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We've been having an internal debate about (1) whether it is possible to increase the maximum value of a FFP contract using an in scope increase and (2) whether one is even necessary.  Interested to hear your thoughts. 

Basically, demand was greater than anticipated and we've hit the contract max early.  Sort of.  The kicker here is that this IDIQ contract (we'll call it Contract1) is part of a program where another contractor (Contract2) is authorized to order from Contract1 and gets government's negotiated pricing and delivery.  The Contract2 contractor then stocks the item at their cost and waits for a gov't demand for it.  When a government demand materializes, Contract2 contractor is paid, but not before.  So, technically, the gov't hasn't spent a dime under Contract1, but the Contract2 contractor has ordered sufficient material from Contract1 that the amount spent would reach the maximum on Contract1. 

No need to change contract duration or any other Ts & Cs.  This is solely about spend and whether there is a need to secure additional money under these conditions. 

Thoughts? TIA

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Who is the customer for Contract1? How does the contractor get paid? Does it get paid for orders on its ID/IQ contract that were placed by Contractor2?

I'm guessing that once the contractor has fulfilled its maximum under Contract1, it's done. It doesn't matter who ordered what. If so, then if the customer has additional demand then it needs to add funding to Contract1. Period.

Or the customer can go to Contractor2 and order items and pay for them.

Should be the same result if I've parsed the situation correctly. Either add funding to Contract1 or else use that funding to buy from Contractor2.

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Guest Vern Edwards

@D3ad3y3

If I understand the problem correctly, and I'm not sure that I do, then the problem is not whether "to secure additional money." The problem is whether you can increase the maximum quantity (value) of Contract1 without getting full and open competition or preparing a CICA J&A.

The maximum quantity (value) of an IDIQ contract limits how much the Government can buy under the contract. Any contract modification to increase the maximum quantity would be an out-of-scope change. See FAR 16.505(a)(2). See also Feldman, The Government Contracts Guidebook § 4:30 (4th ed.):

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Implementing 10 U.S.C.A. § 2304c(d) and 41 U.S.C.A. § 4106(f), FAR provides that no protest under FAR subpart 33.1 (see Chapter 7) is authorized in connection with the issuance or proposed issuance of a order under a task order or delivery order contract, with limited exceptions. The permissible grounds for protest are the order increases the scope, period, or maximum value of the contract.

(The language used in the statutes and FAR is confusing. Maximum quantity (value) is one of the terms that delineates scope.)

If the maximum quantity of Contract1 has been ordered by (a) the government, (b) a contractor ordering against the contract as expressly authorized by the government,  or (c) a combination of the two, then a modification to increase the maximum quantity would be an out-of-scope change and the agency would have to seek full and open competition or prepare a CICA J&A for sole source contracting.

Increasing the maximum quantity (value) would not increase the Government's obligation and would not require more funds.

Does that answer your question?

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So, to clarify (hopefully), Contract2 contractor is ordering and paying for supplies from Contract1 with commercial money (not government money, and not money provided by the Government for the purpose of purchasing stock).  Contract2 contractor then stocks a warehouse (wholesale) with the material they ordered.  The government is not under any obligation to purchase the material Contract2 contractor purchases/stocks at this point.  Contract2 contractor is responsible to make its own stocking decisions - the government does not pay for their stocked inventory.  Later, when the government gets retail demands, those demands flow to contractor2, who then ships material to meet those demands.  The government pays them as those individual orders are filled.  At no time during performance has the government actually spent any money under Contract1 - all Contract1 transactions are commercial to commercial transactions - Contractor1 and Contractor2 basically use Contract1 as a BOA. 

 

@Vern Edwards - you're correct - if the scenario above is interpreted to mean that the Contract1 maximum is reached, I agree that a J&A would be required to increase the maximum.  Just not sure whether the above scenario results in any actual work under Contract1 that would count towards the maximum.  All government spend occurs under Contract2.  Lawyers here think J&A.  We may end up going that route (and probably will), but I want to challenge them to think about whether its even necessary to do that under these circumstances.  This decision has ramifications to several other contracts.       

 

@here_2_help - the customer for Contract1 can be both Contractor2 and the Government.  The difference is that the language of Contract1 indicates that transactions between Contractor1 and Contractor2 are commercial to commercial transactions paid for by Contractor2.  But it doesn't clearly state whether those commercial to commercial transactions should count against the contract maximum.  All transactions to date have been between Contractor1 and Contractor2 - the government has not spent any money directly on Contract1. 

 

Appreciate the thoughts!

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Guest Vern Edwards
28 minutes ago, D3ad3y3 said:

So, to clarify (hopefully), Contract2 contractor is ordering and paying for supplies from Contract1 with commercial money (not government money, and not money provided by the Government for the purpose of purchasing stock).  Contract2 contractor then stocks a warehouse (wholesale) with the material they ordered.  The government is not under any obligation to purchase the material Contract2 contractor purchases/stocks at this point.  Contract2 contractor is responsible to make its own stocking decisions - the government does not pay for their stocked inventory.  Later, when the government gets retail demands, those demands flow to contractor2, who then ships material to meet those demands.  The government pays them as those individual orders are filled.  At no time during performance has the government actually spent any money under Contract1 - all Contract1 transactions are commercial to commercial transactions - Contractor1 and Contractor2 basically use Contract1 as a BOA. 

If Contract1 is a government-awarded contract, and if the Contract2 contractor is placing orders against it, and if the orders placed by the Contract2 contractor have reached the maximum quantity (value), then the maximum has been reached. Period. It does not make sense for you to say "all Contract1 transactions are commercial to commercial transactions[.]" They are not "commercial", i.e., private sector, transactions, if they are carried out under a government contract. It does not matter that the government itself placed no orders against the contract. It does not matter that the contractor is using what you call "commercial money." The government has awarded a contract to a contractor to sell stuff under the terms of a government contract.

What a tangled web you people have woven! What are you up to---awarding a contract, then placing no orders but allowing another government contractor to use the government's contract to buy stuff, then buying that stuff from the second government contractor? What the heck?! Was the government hired to be the Contract2 contractor's contracting agent? Is the second contractor paying the government a fee for services? It sounds like you guys are running some kind of money laundering scheme. I sure as heck hope that the government is not paying the Contract2 contractor's indirect costs and profit on top of the price it paid for the stuff it bought under Contract1.

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The language of Contract1 indicates that transactions between Contractor1 and Contractor2 are commercial to commercial transactions paid for by Contractor2.

That's a hoot. A government contract says that some transactions under it are private sector transactions. Do all of the government contract clauses apply to those transactions?

Surely you realize how strange this must sound to others. 

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Not only strange but possibly improper use of a government contract to extend the pricing and/or availability of the supplies to some future period of funding? Don't know if the definition of "money laundering" would fit.  However, it would seem that somebody should examine the appropriations law aspects of the arrangement and perhaps the contract cost principles and procedures, especially if contractor 2 is marking up contractor 1 costs and/or adding finance costs to its prices.  

Also - what if contract 2 is not used to buy all of the inventory purchased under a government contract 1?  It would seem that contractor 2 is free to directly sell products purchased under a government contract as a result of government's negotiated pricing and delivery terms, to the public, essentially as a commercial distributor.  

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Alright, thanks for the thoughts re the contract max.  Regarding the other comments, suffice it to say there's a lot of oversight, and the concerns raised in your comments have been considered.  To be fair, its probably hard to understand this without the contracts and specific language in front of you - it is admittedly something of a unique arrangement.   Was just interested to hear thoughts on the contract max.  Thanks!

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D3, changing the focus a little here, if you do not want to count the Contractor 2 orders as orders against the max of the IDIQ and the government has not placed any orders against Contract1, has the government breached its obligation to purchase a minimum quantity under Contract 1?

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Good question.  The min language specifies "government orders" but also references the PWS language stating orders will primarily come from Contractor2.   The max language only addresses the math to explain how the number was calculated - it doesn't specify whether that comes from gov't direct orders or commercial orders.  That said, I think you're right that the next logical step would be that the max and min should be treated the same - which would indicate a J&A is needed.  I think that's the road we're headed down. 

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Guest Vern Edwards

It seems often to be the case that agencies create unorthodox arrangements in order to meet various needs. In my experience, such arrangements are contrived because the people involved simply did not know how to do what they wanted to do through orthodox arrangements. Then, when problems arise under the unorthodox arrangements, people have questions which others simply do not understand or to which they have no answer. How the heck does that work? What the heck did you do? The answer is along the lines of Well, you had to be there.

45 minutes ago, D3ad3y3 said:

The min language specifies "government orders" but also references the PWS language stating orders will primarily come from Contractor2.   The max language only addresses the math to explain how the number was calculated - it doesn't specify whether that comes from gov't direct orders or commercial orders. 

Of course, pros want to ask: Was Contractor2 a party to the contract? A third party beneficiary? Did the CO delegate authority to place orders to Contractor2? In writing? Is Contractor2 a COR? What about FAR 1.602-2(c)(1)? What if Contractor1 breaches an order from Contractor2? Can Contractor2 sue for breach? Whom would it sue? What if Contractor2 breaches, does the Disputes clause apply? Does Contractor1 file its claim with the government or Contractor2? What about the Anti-deficiency Act? Et cetera. The people who put the deal together rarely have good answers, because they didn't know enough to consider such possibilities when they put the deal together.

It's no way to run a contracting activity. It's the kind of thing that brings us new laws and regulations.

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1 hour ago, D3ad3y3 said:

... which would indicate a J&A is needed.  I think that's the road we're headed down. 

When you prepare your J&A, will you note that market research shows that Contractor2 can supply the item(s) required, and that Contractor1 is no longer the sole source?

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