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Deductions from contracts


Boof

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Our OIG just provided us a recommendation to require deducts on contracts with performance standards in the requirement.   They found a contract that had a few performance issues written up by the COR and were not happy that the contract did not provide for deducts for these deficiencies. 

"develop and implement a) a methodology to calculate the cost associated with the contractor not meeting performance metrics and B) a process to reduce payment to the contractor when contractual requirements are not being met. This methodology and process should be included in all current contracts".

 

I have seen deducts used but not in a majority of the contracts.  Here they want us to agree to put some kind of deducts in all our contracts.  I was just wondering what this esteemed body thought about that and what type of reply you would give them on thier recommendation.

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Guest Vern Edwards

The concept of scheduled deducts in service contracts was first promoted by the Air Force in Air Force Regulation 400-28, Base Level Service Contracts (1979), which became OFPP Pamphlet No. 4, the 1980 version, not the most recent version, which is greatly watered down. It is an attempt to apply statistical methods of manufacturing quality assurance to services, coupled with predetermined deducts for services not received (as opposed to damages). I have referred to it in writing as the "Doctor Venkman System of Negative Reinforcement."

The Air Force tried the concept experimentally and even produced templates. I was running an Air Force contracting office in 1980 that was selected to try the method in a couple of support service contracts. It worked poorly and provoked a lot of conflict, both between the government and the contractors and between the contracting office and the client offices. The Air Force eventually abandoned the method in the late 1980s. You still encounter it from time to time. There has been some litigation, but not much. See e.g., PRIDE Industries, ASBCA 55771, 08-1 BCA ¶ 33757, Dec. 21, 2007, which dealt with a contract for "shelf stocking, custodial, and receiving/storage/holding are services" at an Air Force Base for the Defense Commissary Agency, and a $21,987.19 price reduction. The Board held for the Commissary Agency. The litigation undoubtedly cost more than the government got by way of price reduction.

IG knowledge is shallow. They read about such stuff and seize on it when auditing agency offices. They tend to be unyielding when confronted by superior professional experience and know how, but you stand a chance if you can confront them with facts and sound analysis.

I wrote an article about the method for The Nash & Cibinic Report entitled, "Calculating Price Reductions When Services Are Defective." which was published in May 2006 issue. I also wrote an article about the PRIDE Industries case, see Service Contracting Quality: We've Got More Thinking To Do (March 2008). It includes an in-depth analysis of the method. I concluded:

Quote

We do not think that the Government should routinely pay for unacceptable services, but COs should be judicious when contemplating deductions from payments. Under a competitively awarded fixed-price contract, such deductions might make it more difficult for a contractor to make process improvements. The prospect of deductions makes the inspection process seem punitive and creates tension between the parties, causing them to focus on the past and making it harder for them to work together. Justifiably or not, deductions come across as penny-ante nickel-and-diming to a contractor working with a narrow margin. Even when they are small, such deductions are an irritant. As urged in MIL-STD-1916, the parties should focus on the future and improvement, not on the past and retribution. This won't play well with the “hold their feet to the fire” crowd, but it's a better way to go if you want good performance instead of paperwork, tension, bickering, and disputes.

You can always deduct for services not received if you can calculate a reasonable amount. You don't have to pay for what you don't get. Such calculations can be difficult to make, however.

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Guest PepeTheFrog

A visit from the IG creates two big lies:

(1) The IG says, "We're here to help."

(2) The receiving office says, "We're so glad you're here."

PepeTheFrog apologizes in advance to the inspectors general out there who are truly competent and helpful-- it's just a joke.

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On ‎2‎/‎17‎/‎2017 at 10:50 AM, Boof said:

Our OIG just provided us a recommendation to require deducts on contracts with performance standards in the requirement.   They found a contract that had a few performance issues written up by the COR and were not happy that the contract did not provide for deducts for these deficiencies. 

"develop and implement a) a methodology to calculate the cost associated with the contractor not meeting performance metrics and B) a process to reduce payment to the contractor when contractual requirements are not being met. This methodology and process should be included in all current contracts".

 

I have seen deducts used but not in a majority of the contracts.  Here they want us to agree to put some kind of deducts in all our contracts.  I was just wondering what this esteemed body thought about that and what type of reply you would give them on thier recommendation.

52.246-4 Inspection of Services gives you the authority to make deductions:

(e) If any of the services do not conform with contract requirements, the Government may require the Contractor to perform the services again in conformity with contract requirements, at no increase in contract amount. When the defects in services cannot be corrected by reperformance, the Government may --

(1) Require the Contractor to take necessary action to ensure that future performance conforms to contract requirements; and

(2) Reduce the contract price to reflect the reduced value of the services performed.

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1 hour ago, Vern Edwards said:

Authority isn't the problem. Calculating the deduction is usually the problem.

True. But the OP did state: "They found a contract that had a few performance issues written up by the COR and were not happy that the contract did not provide for deducts for these deficiencies. "

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The OIG apparently wants us to write universal procedures and local clauses to be used in determining and  calculating deficiencies deductions.  The inspection clause covers deficiencies just fine in my opinion and calculating what should be deducted would depend on each set of circumstances. 

Deciding how to enforce each particular deficiency should be a CO decision also depending on the circumstances.  I think their recommendation should have been to investigate why no action had been taken since the deficiencies were in an  inspection  report and not recommend we make more policy and procedures.     

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