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Hilarity_Follows

Allowable application of Fee dictated by Contract Cost Type

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In the process of negotiating a contract for complex Research and Development exceeding $750K with a performance over 24 months with an Agency my firm very often receive awards from. Submitted a technical and cost proposal, showing fee applied as a percentage of total budgeted cost. 

The Agency has just implemented a new but unwritten policy/business practice only allowing the proposed fee percentage to be applied to labor and overhead costs if the firm wants to pursue a CPFF cost type award - so, no fee can be applied to materials, equipment, travel, subcontractor, ODCs, etc..

However, if the firm chooses a FFP cost type instead, fee is allowed to be applied as a percentage of all budgeted costs and does not require any reduction or alteration.  Altering fee application in the manner which I've described can cut the fee to half of what was initially requested because our budgets typically have a variety of different types of costs: research partners, materials and supplies, equipment, travel etc. 

In Federal complex R&D, CPFF is necessary because the technical proposal and research work is purely theoretical. It might work - or something could go differently than we theorized - there are a lot of known unknowns. Estimating all costs accurately on day 1 is an impossibility. If the work was proven, it wouldn't be R&D. FFP is unduly risky for research type work. We have an approved accounting system, so there is no reason the firm can't perform on or accept a cost type award. We have given up fee on some types of costs with other agencies, however the application of fee not being allowed on travel or equipment or some other single cost element was always clearly spelled out in the solicitation. The firm has no black marks on past performance. 

I'm at a loss how to negotiate a CPFF award with this Agency and still preserve proposed fee. This new unwritten policy seems almost predatory forcing the firm to accept all cost risk under FFP. The FAR is pretty clear that CPFF is an appropriate cost type for complex R&D, though they aren't technically denying that we can have that cost type award - just as long as we forgo nearly all of the fee. I am only getting this type of negotiation feedback from a single agency, but unfortunately we do a lot of work with them. So, this new policy aims to also affect future awards. 

There is no mention of this in the solicitation under which the awards are being made. The agency says they have no control over what is in the overall solicitation. Would it be beneficial to alter budgets going forward to show fee only as a total fixed dollar amount and try negotiate as a whole dollar figure instead of a percentage of cost? I could then state the firm no longer wants X percentage of cost - they want $YY,YYY dollars for fee... which was deemed an acceptable amount of fixed fee on previously awarded contracts from the same agency for similar work and total contract value on contract no. A, B, C, D, E, etc. dated W, X, Y, Z. However, I have a feeling this likely won't be successful because it is entirely obvious what contract type the Agency is motivating the firm to accept. 

Have you heard of this fee application approach in negotiations to essentially require contractors to accept one contract cost type over another or else significant fee reduction? What strikes me is that the FAR dictates what cost type contract is appropriate for certain types of federal requirements. Fee should be a completely independent point of negotiation - right? 

Is there something I'm not thinking of in this scenario that I should be asking/asserting?  Thanks for your input. 

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Maybe you should ask that agency why they use that business practice.  Anything anyone tells you here is nothing more than a guess (unless someone from that office decides to respond here on WIFCON).

1 hour ago, Hilarity_Follows said:

Fee should be a completely independent point of negotiation - right

No, not at all.  See FAR 16.103 for starters:

Quote

(a) Selecting the contract type is generally a matter for negotiation and requires the exercise of sound judgment. Negotiating the contract type and negotiating prices are closely related and should be considered together. The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance.

Also see FAR 15.405:

Quote

(b) The contracting officer’s primary concern is the overall price the Government will actually pay. The contracting officer’s objective is to negotiate a contract of a type and with a price providing the contractor the greatest incentive for efficient and economical performance. The negotiation of a contract type and a price are related and should be considered together with the issues of risk and uncertainty to the contractor and the Government. Therefore, the contracting officer should not become preoccupied with any single element and should balance the contract type, cost, and profit or fee negotiated to achieve a total result -- a price that is fair and reasonable to both the Government and the contractor.

(c) The Government’s cost objective and proposed pricing arrangement directly affect the profit or fee objective. Because profit or fee is only one of several interrelated variables, the contracting officer shall not agree on profit or fee without concurrent agreement on cost and type of contract.

 

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3 hours ago, Hilarity_Follows said:

I'm at a loss how to negotiate a CPFF award with this Agency and still preserve proposed fee. This new unwritten policy seems almost predatory forcing the firm to accept all cost risk under FFP. The FAR is pretty clear that CPFF is an appropriate cost type for complex R&D, though they aren't technically denying that we can have that cost type award - just as long as we forgo nearly all of the fee. I am only getting this type of negotiation feedback from a single agency, but unfortunately we do a lot of work with them. So, this new policy aims to also affect future awards. 

Would it be beneficial to alter budgets going forward to show fee only as a total fixed dollar amount and try negotiate as a whole dollar figure instead of a percentage of cost?

A couple of things that we know: (1) for R&D work, fixed fee is capped at 15% of total costs (FAR 15.404-4(c)(4)(i)(A)); and (2) when cost analysis is performed a structured analysis approach must be used to develop negotiation objectives.

In my mind the best way to approach the negotiation is to use the structured approach (e.g., weighted guidelines or similar) to determine the fee you believe you are entitled to receive, then negotiate that dollar value, not the percentage. Avoid discussing the fee as a percentage of certain cost elements; attempt to discuss the fee as a dollar value--but use the results of the structured approach to support your position.

All I've got. Hope this helps.

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Ultimately, it is your firm's business decision that should prevail. There are contractors that will accept cost type contracts with a low fee amount in order to help out a customer if it looks like there are future business opportunities that may be more in line with the firm's contract business model. Is the Agency or your firm willing to explore a cost plus incentive fee contract where it could be shown that the potential Agency dollarized share of savings might exceed their unwritten policy expectation? Other aspects to consider are whether this is a competitive situation. 

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I’m with here_2_help — negotiate fee as a fixed dollar amount.  Problem solved.  

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5 hours ago, Hilarity_Follows said:

Submitted a technical and cost proposal, showing fee applied as a percentage of total budgeted cost. 

What does that mean? Did you propose the fee as a dollar amount or as a percentage? Are you asking how to work DOD weighted guidelines or a similar system used by a different agency?

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17 hours ago, Vern Edwards said:

What does that mean? Did you propose the fee as a dollar amount or as a percentage? Are you asking how to work DOD weighted guidelines or a similar system used by a different agency?

The budget line for fee in the proposal says " Fee  (RATE X%)......... $$$$$"        It was shown as a whole dollar amount but described in the line as a percentage. 

I'm asking what the best approach would be to use with a contracting office who just says "We just don't do that anymore on CPFF Contracts." They aren't discounting my proposed fee using any cost analysis methodology described in the FAR like... using the DOD weighted guidelines (this is a DOD contract)... Just stating they won't accept fee as requested because of a newly enacted business decision... UNLESS I agree to a FFP award then they have no issue accepting the entire fee as it was proposed. 

 

 

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49 minutes ago, Hilarity_Follows said:

I'm asking what the best approach would be to use with a contracting office who just says "We just don't do that anymore on CPFF Contracts."

Propose something else.

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3 hours ago, Hilarity_Follows said:

I'm asking what the best approach would be to use with a contracting office who just says "We just don't do that anymore on CPFF Contracts."

Negotiate or find a new contracting office to do business with.

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