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

[joel hoffman 0]

Vern - The publication 510 has been restructured into numerous other documents. Only members can download the documents.  The Standard Form of Agreement for the Cost-Plus/GMP method, Document 530 , is still there.  I am searching for the discussion on how and when to use it in the current publication list.  Have asked the staff to assist. 

EDIT:  AHA!  The Pub 510 chapter 5.0 on Lump Sum vs. Cost-Plus/GMP has been absorbed into the general instructions for the Standard Form of Agreement.  It is  available only for members as a download. Unfortunately, I cannot transfer, copy or reprint it under the license agreement. It is only available for members as a download. 

The new citation for that which I cited earlier as Publication 510, "Lump Sum vs. Cost-Plus/Guaranteed Price" is "(Specific Instructions For) Document No. 530, Standard Form of Agreement Between Owner and Design-Builder - Cost Plus Fee With An Option For A Guaranteed Maximum Price (2010 Edition)"

Darned. Sorry.

 

[joel hoffman 0]

21 hours ago, Vern Edwards said:

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

Gosh,   I think we adequately discussed this.  The short of it is - 1) There is no government sponsor,  2) the FPIF method with target= ceiling (then defining that in the solicitation as the GMP) is similar to the industry's "Cost-Plus/GMP", with the understanding that their vernacular simply means that the owner will reimburse certain defined allowable costs for completing the project - not to exceed the ceiling/GMP.   That's the same as the federal "FPI" version.   The  "I" incentive operates essentially the same in both forms. 

My question is WHY does it seem to you that the FPI approach is a halfway measure?  Why isn't the existing FPIF contract type and incentive revisions clause 52.216-16 suitable for the specific application of D-B described herein ,  when the clause is slightly edited (as I showed in a previous post is specifically allowed)? 

It appears to me to operate essentially the same as the commercial GMP contract, subject to standard FAR operatives for such as determining allowable costs.  Unfortunately, you apparently don't have access to the DBIA Standard Agreement and DBIA specifically prohibits me from sharing it "for educational purposes" or any other purpose other than to a D-B client that I may be working for.

The FPI should exclude the indirect/overheads that DBIA includes in the fee ( fee = profit only).  In my opinion, the DBIA treatment of those costs is too ambiguous to put into the "fixed fee".  They are included in the fee in the DBIA contract for commercial privacy reasons. Construction companies vary widely in how they are organized and how they treat costs as direct or indirect costs. The FAR is very strict on mixing fixed costs and reimbursable costs for construction contracts (e.g., 36.208 Concurrent performance of firm-fixed-price and other types of construction contracts). To me, it would be very challenging for the government to determine if direct and indirect costs have been totally separated or classified within the fixed fee or within the reimbursable costs.  The possibility of paying twice or of inconsistent treatment of direct and indirect costs is difficult to avoid where there is no visibility of what costs are included in the fixed fee. 

The only FAR change that might be recommended is to clarify that the target price can be set to equal the ceiling price and when that could be appropriate.   I think that the DFARS at  216.403-1 and the PGI at 216.403-1 already cover how an organization can vary from the  'one size fits all' " 120 % ceiling and 50/50 share ratio "point of departure".  Its ridiculous to assume that a Design-Build contract - when used under the circumstances in the "Guidance" - would have to have a ceiling price that is 20% more than the target - as though it were an ACAT 1 Acquisition Program for a nuclear submarine or aircraft carrier or the dad-gummed Air Force Tanker. The PGI describes the requirements for D&F approval for any Incentive type contract and how to analyze risk, etc.in establishing a ceiling price. The Budgets for federal construction projects don't include other than a low percentage for contingencies.

The various FAR References that provide flexibility (including the instructions for the FPIF Incentive Clause) have already been quoted herein. 

At least two people from DAU,  Vern Edwards and an attorney from my client organization have indicated that it doesn't appear that the target and ceiling can't be the same in an FPIF.

For the most complex straight construction projects, using various forms of Construction Manager at Risk project delivery method,  the successive targets form has been used with success.

By the way, 

Quote

 

PGI 216.401 General.

(c) Incentive contracts. DoD has established the Award and Incentive Fees Community of Practice (CoP) under the leadership of the Defense Acquisition University (DAU). The CoP serves as the repository for all related materials including policy information, related training courses, examples of good award fee arrangements, and other supporting resources. The CoP is available on the DAU Acquisition Community Connection at https://acc.dau.mil/awardandincentivefees. Additional information can be found on the MAX website maintained by the Office of Management and Budget at: https://max.omb.gov.

 

 I must read the info at the above site that I just noticed...

[Guest Vern Edwards]

1 hour ago, joel hoffman said:

My question is WHY does it seem to you that the FPI approach is a halfway measure?  Why isn't the existing FPIF contract type and incentive revisions clause 52.216-16 suitable for the specific application of D-B described herein ,  when the clause is slightly edited (as I showed in a previous post is specifically allowed)? 

Because you're not really thinking of an FPI(F) when you propose a target and a ceiling that are the same. That's not a concept that I know to have been used in the entire history of FPI(F) (which goes back to WWII). There is nothing that "specifically" (expressly) provides for such a thing, including the instructions for completing the incentive price revision clause. The FAR is silent about what you want to do, so, legally, it can be done, but why do it? See FAR 1.102-4(e):

Quote

The FAR outlines procurement policies and procedures that are used by members of the Acquisition Team. If a policy or procedure, or a particular strategy or practice, is in the best interest of the Government and is not specifically addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, Government members of the Team should not assume it is prohibited. Rather, absence of direction should be interpreted as permitting the Team to innovate and use sound business judgment that is otherwise consistent with law and within the limits of their authority. 

Why is identical target and ceiling, something that as far as I can determine is inconsistent with 57 years of written guidance in FPI(F) structuring, in the best interest of the Government and sound business judgment? Here's what you said in your opening post:

Quote

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 first sentence is the real rationale. As for the second, why would FPI(F) do those awful things for a DB construction project when it didn't do them for the first GPS satellite development project in 1977, which used an FPI(F) with a 75/25 share ratio and a 120 percent ceiling? The launch and spacecraft performance were a great success. Come on. 

The only rationale you have provided since (that I can remember) was this:

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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.

Now, Joel, be fair. Read what that says. That's not a rationale (argument) for identical target and ceiling, which is a radical departure from long-standing FPI(F) guidance and practice. The fact that you were asked to research and develop guidance is not a rationale for the guidance you are developing. True, FPI(F) is simpler than FPI(S), but how is that a rationale for identical target and ceiling? What comes after that "thus" in the last sentence of your second paragraph does not logically follow from the three sentences that go before it. The fact that CM@Risk isn't suitable isn't a rationale for identical target and ceiling, either.

1 hour ago, joel hoffman said:

The only FAR change that might be recommended is to clarify that the target price can be set to equal the ceiling price and when that could be appropriate.

Talk about bureaucratic resistance. I can tell you now that if you recommend that without a better rationale than you've given here you are likely to face a long, uphill struggle to get anybody to write that into any regulation or guidance. Why would they? If I were at a meeting with you in which you made that recommendation I would ask you to tell us when such a thing would be appropriate and why? And you'd be done for if your only explanation was that it would be appropriate because it would match what's in the DBIA Manual of DB Practice. I would ask, if you're trying to match DBIA's guidance, why not simply recommend that we adopt the GMP contract type that they use? Why corrupt the FPI(F), which we think has worked well. (Actually, there is no evidence that it has.)

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs? Do that and you don't have to recommend or justify anything to anybody. If you want to use FPI(F), why not just use a standard-practice FPI(F)?

Joel, I'm not trying to be difficult. I'm trying to help you prepare for questions you might get from the conservative, cautious staffers you mentioned earlier. After all, you were concerned enough about the identical target and ceiling yourself to post a long thread asking if it would be okay. If I were a staffer and you brought this to me for review I would hone right in on that identical target and ceiling and not let go until you hollered, relented, or provided a reasoned argument in support.

You don't have to agree with me about FPI(F), just gin up a decent argument for what you want to do. Don't wreck your cause by constructing a rickety framework for it.

If I were in your place I would recommend Government adoption of GMP. I'd find a Government sponsor.

Vern

[Don Mansfield 0]

According to the DFARS, the public can make recommendations for FAR and DFARS changes directly to the DAR Council. From DFARS 201.201-1(d)(ii):

Quote

The public may offer proposed revisions of FAR or DFARS by submission of a memorandum, in the format (including all of the information) prescribed in paragraph (d)(i) of this subsection, to the Director of the DAR Council.

 

[joel hoffman 0]

GSA is using FPI with GMP similar to this proposed use. They are using FPIS and developing a single target-ceiling GMP.  So, it is being done already, whether or not you knew about it. 

There is less uncertainty for design-build application than for CM@risk project delivery system.  The CM is hired early in the design stage and the government has hired a separate designer. I see a high probability that the target/ceiling  may change during the owner's design development. The construction manager has no control over the design development. But they are able to  refine the GMP.

In design-build,  the same firm is responsible for providing the integrated design and construction services.  Much more collaboration with much less uncertainty. Thus FPIF should be possible and appropriate for most projects - again with a single target/ceiling.  

 

[joel hoffman 0]

On 9/1/2017 at 11:42 AM, Vern Edwards said:

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs? Do that and you don't have to recommend or justify anything to anybody. If you want to use FPI(F), why not just use a standard-practice FPI(F)?

No justification to anybody is not true for DoD. . Use of  FPI for any application requires approval. 

Use of any ceiling price that "departs" from 20% delta will require appropriate justification, whether 3-5% or 0%.

 Of course, expecting a target price for  a construction project to be established at least 20% below the programmed amount for 100% scope would be asinine.  

 Whether it is 3-5% or 20% , requiring a construction contractor to pay 30-50% of the risk of contingencies/uncertainties by putting it on the right side of the target is unrealistic expectation.  This isn't the same application of FPI, as "you know" it has been used for.  Since at least  95% of design and construction in the US market is performed by other than the US Government,  it generally doesn't involve something as complicated as inventing or developing new classes of  ships, airplanes, complex weapons systems, etc. 

Construction contractors base the estimates for their FFP prices on historical construction costs that include normal events and less than perfect execution, then add for some escalation. They also consider risks for contingencies that might or might not occur. The owner's estimate of "fair and reasonable costs" also consider historical costs and some allowance for level of escalation plus risk.  

There are risks that the contractor can't always control, such as skilled labor availability, material cost escalation, subcontractor availability and market conditions that would affect buyout prices, etc. 

What would you expect the contractor to eat 30-50% of the cost of?  Reimbursement is already limited to those costs which are reasonable and allocable, etc.  

[Guest Vern Edwards]

What's the point of continuing this discussion if you won't provide a straightforward answer to the question: Why target = ceiling?

On 9/1/2017 at 8:42 AM, Vern Edwards said:

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs?

You should be able to answer that in just a few simple sentences, without the irrelevancies. Why is target = ceiling an essential feature of your use of FPI? How is it in the government's best interests?

9 hours ago, joel hoffman said:

GSA is using FPI with GMP similar to this proposed use.

Give me the contract number(s) or name the project.

Let's take a break until Tuesday. It's a holiday weekend.

[joel hoffman 0]

We can continue later, Vern. 

But while I am thinking about it and before I lose my train of thought (one of my problems these days) , the types of contingency costs that you would suggest the government make the design-build contractor share between a target and separate ceiling would be otherwise reimbursable in a cost reimbursement construction contract and would probably be included in a FFP contract price, if you could even get a design-builder to agree to one.

The GMP method would only be appropriate for the limited instances where it is too early or otherwise too risky to be able to achieve a reasonable FFP when the owner needs to award a contract to meet its schedule for occupancy.  The cost plus methods would result in the government paying for all risks and inefficiencies that are allowable.  The FFP, if even possible,  would have the government pay for the risks included plus a markup on those costs, regardless of whether they are actually encountered.  Some otherwise unallowable costs might be included in a competitively negotiated price, too. 

The GMP includes contingencies - but only costs that are otherwise allowable would be reimbursed.  

The cost savings share incentive  encourages the contractor to manage and avoid or mitigate expending those costs. It allows both parties more time to address and mitigate risks. 

The government benefits from the time gai8ned to award and start project execution. The government also gains extra time after award to collaborate with the design-builder in addressing , avoiding and mitigating risks.  It  saves paying some costs it otherwise would have paid in a firm fixed price at the outset.  

I think that  someone would have to justify to me why the construction contractor must be required to share those costs between separate target and ceiling that iotherwise would have been allowable under a different pricing method . 

I think that H2H also mentioned the difference between paying for risk in an FPP contract whether or not the costs are avoided later.  Yes, something like the Monte Carlo simulation should be used in pricing risk. 

 I am making some contacts to find out where GSA has used their GMP method.  

[joel hoffman 0]

I've been a bit remiss by not emphasizing that the federal design-build with GMP project delivery method - just like the industry model - provides the flexibility for the parties to definitize Firm Fixed-prices for all or part of the project after award, during project execution.  

This greatly simplifies contract administration, especially for the owner but also the design-builder, who can then focus on internal design and construction management. 

The design-builder will track their actual costs, anyway as part of their own traditional project controls, construction and earned value management. 

The cost savings Incentive would still apply if the FFP comes in under the GMP. 

It is apparent to me that the lack of input here by other forum members indicates that they don't really care about the topic and/or likely don't have much, if any, clue about design-build, the business side of construction or when such a pricing method would be useful for the government.

The industry is pushing for a way to do this but isn't going to go to the effort and expense to sponsor FAR revisions if nobody in the government would understand when or how to use it.

The D-B Industry's current primary interest focus is on promoting the use of "Quality Based Selection" of design-build teams in government and commercial D-B , then using what they term "Progressive Design-Build",  in lieu of selecting the design-builder using Best Value (FFP).

In Progressive Design-Build, the owner may select a D-B team to define or help define its "program" (scope, budget and program schedule), then develop the performance criteria for functional and technical design, then design and build the project.  The method would use an evolutionary contracting process, through a series of options that would be negotiated as the project progresses. 

The industry also advocates using  sole source negotiated GMP for Progressive design-build pricing purposes. 

All that is beyond the scope of the GMP method being discussed here. 

[ji20874 0]

1 hour ago, joel hoffman said:

It is apparent to me that the lack of input here by other forum members indicates that they don't really care about the topic and/or likely don't have much, if any, clue about design-build, the business side of construction or when such a pricing method would be useful for the government.

Joel,

You may err in your conclusion -- this is not a design-build discussion; rather, this is a FPI discussion focusing on whether the target and ceiling prices may be different.

[here_2_help 0]

3 hours ago, joel hoffman said:

The industry is pushing for a way to do this but isn't going to go to the effort and expense to sponsor FAR revisions if nobody in the government would understand when or how to use it.

Speaking for myself here, industry has learned through many years of futile effort that the FAR Councils, and especially the DAR Council, don't really give a darn about what industry thinks. Members are primarily focused on following the policy agenda established by their supervisors, and then doing what Congress tells them to do via implementing public laws in the regulations. (The latter is a distant second.)

I would strongly suspect that any innovations that made sense to the people in the trenches, actually trying to accomplish projects, would be either (a) ignored or (b) killed in an ad hoc committee. I support my assertion by reference to the regulatory history of DOD's attempts to kill Performance-Based Payments or DOD's attempts to kill commercial pricing or the DAR Council's embarrassing response to recommendations contained in http://www.acq.osd.mil/fo/docs/Eliminating-Requirements-Imposed-on-Industry-Study-Report-2015.pdf

[joel hoffman 0]

9 hours ago, ji20874 said:

Joel,

You may err in your conclusion -- this is not a design-build discussion; rather, this is a FPI discussion focusing on whether the target and ceiling prices may be different.

ji, If that's all you think the discussion is about, then you have confirmed my conclusions. The FAR says very plainly that fixed price contracts that provide for an adjustable price may include a ceiling price, a target price (including target cost), or both. For application of a pre-determined formula-type cost incentive, the contract includes a target cost, target profit or fee and a profit or fee adjustment that is within the constraints of a price ceiling. 

The basic question is why and when you would set the target price equal to the ceiling price for a construction or design-build contract, rather than setting it lower than the ceiling price.

Other than telling me "that's the way we've always done it", I want to know  why the ceiling price must be higher than the target price for a construction or design-build contract that is awarded, due to time constraints, before various questions or concerns or before a reasonable FFP can be determined. I explained why the type of costs that you'd be asking the contractor to eat a share of in a design-build contract would be payable in either a cost or FFP contract type. The object is to incentivize the contractor to manage the unknowns after award and control and reduce the overall cost to the government. A GMP icost incentive does that and allows the parties time to collaberate together to address and mitigate contingencies.

And it "hasn't always been done that way".  

I'm busy preparing for a hurricane but will try to find a POC in DAU or GSA to answer Vern's question of which projects have used a GMP using FPI. 

 

[ji20874 0]

Joel,

I didn't say anything about the way we've always done it.  Perhaps your comment to me was mis-addressed?

[joel hoffman 0]

ji, sorry- that wasn't necessarily directed at you.

What is your opinion about whether or not an FPI contract necessarily must have separate target and ceiling for the application addressed above?  If yes, why?  What costs must be absorbed by the D-B contractor within the ceiling price?

[bob7947 0]

Joel:

Can you make a FPAF work?  Best guess = FP.  Contingency and slop included in AF.

[joel hoffman 0]

7 hours ago, bob7947 said:

Joel:

Can you make a FPAF work?  Best guess = FP.  Contingency and slop included in AF.

Nope