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hightytighty

Fully Burdened Rates for FFP Orders

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I issued a request for pricing for a sole source single award IDIQ contract for services with a five year ordering period. In Section B the contract required fully burdened labor rates for each year of the contract to be used for T&M type orders and FFP type orders. The contractor refuses to provide fully burdened rates for FFP orders stating labor rates are not relevant to the FFP contract value and this approach places significant risk to the contractor. They also argue this approach is not aligned with FAR since they cannot provide a certificate of current cost and pricing data for applicable orders when using out year rates that may be different from actual current labor rates at the time of placing an order.

I don't understand what the difference is between establishing labor rates for any contract type and establishing rates in a FPRA. Their position that the labor rates are not relevant to the total value is not totally sound to me as the established rates would be used against the contractor's proposed level of effort that would build to the total FFP value. All GSA Schedules have burdened rates used when developing FFP orders and I've also seen this done on BPAs. I offered to negotiate separate T&M rates from the FFP rates because to me the only difference is profit but this was still unsatisfactory. 

I don't understand why this is a hard pressed issue for the contractor. I think this is a standard practice to negotiate labor rates for up to five years as is done with GSA and DCMA. Is there any reason why it's not appropriate to negotiate fully burdened rates for FFP orders? Is the contractor's claim about certified cost and pricing data true? 

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2 hours ago, hightytighty said:

Is there any reason why it's not appropriate to negotiate fully burdened rates for FFP orders? 

Well, one reason would be that your sole source doesn't want to do it.

Another reason is that only a stupid buyer would negotiate burdened labor rates (i.e., including indirect costs and profit) in advance and then price FFP orders by (1) determning labor categories and hours per category needed for the task and then (2) multiplying the hours by the agreed upon rates. It would be truly, deeply stupid, and justifiable only by laziness or some kind of emergency. In fact, such an approach may well be inconsistent with FAR 15.404-4(a)(2) and (b) and 15.405(b). I know that people do it, but that's no excuse.

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They also argue this approach is not aligned with FAR since they cannot provide a certificate of current cost and pricing data for applicable orders when using out year rates that may be different from actual current labor rates at the time of placing an order.

That does not make sense to me, but I'm not sure what that means.

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I don't understand why this is a hard pressed issue for the contractor.

Well, then, why don't you sit down with the company and ask them to explain their position in depth and detail and the reasoning behind it. Ask them to pencil it out for you. Once you fully understand their reasoning you can figure out how to respond.

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9 hours ago, hightytighty said:

I don't understand what the difference is between establishing labor rates for any contract type and establishing rates in a FPRA.

I offer the suggestion that one difference is that FPRAs "shall provide specific terms and conditions covering expiration, application, and data requirements for systematic monitoring to ensure the validity of the rates. The agreement shall provide for cancellation at the option of either party and shall require the contractor to submit to the ACO and to the cognizant contract auditor any significant change in cost or pricing data used to support the FPRA." (See FAR 42.17(c).) Thus, rather than locking into rates for a 5 year period, the FPRA only estimates rates for a 5 year period and may be changed/cancelled when the estimates are no longer valid.

Further, I don't understand why you don't understand the contractor's concerns about locking into fully burdened labor rates for a 5 year period. Do you think the contractor can estimate its future years' labor rates? Will you permit use of a generous labor escalation rate so that the contractor can be sure to retain its current work force and attract new hires? And what about future years' indirect rates? Do you think the contractor feels comfortable estimating its overhead rates in the year 2020? --especially given the current budget situation?

Let me turn this around for you. Why are you issuing an ID/IQ contract? Why won't you commit to a firm quantity of work that the contractor can count on? Why won't you issue a FFP contract for the 5 year PoP? See, it works both ways. You can't commit to a firm quantity but you want the contractor to commit to firm hourly rates. That's going to be a problem.

Finally, I have a general question. Apparently contractors' proposals to establish FPRAs must include certified cost or pricing data. (FAR 15.407-3(c).) Fine. What then is the remedy for defective pricing with respect to the FPRA?

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If hightytighty is in the situation I think he/she is in, the contractor's concern regarding providing a Certificate of Current Cost or Pricing Data for orders stems from being required (contractually) to use predetermined rates to price out work that one, two...five years down the road will almost certainly be different than the rates they're realizing. The contractor is likely arguing that it is, therefore, impossible to execute the required certification that the contractually required rates are accurate because their actual rates are not the same as the rates used to price out the work.

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14 hours ago, here_2_help said:

Finally, I have a general question. Apparently contractors' proposals to establish FPRAs must include certified cost or pricing data. (FAR 15.407-3(c).) Fine. What then is the remedy for defective pricing with respect to the FPRA?

COs must obtain cost or pricing data when negotiating FPRAs, but they may not require certification of those data at the time of agreement on forward pricing rates. The data submitted for the rate agreement are certified (or updated and certified) when a contract action is negotiated on the basis of the agreement. If the certified cost or pricing data that were submitted for the pricing of the contract action indicate that the FPRA is not a valid basis for pricing, the CO should negotiate based on rates appropriate the contract action.

If the data submitted with the FPRA proposal, and periodically updated (see FAR 14.1701(c)), are not accurate, complete, and current as of the time of price agreement for the contract action, and the contractor does not update those data, then the data supporting the FPRA will be defective for that action. The government's remedy is a price reduction in the amount of the difference between  the price on which the government agreed for the contract action and the price that it would have agreed to had it been given data that were not defective.

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I don't understand what the difference is between establishing labor rates for any contract type and establishing rates in a FPRA.

The difference is that FPRAs are not the same as contractually specified fully burdened labor rates. FPRAs are not binding. FPRAs are updated periodically and either party can opt out when it wants to. See FAR 42.1701(c). I presume that fully burdened rates in a contract would be binding. Why would a contractor want to sign up to contractually specified rates five years in advance of order pricing? To the best of my knowledge, FPRAs for labor that are negotiated under FAR Subpart 42.17 cover only wage rates, not "fully burdened" ("wrap") rates that include indirect costs and profit.

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The contractor is likely arguing that it is, therefore, impossible to execute the required certification that the contractually required rates are accurate because their actual rates are not the same as the rates used to price out the work.

If that's the contractor's concern, then it does not understand defective pricing. The certificate of current cost or pricing data would not cover the negotiated and contractually stipulated labor rates. When signing the certificate of current cost or pricing data the contractor is not certifying that the rates are accurate. That is a fundamental misunderstanding. The certificate covers only the cost or pricing data submitted when negotiating those rates. Contractors don't certify that their proposed rates or prices are accurate, complete, and current. They certify that the data on which the price agreement was based were accurate, complete, and current. The contractor will have no worries about defective pricing arising from differences between contract and actual rates as long as the data supporting the negotiation of those rates were accurate, complete, and current as of the date on which the parties agreed on them. It will make no difference that its subsequent real rates are different than the contract rates.

It's a dumb idea to enter into an IDIQ service contract under which orders are to be priced through the use of T&M type fully burdened rates. Any such rates included in any such contract should be advisory only. The parties should negotiate task order prices -- costs and profit -- on a case-by-case basis. Negotiating task order prices by applying pre-negotited fully burdened rates to estimates of labor hours is nothing but a labor-saving device used by government buyers. It is not a sound business practice. It's dumb.

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i find all the objections to fully burdened labor rates on an IDIQ contract interesting, especially considering that is what the GSA MAS service contracts have been doing for more than a decade.  Not trying to start anything... just making an observation.

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Desparado:

Keep in mind that when it comes to GSA MAS contracts, FAR 8.405-4 permits agencies to seek price reductions before placing an order and requires them to do so before placing an order that exceeds the simplified acquisition threshold. In essence, the rates in those contracts are for contract award purposes only and are not binding on the government. GSA MAS "contracts" are not like agency-awarded sole source, single-award IDIQ contracts.

The OP for this thread did not ask about GSA MAS contracts. He or she seemed to suggest that, unlike the case under GSA MAS contracts, rates in the prospective IDIQ contract would be contractually binding. The OP seemed clear that the rates would be binding on the contractor, he or she gave no indication that the rates would not be binding on the Government, and he or she made no mention of seeking rate reductions prior to placing an order. There is no comparison with GSA MAS contract pricing.

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The Contractor is hesitant to provide fully loaded FFP labor rates because it must guess what its costs are up to five years after award.  As a thought experiment, try to guess what your hourly rate is in five years, and be willing to stick with that rate regardless of changing circumstances.  Difficult indeed.  

I am not sure I agree that negotiating these rates is "deeply stupid."  There are some industries where this is common practice, particularly those where prices are not expected to change significantly or there is sufficient historical trends to justify the pricing arrangement.  Many agencies successfully use this arrangement in information technology contracts, with rates increasing consistent with the DLA BLS Employment Cost Index.  I agree, however, that using fully-loaded rates in markets facing significant pricing variances is less than ideal.  

Perhaps a better option would be to use a fixed price with economic price adjustment.  This would 1) be less risky for the contractor; 2) increase the probability the agency would pay realistic prices for the services it received; 3) avoid a high-risk contract type; and 4) potentially reduce the amount of administrative effort to determine the price fair and reasonable (depending on the contract value and circumstances, remove the need for cost and pricing data, cost analysis, CAS, etc.).  

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As somebody who often has to untangle the results of a botched contract type choice, I tend to agree with Vern's assertion (not that he needs my support). I'm dealing right now with an allegedly cost-reimbursement contract where the contractor was directed to submit proposed hourly billing rates each contract year for each individual performing work. Those rates were to include all indirect costs plus a "fee" ... and then were to be used for the year for billing purposes. Period. Yet somehow this is a cost-type contract and the auditors are deeply into this contractor's indirect costs, even though there is nothing in the contract or the course of dealing that would support the notion that actual direct and/or indirect costs would impact the authorized hourly billing rates.

Lots of fun for me. Not so much for the contractor.

(Note: The contract was not issued by an agency of the Federal government, though Federal funds were used.)

Thus I echo and endorse Vern's comments that attempts to create FFP hourly labor rates (with a 5 year validity period) to be used for pricing FFP and T&M task orders and, ultimately, for billing work performed, is a bad idea. Far better (to my way of thinking) to establish pricing (whether T&M rates or a FFP amount) for each task order on an individual basis as the work is needed. Of course, that leads to the question as to who is paying for the task order proposals ... but that's a discussion for another thread.

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13 hours ago, Vern Edwards said:

Matthew:

I'm not sure what you mean by "CPFF rates." Please explain.

Matthew, yes please explain the mechainics of how CPFF rates would be established. Thanks. 

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I'm looking back at the original post. First, our original poster hasn't returned to engage, so my tendency is to walk away from the thread. But I've been thinking about this one. Here Hightytighty has presented us with a sole-source ID/IQ contract award for services with a 5 year ordering period. Absent anything "unusual" the requirements of Truthful Cost or Pricing Data (aka TINA) would apply to the evaluation of each proposal submitted for each task order award, right? Thus, for the next 5 years or so Hightytighty is going to be doing a LOT of cost analysis and a lot of negotiating. That's a lot of work!

Unless ... s/he can get the contractor to propose a set of fully burdened rates to be used throughout the ordering period. Then s/he would only have to perform cost analysis once, at the beginning of the ordering period, and s/he gets to say task order prices are fair & reasonable because they used the same rates that were subject to cost analysis way back then, and found to be fair & reasonable at that time. Think of all the future work Hightytighty is going to avoid!

Again, our friend hasn't come back to engage so this may all be wild speculation on my part. But I'm speculatin' that's where s/he is coming from.

P.S. - I realize the contractor is still going to have to disclose actual labor costs and actual overhead rates in order to comply with TCoPD (aka TINA) but I'm speculatin' Hightytighty is going to figure out a way to ignore that information or explain it away because the parties have contractually agreed-upon rates.

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3 hours ago, here_2_help said:

Then s/he would only have to perform cost analysis once, at the beginning of the ordering period, and s/he gets to say task order prices are fair & reasonable because they used the same rates that were subject to cost analysis way back then, and found to be fair & reasonable at that time.

No.

Agreeing on rates would not ensure that task order prices are fair and reasonable. Unless all tasks were identical, the CO would have to perform cost analysis for every order, because the order price would be the sum of the individual labor category costs, which would be the product of the labor rate and the labor hours, plus any materials costs. Cost analysis would have to be done in order to determine whether the contractor (and any subcontractor) has proposed the appropriate labor categories, hours per category, and category mix. Agreeing upon hourly rates would not eliminate the need for cost analysis and submission of certified cost or pricing data.

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Assuming the work is not commercial, rather than using FFP rates (via task order or additional CLIN depending on how the contract is structured) where one pays the full amount regardless, one could use a pre-established CPFF rate(s) on a per labor hour basis. With a CPFF structure, the contractor would only be able to charge for actual costs of performance (which may be lower or higher than the amount established) and the fixed fee at the amount specified.  In terms of execution, the parties negotiate the amount of labor hours then apply the pre-established contractual CPFF rate and fee amount to arrive at the total estimated hours, target cost, and fixed fee amount for the effort.  

One could conceivably use a pre-established CPIF structure instead in order to encourage cost control during performance, although I have not seen this approach used (yet).

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7 hours ago, Vern Edwards said:

No.

Agreeing on rates would not ensure that task order prices are fair and reasonable. Unless all tasks were identical, the CO would have to perform cost analysis for every order, because the order price would be the sum of the individual labor category costs, which would be the product of the labor rate and the labor hours, plus any materials costs. Cost analysis would have to be done in order to determine whether the contractor (and any subcontractor) has proposed the appropriate labor categories, hours per category, and category mix. Agreeing upon hourly rates would not eliminate the need for cost analysis and submission of certified cost or pricing data.

Okay. I can take correction. But then, what in the name of all that's holy is the perceived benefit from Hightytighty's planned approach?

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H2H,

For an IDIQ I'm not sure either - the approach I've mentioned is used on contracts to establish options/mechanisms to contract for quick reaction tasks or studies.  Establishing rates and a labor hour cap is necessary to comply with FAR 17.207(f), otherwise those efforts may require a J&A.

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19 hours ago, Matthew Fleharty said:

Assuming the work is not commercial, rather than using FFP rates (via task order or additional CLIN depending on how the contract is structured) where one pays the full amount regardless, one could use a pre-established CPFF rate(s) on a per labor hour basis. With a CPFF structure, the contractor would only be able to charge for actual costs of performance (which may be lower or higher than the amount established) and the fixed fee at the amount specified.  In terms of execution, the parties negotiate the amount of labor hours then apply the pre-established contractual CPFF rate and fee amount to arrive at the total estimated hours, target cost, and fixed fee amount for the effort.  

One could conceivably use a pre-established CPIF structure instead in order to encourage cost control during performance, although I have not seen this approach used (yet).

1. One could use a pre-established CPFF rate(s) on a per labor hour basis. You're still using the term "CPFF rates" without definition. What kind of rates are those? Direct labor rates, without burden? Those are not difficult to propose. Why bother to "pre-establish" them? Now, if you mean not-to-exceed direct (unburdented) labor rates, i.e., rate caps, then I would see the point. But your next sentence suggests that's not what you mean. You plan to reimburse based on allowable incurred costs. See 2, below.

2.  With a CPFF structure, the contractor would only be able to charge for actual costs of performance (which may be lower or higher than the amount established) and the fixed fee at the amount specified. If you're just going to reimburse the contractor at allowable rates, why bother setting "pre-established CPFF rates," whatever those are? Moreover, by adding fixed-fee in the same dollar amount per hour of input, regardless of the nature of the task, you're not complying with FAR policy about profit and fee, which is that the fee objective is to be based on the nature of the task and risk, among other things. See FAR 15.404-4(d). Your method is purely mechanical.

3. The parties negotiate the amount of labor hours then apply the pre-established contractual CPFF rate and fee amount to arrive at the total estimated hours, target cost, and fixed fee amount for the effort. Again, your method strikes me as mechanical. It appears to have the potential to result in unreasonable fixed or target fees, because fee-setting would not be based on task and risk analysis, but input quantities. The higher the estimates of hours, the higher the fixed or target fees. While I understand the desire to simplify and speed up the ordering process, I don't think goal justifies the abandonment of professional pricing policies and procedures, which are analytical, not mechanical.

4. One could conceivably use a pre-established CPIF structure instead in order to encourage cost control during performance, although I have not seen this approach used (yet). And I hope you never do see it. Foolishness squared by needless complexity.

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18 hours ago, here_2_help said:

But then, what in the name of all that's holy is the perceived benefit from Hightytighty's planned approach?

Ease of calculation in the ordering process. They may think that once the contractor gives them the estimated hours, they can get a fair and reasonable task price by multiplying the hours times the fully burdened rates -- mission accomplished. You can think that way if you don't care or if you're a dummkopf. Mission accomplished. Besides, don't assume that the OP's office is complying with FAR 16.505(b)(3), "Pricing orders." They may not be complying with 15.403-4, 15.404-1(a)(3), or 15.404-4 on an order-by-order basis.

Offices that use those kinds of methods and contracts are not interested in analysis and pricing outcome. They want administrative convenience and process speed. I understand it, but I don't respect it.

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On 10/20/2016 at 9:00 AM, Vern Edwards said:

Desparado:

Keep in mind that when it comes to GSA MAS contracts, FAR 8.405-4 permits agencies to seek price reductions before placing an order and requires them to do so before placing an order that exceeds the simplified acquisition threshold. In essence, the rates in those contracts are for contract award purposes only and are not binding on the government. GSA MAS "contracts" are not like agency-awarded sole source, single-award IDIQ contracts.

The OP for this thread did not ask about GSA MAS contracts. He or she seemed to suggest that, unlike the case under GSA MAS contracts, rates in the prospective IDIQ contract would be contractually binding. The OP seemed clear that the rates would be binding on the contractor, he or she gave no indication that the rates would not be binding on the Government, and he or she made no mention of seeking rate reductions prior to placing an order. There is no comparison with GSA MAS contract pricing.

There is one place where there is some comparison. One of the main issues being raised here is the thought that contractors cannot forward-price for 5 years on a fully loaded labor hour basis.  That is exactly what they must do on GSA MAS service contracts.  Yes, they can go lower, but they can not go higher than the previously negotiated rates, which are done in 5-year increments. 

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Frankly, I'm not concerned with the seller's pricing problem. A seller can price labor in advance and manage its costs accordingly. There is a risk in some industries, but I think it's manageable, especially for a sole source.

I'm concerned about the idea of a buyer entering into a long-term arrangement under which firm-fixed prices are set for the performance of various tasks by multiplying estimated hours by preset and contractually-binding fully-burdened rates. I find it interesting that no one in this thread other than me seems to recognize how foolish it would be for a seller to enter into such an arrangement with a sole source. There are few circumstances in which such an arrangement would be sound over an extended period of time for tasks of varying complexity and difficulty. it's astonishing, really, and suggests that the government has done a poor job of teaching its people the proper way to price jobs.

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Since nobody else here has volunteered to be the "dummkopf", I will fill that role.  When I arrived at my current agency to lead their regional contracting office, I found they used this exact approach for some of their IDIQ Task Order work. With the labor rates fully burdened and fixed, the only thing left to negotiate is the labor mix and level of effort. Please be kind if you call me any names since I volunteered to be the scapegoat of the conversation, but I did not see anything to be as horrifying as you have expressed. Why is this such a god-awful approach?  Why would you want to negotiate labor rates, G&A, and profit every time you want to issue a task order?  Yes, I think the main reason they did this was administrative convenience, but when you compare what costs you might save in all those negotiations and the time spent to do so, I don't know that you would realize any true savings. In fact, the opposite may be true.  Okay, feel free to bash me, but please be kind in the name-calling...  I can be sensitive sometimes <lol>

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53 minutes ago, Desparado said:

Yes, I think the main reason they did this was administrative convenience, but when you compare what costs you might save in all those negotiations and the time spent to do so, I don't know that you would realize any true savings. In fact, the opposite may be true.

Desparado, PepeTheFrog thinks that tough and respectable frogs respect those who stick their gills out, as you've done.

Putting aside the FAR (*gasp*) to consider the economics: PepeTheFrog thinks you've highlighted the crux of the issue. What is the expected difference between the pre-priced rates and the individually priced rates? Does this value significantly exceed the cost (time, money, resources, opportunity cost) of negotiating individually priced rates? Two influential variables are the number of separate negotiations, and the magnitude (value) of the orders.

PepeTheFrog supposes that depending on the size of these variables, there is a space where Desparado's method is practical and wise (many orders, small values), followed by a mid-range space that is a toss-up, followed by a space with relatively high values where Vern's opinion rings true.

On 10/16/2016 at 8:27 AM, Vern Edwards said:

Negotiating task order prices by applying pre-negotited fully burdened rates to estimates of labor hours is nothing but a labor-saving device used by government buyers. It is not a sound business practice.

Vern, why can't this be a labor-saving device that is also a sound business practice in some cases? Many private-sector, profit-generating businesses use this practice, not just government buyers. Putting aside government buyers (*gasp*) to focus on the private sector: What's wrong with this method if it avoids many negotiations for relatively small projects? Is there a superior contractual arrangement?

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Desparado:

No names will be necessary.

I assume that we will discuss this in the context of the opening post, which posited a sole source, an IDIQ contract, and FFP orders priced by multiplying estimated hours by contractually stipulated, fully-burdened, fixed labor (FBR) rates.

Preliminarily, the official pricing presumption in such cases is that the price to be paid will reflect reasonable costs of performance -- direct and indirect -- plus a reasonable profit. Profit policy says that the government's profit objective should reflect the challenges and risks of performance.

An FBR includes direct and indirect costs and profit. Such rates are officially prescribed for T&M and L-H contracts, but not for any other type. However, there is no express prohibition against their use in the pricing of task orders issued under indefinite-delivery contracts. So you ask: Why not use them if they make pricing easier, which you think that they do.

My assertions:

First, the direct labor rates and fringes included in FBRs will not necessarily reflect the amounts paid to the workers who will do the job. In pricing a particular labor category in which actual amounts paid to workers will vary within a range, the contractor must choose some point within the range to include in the FBR. Then, when pricing a particular job, the contractor might use workers whose actual pay is on the lower end of the range, below the amount at which the FBR was set. The difference between the amount included in the FBR and the amount paid to the workers, is potentially additional profit. Since the FBRs are fixed by contract, cost analysis and certified cost or pricing data submitted with an order proposal will be of no avail. It won't matter than you know what the contractor is doing. It won't be breaking the law, and it will not be defective pricing. So if you don't like it all you can do is try to renegotiate or stop issuing orders.

Second, the indirect cost rates in the FBR include fixed-costs, semi-variable costs, and variable costs. Depending on how the contractor has set up, cost-volume-profit analysis will indicate the sum of hours of each category that must be sold in order to break even. At some point in the period of performance, after the contractor has broken even, the fixed costs will be fully absorbed, but will remain in the FBR, at which point they will contribute to additional profit. Since the FBRs are fixed by contract, cost analysis and certified cost or pricing data submitted with an order proposal will be of no avail.

Third, profit policy is to negotiate profit based on the challenges and risks associated with the work to be done. The more challenging and risky the job, the higher the rate of profit. But since each the FBR will include a standard rate of profit, the contractor's profits will reflect how many hours  are included in the price, not the job's challenges and risks.

Fourth, the assertions that I have made above, if understood and believed by the contractor, will motivate the contractor to base estimates of hours on worst case assumptions and scenarios. It will also motivate the contractor to scrutinize task SOWs for errors and gaps that represent potential opportunities to request equitable adjustments and submit claims, in order to get paid for more hours. Presumably, the same FBRs will apply to the pricing of equitable adjustments and claims.

Fifth, nothing in FAR says that a CO can trade off compliance with pricing policy and sound pricing technique in return for ease of price calculation, which you call "administrative convenience." Since each of the various tasks is not fully priced in advance of ordering, the CO must determine whether each order price is fair and reasonable. Can the CO assert, two or three years after award, that order prices are fair and reasonable based on the initial determinations of fairness and reasonableness of the FBRs that were made at the time of contract award if experience yields indications or evidence that, in fact, they no longer are?

All of the  assertions that I have made above can also be made by a competent procurement management review or IG review team. I think that when confronted by those assertions, the chief of a contracting office will have to produce a better response than: We did it that way for administrative convenience. He'd better be able to say how he calculated the administrative convenience and produce solid evidence that there were real savings, not just fantasy calculations. Nothing has caused Congress to enact more laws and for agencies to issue more policies and regulations than "administrative convenience" gone wrong. Why do you think FAR Subparts 8.4 and 16.5 are so much longer today than they were in 1994?

Now, you can accept my assertions, refute them by showing them to be untrue or inapplicable, or pooh-pooh them on grounds of administrative convenience. Which will it be?

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