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Must a Fixed Price Incentive Contract include Separate Target and Ceiling (Prices)

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On 8/26/2017 at 3:18 PM, Vern Edwards said:

Well, since you're determined to call it an FPI contract, I'm glad your happy. I hope I'm still writing for The Nash & Cibinic Report when someone solicits proposals for the first one of your creations. B)

Already been done with design-build.  Pentagon Renovation after 9/11/2001.

Although CM@risk, rather than D-B,  GSA is doing it, in accordance with the PBS policy that I referred to earlier today.  

Joel:

That link does not work.  This edit is a reminder to me to tell you that.

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57 minutes ago, bob7947 said:

Joel:

Your post wasn't deleted.  

Bob, I think you deleted one of those duplicate posts of mine while I was composing my post as an edit to the one that said "duplicate".  When I hit "save", the post had already been deleted. Not your fault.

Someone called me on my cell phone while I was walking my dog and I apparently push the wrong button twice, thus a duplicate and triplicate.:wacko:

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2 hours ago, joel hoffman said:

I did come up with a name for it: It's "Fixed Price Incentive with GMP".

Where is that described in FAR Part 16? Where does "GMP" appear anywhere in FAR? Where does "Guaranteed Maximum Price" appear in FAR? Let me tell you: nowhere, nowhere in the entire FAR System. So why does fixed-ceiling-price with cost incentive bother you? 

In the construction industry and in agencies other than DOD a GMP contract is a CPFF contract with a cap at which the contract becomes FFP. (Do you need me to provide references to prove that assertion? I can provide plenty: legal websites, construction industry websites, government regs, board of contract appeals decisions, and Court of Federal Claims decisions. But I'm trying to avoid the Joel Hoffman Pit of Tediously Endless Posts.) The contractor is reimbursed for its costs and is paid the lesser of its costs and a fee or the GMP. It's a device that limits the owner's risk under a CPFF contract. All  you want to do is add an incentive and call it FPI.

So what are your lawyers and KOs going to say about that? They'd be idiots not to see what you'd be trying to do.

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Geez, Vern.  The "contract type" is either an FPIF or (hopefully rarely) an FPIS.  

Quote

 

52.216-1 Type of Contract.

As prescribed in 16.105, complete and insert the following provision:

Type of Contract (Apr 1984)

The Government contemplates award of a _________ [Contracting Officer insert specific type of contract] contract resulting from this solicitation.

 

 

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3 minutes ago, joel hoffman said:

Geez, the "contract type" is either an FPIF or (hopefully rarely) an FPIS.  

Bull, and by calling it FPI anything you're leading your people into a contract admin disaster.

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So you are finally alluding to the actual question that I asked three days ago.  Thanks for your opinion.  

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FPIF, the solicitation explains that the target cost plus target profit equal the ceiling cost.  

Thus the target is within the confines of the ceiling cost per FAR** as  I stated in the first post.  

 

 

**8/31/2017 EDIT FOR CLARITY: 

Quote

 

FAR 16.201(a): 

(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances...

 

 

**8/31/2017 EDIT FOR CLARITY: 

 

Quote

 

16.204 Fixed-price incentive contracts.

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to total target cost...

 

 

**8/31/2017 EDIT FOR CLARITY: 

 

Quote

 

16.402-1 Cost incentives.

(a) Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

(b) Except for award-fee contracts (see 16.404 and 16.401(e)), 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.

 

 

**8/31/2017 EDIT FOR CLARITY: 

The following is inapplicable when Target cost plus profit = ceiling price:

Quote

16.401 (b)...

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

 

**8/31/2017 EDIT FOR CLARITY: 

See the notes for Clause 52.216-16 which allow changing the language in paragraph (d)(2)(ii) of  Clause 52.216-16:

Quote

 

Notes:

(1) The degree of completion may be based on a percentage of contract performance or any other reasonable basis.

(2) The language may be changed to describe a negotiated adjustment pattern under which the extent of adjustment is not the same for all levels of cost variation

 

 

**8/31/2017 EDIT FOR CLARITY: 

This language can be changed to reflect that the total final negotiated cost will not exceed the ceiling price less target profit (GMP less profit). Or it can simply be deleted:

Quote

 

52.216-16 (d) (2) ((ii)

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.

 

 

 

 

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On 8/23/2017 at 4:43 PM, joel hoffman said:

Is there enough flexibility under the FAR in Parts 16.2 and 16.4, to use a fixed price incentive with Firm Target (FPIF) or similar contract type for a federal design-build construction project but with the "target price" plus  the "target profit" in an FPI with "Firm Target" (FPIF) equal to the ceiling price?   In other words, does the FAR specifically require separate "target" (cost plus profit) and "ceiling" (where ceiling price = cost plus profit)?

That's the question you asked three days ago. What you meant of course was not "specifically" but expressly. Don answered your question some time ago. FAR does not say that the target price and the ceiling price must be different numbers. The inventors of FPI and the authors of the incentive price revision clause presumed that the numbers would be different, but nothing says that they must be in so many words.

I was not "alluding" to that question at all.

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On ‎8‎/‎26‎/‎2017 at 4:15 PM, Vern Edwards said:

That's the question you asked three days ago. What you meant of course was not "specifically" but expressly. Don answered your question some time ago. FAR does not say that the target price and the ceiling price must be different numbers. The inventors of FPI and the authors of the incentive price revision clause presumed that the numbers would be different, but nothing says that they must be in so many words.

I was not "alluding" to that question at all.

Ok thanks.  'Specifically' and 'expressly' are synonyms.  However, you answered my question in the initial post. 

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What some readers of this thread might not understand is that a Guaranteed Maximum Price (GMP) contract is a CPFF contract. But unlike a Government CPFF contract, the contractor is obligated to finish the work. It is not a "best effort" contract. The owner agrees to reimburse the contractor's costs, but only up to the guaranteed maximum price. At the GMP the contractor is fully responsible for all additional costs to complete.

For the sake of those who are not familiar with GMP, here is the text of a model GMP clause for a commercial GMP contract:

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ARTICLE IV – AMOUNT OF CONTRACT – GUARANTEED MAXIMUM PRICE

(a) Guaranteed Maximum Price. The Contractor shall furnish all items required by the Contract Documents for proper completion of the Work. In full consideration for the performance of the Work and all other obligations of Contractor hereunder, Princeton University agrees to pay the Contractor’s actual costs incurred to perform the Work (“Cost of the Work”) plus the Contractor’s Fee established in accordance with this Contract the sum of which is guaranteed not to exceed the total amount of $XXX,XXX,XXX.XX (text description). This GMP amount consists of the following ‐‐

(1) The total estimated amount for Cost of the Work of $X,XXX,XXX.XX as more fully detailed in the Guaranteed Maximum Price Breakdown set forth in Part IV; and,

(2) The Contractor’s Fee amount of $X,XXX,XXX.XX.

(b) The Cost of the Work and the Guaranteed Maximum Price may be increased or decreased resulting from changes to the Work made by the issuance of approved Change Orders as provided for in this Article and in accordance with General Terms & Conditions Clause L5 – Changes Under GMP Contracts.

(c) General Conditions.

(1) The Contractor guarantees that the actual costs incurred for its General Conditions shall not exceed the amount of $X,XXX,XXX.XX as more fully detailed in the Guaranteed Maximum Price Breakdown set forth in Part IV and that all costs or expenses in excess of this amount shall be borne by the Contractor unless adjusted by Change Order. Should a change or adjustment to the General Conditions amount be required, the Contractor shall submit a separate Change Order exclusively addressing General Conditions and include supporting rationale for the change. Change Orders addressing changes to the Work shall not intermingle costs or expenses for General Conditions. The Contractor is not entitled to fee assessed on General Conditions costs and expenses and such costs shall not be included in any calculations to establish or adjust the Contractor’s Fee.

(2) Hourly Billing Rates. The Parties have agreed to fixed hourly billing rates for the Contractor’s salaried project administration and field supervision staff and other direct‐hire labor included as a part of the General Conditions for this project. These rates include salaries, wages, bonuses, payroll taxes, benefits, and insurances and are fully‐burdened with overhead and fee. Hourly rates shall remain fixed and in effect for the duration of this Contract: Individual/Labor Category Hourly Rate

(d) Adjustment to Contractor’s Fee. The Contractor’s Fee amount established in this Contract is a fixed amount that shall be adjusted only as provided for in this paragraph. The Contractor is not entitled to fee on individual Change Orders nor shall individual Change Orders cause any modification to the Contractor’s Fee. However, upon completion of the Work, if the cumulative total of all Change Orders has resulted in a net increase to the Guaranteed Maximum Price of $X,XXX,XXX.XX or more, then the Contractor’s Fee shall be correspondingly increased by an amount equal to NN% (TBD percent) of the cost of the Change Order Work in excess of $X,XXX,XXX.XX. Alternately, if the cumulative total of all Change Orders has resulted in a net decrease to the Guaranteed Maximum Price of $X,XXX,XXX.XX or more, then the Contractor’s Fee shall be correspondingly decreased by an amount equal to NN% (TBD percent) of the cost the Change Order Work in excess of $X,XXX,XXX.XX. When calculating the cumulative total of all Change Orders, amounts related to the following shall be excluded from any and all fee calculations or adjustments:

(1) Any change order issued to adjust the amount established for General Conditions without regard to the reason for the adjustment.

(2) Change orders issued to make adjustments to the amount established for Construction Contingency or Buy‐Out Savings or to incorporate changes for which costs are to be paid from Contingency as defined in Article II(b).

(3) Change orders issued to incorporate priced Alternates that have been specifically identified in the Contractor’s GMP or as part of Subcontractor bids.

(4) Change orders issued solely for the purpose of adjusting the GMP amount to add costs related to Work that is within the existing scope of the contract or related to scope previously added by an approved change order. This includes, but is not limited to (i) adjustments to estimated amounts for Allowances identified in the GMP; (ii) costs for Work performed under time & materials (T&M) type field tickets that are related to within‐scope Work; or, (iii) adjustments to authorized T&M Work when costs exceed previously established not‐to‐exceed limits.

(5) Change orders issued to make administrative adjustments to the GMP such as those to correct errors or omissions, resolve audit findings, or the final change order issued for the purpose of finalizing the GMP, returning any savings to Princeton University, and/or otherwise adjusting the contract value based on the final GMP amount.

(6) Any change orders not authorized or expressly approved by Princeton University in accordance with Clause L5 ‐ Changes Under GMP Contracts.

(e) Savings. Upon completion of the Work, the Contractor shall provide to Princeton University a detailed and complete accounting of the Cost of the Work for the Project. Should the actual final Cost plus the Contractor’s Fee be less than the GMP amount as adjusted pursuant to this Contract; the savings shall accrue one hundred percent (100%) to Princeton University and zero percent (0%) to the Contractor. Should, however, the actual final Cost plus the Contractor’s Fee exceed the GMP amount as adjusted pursuant to this Contract; then, the excess amount shall be borne solely by the Contractor.

(f) Payment Schedule. Prior to the submission of the first Application for Payment, Contractor shall prepare and submit for Princeton University’s review and written approval a proposed schedule of values (trade breakdowns) and fee payment schedule. This shall be the basis for the Contractor’s monthly Applications for Payment.

(g) Limitation of Markup. Contractor shall include in each subcontract a limitation on the markup that Subcontractors can include in their Change Orders. The cumulative total markup (subcontractor markup plus all lower‐tier subcontractor markups) shall not exceed fifteen percent (15%) of the direct cost of the change.

 

It should be clear from that text that the clause describes a hybrid of CPFF and FFP. The contractor is paid the lesser of its actual costs or the GMP. The clause does not give the contractor a share of the savings, but paragraph (e) could easily be rewritten to do so.

I'm pointing these things out to you because I hate FPI contracts. The administration of such contracts is difficult. They greatly complicate the process of contract modification. I don't think you would be doing a good thing by trying to implement the use of GMP through the use of FPI.

I think FAR Part 16 allows you to mix features of contract types. Others may disagree, but there is a long-established tradition of doing so. In a May 2000 article, Selecting The Type Of Contract: Limits On Discretion?, Ralph Nash interpreted FAR 16.102(b) to permit the use of GMP for design-build and discussed how the FAR appears to limit agency discretion in use of contract types. Among many things, he said:

Quote

[W]ith regard to the use of guaranteed maximum prices in design-build contracts, we believe agencies should accept our interpretation of FAR Part 16 and rule that they are permissible. Contracts for construction should use the terminology of the construction industry and not impose new terminology for the sake of playing the FAR game. Thus, we do not believe agencies should get around the literal requirements of the FAR by calling such contracts “incentive contracts” or “redeterminable fixed-price contracts.”

I'd be happy to provide you with the full text of his article if you have no other access to it.

If the people you must work with on your project will not accept an interpretation of FAR that permits the use of GMP for design-build, then I urge that you seek a class deviation of FAR amendment permitting the use of GMP for design-build rather than using FPI contracts with identical target and ceiling prices. I truly believe that the use of FPI contracts would make construction KOs and contractors very unhappy in the long run. I've adwarded and administered several of them, and I cannot think of a worse contract type for construction contracting than FPI.

Vern

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On 8/26/2017 at 11:27 AM, Vern Edwards said:

Does that mean you are unable to determine how it works or unable to determine what to call it?

And Joel, how about short and to-the-point posts. That one from an hour ago was 659 words. Your first one was 2,556. It's too much!

Vern, your last post was 1484 words - sometimes it takes more than a few one liners to explain your points, right?  :)

DBIA's STANDARD FORM OF AGREEMENT BETWEEN OWNER AND DESIGN-BUILDER - COST PLUS FEE WITH AN OPTION FOR A GUARANTEED MAXIMUM PRICE, Document No. 530, includes 9 pages of language about the Contract price, Procedure for payment and Termination for Convenience.  It's part of a 34 page contract fill-in agreement. I can't copy it, as it is copyrighted and I only have rights to use it for my research.

The similar topics in clause 52.216-16. require 4 pages.  It's also lengthy but covers roughly the same topics. 

Thanks for your explanation.  

 

 

 

Edited by joel hoffman
Corrected Far Clause citation. 52.216-16

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Okay, Joel. But 52.216-17 does not cover all of that. And your first post was 2,556 words just to ask one question, not to make a point, and to which you got only two responses.

I'm just trying to persuade you to do something simpler than what you seem determined to do. I didn't realize you weren't open to suggestions. Now I am, and I'll quit offering unwelcome ideas.

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Vern, I was thanking you for your explanation.  The information would have been particularly useful earlier.  I would be interested in reading Prof. Nash's full article.  Thanks. 

If there is a simpler way - that is expressly allowed by FAR - without having to create a class deviation or seek FAR revisions, then I'm open to it under the circumstances of my current assignment. 

Sorry for the detail to follow:

Having access to both an industry  published Manual of Practice and the FAR clause, it appears to me that both the industry cost-plus GMP and federal FPIF operate essentially the same  - for the D-B application that is possible for government to use, as explained below. 

 The existing FAR clause 52.216-16 could be revised to add an Alternate 2, deleting paragraph (d) (2)(ii), which provides a fill-in for a price adjustment when the actual negotiated final cost exceeds the target. That situation isn't applicable to GMP. A simple statement that the target cost plus target price equals the ceiling cost equals the GMP could also be included in the new Alternate 2.  I don't think that is really necessary though. The solicitation/contract language would define and explain it. 

Contractors read the solicitation narratives before reading the operative contract clauses anyway. 

For now, the fill-in paragraph can be simply filled in as N/A. The contract narrative language defines what constitutes the GMP (target cost plus target profit equals ceiling price equals GMP).

In Industry, an owner can use a QBS selected D-B team to develop the owners program and develop the performance-based design criteria.

Then at an early point in the design development, before the  parties are able to negotiate a lump sum (FFP) contract, they negotiate a GMP for the construction or both design and construction.  The parties might choose to convert to lump sum at a later point, when the cost certainty would allow.  

The owner has the option of continuing the relationship or ending it after each preliminary phase.  That is called "progressive design-build". 

The federal government can't use "progressive design-build" under current law and regulations to select a D-B team using QBS (without meaningful consideration of price) to develop its program, develop the requirement and design criteria for the government, then use the same firm to design and construct it.

However, both government and industry can use D-B with a GMP after having established the "program" (which means defining the scope, cost and budget) and after having established enough level of preliminary design development to be able to select a D-B team.  

The GMP pricing method is used in industry or government when it is too early in the acquisition cycle to be able to establish a lump sum price (FFP) - for reasons of urgency and/or the level of complexity of the project. This then is the application that the government could use for D-B with GMP - urgency and/or complexity of the project don't allow the additional time needed to develop the design criteria to be able to price and award a FFP design-build contract. 

It won't use QBS - it must use  best value, considering quality and price.

You probably don't believe it but the industry " Standard Form of Agreement for Cost Plus GMP" and the FPIF clause are actually very similar when used with the  best value approach ( not the Progressive D-B approach). 

Both the industry approach, the government GMP approach can allow for the parties to be able to definitize prices for the project or  portions of the project to FFP if the parties agree. This is done to simplify contract administration effort, cost, etc. under industry or government approaches. Contractors don't like private or government owners having full access to their books and other management and business information. 

The  government D-B method with GMP is not intended for broad use. It would only be used under special circumstances. 

Therefore, there isn't currently much if any political support to allow QBS selection of a design-build firm without meaningful consideration of price) or to allow federal-wide use of "Progressive Design-Build". 

Based upon my personal experience and that of some other leading D-B practitioners, the government often can't afford  many of the most highly qualified design-build teams - that would dominate a QBS selection process.  After selection they would  negotiate with the firm in the absence of competition to establish a fair and reasonable cost for the project. Been there - done that, in single award, design-build ID-IQ follow on task orders. 

There isn't a government agency that is currently interested in acting as the proponent to sponsor amended law or FAR revisions to allow QBS or progressive D-B. 

It would probably require a monumental effort and the sponsorship of several agencies to effect legislative and regulatory (major) revisions to use it.

D-B with GMP would not be widely used in government anyway,  Yes it is more complex and requires expertise that most government agencies don't have.

I don't think that the agencies are interested in revising FAR to "expressly" define  a special GMP contract type and write a clause that would likely largely mirror the current FPI clause, anyway.

GSA has Developed policy and procedures to use GMP with FPI for their version of owner furnished design with construction manager hired early in the design development phase. It uses the existing FAR FPI Incentive clause(s).

So it can be done within the context of the current FAR for the intended limited application. 

That's why I originally asked the question. 

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1 hour ago, joel hoffman said:

If there is a simpler way - that is expressly allowed by FAR - without having to create a class deviation or seek FAR revisions, then I'm open to it under the circumstances of my current assignment.

Joel:

A simpler way need not be expressly allowed by the FAR. It only need not be "specifically" prohibited by the FAR. See FAR 1.102(d) and 1.102-4(e).

In his article, Prof. Nash argues that the sentence in FAR 16.102(b), "Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4," should not be read so as not to permit use of any contract type that is not named in Part 16. Several types are in use that were or are not named in FAR. Firm-fixed-price with award fee contracts were used for several years before being specifically mentioned, and were reported as FFP. Award term contracts have been in use now for a decade and are not specifically mentioned. Share-in-savings contracts are used without specific mention in FAR.

I think a GMP contract is ultimately FFP,  but is hybridized with CPFF-type terms below the maximum price. I think the contract should be reported to FPDS as FFP. The actual cost provision is not truly CPFF, because unlike the CPFF described in FAR, the contractor would be required to complete the work in order to be entitled to payment, and you don't need a limitation of cost clause, because you've got the guaranteed maximum price. So it should not run afoul of the prohibition against use of CPFF construction contracts by DOD.

Trying to teach people who don't ordinarily use FPIs about an FPI that is not really an FPI as described in FAR and the Contract Pricing Reference Guides, which has a separate ceiling price and a "point of total assumption", is going to be more trouble than it's worth, especially if, as you indicated, most can't administer DB GMP contracts. What happens if, as part of an REA, the contractor seeks a ceiling price that is higher than the target price? You're going to have to write a provision that prohibits such an REA. Would that require a FAR class deviation? If it did, and you didn't get one, would it be enforceable? Why bother with all that?

Who would reasonably complain about a contract type that provides for payment of either a firm-fixed-price (the maximum) or actual costs and a fee, whichever is less? After all, the maximum is considered fair and reasonable, right? As for a name for the contract type, you could call it "FFP (or Less)". B)

I have attached the Nash article to this post. The article is copyrighted, attached with permission, and must not be further disseminated.

Best of luck to you.

Vern

SELECTING THE TYPE OF CONTRACT LIMITS ON DISCRETION.pdf

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Thanks, Vern. 

I will study the article and discuss with my client to see if they want to pursue developing guidance under that approach. 

Trying to implement guidance for something out of the ordinary that could be used government wide is a challenge. Inventing a "new" contract type will be especially daunting, inasmuch as we are interacting with some organizations that are staffed by risk averse legal, contracting and program managers.

They want to see a contract type that neatly fits into a FAR 16 box.  One Agency's HQ Counsel are stating that FPI is a "cost reimbursement" contract therefore prohibited for any construction, even though the wording in the law and the regulations expressly/specifically name the prohibited FAR types of cost reimbursement construction contracts.

Geewiz, Prof. Nash wrote that article 17 years ago and still no takers. 

thanks again.  

Edited by joel hoffman
I meant "risk averse".

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12 minutes ago, joel hoffman said:

One Agency's HQ Counsel are stating that FPI is a "cost reimbursement" contract therefore prohibited for any construction, even though the wording in the law and the regulations expressly/specifically name the prohibited FAR types of cost reimbursement construction contracts.

Good grief! Well, remember the fight over whether the FAR Part 12 prohibition against "cost type" contracts prohibited use of T&M? If only the reg writers would be clear and would adjust their wording to clarify their intent as soon as these kinds of disagreements emerge. Never going to happen, and they are impervious to argument and criticism.

12 minutes ago, joel hoffman said:

Trying to implement guidance for something out of the ordinary that could be used government wide is a challenge. Inventing a "new" contract type will be especially daunting, inasmuch as we are interacting with some organizations that are staffed by risk adverse legal, contracting and program managers.

You got that right. But I would simply argue that GMP is really FFP or less and that FAR clearly permits it. You could always ask DPAP for an "official" interpretation, if there is such a thing. I'll see in Nash would be willing to write an update to his piece. Small caliber ammunition, but it might be of some help.

Legislation is unlikely. Congress is dysfunctional.

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Haven't had a chance to read it yet - not at home. 

Id like to discuss some more off line.  We are going GMP to allow the contractor to include quantifiable risk that is included as a contingency. We want to positively incentify the contractor through a share of the savings to manage, mitigate or avoid as much of those risks and associated contingency costs as possible. There is often other not fully fleshed out design definition at the point that the contract has to be awarded, so there is some risk there. The cost avoidance sharing can also positively motivate the contractor to finish early, avoid quality control related rework, etc.

I don't understand how that fits the "FFP" concept that the contract price is not subject to revision based upon the actual costs incurred. 

In true FFP, the contractor assumes those risks but may well include them in the contract price. The contractor keeps all savings and the owner pays the costs included for the risks even if not  actually encountered or that cost less than priced. 

Let me catch up with Ralph's article.  I probably read it back then. We had a subscription at the Office.  

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Ok, I read the 2000, Nash & Cibinic Reports article. I don't agree that there is not an existing, appropriate contract type under the FAR that operates essentially the same as the "Cost-Plus/GMP" type, as described and defined in the DBIA Design-Build Manual of Practice - when both are used under the scenario described herein.

I will limit my scenario to the circumstances where the commercial owner or federal government has a defined "program" for a construction project. The owner/government has an authorized project, the scope is defined, the funding budget limit is defined and the owner/government has defined the functional and technical performance requirements. Both the design-build team and the government can develop a parametric cost estimate.  However, the project is very complex and there may be numerous risks that might affect price but can't be totally mitigated or avoided with certainty at the point that it is necessary to award a contract. Prices for various construction materials are fluctuating due to market conditions, so it would be risky to lock in one design solution at this point and alternative material and systems can be used to meet the owners performance requirements.

Thus, this is not an application of the "progressive design-build" approach, which is generally not allowed for FAR acquisitions.

Lets assume that there is a commercial design-build project with similar characteristics and circumstances. 

Under this scenario, assume, it would be very risky and/or speculative for a design-builder to agree to a "lump sum" (translated for federal contracting: FFP).  The contractor will only agree to an FFP if it can include a contingency for the POSSIBLE,  quantifiable risks, that may or may not occur or may or may not be controllable, manageable or able to be  mitigated, given time and possible alternatives.  The owner and contractor agree that it isn't practical to use a FFP, with the owner absorbing all the cost risk for the contingency. 

 The contractor will agree to a ceiling price but wants protection for the risks.  

The owner will agree but wants a way to positively motivate (incentivize) the contractor to try to avoid, find ways to mitigate and to manage the risks,  in order to reduce costs and/or time to complete the project. The owner wants to avoid delays due to unmanaged risk that would prevent the project from being available for its business use (let's not discuss other time incentives for the sake of this discussion).

The parties agree to a designbuild method, as described and defined DBIA's Manual of Practice in Document Numbers 510, "Cost-Plus/Guaranteed Maximum Price" and 530, "Standard Form of Agreement Between Owner and Design-Builder - Cost Plus Fee With an Option for a Guaranteed Maximum Price". Under this scenario, the parties are able to negotiate a GMP at the outset, so there is no option used (or the parties could include the option to incentivize the contractor's initial performance). 

The parties agree to  an incentive shared cost savings formula of 50/50% for each dollar of contractor cost savings under the GMP and they agree to a fixed fee for profit.  They agree that the contractor will open its books so that the owner can verify or audit actual costs expended. 

Note: in actuality,  the DBIA model includes the contractor's Home and Branch Office overheads and other indirect costs in the "fee". The contractor usually doesn't want to completely share its indirect and other overhead details with another business organization for proprietary business purposes. 

The parties establish a distinct line item within the GMP for the contingency risks that have been quantified. They agree that the line item is exclusively for the contractor's use to draw on but that it must justify the need to draw on the line item. 

Note: As Vern and I previously stated, the commercial "Cost Plus" model does not equate to the FAR "cost plus" (cost reimbursement) types. 

Now, assume that the federal agency's project falls under a similar scenario. The federal agency has decided to use design-build for similar cost and urgency reasons.  Assume that the agency can't justify sole source or limited competition. It must use the two-phase design-build process in FAR 36.3. The government doesn't want to assume the entire cost risk for possible contingencies but due to urgencies or other reasons, doesn't have the time or solutions to all the concerns at hand. 

Through market research, the government discovers that industry is unwilling to agree to a firm fixed price contract without allowing for the risk contingencies. 

The government determines that a design-build contract with a cost ceiling (GMP) like the DBIA model, which will include a fixed profit and a POSITIVE incentive for the design-build contractor to manage, avoid or mitigate risks is appropriate and desirable, thus hopefully the contractor will not expend the entire ceiling cost. The government will reimburse the contractor for its allowable costs, including overhead and other indirects under the Part 31 cost principles, within the ceiling price (less the fixed profit). 

Voila - the Fixed Price Incentive Firm Target with the ceiling price = the target price plus profit = GMP is within the bounds of FAR Part 16.  The contract clause 52.216-1 Type of Contract will state that the contract type is a Fixed Price Incentive -  Firm Target and that the target cost plus target profit will equal the ceiling cost, which is a Guaranteed Maximum Price.

The cost savings incentive sharing formula may be specified or it may be competitively negotiated. 

 The GMP must be within the Contract Cost Limit (CCL), which the government will identify in a solicitation provision. The solicitation provision will also state that "Offerors are under no obligation to approach the CCL."  In this example, the solicitation will state that full scope and design and material quality are the most important of the non-cost factors.  It will state that all evaluation factors other than cost or price, when combined, are significantly more important than cost or price. Thus, competition will hopefully control the reasonableness of proposed cost and provide high quality. 

A distinct line item for contingency within the GMP could be used and could be evaluated during the source selection to determine what kind of risks the proposers are considering. This often reveals industry concerns,  ambiguities or errors in the solicitation or industry misunderstandings of requirements. This facilitates the possibility for effective discussions that lead to solutions or otherwise alleviate some concerns, hopefully leading to better final pricing. I have successfully used similar approaches during discussions when initial proposed prices exceeded the CCL or were otherwise worthy of discussion. 

The final price is established by contract modification, based upon the final cost, fixed profit plus any share of cost savings realized below the target cost.

 Having studied both the DBIA's contract conditions and the FAR contract clause at 52.216-16,  I believe that the FPIF with GMP, in operation, is essentially the same as the DBIA's Cost-Plus/GMP model used for the commercial D-B project above- of course, tailored for the federal government acquisition regulations, cost principles, etc.

The FPIF contract is greatly simplified when there is not separate ceiling with its separate cost sharing disincentive of costs between the target and price ceiling. 

 

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On ‎8‎/‎29‎/‎2017 at 10:07 AM, Vern Edwards said:

What happens if, as part of an REA, the contractor seeks a ceiling price that is higher than the target price? You're going to have to write a provision that prohibits such an REA. Would that require a FAR class deviation? If it did, and you didn't get one, would it be enforceable? Why bother with all that?

Just noticed this. The Ceiling price or GMP is subject to adjustment under an applicable clause in the contract.  See paragraph (k) of the clause --- I've been quoting the wrong clause. The FPIF Incentive price revision clause is 52.216-16, not -17.  

Its covered exactly the same way  in the DBIA's cost-plus/GMP contract language. 

 

8/31/2017 EDIT: Your question is also answered in FAR  16.201 (a):

Quote

FAR 16.201(a): 

(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances...

8/31/2017 EDIT:

Here is the paragraph (k)

Quote

FAR clause 52.216-16:

(k) Equitable adjustment under other clauses. If an equitable adjustment in the contract price is made under any other clause of this contract before the total final price is established, the adjustment shall be made in the total target cost and may be made in the maximum dollar limit on the total final price, the total target profit, or both. If the adjustment is made after the total final price is established, only the total final price shall be adjusted.

 

8/31/2017 EDIT:

I'm thinking that the author of the DBIA's:   STANDARD FORM OF AGREENENT BETWEEN OWNER AND DESIGN-BUILDER -- COST PLUS FEE WITH AN OPTION FOR A GUARANTEED MAXIMUM PRICE adapted the FAR clause for non-government D-B industry use.  He/she got rid of the legal gobblygook, FAR language using PlainSpeak but covered much of the meat of the clause - converting it to a GMP clause..

Michael C. Loulakis, ESQ., a well known attorney in design, construction and design-build law, who is also an engineer, is the probable author.  I'll ask him the next time we talk.

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Joel:

Okay, let me play devil's advocate. Pretend that I'm one of the staffers you described earlier, and you have presented your design-build proposal (above) for use of an FPI(F) contract--with (a) identical target price/ceiling price, (b) a 50/50 share ratio, and (c) a separate contingency line item--to me for review and comment.

Among other things, you said:

22 hours ago, joel hoffman said:

Under this scenario, assume, it would be very risky and/or speculative for a design-builder to agree to a "lump sum" (translated for federal contracting: FFP).  The contractor will only agree to an FFP if it can include a contingency for the POSSIBLE,  quantifiable risks, that may or may not occur or may or may not be controllable, manageable or able to be  mitigated, given time and possible alternatives.  The owner and contractor agree that it isn't practical to use a FFP, with the owner absorbing all the cost risk for the contingency. 

 

22 hours ago, joel hoffman said:

The contractor will agree to a ceiling price but wants protection for the risks.  

 

22 hours ago, joel hoffman said:

The owner will agree but wants a way to positively motivate (incentivize) the contractor to try to avoid, find ways to mitigate and to manage the risks,  in order to reduce costs and/or time to complete the project.

 

22 hours ago, joel hoffman said:

The parties establish a distinct line item within the GMP for the contingency risks that have been quantified. They agree that the line item is exclusively for the contractor's use to draw on but that it must justify the need to draw on the line item.

 

22 hours ago, joel hoffman said:

The government doesn't want to assume the entire cost risk for possible contingencies but due to urgencies or other reasons, doesn't have the time or solutions to all the concerns at hand. 

I have no objection to the use of an FPI(F) pricing arrangement for design-build contracts. I wouldn't use one, but that's a CO call. But what you propose is a departure from standard FPI(F) practice, and I object to (1) the identical target price/ceiling price and (2) the distinct line item for contingencies on the grounds that you have not provided a good rationale for either feature of your proposal

Identical Target and Ceiling Prices

The identical target price/ceiling price, while not expressly prohibited by FAR, is radically inconsistent with the long-standing guidance on structuring an FPI(F), going back to the 1960s and presently reflected in the Contract Pricing Reference Guides, Vol. 4, Section 1.3.1. You give no rationale for that extraordinary feature of your proposal. Why should/must they be the same? How is that consistent with orthodox incentive theory? Why couldn't the target price be the ceiling price minus the quantified contingencies? That would give the contractor a motive to control costs arising from the contingencies, which your scheme does not provide. See the next section.

Distinct Line Item For Contingencies

While I think it's a good idea to identify and discuss contingencies during discussions leading up to contract award, I don't understand your notion of establishing a distinct line item for them.  Do you intend to fund it? What would be the deliverable(s) stipulated in such a line item? See FAR 4.1003. Would "contingencies" be the deliverables and the obligation? How so?

Establishing a distinct line item for contingencies that is not subject to the cost sharing incentive would give the contractor no contractual motivation to control those costs. The contractor would have an incentive to underrun the GMP, but since the GMP would exclude the contingencies the incentive would not apply to them. What your scheme appears to do is relieve the contractor from any responsibility for managing contingencies and their costs, which is inconsistent with your statement that the Government's doesn't want to assume the entire cost risk for possible contingencies. Moreover, the contractor would have a basis for submitting a claim if the Government refused to approve a "draw".

Moreover, some current guidance on the use of guaranteed maximum price indicates that the contingency is typically a 3 to 5 percent add-on within the maximum price, which is not what you're  proposing. See Carney, Contracting Methodologies and Project Delivery Systems, Maryland Construction Law Deskbook, Ch. 2 (2017):

Quote

Other issues that should be addressed in a GMP contract are the contingencies available to the contractor for items such as bid errors, missed scope between trade contractors, defects in the work, defaults by subcontractors or suppliers, and other expenses that constitute a cost of the work but do not result in an adjustment to the guaranteed maximum price. Typically, a contingency of 3-5% is included on top of the projected costs of the work and is carried as part of the guaranteed maximum price. Thus, the guaranteed maximum price will be comprised of the anticipated costs of the work, the contingency, and the fee to be paid to the contractor. 

Emphasis added. If that is, in fact, "typically" the case, why do you want to establish a distinct line item from which the contractor can "draw", whatever that means? It seems to me that you have proposed a feature that requires more explanation.

Summary

The objective that I discern in your scheme is to develop a Government contract type that is consistent with guidance published by the DBIA. You have not made a case for adoption of DBIA guidance other than that you like it. Your proposal strikes me as a scheme to get around the limitation that some see in the second sentence of FAR 16.102(b) by calling your GMP cost-plus/fixed-price hybrid an FPI contract.

I see no insurmountable legal or policy issues with the use of an FPI(F) contract for design-build. But if you use it, use it in accordance with standard practice, and apply the cost sharing incentive to contingency costs. Set a target price that excludes specified contingencies, and include contingencies within the ceiling price. In that way the Government and the contractor will share the risks arising from the contingencies. I see no value added by your proposed departures from long-standing standard practice.

Let me know if I have misunderstood anything that you've said.

 

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Not meaning to derail this very interesting thread, but I wanted to mention that when negotiating contracts with the UK MoD, the parties are supposed to discuss contingencies and, through a relatively complex probability analysis using Monte Carlo simulations, develop a probable contract cost for the contingency. That probable cost is added to the contract price as an allowable cost and, thereafter, it's the contractor's risk. In a FFP-like contract, the contractor has been compensated for that contingency whether or not it occurs, or regardless of to what extent it materializes. Obviously things are a bit different in a CP-like contract environment because funding is involved, but my understanding is that the contract profit/fee would not be adjusted for that particular contingency, regardless of actual cost incurred related to it.

"Risk that can be estimated and modelled may be an Allowable Cost within the contract price if agreed by the [MoD]. Costs associated with compensating the contractor for such risk should be evidenced, be appropriately modelled, and only be recovered once." (Emphasis in original.)

 

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Vern, thanks.

2 hours ago, Vern Edwards said:

I have no objection to the use of an FPI(F) pricing arrangement for design-build contracts. I wouldn't use one, but that's a CO call. But what you propose is a departure from standard FPI(F) practice, and I object to the identical target price/ceiling price and the distinct line item for contingencies on the grounds that you have not provided a good rationale for them..

Regarding contingencies:

Vern, I did not go into detail regarding a separate line item for the risk/contingencies. That is discussed as optional approach in both the DBIA Publication 510 and in my proposed Guidance for Federal D-B with GMP.  It is an amount that is included in the target cost, thus is within the GMP and included within the incentive . 

I mistakenly said in an earlier post that the contractor would have to justify using it. 

In my post yesterday, I explained why a separate line item might be useful during the source selection evaluation:

23 hours ago, joel hoffman said:

A distinct line item for contingency within the GMP could be used and could be evaluated during the source selection to determine what kind of risks the proposers are considering. This often reveals industry concerns,  ambiguities or errors in the solicitation or industry misunderstandings of requirements. This facilitates the possibility for effective discussions that lead to solutions or otherwise alleviate some concerns, hopefully leading to better final pricing. I have successfully used similar approaches during discussions when initial proposed prices exceeded the CCL or were otherwise worthy of discussion. 

Vern, I tend to agree with you that separate line item isn't necessary. 

Actually, the DBIA model states "Subject to the issue of which costs are reasonable,  the design-builder has the entire GMP available to perform the work, and in the event a line item within the GMP is exceeded,  the design-builder has the right to use underruns in other items to offset the overages, as long as the overall GMP remains intact." 

The separate line item is only useful to identify what the proposers are considering to be such contingencies. A separate line item that can be used on other line items would add unnecessary complexity. 

 

Quote

The identical target price/ceiling price, while not expressly prohibited by FAR, is inconsistent with the long-standing guidance on structuring an FPI(F), going back to the 1960s and presently reflected in the Contract Pricing Reference Guides, Vol. 4, Section 1.3.1. You give no rationale for that feature of your proposal. Why must they be the same? Why could the target price be the ceiling price minus the quantified contingencies? That would give the contractor a motive to control costs arising from the contingencies

The basic rationale for the identical target price/ceiling price is that, as a result of recommendations from an industry sponsored Forum for Federal Owners, I was asked to research and develop guidance for federal agencies to utilize GMP (and recommend required revisions to laws or FAR that restrict or prohibit its use).  I was told later that the scope of the recommendations isn't restricted to D-B but also includes the Construction Management at Risk project delivery method. 

Mike Loulakis referred me to GSA's policy for their version of CM@Risk, using FPIS with GMP (also uses target = Ceiling) .  I considered their method during my development of design-build guidance. However, In design-build, the contractor has more control over the design than a construction manager at risk does.  Thus the FPIF, which is simpler than the FPIS would generally be the contract type used for design-build with GMP.

I informed my client that there is already a policy for CM@Risk that could be used and adapted for other agencies. 

Quote

You give no rationale for that feature of your proposal. Why must they be the same?

I believe that I discussed the rationale in my introductory posts.  However, 

1. It is consistent with an established industry method - which GSA also adopted and which the Federal Owners Forum discussed. The industry and commercial owners are comfortable with it and it is understandable.

2. It is MUCH less complex than the separate target and ceiling and the PTA  -   if you recall a recent thread, the concept of PTA wasn't clear and in the example used, ALL of the profit was eliminated at a point below the actual ceiling cost. 

3. It is simpler and provides a POSITIVE incentive.  The separate target versus ceiling with cost overrun sharing formula can be essentially a punishment for the contractor encountering a situation during or after design, which the contractor might have little no control over - e.g., delays in obtaining third party permits, the risk of trade buyout differentials, which aren't known until after the associated tradework is designed and bid, etc.,

4.  The government's version of FPI is more suited for complex developmental programs with first articles or prototypes, systems designs, complex software development, etc.   It is vastly more complex than the type of work involved with the GMP method. Look at the Boeing Tanker program as but one example.  The government leads the public (as reported by the press, who knows nothing about FPI) to believe that the second competition was a fixed price LPTA.  Shortly after contract award for the FIRST FOUR PLANES, the contractor announces a multi-hundred million dollar cost overrun, which the government (taxpayers) will have to share in.  Was it a buy in?  

5.  In design-build, the scope is generally boxed within the defined program for one project.

Back to discussion of contingency:

The GSA policy definition of the contingency allowance, which is set at 3% of the estimated cost of the work,  is:

Quote

 CMc Contingency Allowance (CCA) is an allowance for the exclusive use of the CMc to cover reimbursable costs during construction that are not the basis of a change order as defined in the contract template. These costs could include estimating and planning errors in the final ECW or other CMc errors. This allowance is the beginning pool for the shared savings incentive. The CCA is a set 3 percent of the ECW. This contingency allowance is not the budget contingency that is appropriated for the project. NOTE: This is a change in the former policy for CMc which included a shared contingency pool.

The contingency allowance is included within the GMP, thus provides the construction manager at risk a positive incentive not to have use all of it.

I did not go into that kind of detail about contingency in this thread but did say that it is within the GMP.

 

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39 minutes ago, here_2_help said:

Not meaning to derail this very interesting thread, but I wanted to mention that when negotiating contracts with the UK MoD, the parties are supposed to discuss contingencies and, through a relatively complex probability analysis using Monte Carlo simulations, develop a probable contract cost for the contingency. That probable cost is added to the contract price as an allowable cost and, thereafter, it's the contractor's risk. In a FFP-like contract, the contractor has been compensated for that contingency whether or not it occurs, or regardless of to what extent it materializes. Obviously things are a bit different in a CP-like contract environment because funding is involved, but my understanding is that the contract profit/fee would not be adjusted for that particular contingency, regardless of actual cost incurred related to it.

"Risk that can be estimated and modelled may be an Allowable Cost within the contract price if agreed by the [MoD]. Costs associated with compensating the contractor for such risk should be evidenced, be appropriately modelled, and only be recovered once." (Emphasis in original.)

 

Yes - I agree with you, H2H.   In the negotiations of the Cost plus Award Fee construction task orders on two single award task order, systems contracts for the last two Chemical Weapons Demilitarization Projects,  the government and the systems contractor used Alpha Contracting methods to identify and quantify various risk contingencies. In those cases, the amount of the contingency affected the cost ceiling and the fixed portion of the fee. The funding was available for those or any other cost of the work.  The systems contractor is also the designer and the design development was in the early stages at that point.  I don't know how the DoD got authorization to perform the construction task order under cost plus award fee, considering the statutory and regulatory restrictions on that method. I'm guessing that they ignored it - but it was a DoD Level I, Major Acquisition Program.

The award fee did provide an incentive for cost underruns - cost incentives are mandatory, if performance incentives are also to be included..  

EDIT: I forgot to say that we also used the Monte Carlo simulations...

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Thanks, Joel. I'll read your last post carefully later today.

A couple of things:

You have referred to a DBIA publication 510 a couple of times. I can't find a DBIA publication 510. I called DBIA just now and spoke with someone in their publications office who told me there is no DBIA 510. She said she checked their archives, too. Please check that reference and provide a complete citation. Thanks.

I'm curious--Why not just go for a FAR amendment to expressly authorize the use of GMP and to provide appropriate clauses?  Alternatively, if the FAR councils won't act, why not propose a class deviation for adoption in agency supplements ? It seems to me that the FPI approach is a halfway measure.

Vern

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1 hour ago, Vern Edwards said:

Thanks, Joel. I'll read your last post carefully later today.

A couple of things:

You have referred to a DBIA publication 510 a couple of times. I can't find a DBIA publication 510. I called DBIA just now and spoke with someone in their publications office who told me there is no DBIA 510. She said she checked their archives, too. Please check that reference and provide a complete citation. Thanks.

I'm curious--Why not just go for a FAR amendment to expressly authorize the use of GMP and to provide appropriate clauses?  Alternatively, if the FAR councils won't act, why not propose a class deviation for adoption in agency supplements ? It seems to me that the FPI approach is a halfway measure.

Vern

Vern, it is part of the "DBIA Manual of Practice".  My Manual is a Binder with each Document separately bound with covers. I'm referencing Manual of Practice Document Number 510: "Design-Build Contracting Guide."  I will call DBIA and ask and check the website.

I also remembered this morning, when I was responding to H2H about negotiating risk on the construction task orders for two Systems Contracts under a DoD Level I Major Acquisition Program, that a Cost Reimbursement construction contract doesn't contain the same clauses as a FP construction contract. 

The FPI contract type for construction contains most of the FFP clauses, including differing site conditions and other clauses that provide for equitable adjustments.

The Cost Plus Systems contractor had argued to include many of those possible risks during the Alpha Contracting definition phase. The overall risk contingency allowance affects the amount of the fixed fee or base fee.  I  just don't remember how we finally addressed it in pricing the task order.    

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