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Zag2009

Fee on Negotiated Changes

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We are a government contractor in negotiations for a change to our contract.  We originally proposed a set fee at X%.  Negotiations have taken well over a year.  Now the agency wants to reduce the fee to Y% claiming that since the work is complete, the risk is now lower than originally proposed, therefore justifying a lower few percentage.  Has anyone have any experience with a similar situation and if so, what counter arguments have you proposed against reduced fee? 

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Since you are using the term "fee," I assume that the contract is cost-reimbursement.

Yes, I've had experience.

In theory, the government is being consistent with government fee negotiation policy, which puts a heavy emphasis on risk. At this point, with the work complete, you are not facing any risk. You can blame the government for dragging their feet, but if I were the CO that would buy you absolutely nothing.

Look, these matters are negotiable, and I doubt very much that your company would pursue the matter before at a board of contract appeals or at the Court of Federal Claims unless the difference between the fee you want and the fee they want to give you is a matter of many thousands of dollars. Is the difference a matter of many thousands of dollars?

Use your best negotiations skills and push for what you want. Settle for a reasonable amount. You are not likely to get more through litigation.

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I would argue that  (1) the proposed fee was offered at a time when little or no actual costs could have been known, and in fact, were not known (2) although the work is complete, you do not know the actual cost of the work because you didn't actually collect or record costs that were only incurred against that change (of course this has to be true). Therefore proposed fee on proposed costs are still reasonable.  

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GAO issued a report (07-599) on undefinitized contract actions in 2007 in part finding DOD wasn't doing this enough (i.e. factoring the lack of risk from completed performance into the profit analysis).

For a negotiation position, you could look at the DOD weighted guidelines described at DFARS 215.404-70 and 215.404-71. Internally run through the analysis to figure out how little the Government thinks your effort is worth :) But the main takeaway is just to get a feel for what the Government is looking for in their profit analysis, and what levers they consider that you can spit back at them. I have no clue if your dealing with DOD, but this is good practice for dealing with any agency.

In the end though, like Vern said, this is a negotiation. Come up with your best arguments for why you deserve what you deserve, and help them out with talking points for their negotiation memorandum so that they can show they made a proper effort (they've already started that part by reducing your fee due to decreased risk).

 

[EDIT--removed commentary on UCAs since they aren't really relevant to the specific topic]

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10 hours ago, Neil Roberts said:

I would argue that  (1) the proposed fee was offered at a time when little or no actual costs could have been known, and in fact, were not known (2) although the work is complete, you do not know the actual cost of the work because you didn't actually collect or record costs that were only incurred against that change (of course this has to be true). Therefore proposed fee on proposed costs are still reasonable.  

If the negotiations have taken “well over a year”, I would question an argument that the contractor didn’t collect or track any costs of a change or identify any impacts to the unchanged work. 

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11 hours ago, Neil Roberts said:

although the work is complete, you do not know the actual cost of the work because you didn't actually collect or record costs that were only incurred against that change (of course this has to be true).

If that's true, then what is the basis for the request for equitable adjustment? Total cost method? That would be another reason for a lower fee.

The best approach might be to just ask for the same rate of fee as was negotiated for the basic contract. If the work of the change was more difficult than the work of the basic contract you could try asking for a higher rate of fee on that basis.

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15 hours ago, Zag2009 said:

Negotiations have taken well over a year. 

Why? The answer to this question will impact my answer to your other question, which is below.

 

15 hours ago, Zag2009 said:

... what counter arguments have you proposed against reduced fee? 

In this case, the counter argument is that the contractor has floated the government a loan for the costs of the changed work, since the contract wasn't modified timely to include the additional funds. Therefore the contractor wasn't able to bill its additional costs and had to go borrow the funds, paying unallowable interest on its loan.

This assumes the government is at fault for taking "well over a year" to negotiate the value of the contract mod for the changed work. If the cause for the delay is something the contractor did or did not do, then my counterargument won't work.

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43 minutes ago, here_2_help said:

In this case, the counter argument is that the contractor has floated the government a loan for the costs of the changed work, since the contract wasn't modified timely to include the additional funds. Therefore the contractor wasn't able to bill its additional costs and had to go borrow the funds, paying unallowable interest on its loan.

@here_2_help

This is another case in which an OP did not provide all of the information we need to respond effectively. I said in my first post that since he/she used the word "fee,' I would presume that the contract is cost-reimbursement. We have heard nothing back from Zag2009. If the contract is cost-reimbursement, then the above counterargument won't hold water.

If Zag2009 comes back after a couple of days and says that the contract is fixed-price, then I'm going to put out a contract on him/her. This is the Contract Administration Forum, not the Beginner's Forum. No mercy.

Omar lives!

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25 minutes ago, Vern Edwards said:

@here_2_help

If the contract is cost-reimbursement, then the above counterargument won't hold water.

Omar lives!

Vern,

1. It doesn't matter whether my argument holds water since we are negotiating. Any argument that gets the other side to hesitate, to blink, to lose confidence, is a valid argument.

2. I really really hope your last comment ("Omar lives!) was not a reference to Omar Mir Seddique, the Pulse nightclub shooter. Please tell me you were referring to something else.

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44 minutes ago, here_2_help said:

1. It doesn't matter whether my argument holds water since we are negotiating. Any argument that gets the other side to hesitate, to blink, to lose confidence, is a valid argument.

I disagree - misrepresenting facts is not negotiating in good faith...

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9 minutes ago, Matthew Fleharty said:

I disagree - misrepresenting facts is not negotiating in good faith...

You're hilarious. Government negotiators do it routinely.

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2 minutes ago, here_2_help said:

You're hilarious. Government negotiators do it routinely.

Didn't your mother teach you that two wrongs don't make a right?

I personally hope no one heeds your advice on what constitutes proper behavior at the negotiating table - I think if you took some time to reflect on what you stated, you'd realize its inappropriate.  If you do come to that realization, you should retract that statement.  If you don't, it will just serve as a piece of information about who you are and how you operate.

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I recall a case before the Federal Circuit in the 1990's where the Court held that the proper time to assess risk is when a change is made to contract work, not when the amount of the adjustment is negotiated.  With my limited research capabilities, I have not been able to find that case, but I believe it involved Texas Instruments.

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1 hour ago, here_2_help said:

Vern,

2. I really really hope your last comment ("Omar lives!) was not a reference to Omar Mir Seddique, the Pulse nightclub shooter. Please tell me you were referring to something else.

Omar refers to the character in “The Wire” who robbed drug dealers. Do you really think I’d refer to the other guy? 😠

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1 hour ago, here_2_help said:

Vern,

1. It doesn't matter whether my argument holds water since we are negotiating. Any argument that gets the other side to hesitate, to blink, to lose confidence, is a valid argument.

Utter nonsense.

 

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1 hour ago, Matthew Fleharty said:

Didn't your mother teach you that two wrongs don't make a right?

I personally hope no one heeds your advice on what constitutes proper behavior at the negotiating table - I think if you took some time to reflect on what you stated, you'd realize its inappropriate.  If you do come to that realization, you should retract that statement.  If you don't, it will just serve as a piece of information about who you are and how you operate.

Perhaps I simply don't agree with your characterization that, if I made such an argument, I would be "misrepresenting the facts." Facts and judgments are two different things. In any case, enjoy your moral superiority.

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1 hour ago, Vern Edwards said:

Utter nonsense.

 

Okay. Whatever.

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20 minutes ago, here_2_help said:

Perhaps I simply don't agree with your characterization that, if I made such an argument, I would be "misrepresenting the facts." Facts and judgments are two different things. In any case, enjoy your moral superiority.

Well you could have said that, but you didn't (and still haven't by saying "perhaps").  You instead hid behind a fallacious argument by appealing to (what you assert is) common practice by the Government.  Re-read what you argued and explain how your counter argument is equally valid under a cost-reimbursement environment as it is in a fixed price environment.  When Vern pointed out that your argument is not applicable in both of those situations, you posted what I consider an egregious negotiation philosophy.  Now you're pivoting again.  Are you going to defend your original position or admit its flaws?  It's okay to do the latter, I've done it plenty of times on these forums and felt no shame whatsoever.  After all, we're all here to learn (so let's learn the right things).

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4 hours ago, Vern Edwards said:

@here_2_help

This is another case in which an OP did not provide all of the information we need to respond effectively. I said in my first post that since he/she used the word "fee,' I would presume that the contract is cost-reimbursement. We have heard nothing back from Zag2009. If the contract is cost-reimbursement, then the above counterargument won't hold water.

If Zag2009 comes back after a couple of days and says that the contract is fixed-price, then I'm going to put out a contract on him/her. This is the Contract Administration Forum, not the Beginner's Forum. No mercy.

Omar lives!

I'm here....just stuck in meetings all morning.  The contract is cost-reimbursement (thankfully...now I can sleep at night).  The dollar figure associated with the fee proposed and the fee countered by the government is in the millions.  Therefore, as you can imagine, we don't want to concede without a fight.  We asked for what we believed was a reasonable fee based on risk, in line with previous modifications for similarly scoped work.  The government's argument isn't that the fee is too high for the work being performed, just that since the work is complete, the risk no longer exists.  In other words, had this been negotiated prior to completion of the work, I presume the fee rate proposed and that countered by the government would be much closer.   

I was hoping for past precedence that would support our argument that the fee should be based on the risk of the originally proposed work, but it appears we will just have use our best negotiation skills to justify the higher fee.  As always, thank you for your input.

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2 hours ago, Retreadfed said:

I recall a case before the Federal Circuit in the 1990's where the Court held that the proper time to assess risk is when a change is made to contract work, not when the amount of the adjustment is negotiated.  With my limited research capabilities, I have not been able to find that case, but I believe it involved Texas Instruments.

A coworker of mine vaguely recalled the same, but I haven't been able to dig up that case.  I will keep digging and update if I find that case.

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12 minutes ago, Zag2009 said:

I'm here....just stuck in meetings all morning.  The contract is cost-reimbursement (thankfully...now I can sleep at night).  The dollar figure associated with the fee proposed and the fee countered by the government is in the millions.  Therefore, as you can imagine, we don't want to concede without a fight.  We asked for what we believed was a reasonable fee based on risk, in line with previous modifications for similarly scoped work.  The government's argument isn't that the fee is too high for the work being performed, just that since the work is complete, the risk no longer exists.  In other words, had this been negotiated prior to completion of the work, I presume the fee rate proposed and that countered by the government would be much closer.   

I was hoping for past precedence that would support our argument that the fee should be based on the risk of the originally proposed work, but it appears we will just have use our best negotiation skills to justify the higher fee.  As always, thank you for your input.

If you're negotiating with DoD, then the contracting officer probably used the weighted guidelines method to arrive at their negotiation objective. This method considers "contract type risk" (see DFARS 215.404-71-3). The greatest value is given to firm-fixed-price contracts with no financing (4-6% of estimated cost) and the lowest value is given to four different contract types, one of which is cost-plus-fixed-fee (0-1% of estimated cost). This subsection also contains the following instruction to contracting officers:

Quote

The contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action (also see 217.7404-6(a) and 243.204-70-6).  The  assessment shall include any reduced contractor risk on both the contract before definitization and the remaining portion of the contract.  When costs have been incurred prior to definitization, generally regard the contract type risk to be in the low end of the designated range.  If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as 0 percent, regardless of contract type.

Let's assume that the contracting officer would have used the "normal value" for contract type risk for a CPFF contract (0.5% of estimated cost) if negotiations took place before performance. However, because those negotiations took place after performance they are going to use 0% for contract type risk. Doing this should only lower the fee objective by 0.5%.

What was the fee % you originally proposed? What is the fee % the Government countered with?  

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3 hours ago, here_2_help said:
3 hours ago, Matthew Fleharty said:

I disagree - misrepresenting facts is not negotiating in good faith...

You're hilarious. Government negotiators do it routinely.

@here_2_help is getting heat for making an accurate observation and holding a realistic, sober viewpoint that reflects reality and human nature (and human evolutionary psychology). Language helps us communicate. Language also helps us deceive. Don't shoot the messenger.

Negotiation almost always involves some deception or "misrepresenting facts." PepeTheFrog thought this was a forum for contracting professionals, not naive Puritans. PepeTheFrog smells some (exclusively) federal employees who have never been subjected to reality. 

If it doesn't, why are some people better at negotiating than others? Think about what makes someone a strong negotiator. Here are some:

*bluffing (lying, misrepresentation) 

*knowing what to say (hiding information)

*knowing what not to say (hiding information)

*appealing to the interests of the other party (deceiving someone to think their interests coincide with yours)

*using emotions, psychological weaknesses, cognitive biases, to persuade (Cialdini's Influence has a solid list of these short-circuits)

*"I don't have the authority" (misrepresentation)

*"That's the best I can do" (misrepresentation if not an outright lie)

*"That's too steep" (misrepresentation if not an outright lie)

Those are just a few. They all involve "misrepresenting the facts" or deception. 

Sure, laws (e.g. fraud, False Claims Act) proscribe going "too far" in misrepresenting the facts, and that's vital to having efficient and transparent markets. But misrepresentation is a fundamental part of negotiation. It's best to minimize misrepresentation and deception through (a) habituation by institutions like juries, common law, rule of law, insurance markets, (b) cultural and therefore genetic reinforcement through making truth-telling a heroic act that is rewarded by material goods (e.g. science and technology), and (c) steep penalties for "crossing the red line" of misrepresentation or deception (e.g. the common law of fraud). But up to that red line... 

Is PepeTheFrog incorrect? (Spare PepeTheFrog nonsense about morality.)

 

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53 minutes ago, Zag2009 said:

I was hoping for past precedence that would support our argument that the fee should be based on the risk of the originally proposed work, but it appears we will just have use our best negotiation skills to justify the higher fee.  As always, thank you for your input.

There is some Government precedence for thinking about what to do with fee weighted guideline analysis when there may be actuals. See https://www.gpo.gov/fdsys/pkg/FR-2016-10-21/pdf/2016-25332.pdf.

This case is still pending a final report.

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47 minutes ago, Matthew Fleharty said:

Pepe, 

Before I respond further, let me ask you this: do you support the specific “misrepresentation” H2H deemed appropriate on this thread?

 

1 hour ago, PepeTheFrog said:

Is PepeTheFrog incorrect? (Spare PepeTheFrog nonsense about morality.)

 

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