimate the higher the fee. Having inflated an estimate and persuaded the government to accept it, they might not be motivated to perform as economically as possible, since underruns would undermine their cost-estimating/fee strategy. Contractors should learn that fee rates increase as cost estimates become more realistic. They should not learn that the higher the cost estimate the higher the fee.

If I were on an IG team and was reviewing the files for such a contract, the moment I spotted the pre-fixed fee rate I would start scrutinizing task order proposals, negotiations, and final costs. I would hammer poorly documented cost analyses, pre-negotiation positions, and negotiation memorandums, which generally includes about 98 percent of them, and suggest that the agency was paying excessive costs and fees due to use of a poor contracting technique. I probably would not be permitted to say what I really think, which would be that the CO who agreed to the technique is an idiot.

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Sorry, I do not get to this site a much as I would like to so I review some of the postings to "catchup" on items of interest and this one caught my attention.

Chip13 stated that this was for an CPFF IDIQ task order for services where they appear to have established a Fixed Fee relationship regarding future Task Order needs. If it is IQ (FAR 16.504) does that not speak to the issue that the Government has a known amount of service support requirements and are seeking to establish a business relationship that will meet these future service support needs. CHIP13 went on to comment that "cost will be negotiated and fixed fee established before any cost is incurred". So when these future Task Orders are solicited the Government and the contractor have each had their opportunity to raise market conditions that would affect the prior fixed fee relationship. I believe that the prior relationship was prepared as "ohnoudidnt14" commented to derive a "reasonable approach and very helpful to the Government to be able to anticipate what to expect in advance of issuing a Task Order." That CHIP14 has looked down the road at the future work requirements and tried to establish a reasonable working relationship with the industrial partner for future work requirement needs should not discouraged. After all how much variance in the future work product will not be known until these future Task Orders surface. If the work is redundant it would seem to me that he has set in place a plan to quickly and efficiently place new work. Isn't he trying to be proactive? Why speak ill of this approach.

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