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Applicability of Multiyear Cancellation Ceilings for CPFF Overseas Services

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Applicability of Multiyear Cancellation Ceilings for CPFF Overseas Services

Field Contracting Officers of my civilian agency awarding multiyear contracts have been directed to negotiate cancellation ceilings in schedules of awards and incorporate FAR 52.217-2, Cancellation under Multiyear Contracts, into its contracts.  Nevertheless, implementation guidance has not been provided and is solicited by this posting. 

Unlike major weapons system procurements, the guidance sought would apply principally to a subset of multiyear contracts within the meaning of FAR 17.103, namely, 5-year, incrementally funded CPFF completion type contracts for overseas services.  Incorporating FAR 52.217-2, these contracts provide for cancellation arising from the circumstances described in FAR 52.217-2 (a) (1) and (2), namely, when “funds are not available for contract performance for any subsequent program year” or [the Government] “fails to notify the Contractor that funds are available for performance of the succeeding program year requirements.”

FAR 52.217-2 (b) states in pertinent part that “except for cancellation under this clause or termination under the Default clause, any reduction in contract requirements shall be considered a termination for convenience.  Cancellation charges up to yearly negotiated ceiling amounts may include only incurred and reasonably necessary costs “that would have been equitably amortized over the entire multiyear contract period, but, because of the cancellation, are not so amortized.”  However, the meaning of unamortized costs in the context of CPFF completion contracts for overseas services is unclear.  Phase-out costs, e.g., terminating leases, disposing property, and repatriating personnel would be anticipated, but may not fit the definition of “unamortized.”  In sum, if such costs are not considered unamortized, then would not $0.00 be appropriate as a cancellation ceiling?

My limited research indicates the cancellation clause has a narrow purpose.  According to USAF Informational Guidance IG5317.1, Multiyear Contracting, dated October 2006, cancellation “was intended to deal with the situation in which Congress does not appropriate the funds needed to continue the multiyear contract.”  Further, “if a future Congress does not appropriate adequate funds, the multiyear contract will have to be cancelled and cancellation charges will have to be paid to the contractor to reimburse for unrecovered costs, which the contractor was unable to amortize in the canceled years. In other words, there is a price to pay if the Government does not follow through on its multi-year commitment.”

In addition to cancellation, two other clauses, Termination for the Convenience of the Government and Limitation of Funds, broadly govern the absence or unavailability of contract funds.  The termination for convenience clause permits termination whenever it is in the Government’s interest.  Thus, although only unamortized costs can be reimbursed under the cancellation clause, FAR 17.104 (d) states that a convenience termination “may apply to any Government contract, including multiyear contracts.”  Therefore, it appears that in the event funds are not forthcoming at any time and for any reason, a convenience termination would permit the Contractor to recover allowable phase-out costs based on standard cost reimbursement rules without the need for a cancellation ceiling.

Finally, many of the multiyear contracts issued by the agency are incrementally funded, and therefore, FAR 52.232-22, Limitation of Funds, is incorporated by reference.  Under subparagraph (b) of the clause, the Contractor agrees to work on the contract up to the point “at which the total amount paid and payable by the Government …does not exceed the total amount actually allotted by the Government to the contract.”  Thus, in this circumstance as well, when funding approaches exhaustion, the cancellation clause would not pertain.

In view of the foregoing, it appears that the cancellation clause may not be applicable to the multiyear CPFF contracts discussed above.  Thanks in advance for your comments.

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Filippo, the facts of your case are not clear.  First, does your agency have statutory authority to enter into multi-year procurements for services?  Is the contract you are asking about already in place or are you negotiating it?  Is the contract period for a single five year period or is it broken up into a base period and option period(s)?  If a single performance period, what is the applicability of FAR 37.106 to your contract?  Finally, who issued the guidance you are questioning and why have you not gone back to them for clarification?

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Filippo,

Retreadfed asked very good questions -- I recommend you answer each one of them in the following format so that posters here can be helpful to you.

1.  Does your agency have statutory authority to enter into multi-year procurements for services?  your answer

2.  Is the contract you are asking about already in place or are you negotiating it?  your answer

3.  Is the contract period for a single five year period or is it broken up into a base period and option period(s)?  your answer

4.  If a single performance period, what is the applicability of FAR 37.106 to your contract?  your answer

5.  Who issued the guidance you are questioning and why have you not gone back to them for clarification?  your answer

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Guest Vern Edwards
Quote

...it appears that the cancellation clause [FAR 52.217-2]may not be applicable to the multiyear CPFF contracts discussed above.

In other words, you want confirmation that you do or do not have to include FAR 52.217-2 in your contracts. Your question is: Do I need the clause in the contracts in question?

The answer is easy. Read this definition from FAR 17.103, Definitions:

Quote

“Multi-year contract” means a contract for the purchase of supplies or services for more than 1, but not more than 5, program years. A multi-year contract may provide that performance under the contract during the second and subsequent years of the contract is contingent upon the appropriation of funds, and (if it does so provide) may provide for a cancellation payment to be made to the contractor if appropriations are not made. The key distinguishing difference between multi-year contracts and multiple year contracts is that multi-year contracts, defined in the statutes cited at 17.101, buy more than 1 year’s requirement (of a product or service) without establishing and having to exercise an option for each program year after the first.

A multi-year contract obligates an agency to to buy more than one year's worth of stuff even though it has money for only one year's worth, subject to cancellation and compensation to the contractor if the additional money doesn't come. That's different from incremental funding, which does not obligate the government to buy more than it has  money for and does not compensate the contractor if additional money doesn't come.

If, based on that definition, you determine that the contracts in question are "multi-year contracts," go to FAR 17.109, Contract clauses:

Quote

(a) The contracting officer shall insert the clause at 52.217-2, Cancellation Under Multi-year Contracts, in solicitations and contracts when a multi-year contract is contemplated.

Unless your agency supplement says something different, case closed.

 

 

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6 hours ago, ji20874 said:

3.  Is the contract period for a single five year period or is it broken up into a base period and option period(s)?  your answer

If the answer to this question is a base with four options it is not a multi-year contract and the exercise ends.

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Guest Vern Edwards

The purpose of a multi-year contract is to save money by letting the contractor take advantage of economies of scale without having to take the risk that the government won't buy its out-year requirements.

Let's say that the government plans to buy X number of widgets in each of the next three years. The program is funded annually, so the agency cannot obligate the government to buy more than one year's quantity at a time. That means that the contractor cannot buy enough materials for all three years, thereby saving money though quantity price discounts, but must buy material one year at a time, which is more costly.

But if the agency can get permission from Congress, it can obligate the government for all three years with the right to cancel (not terminate for convenience) and compensate the contractor up to the cancellation ceiling of any cancelled requirement for amounts that the contractor spends in advance of the second and third years of the program. The cancellation ceiling protects the contractor by guaranteeing payment for its advanced purchases and letting the contractor buy all three years' worth of materials..

You need the cancellation clause only if that's the kind of contract that's being awarded. Given its prescription, use of the clause in any other kind of contract would be a FAR deviation and could result in a violation of the Antideficiency Act.

It sounds like the OP might be talking about a CPFF completion-type, incrementally funded contract, that has a completion date that is five years out. Ordinarily, under an incrementally funded CPFF contract (one that includes the Limitation of Funds clause for incrementally funded cost-reimbursement contracts), the contract explicitly tells the contractor that the government will not reimburse it for any costs incurred in excess of the total amount currently allotted. That term is inconsistent with a multi-year contract cancellation ceiling. It might be that his HQ wants a T for C cap and is calling it a "cancellation ceiling." Who knows?

Anyway, the closest thing we have to a question from the OP is: should he or should he not include FAR 52.217-2 in the contract. That question has been answered. If the OP has another question, he should ask it as clearly, directly, and succinctly as possible.

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On ‎4‎/‎1‎/‎2016 at 9:48 AM, Retreadfed said:

Filippo, the facts of your case are not clear.  First, does your agency have statutory authority to enter into multi-year procurements for services?  Is the contract you are asking about already in place or are you negotiating it?  Is the contract period for a single five year period or is it broken up into a base period and option period(s)?  If a single performance period, what is the applicability of FAR 37.106 to your contract?  Finally, who issued the guidance you are questioning and why have you not gone back to them for clarification?

 

If you are using an older version of MS Word, you may not have been able to download the note that filippo posted.  I copied and pasted the contents of his note and posted it below in a quote box. 

 

Quote

Thanks all for your comments and questions.  My agency has multiyear contracting authority, and my strawman is a hypothetical multiyear, incrementally funded, non-severable, 5-year, CPFF Completion contract (without options) for technical services, not widgets.  Narrowly, the guidance sought is not whether the cancellation clause is required – it is because of FAR 17.109.  Instead, when, if ever, would a cancellation ceiling in the Schedule be meaningful?  Rephrased, “does the clause make sense if the cancellation charge is anything other than $0.0, and if so, how is anything other than $0.0 (per the clause, for unamortized costs only) justified?”

I appreciate ji20874 for pointing out FAR 37.106, since 37.106 (c) requires agencies to consider [multiyear contracting] “to encourage and promote economical (sic) business operations…” and may explain why FAR 52.217-2 is required.  Thanks, too, to Vern for pointing out that incremental funding is incongruent with multiyear cancellation ceilings to the extent the ceiling exceeds available funds. 

My tentative take-away is that there is no rationale for negotiating a cancellation ceiling other than $0.0.  Further, Termination for Convenience could conceivably provide appropriate relief for a contractor seeking reimbursement of allowable phase-out costs, when, for example, contract funds to fully fund the contract are reprogrammed or otherwise are no longer available. 

Thanks again for an important exchange of ideas; it is time to follow up with my agency.

 

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Filippo, your attachment is not available to everyone at this Forum.  I have attempted to open it and have received a message that it is not available to me.

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I wish Filippo had answered the questios and engaged in the discussion -- it would have been good learning for everyone...

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Guest Vern Edwards

The issue was whether or not to use a particular clause in a particular contract. The clause has a clear and unambiguous prescription. The way to resolve the issue should be clear. The only thing that is not clear, to us, that is, is whether the contracts in question are multi-year, multiple year, or something else. That is the only thing left to discover, unless I've missed something.

The attached document is mysterious, and we all love a mystery. So I've asked Bob about it, but haven't heard back yet. I'm sure he'll let us all know, unless the content was intentionally confidential.

The only interesting thing about this thread to me is what it reveals about how complex the contracting rules are. Everything is connected, there is a chain of knowledge, and you have to know a lot of stuff to make your way. For instance, if you are working on a contract and want to know whether a particular clause applies, you have to know things: such as the difference between multi-year and multiple year. Each of those kinds of contracts have particular attributes. If you know what they are, and if you know how to identify them in particular contracts, then answering the question is easy. But if you don't know the attributes, or can't recognize them in a particular contract, then answering the question is more difficult.

So if you are poor and someone tells you that you'll find a pot of gold buried a foot deep in the smallest alluvial fan in the next county, and you don't know what an alluvial fan is or how to recognize one when you see it, then poor you are and poor you'll probably stay. Curiosity, research, and study are the keys to everything.

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Thanks all for your comments and questions.  My agency has multiyear contracting authority, and my strawman is a hypothetical multiyear, incrementally funded, non-severable, 5-year, CPFF Completion contract (without options) for technical services, not widgets.  Narrowly, the guidance sought is not whether the cancellation clause is required – it is because of FAR 17.109.  Instead, when, if ever, would a cancellation ceiling in the Schedule be meaningful?  Rephrased, “does the clause make sense if the cancellation charge is anything other than $0.0, and if so, how is anything other than $0.0 justified, i.e., for unamortized costs only, in keeping with the clause?

I appreciate ji20874 for pointing out FAR 37.106, since 37.106 (c) requires agencies to consider [multiyear contracting] “to encourage and promote economical (sic) business operations…” and may explain why FAR 52.217-2 is required.  Thanks, too, to Vern for pointing out that incremental funding is incongruent with multiyear cancellation ceilings to the extent ceilings exceed available funds. 

My tentative take-away is that there is no rationale for negotiating a cancellation ceiling other than $0.0.  Further, Termination for Convenience could conceivably provide appropriate relief for a contractor seeking reimbursement of allowable phase-out costs, when, for example, contract funds to fully fund the contract are reprogrammed or otherwise are no longer available. 

Thanks again for an important exchange of ideas.  Following up with my agency is next.

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Filippo,

     If your need is for an "incrementally-funded, non-severable, 5-year, CPFF completion contract (without options) for technical services, not widgets," as you describe, then to me it sounds like maybe you do not have a multi-year contract.  Your requirement seems "entire" rather than "severable" (see GAO Redbook, Vol. I, Chapter 5, B.5.).  I don't know for sure because you haven't described the services, but I'm wondering.

     If this is not a real multi-year contract, then there is no need for a cancellation ceiling.

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Thanks, still mulling over some GAO Redbook passages, but it now seems that the agency does not actually award multiyear contracts (as properly defined), and has mistakenly labeled multiple year contracts as multiyear contracts.

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4 hours ago, filippo said:

Thanks, still mulling over some GAO Redbook passages, but it now seems that the agency does not actually award multiyear contracts (as properly defined), and has mistakenly labeled multiple year contracts as multiyear contracts.

If that is the case, it's probably good that you did check here, anyway 👌

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