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

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I need to find a fixed price incentive contract or similar cost incentive contract type that is allowable under the existing FAR for federal Design-Build contracting that provides for reimbursement of allowable costs, not to exceed a ceiling price or "Guaranteed Maximum Price" (GMP).  The contract will provide for shared savings on the project if the actual costs are less than the ceiling price/GMP, through contract provisions for sharing of savings.  In this scenario, the goal is to control costs within the target cost that is established at the price ceiling (GMP).

The Question:

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)?

Background :

I'm presently working to develop guidance for federal agencies to use design-build with a “Guaranteed Maximum Price”, similar to the industry model described below. My goal is to be able to find a way to implement it consistent with the current federal statutes and the current FAR, without having to change either to implement it.

D-B Industry Application:

The Design-Build industry, e.g., Design-Build Institute of America (DBIA), Associated General Contractors (AGC), and the Engineers Joint Contracts Committee (EJCDC),  have contract formats appropriate for design-build contracting.  Their formats include, in addition to firm fixed price (the D-B industry term is "lump sum"), a form of "Cost-Plus with Guaranteed Maximum Price (Cost-Plus/GMP). This is a hybrid, combining the cost reimbursement features of a cost-plus contract with the cost certainty of a lump sum contract. The owner benefits by paying only the actual reimbursable costs of the work for the design-builder's performance and by knowing that its project will not exceed a pre-established price (adjusted, of course, for changes made by the owner or for other authorized adjustments under the contract).  The GMP also offers both the owner and the design-builder the opportunity to realize savings on the project if the actual costs are less than the GMP, through contract provisions for sharing of savings.

In commercial industry design-build practice, the use of a GMP contract structure is often used where the owner’s program is not defined well enough in scope and/or functional or technical requirements to be able to develop a budget or for the owner and industry to agree to a firm fixed price (FFP) for the project.  Industry refers to FFP as “lump sum” pricing. The design-build contractor might be selected through some type of competitive best value process or through a qualifications-based selection (“QBS”) process. The owner and design-builder might work together to define the program more completely. The initial effort might be priced on a lump sum or cost-plus basis. The parties should establish a GMP for the project when the program is sufficiently established to make the GMP number realistic and meaningful.

Federal Application: 

For federal design-build acquisition, design-build acquisition processes generally do not allow the use of QBS of the design-build contractor.  The design-build contractor is normally selected using a competitively negotiated, best-value selection procedure, considering qualifications, usually design excellence, and price. 

Generally, federal government design-build build contracts are awarded as FFP contracts.

In some instances, federal design-build with GMP contract approach may be more appropriate than the FFP pricing method, when there is already a defined programmatic scope and programmed amount of funding, but with only nominal design development and it is too early to be able to establish a firm fixed-price (FFP) without having to include considerable contingencies or risk in the FFP.  It may be well suited for projects that are complex and difficult to adequately define a FFP at the outset and/or for projects that involve unusually high contingencies due to risks or unknown conditions, prior to considerable design development.

Rather than paying a FFP for the full estimated contingencies, the GMP method can result in the government paying only for those actually encountered. Plus it incentivizes the design-builder to minimize, manage or avoid costs for such contingencies.

Compressed time schedules available for RFP development, awarding and executing design-build contracts for large, complex projects are also a consideration for using design-build with GMP in lieu of FFP award.

To be able to negotiate and establish a realistic GMP at the outset, the government must define its performance requirements for scope and quality up front, using a parametric/conceptual cost estimate.  The design-build teams would also have to be able to conceptually estimate costs within that performance based requirements RFP format to develop their proposals.

Is There an Applicable FAR Contract Type(s)?

    I have found that the federal “Fixed Price Incentive” contract types under FAR 16.403 (FPIF and FPIS) most closely resemble the industry Cost-Plus/GMP approach.  The industry model is described in the DBIA Manual of Practice, in Document Number 510, Design- Build Contracting Guide, Chapter 5, “Lump Sum versus Cost-Plus/Guaranteed Maximum Price”.

Both the industry Cost-Plus/GMP and the Federal design-build with GMP using the FPI approach require the design-builder to perform and complete the contracted scope within the contractually agreed maximum price, within the agreed time. Both provide for reimbursement of certain, allowable costs.

The Challenge:

The current challenge in adapting the FPI for federal design-build with GMP is to be able to use a single target cost/profit and ceiling price – not a lower target within a HIGHER ceiling.  I think so, but need some advice or definitive support for my position. 

The classic FPIF with a lower target doesn't align with the industry model.  It encourages a lower quality target design and construction level and may penalize the contractor for encountering unknowns or other non-controllable contingencies, rather than providing positive incentives to the contractor for mitigating, managing or avoiding risks and NOT consuming the contingency allowance.  It is also much more cumbersome to manage and administer than a simple GMP ceiling.  The industry has already demonstrated a willingness to accept the risk for exceeding the GMP/ceiling, using its existing GMP contract type. 

The design-builder is the single point of responsibility for design and construction.  When D-B is properly used with government furnished performance criteria for means, methods, functional and technical design requirements,  the D-B contractor has more ability to control the cost  of work in design-build  to meet the owner's quality, scope and functional requirements. 

The classic FPI model with separate target and ceiling price may be appropriate for complex, dynamic government developmental manufacturing programs  (like developing and initial production or prototype production of airplanes, ships, missiles, etc.).  It may also be appropriate for hiring a construction contractor during development of government furnished design for a complex facility, such as a hospital, etc. 

It isn't necessarily appropriate for Design-Build construction with a single source for both design and construction.

Applicable FAR coverage:

I found several pertinent FAR references for FPI contracts under: 16.201(a ); 16.204  (Fixed-price incentive contracts); 16.401 (General), 16.402, 16.403,  16.403-1,  

"Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.":

 

Quote

 

Subpart 16.2—Fixed-Price Contracts

16.201   General.

(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. The contracting officer shall use firm-fixed-price or fixed-price with economic price adjustment contracts when acquiring commercial items, except as provided in 12.207(b).

 

 

A fixed price incentive with a single target/price ceiling  (GMP) is consistent with the following:

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. Fixed-price incentive contracts are covered in subpart 16.4, Incentive Contracts. See 16.403 for more complete descriptions, application, and limitations for these contracts. Prescribed clauses are found at 16.406.

 

 

With a target equaling the ceiling price (the GMP), the profit is automatically affected when the contractor's actual cost exceeds the target:

 

Quote

 

Subpart 16.4—Incentive Contracts

16.401   General.

(a) Incentive contracts as described in this subpart are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor's performance. Incentive contracts are designed to obtain specific acquisition objectives by—

(1) Establishing reasonable and attainable targets that are clearly communicated to the contractor; and

(2) Including appropriate incentive arrangements designed to (i) motivate contractor efforts that might not otherwise be emphasized and (ii) discourage contractor inefficiency and waste.

(b) When predetermined, formula-type incentives on technical performance or delivery are included, increases in profit or fee are provided only for achievement that surpasses the targets, and decreases are provided for to the extent that such targets are not met. The incentive increases or decreases are applied to performance targets rather than minimum performance requirements.

(c) The two basic categories of incentive contracts are fixed-price incentive contracts (see 16.403 and 16.404) and cost-reimbursement incentive contracts (see 16.405). Since it is usually to the Government's advantage for the contractor to assume substantial cost responsibility and an appropriate share of the cost risk, fixed-price incentive contracts are preferred when contract costs and performance requirements are reasonably certain. Cost-reimbursement incentive contracts are subject to the overall limitations in 16.301 that apply to all cost-reimbursement contracts.

 

 

 

When the target and ceiling are the same (the GMP), they are within the constraints of the ceiling price. The government doesn't pay any more than what it bargained for and the contractor absorbs any cost overrun, affecting its profit:

 

Quote

 

16.402   Application of predetermined, formula-type incentives.

 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.

 

 

The GMP method meets this:

Quote

 

16.403   Fixed-price incentive contracts.

(a) Description. A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset. The two forms of fixed-price incentive contracts, firm target and successive targets, are further described in 16.403-1 and 16.403-2 below.

(b) Application. A fixed-price incentive contract is appropriate when—

(1) A firm-fixed-price contract is not suitable;

(2) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor's assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance; and

(3) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor's management of the work

 

 

The GMP method meets this :

Quote

 

16.403-1   Fixed-price incentive (firm target) contracts.

(a) Description. A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, 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. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs.

(b) Application. A fixed-price incentive (firm target) contract is appropriate when the parties can negotiate at the outset a firm target cost, target profit, and profit adjustment formula that will provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk. When the contractor assumes a considerable or major share of the cost responsibility under the adjustment formula, the target profit should reflect this responsibility

 

 

 

Paragraph d. (2) (ii) is the only paragraph in contract clause 52.216-16   Incentive Price Revision—Firm Target that would require some tailoring for the GMP with the target cost plus target profit equal to the ceiling GMP. 

Quote

(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.

Inasmuch as the paragraph provides for KO fill in anyway, it would be relatively simple to say something like "No adjustment - the target cost plus target profit equals the price ceiling."

 

 

______________________________________________________________________________________________

Note:  

[FAR Cost Reimbursement Incentive Type is not the Same as Industry Cost-Plus/GMP

As a matter of semantics, the cost reimbursement incentive contract types under the Federal Acquisition Regulations have a different meaning than an industry “Cost-Plus/GMP” contract.

The federal cost-plus (referred to as “cost reimbursement”) FAR contract types also provide for reimbursement of contractually allowable costs.  However, the cost ceiling limitation is initially established as an estimate to complete the contract scope of work effort. The contractor is expected to make its best effort to complete the work within the cost ceiling. The government will not reimburse allowable costs that exceed the cost ceiling limitation. If the contractor cannot or does not complete the work within the cost ceiling limitation, the government would have to decide whether to provide additional funding to proceed beyond the cost limitation

There are also legal and regulatory restrictions or prohibitions against the use of a federal Cost-Plus contract type for DoD Military construction and for some other Federal construction contracts.]

 

 

 

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Is my question too difficult or did I provide too much explanation?  

The question is simply,  as the title of the Thread says:  "Must a Fixed Price Incentive Contract include Separate Target and Ceiling (Prices)?"   -  - not whether or not using FPI is allowed for design-build under the right circumstances.

That would closely resemble the design-build industry's "Cost-Plus with GMP" pricing method

I provided the background because many of us complain about the "Original Poster" not enough development of the circumstances , which OFTEN leads to  people speculating and following rabbit trails.

Thanks.

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joel,

Thanks for the second post. I was having trouble figuring out what your question was.

So, there would be a target profit and a target cost stated in the contract. When added together, they would equal the ceiling price. There would be sharing under the target cost, but not over. In other words, the target cost is the PTA.

I don't see an obvious problem with that. I'm going to ask someone who knows more than me about FPI(F) contracts.

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Thanks, Don 

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Thanks again,  Don. 

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Why call it an FPI contract? Why not just craft a custom incentive. Call it just a cost incentive contract (CIC). Write a clause that describes how it works. That would free you from the terms of the incentive price revision clause.

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Vern, are you saying, in effect, that the FPIF format doesn't allow the target to equal the ceiling and therefore, we have to "just craft" a custom cost incentive contract type, called a "CIC"?  Would this need to be adopted in FAR?  If not, would any agency or office that intends to use the federal design-build with GMP method have to justify using the custom cost incentive contract type and use the custom, non-standard contract clause? 

Would your answer be any different if this design-build with GMP guidance is planned to be published (not by me) for government-wide use for those agencies subject to FAR?  Of course, 'Guidance' is simply that - guidance.  

There should not be a  need to "just' craft a new type of cost incentive contract for federal agencies, if the GMP with target = ceiling is allowable under the FPIF contract type, with proper justification, .  

The DFARS, for example establishes the ceiling at 120% and 50/50 share ratio as "the point of departure " for establishing an FPIF incentive arrangement.  However, that isn't mandatory.  I did not see any special approval authority there or in the PGI, other than the official who has to approve the acquisition plan.  Of course, other agency policy requirements might apply.

 

Quote

DFARS

216.403-1  Fixed-price incentive (firm target) contracts.

  ... (b)  Application. 

             (1)  The contracting officer shall give particular consideration to the use of fixed-price incentive (firm target) contracts, especially for acquisitions moving from development to production.

              (2)  The contracting officer shall pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement.

              (3)  See PGI 216.403-1 (DFARS/PGI view) for guidance on the use of fixed-price incentive (firm target) contracts.

 

 

Here is an excerpt from the PGI coverage:

 

Quote

 

PGI 216.403-1  Fixed-price incentive (firm target) contracts.

      (1)  Use of FPIF contract(i) Not mandatory. DFARS 216.403-1(b)(1) directs the contracting officer to give particular consideration to the use of fixed-price incentive (firm target) (FPIF) contracts, especially for acquisitions moving from development to production. DFARS does not mandate the use of FPIF for initial production and each acquisition situation must be evaluated in terms of the degree and nature of the risk presented in order to select the proper contract type.

               (ii)  Considerations. Volume 4, chapter 1, of the Contract Pricing Reference Guide provides a detailed discussion of the considerations involved in selecting the proper contract type. For example:

                     (A)  It is not in the Government’s best interest to use FPIF when the cost risk is so great that establishing a ceiling price is unrealistic.

                     (B)  It is also not in the Government’s best interest to use firm-fixed-price (FFP) contracts on production programs until costs have become stable. Therefore, FPIF contracts should be considered in production programs where actual costs on prior FFP contracts have varied by more than four percent from the costs considered negotiated. Contracting officers are reminded that actual costs on prior contracts for the same item, regardless of contract type or data reporting requirements of the prior contract, are cost and pricing data on the pending contract, and should be obtained from the contractor on production programs when cost or pricing data are required.

       (2)  Incentive arrangement.  DFARS 216.403-1(b)(2) directs the contracting officer to pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement. While DFARS does not mandate the use of these share ratios or ceiling percentage, it is not unreasonable to expect that upon entering into production, risks have been mitigated to the point that the DFARS recommended point of departure for an FPIF incentive arrangement would be normal.

 

 

 

Following the (proposed - to be published) Guidance for Federal Agency Use of Design-Build with Guaranteed Maximum Price , DoD solicitations using the GMP methodology could "depart  from the 120% "point of departure" and establish 100% of target as the ceiling/GMP, with appropriate justification and approval.

 

Here is the standard FPIF clause language with applicable fill-ins:

Quote

 

 52.216-16   Incentive Price Revision—Firm Target.

 ...(d) Price revision. Upon the Contracting Officer's receipt of the data required by paragraph (c) above, the Contracting Officer and the Contractor shall promptly establish the total final price of the items specified in (a) above by applying to final negotiated cost an adjustment for profit or loss, as follows:

  (1) On the basis of the information required by paragraph (c) above, together with any other pertinent information, the parties shall negotiate the total final cost incurred or to be incurred for supplies delivered (or services performed) and accepted by the Government and which are subject to price revision under this clause.

  (2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

  (i) If the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit.

  (ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less _ *[0]  percent of the amount by which the total final negotiated cost exceeds the total target cost. *[ADDED CLARIFICATION: "The Target Cost is the Ceiling Cost."]

  (iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus _ [**Contracting Officer insert percent] percent of the amount by which the total final negotiated cost is less than the total target cost.

 

*The solicitation will state that the target and ceiling are one and the same.   Paragraph (d) (2) (ii)  in the clause 52.216-16 provides for a "fill in", which would simply be filled in as "0%" with the clarification language substantially as shown above.

** I presume that (subject to any agency policy) the cost savings share ratio in (d) (2) (iii) may be established through competitive negotiations (accepted final proposed share ratio)  or the government may specify it in the solicitation. If established through the source selection process, the clause will be filled in at award to reflect the accepted final proposal.  For DoD, the government could establish "50/50" in the solicitation, could "depart" and establish a different ratio in the solicitation or could allow the proposers to propose and justify a different ratio

Edited by joel hoffman
Something got messed up when I was cutting and pasting

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1 hour ago, joel hoffman said:

Vern, are you saying, in effect, that the FPIF format doesn't allow the target to equal the ceiling and therefore, we have to "just craft" a custom cost incentive contract type, called a "CIC"?  Would this need to be adopted in FAR?  If not, would any agency or office that intends to use the federal design-build with GMP method have to justify using the custom cost incentive contract type and use the custom, non-standard contract clause? 

Would your answer be any different if this design-build with GMP guidance is planned to be published (not by me) for government-wide use for those agencies subject to FAR?  Of course, 'Guidance' is simply that - guidance.  

There should not be a  need to "just' craft a new type of cost incentive contract for federal agencies, if the GMP with target = ceiling is allowable under the FPIF contract type, with proper justification, .  

The DFARS, for example establishes the ceiling at 120% and 50/50 share ratio as "the point of departure " for establishing an FPIF incentive arrangement.  However, that isn't mandatory.  I did not see any special approval authority there or in the PGI, other than the official who has to approve the acquisition plan.  Of course, other agency policy requirements might apply.

I didn't say you have to do anything, and I didn't say you couldn't have a combined target/ceiling price (although I think it's ridiculous). My thought is simply that the FPI contract is the most complicated in use today. If all you want to do is reward the contractor for coming in below some maximum price, why not just write a simple clause that gives it so many cents for every dollar it underruns. Why mess around confusing everybody with that ridiculous FPI contract. (Have you read the incentive price revision clause?) You can use any contract type or combination that is not prohibited, and FAR does not limit you to the FPI cost incentive. KISS is the essence of brilliance.

Joel, you're talking a design-build construction contract, not a contract to develop or produce a new spacecraft, aircraft, or warship. Keep it simple.

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1 hour ago, Vern Edwards said:

I didn't say you have to do anything and I didn't say you couldn't have a combined target/ceiling price (although I think it's ridiculous). My thought is simply that the FPI contract is the most complicated in use today. If all you want to do is reward the contractor for coming in below some maximum price, why not just write a simple clause that gives it so many cents for every dollar it underruns. Why mess around confusing everybody with that ridiculous FPI contract. You can use any contract type or combination that is not prohibited, and FAR does not limit you  to the FPI cost incentive. KISS is the essence of brilliance.

Joel, you're talking a design-build construction contract, not a contract to develop or produce a new spacecraft, aircraft, or warship. Keep it simple.

Vern, As I explained above, a "Cost-Plus GMP" is a standard industry type of design-build contract that is widely used. Apparently, industry doesn't think that it is ridiculous.  I wasn't the one who proposed that we need to find a way to implement the GMP method for federal design-build and to provide guidance for federal government design-build usage. That was a group of industry and federal design-build practitioners.  I was asked to find a way to use it,  to see what laws and/or FAR coverage would have to be revised and to develop guidance for Federal Agencies to use it. 

I am proposing that the FAR allows that type of pricing method without the need to seek FAR revisions. The industry term "Cost-Plus"  doesn't equate to the FAR "Cost-Plus" / "Cost Reimbursement" contract types.  It most closely resembles the industry Cost-Plus/GMP approach, as long as the target and ceiling are the same. 

Quote

...why not just write a simple clause that gives it so many cents for every dollar it underruns.

What is the contract type that "the simple clause" applies to?  It isn't a FFP if actual cost of performance must be considered or used to determine or adjust the contract price . 

 

Quote

 

16.202-1   Description.

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

 

I looked for something other than a fixed Price Incentive to use with cost incentives but didn't find language that would seem to allow it.
 

Quote

 

16.102   Policies.

(a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

(b) Contracts negotiated under part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 3901). Contract types not described in this regulation shall not be used, except as a deviation under subpart 1.4.

 

As I initially said -  (other than FFP) type of contract is used when the it is too early in the project's design development "to be able to establish a firm fixed-price (FFP) without having to include considerable contingencies or risk in the FFP". 

In your simple clause, what is the contractor underrunning from?  What is that amount, contractually?  A target cost?  An estimated cost?  A Fixed cost Incentive?

In order to do that, the contractor and government would have to have a contractual mechanism for determining and agreeing upon "every dollar it underruns".  This implies that there has to be a method to determine and agree on what actual costs we are measuring.  There will have to be a way to determine and make progress payments to the contractor during design and construction. 

The parties could work to definitize the contract price from a (??)  to a FFP at any point, but that also brings in FAR Subpart 15.4 and Part 31 rules and requirements.  The FPI pricing method can also allow for definition of parts or all of the price to FFP.

 

 

 

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18 minutes ago, joel hoffman said:

What is the contract type that "the simple clause" applies to?  It isn't a FFP if actual cost of performance must be considered or used to determine or adjust the contract price . 

If you have to give it a name, which you don't, call it GMP with Cost Incentive, GMP-CI. The contractor shares in the savings. That's the idea, right?

18 minutes ago, joel hoffman said:

In your simple clause, what is the contractor underrunning from?  What is that amount, contractually?  A target cost?  An estimated cost?  A Fixed cost Incentive?

From the GMP. The lower the final price from the GMP, the higher the contractor's fee (profit).

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"The contract will provide for shared savings on the project if the actual costs are less than the ceiling price/GMP, through contract provisions for sharing of savings."

The parties agree on a cost savings share ratio. 

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If the final contract price is less than the GMP, then the contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows:

[(GMP - Contractor's Fee) - Actual Cost] x .25

Is that what you have in mind? If so, then that's the only incentive clause you need.

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On 8/25/2017 at 0:06 PM, Vern Edwards said:

If you have to give it a name, which you don't, call it GMP with Cost Incentive, GMP-CI. The contractor shares in the savings. That's the idea, right?

From the GMP. The lower the final price from the GMP, the higher the contractor's fee (profit).

Vern, that appears to be a type of cost incentive contract.  Name or not, it has to be SOME contract type and has to be described in the solicitation:

"16.105   Solicitation provision.

The contracting officer shall complete and insert the provision at 52.216-1, Type of Contract, in a solicitation unless it is for—

(a) A fixed-price acquisition made under simplified acquisition procedures; or

(b) Information or planning purposes."

 Is it a cost incentive contract type described somewhere in subpart 16.4 -  Incentive Contracts? 

If not, that is the problem:

Quote

 

16.102   Policies.

(a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

(b) Contracts negotiated under part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 3901). Contract types not described in this regulation shall not be used, except as a deviation under subpart 1.4.

 

 

How do you define "cost" in a "GMP with Cost Incentive, GMP-CI", which doesn't seem to be a contract type described in Part 16?

How do you determine the "actual cost" in a "GMP with Cost Incentive, GMP-CI"?

In order to do that, the contractor and government would have to have a contractual mechanism for determining and agreeing upon "every dollar it underruns".  This implies that there has to be a method to determine and agree on what actual costs we are measuring.

How is a "GMP with Cost Incentive, GMP-CI" simpler, in actual practice than the FPIF with GMP?

 

On 8/25/2017 at 0:52 PM, Vern Edwards said:

If the final contract price is less than the GMP, then the contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows:

[(GMP - Contractor's Fee) - Actual Cost] x .25

Is that what you have in mind? If so, then that's the only incentive clause you need.

Bingo! 

See the highlighted FPIF applicable "cost incentive" paragraph (d)(2)(iii). 

I doubt that paragraph (d)(2)(i) is achievable, within $1 .  

Paragraph (d)(2)(ii) is not applicable. because the target cost plus target fee = GMP = ceiling price.   The final negotiated cost cannot exceed the target cost and the final price cannot exceed the ceiling price (GMP). There is no profit adjustment if "actual cost" exceeds the target cost.

So the only applicable "incentive clause"  language is :

Quote

 

 52.216-16   Incentive Price Revision—Firm Target.

(d) Price revision...

...(2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

"(iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus  25% percent of the amount by which the total final negotiated cost is less than the total target cost.

 

I think that the result is the same as in the "GMP with Cost Incentive, GMP-CI. 

"The contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows"

(The contract states that the target cost plus target profit = GMP)   

=>   Target cost = ( GMP - target profit)

[(GMP - target profit) - (actual cost)] x .25 or:

(target cost - actual cost) x .25

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Whatever, Joel. I have been in contracting a long time and this is the kind of thing I would do with a very short homemade contract incentive clause and without the least trouble. I think the FAR is blurring your vision.

The incentive price revision clause is very long and very complicated and is not necessary for what you want to do, but if you want to use it, then use it. I wouldn't, but that's me. I tend to look for simple ways to do things. You tell people to use an FPI with a target price and ceiling price that are the same and you're going to get more questions than you're going to want to answer.

But be my guest. I don't have a stake in your project. 

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Vern,   THis guidance is intended to be for broad application across federal government. You should be able to understand the challenge of trying to convince lawyers  and contracting officers  in many agencies to do anything outside of the ordinary,  let alone devise a new type of contracting outside of the boundaries of FAR Part 16. 

 Beyond that, I am unable to determine what contract type you are talking about using. It would have to be some type of incentive contract that is either fixed price or cost reimbursement.  Cost reimbursement type of contract is inappropriate for design build because the contractor would only have to make the best effort to complete the project within the so-called guaranteed maximum price. I could not find where a different type of fixed price cost incentive contract is allowable under the wording in the FAR. 

 I have asked you several times what type of contract format you are going to use and how you are going to define costs and cost reimbursement for actual costs expended.

I would appreciate it if you could please specifically tell me how it can be done under the current FAR, so that the contracting officers and their lawyers will agree that it is FAR compliant.  Also, how would you provide for reimbursement and determination of allowable costs under your ?? type contract.

This is not a one time experiment. This guidance would have to be "within the FAR box" for the generally timid and risk adverse gov't legal and contracting community to use it. 

A GMP design-build contract would likely only be used by the more sophisticated construction contracting agencies for complex projects where it is too early in the acquisition cycle to be able to establish a reasonable  FFP amount.  In fact, there are only a couple of USACE Districts that I feel might be presently qualified to try it either.  The Pentagon Renovation Office used something similar after 9-11-2001 to rebuild Phase 1 of PENREN,  after it was destroyed by the Terrorists and was used to design and construct the other 3 phases, thereafter. 

The FPI clause isn't THAT complicated if the final price adjustment is only subject to one adjustment scenario . The rest of the clause primarily explains how allowable costs are determined , and how the billing process and some facets of earned value project management are necessary, which design-builders and most construction contractors do any way.  

You still haven't told us anything about your contracting process other than a one sentence explanation of how to pay the cost incentive. You often chide others here for not providing references or sources for their positions.

I sent the draft guidance document to Don.  If you would like, Don can share it with you.

I think that it very closely resembles the industry version of cost – plus/GMP design – build, which is explained in the Design Build Institute of America's Manual of Practice.  The major differences are in semantics.  What the industry refers to as cost – plus is not the same as what a government cost – plus contract type is.

 In addition, the industry can use (QBS) qualifications based selection of the  design–build contractor, in any point of the acquisition cycle,  then use the same design- build team from project conception through completion. They call it  "Progressive Design – Build". The federal government must use some type of best value determination to select the contractor, which would consider price.  In addition, the federal government is subject to the Brooks Act and other restrictions (e.g., FAR 36.209) which prohibit the government from selecting an A – E contractor, construction contractor or design-build contractor to develop "the program", and/or to develop the design criteria, and then design and construct the project,  with construction as an option at some later point.

P.S., The GSA is already using a similar type of a fixed price incentive contract with GMP for their version of  "construction management at risk."  See next post.

 

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,My "next post" was somehow deleted .  I described the GSA's "Construction Manager as Constructor (CMc) Project Delivery Method", which is GSA's version of Construction Manager@Risk. where:

"The PBS Offices of Design and Construction and Acquisition Management are issuing the attached Policies and Procedure for using the CMc delivery method. The policy prescribes the steps for successfully completing a project under this delivery method. The policy is posted on the PBS Acquisition website at http://insite.pbs.gsa.gov/pbsacqpolicy".

That method uses a form of the FPIS contract type with a "GMP" rather than the separate "target" and "Ceiling".

I described the Pentagon Renovation Office's successful use of D-B, using an FPI contract format to rebuild the just completed first of four phased "pies" in the Pentagon after the Terrorists hit it on 9/11/2001.  It was also successfully used to complete the remaining phases of the PENREN.  It was highly acclaimed by the Design-Build industry.  The Government's Program Manager, Lee Ivey later became the President and CEO of the DBIA.  

I explained how CM@risk fits between D-B-B and D-B in the spectrum of design and construction delivery systems.  

I explained how there are few government agencies that are sophisticated enough to successfully use the more complex delivery systems, anyway.  

Thanks, Bob... 

Joel:

I am adding this edit because your link does not work.  It may be to an internal page.  I wanted to remind myself to tell you.

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2 hours ago, joel hoffman said:

Beyond that, I am unable to determine what contract type you are talking about using.

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!

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Vern, No - but thanks.

CPFF is generally prohibited by law for Military construction and the cost reimbursement contract type only requires that the contractor make a best effort to complete the project within the contract cost.  

Quote

 

216.301-3   Limitations.

For contracts in connection with a military construction project or a military family housing project, contracting officers shall not use cost-plus-fixed-fee, cost-plus-award-fee, or cost-plus-incentive-fee contract types (10 U.S.C. 2306(c)). This applies notwithstanding a declaration of war or the declaration by the President of a national emergency under section 201 of the National Emergencies Act (50 U.S.C. 1621) that includes the use of the Armed Forces.

[81 FR 65564, Sept. 23, 2016]

216.306   Cost-plus-fixed-fee contracts.

(c) Limitations. For contracts in connection with a military construction project or military family housing project, see the prohibition at 216.301-3.

(i) Except as provided in paragraph (c)(ii) of this section, annual military construction appropriations acts prohibit the use of cost-plus-fixed-fee contracts that—

(A) Are funded by a military construction appropriations act;

(B) Are estimated to exceed $25,000; and

(C) Will be performed within the United States, except Alaska.

(ii) The prohibition in paragraph (c)(i) of this section does not apply to contracts specifically approved in writing, setting forth the reasons therefor, in accordance with the following:

(A) The Secretaries of the military departments are authorized to approve such contracts that are for environmental work only, provided the environmental work is not classified as construction, as defined by 10 U.S.C. 2801.

(B) The Secretary of Defense or designee must approve such contracts that are not for environmental work only or are for environmental work classified as construction.

[62 FR 1058, Jan. 8, 1997; 62 FR 1817, Jan. 13, 1997; 62 FR 49305, Sept. 19, 1997; 71 FR 39007, July 11, 2006; 81 FR 65564, Sept. 23, 2016]

 

 

Adding a little incentive doesn't fix that. In addition I don't see that "managing" a cost reimbursement contract is any easier than an FPI -  I'm talking about true management, not just passively administering it and paying the bills.  In addition to management of design and construction, a robust project controls (cost, schedule and production)  team is necessary.  True earned value management skills - not reading EVMS report deliverables that reflect past events - is necessary. That's what they teach in Construction Management college curricula.  That's what contractors do and that's what government project management and contract administration teams must be able to do.

FPI has been successfully used for D-B in the Pentagon Renovation  after 9/11/2001 and is being used by GSA for its version of CM @ risk.  The D-B industry highly praised the PENREN program.  P.S., they had true program and project management.

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1 hour ago, 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, If you took as much time to read it as to count the words, you would have known what I was asking and you would have known that DoD can't use cost plus contracts for construction or design-build without approval by the Sec Defense or designee, except for environmental - which require Sec of Mil. Dept.  approval .  That leaves - - - - Fixed price. ;)

At any rate - three lines into the long post:
 

Quote

 

Beyond that, I am unable to determine what contract type you are talking about using. It would have to be some type of incentive contract that is either fixed price or cost reimbursement.  Cost reimbursement type of contract is inappropriate for design build because the contractor would only have to make the best effort to complete the project within the so-called guaranteed maximum price. I could not find where a different type of fixed price cost incentive contract is allowable under the wording in the FAR. 

 I have asked you several times what type of contract format you are going to use and how you are going to define costs and cost reimbursement for actual costs expended.

I would appreciate it if you could please specifically tell me how it can be done under the current FAR, so that the contracting officers and their lawyers will agree that it is FAR compliant.  Also, how would you provide for reimbursement and determination of allowable costs under your ?? type contract.

 

I can understand if you forgot what I was asking after my excruciatingly long post.  

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Sorry. I last did construction for DOE and we did use CPFF contracts. The last two contracts I ever signed as a CO were CPFF construction contracts.

Okay, call it fixed-ceiling-price with cost incentive.

You know, Joel, if you understand how it works you should be able to come up with a name for it yourself. You could have done it easily in the time it took to post your tomes.

 

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16 minutes ago, Vern Edwards said:

Sorry. I last did construction for DOE and we did use CFPP contracts. The last two contracts I ever signed as a CO were CPFF construction contracts.

Okay, call it fixed-ceiling-price with cost incentive.

You know, Joel, if you understand how it works you should be able to come up with a name for it yourself.

 

DOE has an abysmal track record on their recent cost type construction and remediation contracts -  However, that doesn't matter.  DoD cant use them.  My last full time assignment was on the DoD Chemical Demilitarization Program on two CPFF Systems contracts that are STILL not finished and the cost has doubled or tripled over the original estimates - all for various reasons.. I left that program over ten years ago. 

I did come up with a name for it: It's "Fixed Price Incentive with GMP". The contract explains that it is an FPIF where the target and ceiling are one and the same.

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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)

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1 hour ago, Vern Edwards said:

Okay, call it fixed-ceiling-price with cost incentive.

The lawyers and KO''s will say "Show me where that is described in FAR Part 16." 

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