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Closing Out a FPIF (Firm Target) Contract

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Here's a hypothetical.

Contractor A is a small firm (but NOT a small business) with all FFP contracts except for one FPIF (Firm Target) contract. Work is complete on that FPIF contract, and the parties want to negotiate the final price and close the contract. However, the CO says the contract cannot be closed because the contractor does not have final billing rates. The CO cites to 42.703-1©(2), which states, "Established final indirect cost rates shall be used in negotiating the final price of fixed-price incentive and fixed-price redeterminable contracts and in other situations requiring that indirect costs be settled before contract prices are established, unless the quick-closeout procedure in 42.708 is used."

The contractor tells the CO that's not going to happen. No proposal to establish final billing rates, no DCAA audit of same, no way. It would be prohibitively expensive. The CO tells the contractor that the Allowable Cost and Payment Clause (52.216-7) requires submission. The contractor tells the CO that the clause can't be found in the contract. Indeed, upon checking the CO determines that 52.216-7 is not required to be included in FPIF contracts.

The contractor states that if the CO requires submission of a 52.216-7 compliant final billing rate proposal and expects the contractor to support a DCAA audit of that proposal and to negotiate final billing rates, then all associated costs will be direct costs of the requiring contract (since no other contract requires submission and, but for this contract, the contractor would not have submitted a final billing rate proposal). Further, the contractor states that it will submit an REA seeking to adjust target costs and incentive fees for the estimated costs of the effort, which will be significant in relation to the original contract price. The contractor believes it had no reason to negotiate costs for such an effort in the FPIF contract, since the contract did not require it and the FAR only applies to the extent incorporated into the contract.

In this hypothetical it seems to me that the contractor was not required to submit a final rate proposal but the FAR contemplates that one will be submitted. Both parties are stuck but it's not adversarial; both parties want to resolve this issue quickly.

Thoughts/suggestions please?

Thanks

Also please assume for this hypothetical that quick-close rates cannot be negotiated.

Edited by here_2_help

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First, the parties should begin with the applicable contract clause, FAR 52.216-16, "Incentive Price Revision -- Firm Target (OCT 1997)." FAR 52.216-7, "Allowable Cost and Payment," has nothing to do with FPI(F) contracts.

FAR 52.216-16( c) requires the contractor to submit certain cost data to the CO after performance is complete. Paragraph (d) then requires the parties to use those data, and other "pertinent" data, to determine the total final (allowable) cost incurred and to establish a total final price by applying the incentive formula. The parties can use any reasonable method to determine the total final cost incurred, including an incurred cost audit.

According to FAR 42.703-1( c)(2), the CO must use any final indirect cost rates that have been established when determining total final cost incurred. If no such rates have been established, then the parties should use audit and/or estimates and cost analysis to determine the total final allowable indirect costs, just as they probably did in order to negotiate the target cost prior to contract award. (Paragraph (g) of the clause required the parties to establish "billing prices," not indirect cost interim billing rates.)

FAR Subpart 42.7 is addressed to government personnel, not contractors, unless it is incorporated into the contract. FAR 52.216-16 makes no mention of FAR Subpart 42.7. FAR 42.703-1( c)(2) instructs the CO as follows:

Established final indirect cost rates shall be used in negotiating the final price of fixed-price incentive and fixed-price redeterminable contracts and in other situations requiring that indirect costs be settled before contract prices are established, unless the quick-closeout procedure in 42.708 is used.

Emphasis on "established" added.

In other words, if the contractor has had final indirect cost rates established pursuant to the procedures in FAR Subpart 42.7, then the CO must use those rates when negotiating the total final cost incurred under an FPI(F) contract. It cannot be read to require that a contractor take action to establish final indirect cost rates in accordance with FAR Subpart 42.7 Nothing in FAR 52.216-16 requires any such thing.

Assuming that the contractor has submitted the required post-performance cost data, the CO should seek an incurred cost audit or conduct a cost analysis and then negotiate.

If the CO demands that the contractor proceed under FAR 42.7, then the contractor should treat that requirement as a constructive change and demand an equitable adjustment to the target cost and target profit. Otherwise, it will lose profit if it includes those additional costs as incurred under the current target cost.

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