Jump to content
The Wifcon Forums and Blogs

JAG51

CPFF Direct Labor Rates

Recommended Posts

Navy - ID/IQ Services Award - Multiple Awardees - Base plus Two 1 Year Options - CPPF (Completion/Term).

I happened upon the following slide in a powerpoint kick-off meeting for the above-mentioned ID/IQ. The following was presented by the contracting officer as one of the slides:

"Proposed Direct Labor Rates

Task Order direct labor rate quotes must be in line with the rates proposed at the basic contract level. All offerors (and their respective subs) shall submit their current actual unloaded direct labor rates for all proposed key personnel. Contractors shall:

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order."

The solicitation made no mention of this concept. The contractor's proposal is not incorporated in the ID/IQ. No direct labor rates are present in the ID/IQ. There are no forward pricing labor rate agreements. There are no clauses or statements in the ID/IQ that support the above-mentioned approach. Contractor is a small business.

Anyone see any issues with the above-mentioned slide?

Share this post


Link to post
Share on other sites

I've never encountered this myself, but have had this discussion on one other occasion. The net effect of the prior encounter was that the Customer required cost of increased rates to come out of the fixed fee portion of the contract and they apparently stood firm on this. I'll be interested in following this topic.

Share this post


Link to post
Share on other sites

The last time I saw such customer micromanagement of direct labor rates in a CPFF contract environment, a COTR ended-up going to jail. Seriously.

H2H

Share this post


Link to post
Share on other sites

I think they are within their rights to request the information prior to issuing an order. Moreover, since the contract is an IDIQ and they are not obligated to issue orders beyond the minimum, they are within their rights to try to negotiate ceilings on rates as a condition precedent to issuing orders once the minimum has been reached. My guess is that the minimum is pretty low, so if the rates go up significantly, they might pay you off rather than order the minimum.

Share this post


Link to post
Share on other sites

Vern,

My point is that the customer is attempting to create what is essentially a T&M type contract under the rubrik of CPFF. If the labor rates were going to be micro-managed then the solicitation should have indicated that T&M type task orders would be awarded, in my view.

There's a reason that T&M contracts are the least preferred contract type, as you know. Such risk-shifting after award is hardly the mark of fair dealing, regardless of the perceived utility.

On the other hand, the contractor need not submit task order proposals if it feels the administrative costs and financial risks make any award a bad deal, so there's that.

H2H

Share this post


Link to post
Share on other sites

Help:

I don't agree with you.

I saw nothing in the first post to suggest that the customer is trying to convert a CPFF contract into a T&M contract. What I see is an attempt at some kind of advance agreement to cap unloaded direct labor rates, which is very different from T&M. And I don't think that's micromanagement. I think it's an attempt at cost control.

The CO is an idiot If he wants to convert a CPFF to a T&M.

Share this post


Link to post
Share on other sites

Vern, a couple of things:

1. The Contracting Officer may well be trying to negotiate ceiling rates, but the three items mentioned in the original post don't seem to lead to that.

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order."

The first item seems more like a limitation of cost type provision (provide notice if the rates will be higher), but does not prohibit higher rates.

The second item requires notice and justificatoin when using personnel who are paid at higher rates, but does not prohibit use of such personnel.

Unless the RFP establishes a "labor cost ceiling" (which to me does not really fit within the construct of a CPFF contract), the third item is ambiguous.

2. The contracting officer may be requesting labor rates as part of the proposal, but the three items seem to apply during performance, not as part of the information requested before award. I have no problem with the Contracting Officer doing this, but it is not at all clear what the Contracting Officer is going to do with the information. For example, if actual cost rates are higher than those proposed, and the contractor provides the notice/explanation required, then what?

Share this post


Link to post
Share on other sites

By telling the contractor not to incur higher rates before notifying him, the CO is setting a condition for cost allowability. The practical effect is to allow the CO to effectively cap the rates if he so desires.

As for what the CO is going to do with the info, what do you think he's going to do with it? He's going to use it to decide whether to let the work go forward at the higher rates.

Look, it's a CPFF contract and it's the government's job and money. The CO has every right to control the contractor's costs by requiring approval before incurrence. The only risk is that it might delay the work and increase costs if the CO does not make prompt approval/disapproval decisions.

This is no big deal. The CO's direction is entirely reasonable and legally unobjectionable. In my opinion, this is not worthy of further discussion. JAG51 asked if there were any issues. My response is that there are none of any significance. A wise contractor would do as the CO asks.

But some of you have worried and suspicious minds, so chat on.

Share this post


Link to post
Share on other sites

Thank you, Vern!

Actually, the first question that rose in my mind actually related to whether the proposed task order costs reflect reality or just whatever it will take to win tasks. In my opinion, the KO has the right to require a cost contractor to justify the reasonableness of certain costs that don't reflect what the contractor tells the government to expect during task order competitions/negotiations.

There is no presumption that incurred costs are reasonable (FAR 31.201-3 ( a )). And:

"If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officers representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable."

Share this post


Link to post
Share on other sites

And - I may be wrong - the last point the KO is making is that he/she expects the contractor to manage the task order within the proposed labor budget. Is that a "change"? I doubt it. The implied message could be "Don't smoke me to win a task order."

Share this post


Link to post
Share on other sites

Yes. It seems like the Navy is attempting to impose a contract term you did not agree to.

Don, where is the change to the contract terms? Please elaborate. Thanks.

Share this post


Link to post
Share on other sites

Don, where is the change to the contract terms? Please elaborate. Thanks.

joel,

JAG51 wrote that the CO wants him to abide by the following terms:

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order.

JAG51 also wrote that these terms were not included in the basic IDIQ contract--he never agreed to them. That's why I wrote what I did.

Share this post


Link to post
Share on other sites

Actually, JAG51 did not say that the CO "wants him to abide" by those terms. He said that the CO showed a slide that displayed those terms. Did JAG51 ask the CO any questions about the slide? If so, he did not mention it and did not report a CO response.

Share this post


Link to post
Share on other sites

And so the CO, who presumably has included 52.232-7 and 52.232-22 in the ID/IQ and presumably has an ability to issue a CPARS rating, feels the need to add an additional cost allowability condition into the post-award administration. It may be permissible but that doesn't make it right.

And to Joel's point about 31.201-3, he's wrong. (Sorry Joel, but you are.) A specific allowability rule trumps a general allowability rule. I can't find the legal cite right now for that axiom, but it's precedential. Since there is already a very complex cost principle governing the allowability of contractor compensation (31.205-6)--which requires labor cost to be reasonable as a condition of allowability--then labor that is already allowable pursuant to that set of detailed prescriptions cannot be challenged on the more general reasonability grounds. Which is to say, sure, you CAN challenge it. But it won't be sustained in litigation, I predict.

Litigation is where this relationship is headed, based on the adversarial relationship evidenced by the slide. There's a lack of trust, and Vern's and Joel's posts display it as well.

Is the contractor trust-worthy? Who knows? But the CO has already decided the answer before issuing the first task order. That does not bode well.

Last point: when the CO attempts to control the direct labor rates and use the proposed DL rates as a cap on allowable DL rates that is, in essence, attempting to convert the CPFF T.O. into a T&M T.O. It is an attempt to shift the risk of cost growth from the government customer, where it belongs by virtue of the contract type chosen for award, to the contractor, who by the nature of the contract type should not be expected to bear it. I don't consider that attempt evidence of fair dealing and good faith, but since I'm a contractor I'm biased. Your mileage may vary.

H2H

Share this post


Link to post
Share on other sites

Don, I don't see where those terms for task orders, as stated, are necessarily outside the bounds of a CPFF contract. The KO is telling the contractors that he/she expects that they will propose realistic labor rates for yaks orders that are similar to what the government expects to pay and that the contractor is expected to manage task orders. The contractor is expected to notify the government before paying higher labor rates and should justify why that is reasonable and necessary and what is the value provided for paying more than the government's expected cost. It is also expected to advise the KO how it plans to mitigate the added expense. The KO is being proactive as opposed to being reactive.

That's my perspective as a steward of the taxpayer. I'm not surprised that a contractor or someone who serves the interests of his employers wouldn't have the same perspective. I feel that many government employees have little understanding of being proactive in such contracting situations. I'm at my camp today so don't have the resources handy to cite the law* that added the language to 31.201-3 regarding no presumption of reasonableness of incurred costs and that the contractor should explain and justify the reasonableness if they appear to be unreasonable or out of line with what the contractor proposed and what the government expected. It is easier to resolve the question of reasonableness before costs are incurred than afterwards. The contractors know the KO's expectations before proposing or quoting for each task order.

Edit: *the language that I quoted is based upon statute enacted after I went to work for the government. I believe it was added in the mid to late 80s or early 90s and I do know that many of those "seasoned" government employees had no concept of this but felt only that it "will cost what it costs", regardless of reasonableness under the circumstances. And this law is not meant to conflict with the specific rules in 31.2. The question is whether incurring those costs under the specific circumstances is reasonable. I don't have time to research the law on my cellphone at the moment. EDIT: SEE LATER POST FOR CITATION.

Share this post


Link to post
Share on other sites

H2H, I didn't see where the KO imposed a cap on labor rates. Being "in line with" doesn't necessarily impose any "cap".

Share this post


Link to post
Share on other sites

H2H, Joel is correct in applying 31.201-3 in determining reasonableness of compensation costs. Note that 31.204 specifically requires application of 31.201, including 31.201-3, when determining allowability of costs even if there are criteria for allowability including reasonableness, in the enumerated cost principles in 31.205. Thus, the reasonableness criteria in 31.205-6 are supplementary to those in 31.201-3.

Share this post


Link to post
Share on other sites

"It may be permissible but that doesn't make it right."

I want to re-write the CO slide to help in my understanding -- let's re-write it so clearly show that the contractor does not have to do what was on the slide...

"Proposed Direct Labor Rates

Task Order direct labor rate quotes must need not be in line with the rates proposed at the basic contract level. All offerors (and their respective subs) shall need not submit their current actual unloaded direct labor rates for all proposed key personnel. Contractors shall need not :

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; andor

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order."

Hmmm, somehow I don't really like the re-write.

Share this post


Link to post
Share on other sites

Retreadfed,

I see what you wrote but I don't think it aligns with judicial interpretation. I might be wrong and I don't have time to research it. So let's agree to disagree.

ji20874,

The customer had the option of issuing an FFP contract or a formal T&M contract, which would have pushed the risk of cost growth onto the contractor in an explicit, transparent, manner. It did not choose to avail itself of any of those options. Thus, your rewritten slide is absolutely correct from a regulatory perspective.

H2H

Share this post


Link to post
Share on other sites

Does the contractor invoice its actual direct and indirect costs during the Task Order period of performance, or does it invoice according to the direct labor rate and indirect rate "caps" that the proposal funding was established upon?

Share this post


Link to post
Share on other sites

Contractors shall: Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ...

I see nothing unreasonable in a contracting officer telling a contractor working under a cost-reimbursement contract not to use labor on a job that earns more than a certain rate without first getting the contracting officer's approval. There is no conflict with FAR 31.205-6. Help -- your approach to that cost principle is absurd.

And I cannot believe that any contractor with its head screwed on properly would object to such an instruction or do anything other than put the customer on notice of any potential performance implications.

And having given such an instruction and having ensured that it was received and understood, and having received no strenuous objection from the contractor, I see nothing unreasonable in the contracting officer refusing to compensate the contractor for the difference between the base rate and the higher rate on grounds of unreasonableness if the contractor were to fail to comply. And I do not believe that any board or court would overrule the contracting officers determination in that regard. What could be more unreasonable than to ignore such a straightforward instruction from the contracting officer?

I can think of no grounds for the contractor to strenuously object. It's a cost-reimbursement contract. It need only make its best effort. It's the customer's money. Why object? If it were to appear that higher priced labor were necessary, then all the contractor need do is tell the CO, provide rationale, and let him or her decide whether or not to spend the money.

The idea that such a stance by a contracting officer is a sign of distrust and will lead to litigation strikes me as ridiculous. Ridiculous. This is not a matter of trust. It is a matter of control over expenditure. It's as simple as that.

Share this post


Link to post
Share on other sites

Does the contractor invoice its actual direct and indirect costs during the Task Order period of performance, or does it invoice according to the direct labor rate and indirect rate "caps" that the proposal funding was established upon?

JAG51,

This is the kind of question you need to ask the CO.

Share this post


Link to post
Share on other sites

Don, I don't see where those terms for task orders, as stated, are necessarily outside the bounds of a CPFF contract. The KO is telling the contractors that he/she expects that they will propose realistic labor rates for yaks orders that are similar to what the government expects to pay and that the contractor is expected to manage task orders. The contractor is expected to notify the government before paying higher labor rates and should justify why that is reasonable and necessary and what is the value provided for paying more than the government's expected cost. It is also expected to advise the KO how it plans to mitigate the added expense. The KO is being proactive as opposed to being reactive.

joel,

If you're saying that, by entering into a CPFF contract, the contractor has implicitly agreed to the administrative burden that the CO wants to impose under this task order, I would have to disagree. I believe such specific terms should be contained in the basic IDIQ contract.

Share this post


Link to post
Share on other sites

See Cost-Reimbursement Contracting 3d ed., by Cibinic and Nash, pp. 23 - 24:

The unique risk-allocation provisions of cost-reimbursement contracts permit the Government a great deal of flexibility by writing a broad work statement and directing the contractor to achieve the desired results during performance of the work. This flexibility is not present in fixed-price contracts.... The contracting officer has greater leeway in a cost-reimbursement situation, primarily because the contractor is generally reimbursed for costs that it incurs in following the Government's direction.... Thus, cost-reimbursement contractors do not usually raise strenuous objections when requested to comply with the wishes of Government officials.

In a very real sense, the instruction to not use labor that is paid more than a specific rate with CO approval is technical direction from the CO. The CO did not say that the contractor must use whatever labor is necessary, but that he won't pay more than the originally proposed rates. He said not to use more highly paid labor without first getting his approval. That's very different. It's very similar to requiring advance approval before incurring overtime costs. The CO must balance the government's demands, and he must be reasonable. He cannot require the contractor to do work that requires more highly skilled and paid workers and then refuse to approve their use and to pay the otherwise reasonable bill.

Share this post


Link to post
Share on other sites
Guest
This topic is now closed to further replies.

×