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Bill Baxter

PTA above ceiling price — how big a deal, really?

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2 hours ago, Vern Edwards said:

It seems to me that if $3,250,000 is the most that the Government will have to pay the contractor, then if the contractor incurs a cost greater than that amount the contractor will be totally responsible for it. Am I wrong about that?

Yes, that's wrong. If the contractor incurred $3,250,000 in cost, the Government would only pay $3,175,000. See my first calculation above. Cost sharing would continue up to $3,437,500. At that point and above, the Government would pay $3,250,000 (the ceiling price).

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Don:

You keep sending me back to your equation. Can you explain with words? Suppose that the contractor's cost has reached the ceiling price of $3,250,000 and it then incurs another dollar. What happens as a result? What is the contractual effect on each of the parties?

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2 hours ago, Vern Edwards said:

You keep sending me back to your equation. Can you explain with words? Suppose that the contractor's cost has reached the ceiling price of $3,250,000 and it then incurs another dollar. What happens as a result? What is the contractual effect on each of the parties?

If the contractor incurs another dollar above $3,250,000, the Government pays $0.40 and the contractor's profit goes down $0.60. The total amount the Government pays is $3,175,000.40.

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Don:

I think I understand.

FAR 52.216-16(d)(2)(ii) addresses a situation in which the total final negotiated cost exceeds the target cost. It says:

Quote

If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less ______ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost exceeds the total target cost.

So you are saying that if the total final negotiated cost is equal to or greater than the ceiling price, and if the total target profit minus the contractor's share of the overrun yields a negative number, then the total final negotiated cost is still reduced by the contractor's share of any overrun. An adjustment is made even though the target profit minus the contractor's share is less than zero.

The effect is to produce a final price that is less than the ceiling price, even though the contractor has incurred costs equal to or greater than the ceiling price. In other words, sharing continues even after there is no profit left to reduce. Thus, PTA can exceed ceiling price.

Do I understand correctly?

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Can someone provide a current, working link to the DOD Contract Pricing Reference Guides, Vol. 4, Ch. 1.  ? 

I keep getting circular links to a page at " https://acc.dau.mil/AccessDenied.aspx?returnurl=https%3a%2f%2facc.dau.mil%2fCommunityBrowser.aspx%3fid%3d406579%26lang%3den-US

"ACC has migrated to a new platform
and can be found on the DAU.mil site at  www.dau.mil/community-hub."
 

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Now that is interesting.

The effect of your example is to make both profit and cost entitlement subject to adjustment based on the profit sharing formula. In all my years in contracting I have never entertained such an idea. I have considered zero profit, but not negative profit. I was so started (and intrigued) by the sudden realization of what you were saying that I called two experts, both of whom you know, both of whom have extensive knowledge of and experience with FPI(F) contracts, to ask if they had ever heard of such a thing. Neither had, and one was livid at the thought. They think that target profit is reduced by the overrun until it reaches zero,  at which point the incentive is no longer effective. They do not think that cost entitlement is affected by anything other than the principles of cost allowability and the ceiling price.

I pointed out that the plain language of FAR 52.216-16 does not expressly preclude the use of a negative number in calculations of total final price. They were not impressed. They said that the clause clearly provides for the adjustment of "target profit," not cost entitlement. When target profit minus the contractor's share of an overrun reaches zero, no further adjustment is to be made. The incentive stops working. You don't start subtracting from incurred cost.

I looked at FAR 16.401-1(b) and found:

Quote

Incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula that (within the constraints of a price ceiling or minimum and maximum fee) provides that—

(1) Actual cost that meets the target will result in the target profit or fee;

(2) Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and

(3) Actual cost that is below the target will result in upward adjustment of target profit or fee.  

According to that description, adjustments are to target profit or fee, not to cost entitlement.

At this point I do not agree that FAR 52.216-16 stands for the proposition that cost entitlement is to be reduced by the contractor's share of a cost overrun. I believe that cost entitlement under an FPI(F) contract is limited only by the cost principles and the ceiling price. But see FAR 16.403-1(a). I could find no case law or other discussion of the idea that cost entitlement is to be reduced by the the contractor's share of an overrun.

Since you're with DAU I wonder if you could put this issue to DPAP, ask for their interpretation, and let us know their response.

One of my experts said that before the guidance in Better Buying Power this issue was not likely to come up.

If any reader can shed the light of experience on this issue, please chime in.

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2 hours ago, joel hoffman said:

Can someone provide a current, working link to the DOD Contract Pricing Reference Guides, Vol. 4, Ch. 1.  ? 

I keep getting circular links to a page at " https://acc.dau.mil/AccessDenied.aspx?returnurl=https%3a%2f%2facc.dau.mil%2fCommunityBrowser.aspx%3fid%3d406579%26lang%3den-US

"ACC has migrated to a new platform
and can be found on the DAU.mil site at  www.dau.mil/community-hub."
 

https://www.dau.mil/tools/p/CPRG 

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2 hours ago, Vern Edwards said:

At this point I do not agree that FAR 52.216-16 stands for the proposition that cost entitlement is to be reduced by the contractor's share of a cost overrun. I believe that cost entitlement under an FPI(F) contract is limited only by the cost principles and the ceiling price. But see FAR 16.403-1(a). I could find no case law or other discussion of the idea that cost entitlement is to be reduced by the the contractor's share of an overrun.

I assume your reference to FAR 16.403-1(a) was to "when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss."

As far as cost allowability, one of the standards at FAR 31.201-2( a ) is "Terms of the contract". Why couldn't the parties enter into an advance agreement that would disallow a portion of costs by the amount of any negative profit? 

So the answer to the original poster's question--"PTA above ceiling price — how big a deal, really?"--seems to be a big deal.

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34 minutes ago, Don Mansfield said:

Thanks, Don. Finally figured out how to find it.  Under "Tools" 

 

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3 hours ago, Don Mansfield said:

I assume your reference to FAR 16.403-1(a) was to "when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss.

Yes. But that could refer to a situation in which the contractor exceeds the ceiling with a zero profit.

3 hours ago, Don Mansfield said:

As far as cost allowability, one of the standards at FAR 31.201-2( a ) is "Terms of the contract". Why couldn't the parties enter into an advance agreement that would disallow a portion of costs by the amount of any negative profit? 

They could. The question is whether they did when they agreed to FAR 52.216-16.

3 hours ago, Don Mansfield said:

So the answer to the original poster's question--"PTA above ceiling price — how big a deal, really?"--seems to be a big deal.

No. For one thing, PTA is not a contract term, just an idea. PTA is not mentioned anywhere in FAR and is not a term of an FPI(F) contract. The big deal is the question whether under an FPI(F) contract the parties have agreed to apply a formula for a profit incentive to costs.

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REA'n Maker    0
On 8/1/2017 at 8:23 PM, Don Mansfield said:

I'm sorry, Vern. My example above disproves that assertion. In my example, the ceiling price is $3,250,000, but the PTA is $3,437,500. Your assertion is only true if profit will be >= $0 at the ceiling price. 

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base. 

Is the way to look at it that "the PTA ceases to be an operative concept when it is greater than the ceiling?"

 If your total contract price is  above the ceiling, the PTA is the least of your problems.   To me, that is the teaching point in the OP's scenario.

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1 hour ago, REA'n Maker said:

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base. 

Is the way to look at it that "the PTA ceases to be an operative concept when it is greater than the ceiling?"

 If your total contract price is  above the ceiling, the PTA is the least of your problems.   To me, that is the teaching point in the OP's scenario.

Did you read that case Vern posted?

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1 hour ago, REA'n Maker said:

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base

You're not the only one, REA. Some pretty knowledgeable and experienced people feel the same way. It doesn't seem right. But I found one ASBCA decision that says the Government can do it, based on the board's interpretation of the language of the incentive price revision clause and FAR 16.403-1(a). It appears to be a case of first impression and there has been no other like it since. One knowledgeable person thinks the contractor's case was poorly argued. Don and I are looking further into the matter to find out if there is an official position on the interpretaiton of the clause.

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REA'n Maker    0
1 hour ago, Don Mansfield said:

Did you read that case Vern posted?

Yes; it was a tough read though considering that it brought in several obtuse concepts such as "debt concessions".

Ignoring the extraneous offset calculations, it looks like the key data points supporting your position are in (g) and (h)?

Specifically:  $ 1,517,031 (30% of overrun) - $550,724 (Target Profit) = $966,307 (Total decrease to final cost)

As a thought experiment, doesn't this approach allow the scenario whereby the profit offset is so high that allowable costs = 0?  (not likely, but logically possible)

33 minutes ago, Vern Edwards said:

One knowledgeable person thinks the contractor's case was poorly argued.

That case looks incredibly complicated (a government claim; Chapter 11) , with the FPI calculation forming but a small part.  One wonders if the vagaries of the calculation got lost in the noise.

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11 minutes ago, REA'n Maker said:

As a thought experiment, doesn't this approach allow the scenario whereby the profit offset is so high that allowable costs = 0?  (not likely, but logically possible)

No. In my scenario, once costs get up to $3,437,500 the contract becomes a FFP contract for $3,250,000.

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