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muddypuddles

Escalation Rates

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Under a FFP competitive (commercial) contract, is it unfair (too restrictive) to tell Offeror's that they must apply a specific escalation rate on their option years as part of their pricing proposal (but also allowing them to offer other than the specified escalation rate with supporting narrative)? My goal is to reduce the amount of analysis I do on a FFP contract. I feel conducting a price analysis on labor rates and labor hours are sufficient to make a fair and reasonable determination and based on competition (assuming I receive competition).  My legal department does not object to this approach, but I wanted to see if others have an opinion on this matter or advice on how others may be analyzing option year rates under an FFP.

SCA does not apply.

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My prime contractor supplier management view is this makes little or no sense. Potential suppliers have to be able to use their forecast and/or DCAA approved rates for outer years. 

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I'd leave it up to each offeror to determine if they want to increase their pricing year-over-year, keep it flat, or decrease it.  Regardless of what they choose to do, if they are awarded a FFP contract, the rates would not be subject to an escalation, except for one that may be permitted by a service contract labor standards statute price adjustment clause in the contract. 

Having also worked in the private sector as a buyer, we didn't expect increases from our suppliers and service providers.  It was much to the contrary.  We expected sellers to find ways to offset cost pressures in materials, labor, and exchanges rates (as applicable).  So much so, that they would realize savings for their efforts and then share a portion of those savings each year with us as the buyer for having a business relationship for a certain amount of time with them.  This usually resulted in cost reductions year-over-year for a defined period of time.  

We did the same thing within our company for the products we sold.  We continually sought cost reductions through buying materials at a lower cost, making processes more efficient to reduce labor input, among other things. 

For whatever reason, in Government there is an expectation that the price should only go up.  I know there are cost pressures, especially on labor (pay raises, healthcare, etc.), but I would also often expect a contractor, depending on the nature of the procurement, to become more efficient.  I also know that some contractors become less profitable on contracts for various reasons, but some also become more profitable.

If you receive adequate price competition, you should have little price analysis to conduct, regardless if the price for each option stays the same, increases, or decreases.

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So....

Solicitation for a FFP contract with option period(s), correct?   

Work is a service when labor rates and hours is the driving factor for pricing the work, correct?  

Service Contract Labor Standard wage determination in solicitation and resulting contract , correct?   

If all answers are yes then it would seem that contract clause 52.222-43 "shall" be in the solicitation/contract.   I am confused why you would also add an escalation rate to the contract as it would seem that 52.222-43 is the allowed escalation clause per the FAR with regard to labor rates?   

Also confused as to why labor hours might escalate  if a FFP contract.  I could see where their proposal might indicate why their price is effected by their proposed approach for an option period if they feel their hours will escalate but again still confused why you propose a set escalation in hours?   Isn't that left to the contractor under a FFP contract as to how they plan to approach the work?

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32 minutes ago, Neil Roberts said:

My prime contractor supplier management view is this makes little or no sense. Potential suppliers have to be able to use their forecast and/or DCAA approved rates for outer years. 

Instead of requesting offerors to propose a specified escalation rate on their labor rates for the out years (remember, I am also allowing offerors to propose other than), would you prefer I request that you submit your DCAA approved rates with your price proposal?

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19 minutes ago, Todd Davis said:

I'd leave it up to each offeror to determine if they want to increase their pricing year-over-year, keep it flat, or decrease it.  Regardless of what they choose to do, if they are awarded a FFP contract, the rates would not be subject to an escalation, except for one that may be permitted by a service contract labor standards statute price adjustment clause in the contract. 

Having also worked in the private sector as a buyer, we didn't expect increases from our suppliers and service providers.  It was much to the contrary.  We expected sellers to find ways to offset cost pressures in materials, labor, and exchanges rates (as applicable).  So much so, that they would realize savings for their efforts and then share a portion of those savings each year with us as the buyer for having a business relationship for a certain amount of time with them.  This usually resulted in cost reductions year-over-year for a defined period of time.  

We did the same thing within our company for the products we sold.  We continually sought cost reductions through buying materials at a lower cost, making processes more efficient to reduce labor input, among other things. 

For whatever reason, in Government there is an expectation that the price should only go up.  I know there are cost pressures, especially on labor (pay raises, healthcare, etc.), but I would also often expect a contractor, depending on the nature of the procurement, to become more efficient.  I also know that some contractors become less profitable on contracts for various reasons, but some also become more profitable.

If you receive adequate price competition, you should have little price analysis to conduct, regardless if the price for each option stays the same, increases, or decreases.

I revised my original post to state that SCA does not apply and this is commercial. Did you communicate that somehow in your Section L that may have signaled to offerors that prices are not expected to increase? Or did you just rate them lower (giving a weakness) that the prices in the out years increased, thereby indicating there are no cost efficiencies being offered by the offeror...somehow?

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17 minutes ago, C Culham said:

So....

Solicitation for a FFP contract with option period(s), correct?   

Work is a service when labor rates and hours is the driving factor for pricing the work, correct?  

Service Contract Labor Standard wage determination in solicitation and resulting contract , correct?   

If all answers are yes then it would seem that contract clause 52.222-43 "shall" be in the solicitation/contract.   I am confused why you would also add an escalation rate to the contract as it would seem that 52.222-43 is the allowed escalation clause per the FAR with regard to labor rates?   

Also confused as to why labor hours might escalate  if a FFP contract.  I could see where their proposal might indicate why their price is effected by their proposed approach for an option period if they feel their hours will escalate but again still confused why you propose a set escalation in hours?   Isn't that left to the contractor under a FFP contract as to how they plan to approach the work?

I revised my original post. This is commercial and SCA does not apply. For clarification, escalation rate would be applied to labor rates, not labor hours.  

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1 hour ago, muddypuddles said:

I revised my original post. This is commercial and SCA does not apply. For clarification, escalation rate would be applied to labor rates, not labor hours.  

Thanks but still slightly confused.  Are you saying that since it is commercial item that SCA does not apply or is it both commercial item for a service where SCA does not apply?

Otherwise you might to take a look at this previous discussion thread....

 

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1 hour ago, muddypuddles said:

I revised my original post to state that SCA does not apply and this is commercial. Did you communicate that somehow in your Section L that may have signaled to offerors that prices are not expected to increase? Or did you just rate them lower (giving a weakness) that the prices in the out years increased, thereby indicating there are no cost efficiencies being offered by the offeror...somehow?

I've not applied this to a solicitation, nor do I think it is necessary.  I was just making an observation about how some (probably a large number) COs and contractors view pricing on Government contracts.  If it were me, I'd not make a mention of it in the solicitation and see what type of pricing is received in the proposals (see FAR 17.203(c)-(g) regarding stating limits on option pricing in the solicitation).  If I chose to conduct discussions and an offeror proposed an escalation for the option periods, I'd ask them why that is.  If the rationale made sense, I'd not address the matter further.  However, if based on the type of procurement, I believed there was an opportunity to gain efficiencies under the contract and obtain better pricing in the option periods, I'd make my argument during negotiations.  I don't view the aforementioned limits on what is stated in the solicitation as a prohibition on trying to negotiate lower option pricing when it make sense.

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1 hour ago, muddypuddles said:

Instead of requesting offerors to propose a specified escalation rate on their labor rates for the out years (remember, I am also allowing offerors to propose other than), would you prefer I request that you submit your DCAA approved rates with your price proposal?

Muddy, If they have DCAA approved rates, and they apply to this transaction, they should be using those rates as a matter of course. There is no need to remind them. Not really sure why you wish to analyze labor rates and hours, or whether the proposed suppliers would even submit them to your firm. Rates are competition sensitive and current cost or pricing data does not apply. You say the transaction is FFP. Just get a one number price for the base contract, a one number price for each option, add them together and compare these total prices for each bidder.     

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5 hours ago, muddypuddles said:

Under a FFP competitive (commercial) contract, is it unfair (too restrictive) to tell Offeror's that they must apply a specific escalation rate on their option years as part of their pricing proposal (but also allowing them to offer other than the specified escalation rate with supporting narrative)? My goal is to reduce the amount of analysis I do on a FFP contract. I feel conducting a price analysis on labor rates and labor hours are sufficient to make a fair and reasonable determination and based on competition (assuming I receive competition).  My legal department does not object to this approach, but I wanted to see if others have an opinion on this matter or advice on how others may be analyzing option year rates under an FFP.

SCA does not apply.

Emphasis added:

muddypuddles:

The scant information that you provided about your acquisition is not sufficient to enable anyone to give you an informed opinion or sound advice about your prospective course of action. I saw your post earlier today, moments after you put it up, and ignored it for that very reason.

Unless you assert a copyright on that post, I intend to use it in an article I'm writing about how not to ask question.

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2 hours ago, Vern Edwards said:

Emphasis added:

muddypuddles:

The scant information that you provided about your acquisition is not sufficient to enable anyone to give you an informed opinion or sound advice about your prospective course of action. I saw your post earlier today, moments after you put it up, and ignored it for that very reason.

Unless you assert a copyright on that post, I intend to use it in an article I'm writing about how not to ask question.

I am embarrassed and flattered at the same time. If your article will help others on how to properly craft a question, then please use me.

I don't know how I can pose my question without providing a lengthy description of my scenario. I think my question would be better answered in a face to face forum where dialogue can be easily exchanged.

Thank you for the responses!

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