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hightytighty

Fully Burdened Rates for FFP Orders

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56 minutes ago, PepeTheFrog said:

Many private-sector, profit-generating businesses use this practice, not just government buyers.

Prove that, and provide context. Name the companies that use the approach in question and describe the contracts under which they use it. Tell us what you consider a "relatively small project"? $5,000? $50,000? $500,000? $5,000,000? More? How much money can be saved? How do you measure savings? What subtracted from what?

Remember, too, that private companies measure success mainly at the annual bottom line and by stock prices. Apple and Nike have put up with the use of child labor when it didn't threaten their profits and stock prices through loss of goodwill. The government measures success differently, and part of the measurement of success is regulatory compliance and sound practice.

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6 minutes ago, Vern Edwards said:

Name the companies that use the approach in question and describe the contracts under which they use it.

PepeTheFrog knew you were going to demand proof for that statement, but must respectfully decline this research. Are you saying no companies use the approach?

7 minutes ago, Vern Edwards said:

What do you consider a "relatively small project"? $50,000? $500,000? $5,000,000? More? How much money can be saved? How do you measure savings?

A relatively small project for this discussion is one where the administrative savings of avoiding future negotiations significantly outweighs the potential savings of individually negotiated orders. Yes, PepeTheFrog is heading towards the land of tautology, but the point is that there is no universal rule or equation. There are variables to consider. That's why PepeTheFrog said "relatively," and also why central planning of consumer prices fails, see the Soviet Union et alia. Individuals and companies have unique and constantly changing preferences, which are best expressed on an individual level through subjective value in response to changing market conditions. It seemed like you were universally against the practice, but PepeTheFrog disagrees and thinks the practice makes sense sometimes.

You estimate savings in the future, based on imperfect information, given your circumstances, the same way people decide how long of a warranty to buy, how much to spend on marketing, or how many pairs of underwear to buy given how often they prefer to wash clothes. You adjust your assumptions, choices, preferences, and estimates based on new information and experience.

What about PepeTheFrog's question? Assume no companies use the approach. Can it be a sound business practice for the private sector?

23 minutes ago, Vern Edwards said:

Apple and Nike have put up with the use of child labor when it didn't threaten their profits by loss of goodwill. The government measures success differently, and part of the measurement of success is regulatory compliance and sound practice.

True, and your point about government is well-taken. But you're bringing up child labor and moral concerns, instead of the dry economics of pre-priced labor rates to avoid future negotiations. PepeTheFrog has already conceded or put aside regulatory compliance, and is only concerned with sound practice in the private sector-- business to business.

Can it be a sound practice-- for the private sector? If not, is there a superior contractual arrangement for the private sector? PepeTheFrog is personally interested in this question.

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16 hours ago, PepeTheFrog said:

PepeTheFrog knew you were going to demand proof for that statement, but must respectfully decline this research.Are you saying no companies use the approach?

So, for the record, you don't know whether what you said is true or not. Okay. As to what companies do -- frankly, I have no idea. I would want facts before saying what any company does unless the assertion were general knowledge and indisputable.

16 hours ago, PepeTheFrog said:

A relatively small project for this discussion is one where the administrative savings of avoiding future negotiations significantly outweighs the potential savings of individually negotiated orders. Yes, PepeTheFrog is heading towards the land of tautology, but the point is that there is no universal rule or equation.

Perhaps, since you cannot say what you meant, you shouldn't have used the phrase "relatively small project."

16 hours ago, PepeTheFrog said:

You estimate savings in the future, based on imperfect information, given your circumstances, the same way people decide how long of a warranty to buy, how much to spend on marketing, or how many pairs of underwear to buy given how often they prefer to wash clothes. You adjust your assumptions, choices, preferences, and estimates based on new information and experience.

I asked how you estimate savings in a particular case. Sorry, but I don't consider the above to be responsive (or clear).

16 hours ago, PepeTheFrog said:

What about PepeTheFrog's question? Assume no companies use the approach. Can it be a sound business practice for the private sector?

I see no reason to answer that question. I don't see what bearing it has on the subject under discussion, which is government contracts. The government cannot do business like a private sector firm, and the possible practices of private sector firms in this regard is a subject about which I have no knowledge or interest.

16 hours ago, PepeTheFrog said:

Can it be a sound practice-- for the private sector? If not, is there a superior contractual arrangement for the private sector? PepeTheFrog is personally interested in this question.

Again, I see no reason to answer that question. I am not interested in what would work in the private sector in this regard. I'm a government contracts guy.

 

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As I mentioned in my previous post, there were some of these contracts in place prior to my arrival as chief of this office. I did not state whether I supported or was against this method, but I thought to pooh-pooh it out of hand was interesting.  I find this thread interesting not only in the situation that the OP stated, but also in a non-sole source (aka competitive) environment for a single award IDIQ contract. I am merely trying to gather the information necessary in order to make a decision on these contracts moving forward. I agree that I have to do some in-depth analysis as to the potential savings or lack thereof. I need information, and I appreciate that your have provided a large block of it for me to consider. Our agency tends to try to avoid cost contracting at nearly all costs (pun intended), but T&M isn't any better in my opinion for the reasons cited earlier. The administrative convenience should have also included the additional work/costs to administer cost-type contracts, but again... in-depth analysis is required.  I appreciate the conversation and thank you for the time you took to prepare such a detailed response.  

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The thing to keep in mind is that while the use of fully-burdened labor (FBR) rates as task order pricing factors seems to solve some of the administrative challenges of order pricing, the internal dynamics of fully-burdened rates are complex. No contracting officer should use fully-burdened rates as task order pricing factors unless he or she fully understands those dynamics and their pricing implications. That is especially true when the plan is to use such rates over an extended period of time.

A CO should feel confident in his or her ability to discuss the dynamics and use of FBRs in pricing with management auditors (PMRs, IGs, and the GAO). One can be embarrassed trying to explain the use of FBRs in task order pricing to a management auditor who knows his or her stuff. Know your obligations under FAR 15.403, profit policy under 15.404-4, and the dynamics of indirect cost rates.

Understand the process by which the contractor chose the direct labor category rates to include in the fully-burdened rates, how the actual wage rates in each labor category pool are distributed in the category pool pay range, and how that distribution will change over the course of performance. Know those things even when awards are made competitively.

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5 hours ago, Vern Edwards said:

Understand the process by which the contractor chose the direct labor category rates to include in the fully-burdened rates, how the actual wage rates in each labor category pool are distributed in the category pool pay range, and how that distribution will change over the course of performance. Know those things even when awards are made competitively.

If more COs understood these things, contractors' profit rates would plunge in a dramatic fashion. Contractors are very appreciative that almost nobody (including DCAA) ever checks the math on how those T&M rates were actually calculated, and the dynamics of how the cost components will change over the course of contract performance. This right here is amazing advice for the government folks; and I'm fairly confident almost nobody will follow it. And so contractors will continue to generate windfall profits thru pre-award and post-award manipulation of the cost side of the hourly billing rates.

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