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CPFF and Rate Caps


Cg1

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What is the experience out there when negotiating with contractors on CPFF contracts? Scenario: Contractor proposes a direct labor rate escalation factor in excess of what you believe to reasonable. You negotiate an acceptable rate with the contractor and they revise their proposal to reflect the reduced estimated cost & fixed fee based on the reduced rate of direct labor escalation over a 2 year PoP. In finalizing the contract language, they take exception to language that articulates that they have agreed to a specific rate of escalation, which effectively caps the base direct labor rates to be charged. The contractor's explanation for this is that this is a CPFF contract and they can escalate their base rates as they need regardless of what they have proposed and negotiated and that the effect of the proposal of the reduced escalation rates only has a bearing on the determination of the contract's estimated cost and fee and not on the actual execution of contract activities toward the negotiated contract cost and fee objective. Is this reasonable to anyone? The purpose of negotiating the rate of escalation upfront is to mitigate potential cost growth due to increasing direct labor base rates and establish the expectation of what is allowable and reasonable based on what has been negotiated. It would seem to me that if contractors don't intend to control the growth of direct labor base rates via the negotiated escalation rate, then there is no need to negotiate and propose a reduced rate. Why, as a contracting officer, would you negotiate and arrive at an agreement on an element of cost if you didn't expect the contractor to adhere to what was negotiated?

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It's one thing to for a contractor to revise a cost estimate as a result of negotiations. However, it's an entirely different matter to agree to a cap on allowable labor costs. It seems that you interpreted the contractor's revision of its cost estimate as an agreement to a binding rate cap, and the contractor balked. If that is the case, you shouldn't be surprised.

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It's one thing to for a contractor to revise a cost estimate as a result of negotiations. However, it's an entirely different matter to agree to a cap on allowable labor costs. It seems that you interpreted the contractor's revision of its cost estimate as an agreement to a binding rate cap, and the contractor balked. If that is the case, you shouldn't be surprised.

So if the intent of the proposal revision is to arrive at a mutually agreeable cost objective for the contract on paper, why would it not also be reasonable to infer that in order actually meet that objective, certain steps, such as capping a rate, would need to be executed in order to meet that objective. A contractor says 'I'll agree to A% escalation on direct labor vs. the B% I propose and I'll revise my proposal'. Interpreting this as you say implies that an offer to do (proposed reduction in escalation) is not associated with the action (rate cap) that accomplishes the objective. The means and the ends are mutually exclusive interpretation? The way I interpret their reaction is that they didn't realize what they agreed to when they accepted a lower escalation. Sounds like bad faith to me when you accept a postion, but can't take the action required to execute. Would you accept this as a legitimate misunderstanding?

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I concur with Don's point(s). In a cost-type contract, the government agrees to reimburse the contractor for actual allowable costs incurred (subject to funding limitations). The estimated costs are simply that -- estimated. Not fixed. Apples and oranges.

When the government imposes a cost ceiling or cap, it is essentially converting that portion of the contract from cost-type to fixed-price. The contractor accepts increased risk. If you want the contractor to accept that risk, you need to offer consideration--commonly increased fee.

It's not really "fair" to expect the contractor to accept the increased risk while simultaneously reducing the estimated cost and fee, right?

Hope this helps.

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I concur with Don's point(s). In a cost-type contract, the government agrees to reimburse the contractor for actual allowable costs incurred (subject to funding limitations). The estimated costs are simply that -- estimated. Not fixed. Apples and oranges.

When the government imposes a cost ceiling or cap, it is essentially converting that portion of the contract from cost-type to fixed-price. The contractor accepts increased risk. If you want the contractor to accept that risk, you need to offer consideration--commonly increased fee.

It's not really "fair" to expect the contractor to accept the increased risk while simultaneously reducing the estimated cost and fee, right?

Hope this helps.

That's exactly what happened. Fee was negotiated and there was a tradeoff. There was enough give and take here for them to understand the context and implication of offering and accepting reduced escalation and receiving more fee. That's why their response, while not surprising, is a little hard to understand under the circumstances and I can only interpret it as bad faith. What I'm not hearing from you is why it appears to be acceptable reach a mutually acceptable objective, but not reasonable to make the contractor accountable for meeting it? Again, if the point of negotiating how future cost are accumulated and the contractor indicates their understanding of this, why should they be averse to the mechanism that acheives the understanding?

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I feel like you're adding an arbitrary layer of risk by restricting the contractor's ability to manage their business. To clarify this thought, please answer the following based on how your contract reads; if the negotiated rate cap is 3.0%, would the contractor be able to apply a 4.0% escalation to a high risk labor category and a 2.0% escalation to a low risk labor category? The contractor could presumably execute more effectively if allowed to break your cap, and could perhaps do so at or below the total (estimated) cost.

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That's exactly what happened. Fee was negotiated and there was a tradeoff. There was enough give and take here for them to understand the context and implication of offering and accepting reduced escalation and receiving more fee. That's why their response, while not surprising, is a little hard to understand under the circumstances and I can only interpret it as bad faith. What I'm not hearing from you is why it appears to be acceptable reach a mutually acceptable objective, but not reasonable to make the contractor accountable for meeting it? Again, if the point of negotiating how future cost are accumulated and the contractor indicates their understanding of this, why should they be averse to the mechanism that acheives the understanding?

Cg1,

I do not agree with your assessment, based on the facts as you have presented them. The point of negotiating the estimated cost and associated fixed fee is to establish a target for various management purposes. The government's primary controls relative to price are on the funding, not the costs incurred.

The reason (presumably) that the government chose a CPFF contract type is because the scope was unknown and therefore it was not prudent to hold the contractor to a strict price. If you now want to hold the contractor to a strict price, consider changing the contract type and making the contract a firm fixed-price type -- and be prepared to reopen negotiations. Otherwise, let the contract pricing and billing work as the FAR intends them to.

I really don't know you and I certainly don't know all the facts and circumstances. But based on your posts I have to say that the interpretation of bad faith doesn't seem to be on the contractor's side in this discussion. You want CPFF, then execute it.

H2H

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Guest Vern Edwards

The government enters into cost-reimbursement contracts because there is too much cost uncertainty for fixed-price contracting, but that does not mean that the level of cost uncertainty is the same across all components of cost. For example, when it comes to labor costs there may be a great deal of uncertainty about the number of labor hours that will be required to perform the work or about the labor mix, but there may be relatively little uncertainty about labor rates. If that is the case, then there is nothing wrong with negotiating labor rate caps (ceilings).

If I understand Cg1 correctly, he/she is asking about a cap on labor rate escalation rates. I see nothing inherently wrong with such caps, and Cg1 has not provided enough details to warrant any kind of conclusion about the reasonableness of such caps in his/her case. The question is: Why does the contractor object to a cap? The next question is: Are the contractor's objections reasonable?

To say or suggest that it is inherently unfair for the government to ask a contractor to agree to a cost cap is half-baked thinking, at best. Such caps are not inherently unfair. In fact, FAR indicates that caps are sometimes particularly appropriate. See FAR 42.407(B) and ( c):

(B)(1) Other situations may make it prudent to provide a final indirect cost rate ceiling in a contract. Examples of such circumstances are when the proposed contractor--

(i) Is a new or recently reorganized company, and there is no past or recent record of incurred indirect costs;

(ii) Has a recent record of a rapidly increasing indirect cost rate due to a declining volume of sales without a commensurate decline in indirect expenses; or

(iii) Seeks to enhance its competitive position in a particular circumstance by basing its proposal on indirect cost rates lower than those that may reasonably be expected to occur during contract performance, thereby causing a cost overrun.

(2) In such cases, an equitable ceiling covering the final indirect cost rates may be negotiated and specified in the contract.

( c) When ceiling provisions are utilized, the contract shall also provide that (1) the Government will not be obligated to pay any additional amount should the final indirect cost rates exceed the negotiated ceiling rates and, (2) in the event the final indirect cost rates are less than the negotiated ceiling rates, the negotiated rates will be reduced to conform with the lower rates.

One can find examples of such caps mentioned in many court, board, and GAO decisions. Sometimes the cap is on the total of some element or part of an element of cost. Sometimes it is on a rate or a component of a rate. FAR 31.109 provides for the negotiation of advance agreements, including agreements on caps.

An additional point: Here_2_help wrote:

When the government imposes a cost ceiling or cap, it is essentially converting that portion of the contract from cost-type to fixed-price. The contractor accepts increased risk. If you want the contractor to accept that risk, you need to offer consideration--commonly increased fee.

That statement is, at best, incomplete. Whether or not there is any increased risk associated with a cap depends upon the degree of uncertainty with respect to the cost in question. If there is little cost uncertainty, then there is little risk in a cap, per se. What creates risk is the specific level of the cap in light of whatever uncertainty there may be.

Here_2_help also wrote:

The government's primary controls relative to price are on the funding, not the costs incurred.

The government controls costs through the cost principles and the cost accounting standards, and through cost caps, all of which limit the incurred costs that may be charged to the government. It also controls costs by observing and taking issue with performance.

Finally, Here_2_help wrote:

The reason (presumably) that the government chose a CPFF contract type is because the scope was unknown and therefore it was not prudent to hold the contractor to a strict price.

Why "presumably"? The scope may be perfectly known and clearly understood. The government may be using a cost-type contract because there is a lot of uncertainty about what the scope will cost. It is possible to know exactly what you want to do or accomplish and yet not know what it will cost to do or accomplish it.

Cg1: as you have explained it, the contractor's objection is based on the goofy principle that they should be able to do as they please because the contract is CPFF. That's wrong. During negotiations, each party must justify its pricing position based upon a rational assessment of cost uncertainty and cost risk (which, by the way, are not the same). Why have they agreed to reduce the escalation rate for the purposes of negotiating estimated cost, but refused to agree to a cap on escalation rates? Could it be that they agreed n order to take the topic off the table, thinking that they can do as they please after contract award? Having said that, they may have a good reason for not wanting to agree to a cap. You should try to find out what their reason really is. If it makes sense, then you should negotiate accordingly.

P.S. Be careful about using the term "bad faith."

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The government enters into cost-reimbursement contracts because there is too much cost uncertainty for fixed-price contracting, but that does not mean that the level of cost uncertainty is the same across all components of cost. For example, when it comes to labor costs there may be a great deal of uncertainty about the number of labor hours that will be required to perform the work or about the labor mix, but there may be relatively little uncertainty about labor rates. If that is the case, then there is nothing wrong with negotiating labor rate caps (ceilings).

If I understand Cg1 correctly, he/she is asking about a cap on labor rate escalation rates. I see nothing inherently wrong with such caps, and Cg1 has not provided enough details to warrant any kind of conclusion about the reasonableness of such caps. The question is: Why does the contractor object to a cap? The next question is: Are the contractor's objections reasonable?

To say or suggest that it is unfair for the government to ask a contractor to agree to a cost cap is half-baked thinking, at best. Such caps are not inherently unfair. In fact, FAR indicates that caps are sometimes particularly appropriate. See FAR 42.407(B) and ( c):

One can find examples of such caps mentioned in many court, board, and GAO decisions. Sometimes the cap is on the total of some element or part of an element of cost. Sometimes it is on a rate or a component of a rate. FAR 31.109 provides for the negotiation of advance agreements, including agreements on caps.

An additional point: Here_2_help wrote:

That statement is, at best, incomplete. Whether or not there is any increased risk associated with a cap depends upon the degree of uncertainty with respect to the cost in question. If there is little cost uncertainty, then there is little risk in a cap, per se. What creates risk is the specific level of the cap in light of whatever uncertainty there may be.

Here_2_help also wrote:

The government controls costs through the cost principles and the cost accounting standards, and through cost caps, all of which limit the incurred costs that may be charged to the government. It also controls costs by observing and taking issue with performance.

Finally, Here_2_help wrote:

Why "presumably"? The scope may be perfectly known and clearly understood. The government may be using a cost-type contract because there is a lot of uncertainty about what the scope will cost. It is possible to know exactly what you want to do or accomplish and yet not know what it will cost to do or accomplish it.

Cg1: as you have explained it, the contractor's objection is based on the goofy principle that they should be able to do as they please because the contract is CPFF. That's wrong. During negotiations, each party must justify its pricing position based upon a rational assessment of cost uncertainty and cost risk (which, by the way, are not the same). Why have they agreed to reduce the escalation rate for the purposes of negotiating estimated cost, but refused to agree to a cap on escalation rates? Could it be that they agreed n order to take the topic off the table, thinking that they can do as they please after contract award? Having said that, they may have a good reason for not wanting to agree to a cap. You should try to find out what their reason really is. If it makes sense, then you should negotiate accordingly.

P.S. Be careful about using the term "bad faith."

Vern-

Thanks for your insight. I was beginning to think I was the only one that's negotiated a rate cap on a CPFF contract. Your understanding of the scenario is correct. We don't need to go into detail about the reasonableness of the cap in this discussion. Suffice it to say that the contractor understands the reason their proposed rate escalation was questioned and subsuquently reduced and their proposal revised and resubmitted. I will be careful about characterizing this contractor's actions as bad faith, but when I asked them to justify their response in light of their proposal revision reflecting the reduced direct labor escalation as agreed to, but not stating the intent as a cap, their response was 'We don't do caps'. Amazing. My initial response was to advise them that they just did. I've never had a contractor propose a cost objective and not understand that there are agreements capping certain cost elements in order to meet the objective. Needless to say, I'm bugged by the way this is working out and I'm in a cooling off period right now before re-engaging this contractor. I haven't done anything differently in this negotiation than I normally do. This is the first time that I personally have negotiated with this particular contractor. After speaking with others that have dealt with this contractor in the past, I'm finding out that they have relatively little experience with CPFF and some of that experience is conditioned by how we've negotiated with them and the way some of our contracts are written, i.e. with no stated caps. I also see evidence of the "goofy principle" in effect with our own folks as well which doesn't help matters. So to some extent, we've created our own difficulties with the contracts that have been written. Without the contract language memorializing the cap, any escalation in excess of what was agreed to gets allowed on audit as actual cost.

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Guest Vern Edwards

Cg1:

Actually, "We don't do caps" is an understandable and often effective kind of negotiation tactic. A contractor might well establish certain policies in order to limit the discretion of its negotiators. It's a tactic that works. The government does it all the time, citing policy or regulation. Government negotiators even cite policy or regulation when there is no such policy or regulation.

No reason to get heated about it. Your response should be based on your position. If you are in a strong position you might say, "Well, we must have a cap. We suggest that you folks go home and reassess your policy." Or you might escalate, "We want a cap. Who above you in your organization has the authority to discuss this?" If you are not in a strong position you might not get your cap.

If I were them and you told me that it was the first time anyone had ever failed to understand that you expect them to agree to a cap, I might say, "Well, there's a first time for everything." Then I'd smile, real friendly-like.

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Scenario --

Contractor submits a cost proposal for a CPFF contract. Presumably, the cost proposal was based on forecasted costs, including future labor costs based on known or forecasted wage increases. Government objects to labor escalation values used by contractor and associated direct labor cost estimate. Contractor agrees to revise cost proposal commensurate with Government's desired labor escalation rate. Accordingly, a new estimated cost and associated fixed fee is agreed upon.

Contractor does this because, regardless of what labor escalation rate is agreed-upon, at the end of the day it will be reimbursed for its allowable cost incurred. Profit erosion risk is manageable.

After negotiations are concluded, Government attempts to impose "caps" on the amount of actual labor escalation--effectively limiting the amount of allowable pay raises the contractor can give to its employees for the instant contract. Contractor objects, because if it gives employees the raises it knows (e.g., collective bargaining agreement) or forecasts (based on plans & budgets), it will incur an unallowable cost with respect to this contract. If it limits pay raises to the Government's desired escalation factor, it affects staff morale and perhaps breaches collective bargaining agreements.

Moreover, imposing contract-specific escalation rates signals to the contractor and its employees that this contract is to be treated differently from the contractor's other contracts (assuming it has other contracts). Remember that most (but not all) pay raises are applied to the employee population as a whole, or to salary bands, or to functions -- and not to individuals. Contractors do not, as a rule, identify a small group of employees working on one contract and say, "you guys get 100% raises while everybody else gets 3% raises."

1. Contractors run a competitive business, or try to. Please give them the benefit of the doubt. More to the point, the Government shouldn't assume the right to tell the contractor how to run its business, including what raises to give its employees. If the government wants to in-source the work, do it. Otherwise get out of the contractor's knickers and let it do its job as it proposed.

2. The Government doesn't need to impose contract-specific "caps" in order to control the salary/wage increases a contractor provides its employees. For example, DCAA has an audit program that addresses contractor compensation ceilings. FAR 31.205-6 addresses the allowability of compensation, and contractors with CPFF contracts have to comply. The FAR definition of reasonableness would cover the scenario above, where one set of employees gets a huge raise while other similar employees do not -- and the excessive raises could well be unreasonable and thus unallowable as a contract cost.

Cq1 hints at facts and circumstances that have not been shared. Fine, if there is a bona fide reason that the government feels the need to control the contractor's contract-specific labor costs, then do it. In that case, the above comments should be read as a diatribe aimed at the general 1102 population and not at anyone in particular.

Vern, I appreciate your comments made in addition to my own, augumenting but not contradicting my statements (as best I can tell).

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Guest Vern Edwards

Well, I'm going to contradict your most recent statements as a mass of gross over-generalizations.

After negotiations are concluded, Government attempts to impose "caps" on the amount of actual labor escalation--effectively limiting the amount of allowable pay raises the contractor can give to its employees for the instant contract.

I don't recall anyone saying anything about attempting to impose caps after negotiations are concluded. That's a red herring, and I don't know why you brought it up. All the same, I don't see any inherent unfairness in the government wanting to revisit a deal that's already been made. Business people do that all the time.

Moreover, imposing contract-specific escalation rates signals to the contractor and its employees that this contract is to be treated differently from the contractor's other contracts (assuming it has other contracts).

So? I don't know of any reason why all contracts must or should be treated the same.

Remember that most (but not all) pay raises are applied to the employee population as a whole, or to salary bands, or to functions -- and not to individuals. Contractors do not, as a rule, identify a small group of employees working on one contract and say, "you guys get 100% raises while everybody else gets 3% raises."

Gross over-generalization. "Contractors" takes in too much territory to permit such a statement. Be even if it's true, so what? If the company takes the deal then they should think about what they're going to tell their employees. If they can't stand to do it, then they shouldn't take the contract.

Contractors run a competitive business, or try to. Please give them the benefit of the doubt.

Please. Spare me. I don't like Mom and Apple Pie arguments, whether it's coming from industry or the GAO and DCAA. If I'm awarding a cost-reimbursement contract and the contractor is going to be spending my money, then I see no reason whatsover to give them the benefit of any doubt about costs. That's ridiculous. We're talking about business relations, not marriage.

More to the point, the Government shouldn't assume the right to tell the contractor how to run its business, including what raises to give its employees. If the government wants to in-source the work, do it. Otherwise get out of the contractor's knickers and let it do its job as it proposed.

What are you talking about? What are you thinking? Where have you been? Hello! Throughout the 20th Century the government has reserved the right to tell contractors how to run their businesses under cost-reimbursement contracts, and other contracts as well. There are countless examples of laws, regulations, and clauses through which the government does just that. That's a reality of the marketplace. Any company that cannot stand that should stay away from government contracts. I don't see any mass movement to reject government cost-reimbursement business. If you take a contract that allows you to spend my money and doesn't require you to finish the job as a condition, then I damned well reserve the right to tell you how to spend it and how not to spend it.

The Government doesn't need to impose contract-specific "caps" in order to control the salary/wage increases a contractor provides its employees.

Need has nothing to do with it. The question is whether such a cap would be prudent under a specific set of circumstances.

Fine, if there is a bona fide reason that the government feels the need to control the contractor's contract-specific labor costs, then do it. In that case, the above comments should be read as a diatribe aimed at the general 1102 population and not at anyone in particular.

The first of those two sentences makes good sense. As for the second, diatribes are not illegal. Do all you want.

I really don't know you and I certainly don't know all the facts and circumstances. But based on your posts I have to say that the interpretation of bad faith doesn't seem to be on the contractor's side in this discussion. You want CPFF, then execute it.

You, like Cg1, should be careful about how you use "bad faith."

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I am in Atlanta without access to my FAR this weekend. But to those who say that it is up to the Contractor's discretion what costs they charge the government and expect to get paid for on a cost contract, that's baloney. Costs must be reasonable and allocable to the contract. Back in the 1990's, Congress changed the law and it is reflected somewhere in FAR 31.2 to clearly state that there is no presumption that a contractor's costs are reasonable and that it the burden of the Contractor to prove that they are. If the government negotiated a cap on escalation, the Contractor has plenty of notice of the standard of reasonableness established. In my opinion, the Contractor would then have to justify anything over the cap. I would expect the Contractor to ask before exceeding the cap.

Many old timer Government folks may never have realized that the law and FAR were changed at least 15 years ago. I still hear the myth that any cost is presumed to be reasonable and that the Government is stuck. They then pass this incorrect thinking down to the next generation.

The trick is to establish a clear understanding whenever possible at the outset or during negotiations of the standard of reasonableness.

But simply to say that the costs charged are up to the discretion of the Contractor is wrong.

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Guest Vern Edwards

Joel has changed the subject. We had been talking about cost caps (ceilings) established before costs are incurred. What Joel is talking about is determination of the reasonableness of costs that have already been incurred.

Prior to 1987, the courts and boards had held that when a contractor sought compensation for incurred (historical) costs, the government had the burden of proving that the costs were unreasonable. Congress changed that by enactment of Public Law 99-145 Section 933, which said:

In proceedings before the Armed Services Board of Contract Appeals, the United States Claims Court, or any other Federal court in which the reasonableness of indirect costs for which a contractor seeks reimbursement from the Department of Defense is in issue, the burden of proof shall be upon the contractor to establish that such costs are reasonable.

This is now codified at 10 USC 2324(j). When the statute was implemented in FAR by FAC 84-26, 52 FR 19804, effective July 30, 1987, the rule was applied to all costs, see FAR 31.201-3(a), and is incorporated into cost-reimbursement contracts through the Allowable Cost and Payment clause, FAR 52.216-7.

All of this is unrelated to the topic of contractually stipulated caps on costs.

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What is the experience out there when negotiating with contractors on CPFF contracts?... The contractor's explanation for this is that this is a CPFF contract and they can escalate their base rates as they need regardless of what they have proposed and negotiated and that the effect of the proposal of the reduced escalation rates only has a bearing on the determination of the contract's estimated cost and fee and not on the actual execution of contract activities toward the negotiated contract cost and fee objective. Is this reasonable to anyone? ...It would seem to me that if contractors don't intend to control the growth of direct labor base rates via the negotiated escalation rate, then there is no need to negotiate and propose a reduced rate. Why, as a contracting officer, would you negotiate and arrive at an agreement on an element of cost if you didn't expect the contractor to adhere to what was negotiated?

Vern, I think my post is directly relevant to the original question. The government can tell contractor what is considered to be reasonable - stick with the rate cap that we negotiated and if you can't, come back to me first to discuss - or I won't pay you what I consider to be the excessive, unreasonable portion of the cost. Negotiations can be more than merely establishing the fixed fee and target cost. You can establish what you will consider to be a standard of reasonableness that the contractor will have to justify in order to get paid the additional cost for exceeding.

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Guest Vern Edwards
Vern, I think my post is directly relevant to the original question. The government can tell contractor what is considered to be reasonable - stick with the rate cap that we negotiated and if you can't, come back to me first to discuss - or I won't pay you what I consider to be the excessive, unreasonable portion of the cost. Negotiations can be more than merely establishing the fixed fee and target cost. You can establish what you will consider to be a standard of reasonableness that the contractor will have to justify in order to get paid the additional cost for exceeding.

Your posts are not relevant to the topic of cost caps, which is what the original post was about. A contractually stipulated cost cap is not a standard of cost reasonableness. Adherence to a contractually stipulated cost cap is not a matter of cost reasonableness. Adherence to a contractually stipulated cost cap is a matter of consistency with a term of the contract. See FAR 31.205-2(a), item (4). A cost in excess of a contractually stipulated cost cap might otherwise be reasonable, but it is unallowable by mutual agreement. If a CO has negotiated a contractually stipulated cost cap, any decision to allow a cost in excess of the cap would be a waiver of a contract term, for which the CO should obtain consideration.

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Guest Vern Edwards
Vern, I agree but I don't think that is what CG1 did.

No, it's not what he did. It's what he wants to do. The issue is whether he is being unfair or is negotiating in bad faith because he wants a cap on labor rate escalation.

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Well, I'm going to contradict your most recent statements as a mass of gross over-generalizations.

I don't recall anyone saying anything about attempting to impose caps after negotiations are concluded. That's a red herring, and I don't know why you brought it up. All the same, I don't see any inherent unfairness in the government wanting to revisit a deal that's already been made. Business people do that all the time.

So? I don't know of any reason why all contracts must or should be treated the same.

Gross over-generalization. "Contractors" takes in too much territory to permit such a statement. Be even if it's true, so what? If the company takes the deal then they should think about what they're going to tell their employees. If they can't stand to do it, then they shouldn't take the contract.

Please. Spare me. I don't like Mom and Apple Pie arguments, whether it's coming from industry or the GAO and DCAA. If I'm awarding a cost-reimbursement contract and the contractor is going to be spending my money, then I see no reason whatsover to give them the benefit of any doubt about costs. That's ridiculous. We're talking about business relations, not marriage.

What are you talking about? What are you thinking? Where have you been? Hello! Throughout the 20th Century the government has reserved the right to tell contractors how to run their businesses under cost-reimbursement contracts, and other contracts as well. There are countless examples of laws, regulations, and clauses through which the government does just that. That's a reality of the marketplace. Any company that cannot stand that should stay away from government contracts. I don't see any mass movement to reject government cost-reimbursement business. If you take a contract that allows you to spend my money and doesn't require you to finish the job as a condition, then I damned well reserve the right to tell you how to spend it and how not to spend it.

Need has nothing to do with it. The question is whether such a cap would be prudent under a specific set of circumstances.

The first of those two sentences makes good sense. As for the second, diatribes are not illegal. Do all you want.

You, like Cg1, should be careful about how you use "bad faith."

Vern, we have a different impression/interpretation of the situation. I read the original post as saying that price negotiations had concluded and then the government slipped in the bit about escalation caps as the contract language was being finalized. In my mind, if the contractor had known that the government had wanted to impose caps on labor escalation (not caps on indirect cost rates) then the contractor would have wanted more fee to compenate for the increased risks.

The rest of your points strike me as perhaps my points struck you. Of course the government can tell the contractor how to spend the money. That wasn't my point at all. My point is that the government does so through regulations and contract language and through a COTR and through DCAA audits. (And we still get many delay/disruption claims...) The caps on labor escalation veers dangerously close to something much more, something that smells like interference in the contractor's business. Given that they are unnecessary (for the foregoing reasons as well as others made in my prior posts) they should be avoided if at all possible.

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Vern, we have a different impression/interpretation of the situation. I read the original post as saying that price negotiations had concluded and then the government slipped in the bit about escalation caps as the contract language was being finalized. In my mind, if the contractor had known that the government had wanted to impose caps on labor escalation (not caps on indirect cost rates) then the contractor would have wanted more fee to compenate for the increased risks.

The rest of your points strike me as perhaps my points struck you. Of course the government can tell the contractor how to spend the money. That wasn't my point at all. My point is that the government does so through regulations and contract language and through a COTR and through DCAA audits. (And we still get many delay/disruption claims...) The caps on labor escalation veers dangerously close to something much more, something that smells like interference in the contractor's business. Given that they are unnecessary (for the foregoing reasons as well as others made in my prior posts) they should be avoided if at all possible.

H2H-

You're only seeing part of this as you wish and I sense a certain, for lack of a nicer description, bias, toward the contractor. Correct. Negotiations over the cost objective were cocluded, so I thought. The contractor's cost were challanged and countered on travel, proposed hours, training, direct labor escalation and profit all based on what I and the COTR know about the work to be accomplished. I countered their proposal and they agreed to everything except on profit and direct labor escalation. I asked for a reduced escalation and they asked for more profit. We compromised here. They got what they wanted on profit and I thought I got what I wanted on escalation. THEY revised the proposal to reflect the agreement and resubmitted it to me. I said all of this (without the details on the other cost objectives negotiated) in the thread above. I guess you missed this. The original discussion was about the interpretation of our respective actions in getting to the meeting of the minds here. The first point is that they agreed to the capped escalation by receiving consideration on the profit position they requested and I honored. In enforcing the agreement in the form of cap language to the contract, the contractor refused this language. Bear in mind that the contract does read with the estimated cost and fee that was agreed to based on their revised proposal. In my opinion, the cap language serves to enforce what they agreed to which is that direct labor will not increase at a rate in excess of that agreed to. There is nothing wrong with having prior agreements memorialized in the contract if the parties see fit to do so. That's not unusual. The second point revolves around reasonableness. The contractor refused the cap because they believe that they can escalate direct labor however it sees fit on the basis that whatever they chose to escalate we have to pay and on that belief of CPFF contracting, they 'don't do caps'. I disagree with them as they just agreed to a lower escalation 1) as represented by their revised proposal and 2) consideration on fee as a trade off. You seem to aspire to the 'goofy principle' that Vern identifies and that any cost that the contractor says is allocable to my contract is therefore allowable as long as it meets the allowability standards of FAR part 31. What's the point of negotiating? Based on your and the contractor's understanding of CPFF contracting you can propose whatever you like, revise it to what the government believes is a reasonable cost objective, agree to it as est. cost/fee and then do as you please so long as it's allocable and allowable based on FAR, etc.? You can't leave out cost reasonableness here. I believed that the contractor's proposed direct labor rate of escalation was unreasonable as proposed. I am not saying they can't escalate; just at a more reasonable rate. They agreed to this in a trade off for profit. If they didn't want to agree to lower escalation, they could have said so and I would not have proceeded to craft language that holds them to their part of the bargain. They could have said 'no, we like the escalation and the profit we've proposed'. Not only was that not what they said, they said yes in writing to the countered rate of escalation and profit and revised their proposal reflecting the compromise. No one's trying to 'slip' anything in here and I'm a little offended that you're implying that I'm trying to do something that is outside of the understanding of negotiations which you have absolutely no knowledge of.

Again, I interpreted their compromise on escalation in return for consideration on profit and their revised proposal as agreement to the cap on the escalation. If I've negotiated 3 other contracts the same way with different contractors and we mutually arrive at the same understanding that the trade offs mean they've agreed to a cap on the particular cost element in order to best meet the overall cost objective of the contract and they agree to cap language without the kind of objection I'm describing, I think I'm a little justified in at least questioning this contractor's intention and even their understanding of CPFF contract. Their belief that they can do whatever you want on CPFF and it's ok is what's getting the way.

Vern,

I'm not sure this is worth laboring much further with H2H. I'm happy to move on.

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Guest Vern Edwards
Of course the government can tell the contractor how to spend the money. That wasn't my point at all. My point is that the government does so through regulations and contract language and through a COTR and through DCAA audits. (And we still get many delay/disruption claims...) The caps on labor escalation veers dangerously close to something much more, something that smells like interference in the contractor's business. Given that they are unnecessary (for the foregoing reasons as well as others made in my prior posts) they should be avoided if at all possible.

The government does not control spending. It controls reimbursement, and it often does so through negotiated contract terms.

Your "smells like interference in the contractor's business" comment is absurd. You must be thinking about fixed-price contracts. When a contractor gets to spend the government's money and doesn't have to deliver anything in return, which is the case under a cost-reimbursement contract, it has no business in which the government is barred from interfering in order to limit its cost liability. What's ironic about your comments is that you seem to think that it's better for the government to limit costs through regulation and auditors than through face-to-face negotiation. Really, H2H, that strikes me as a peculiar notion.

I would not say that caps are necessary or unnecessary, only that they may be prudent from a negotiator's point of view. Caps can be an effective way to limit the government's cost liability. A cap says nothing more than: I will not pay more than this much. There is nothing unfair or in bad faith about the government seeking to cap its cost liability. The only issue is whether a cap would be prudent in a specific set of circumstances. That's a judgment to be debated at the negotiation table. Putting it another way, it's a matter of what is wise a given case, and negotiators may differ in their opinions.

Cost caps in a cost-reimbursement contract are not inherently unfair.

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I like what Vern said in his post at 12:27 PM a lot. I have negotiated union contracts representing the union and such techniques as ""Well, there's a first time for everything." Then I'd smile, real friendly-like." were my specialty.

CG1, has anyone actually sat down and told the contractor that its the "cap" or the highway? In my office right now, there is significantly more competition for our contracts, and the contractors are accepting lower costs as a result. I see your situation as no different, and would make sure the contractor was aware of that fact. With a really friendly smile.

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Capping indirect costs in a cost-reimbursement contract is not new. I personally know of an agency that has used such caps with long-term, on-site, support-service contracts since back in the early sixties.

br549,

In this scenario the indirect caps are being applied to labor escalation -- i.e., limiting the amount of raises the contractor can give its employees with respect to this contract. If the contractor gives its employees raises that result in labor costs that are in excess of the negotiated labor escalation factor(s), then the amount over the cap would result in unallowable direct labor costs plus unallowable indirect costs allocated to that direct labor.

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The government does not control spending. It controls reimbursement, and it often does so through negotiated contract terms.

Your "smells like interference in the contractor's business" comment is absurd. You must be thinking about fixed-price contracts. When a contractor gets to spend the government's money and doesn't have to deliver anything in return, which is the case under a cost-reimbursement contract, it has no business in which the government is barred from interfering in order to limit its cost liability. What's ironic about your comments is that you seem to think that it's better for the government to limit costs through regulation and auditors than through face-to-face negotiation. Really, H2H, that strikes me as a peculiar notion.

I would not say that caps are necessary or unnecessary, only that they may be prudent from a negotiator's point of view. Caps can be an effective way to limit the government's cost liability. A cap says nothing more than: I will not pay more than this much. There is nothing unfair or in bad faith about the government seeking to cap its cost liability. The only issue is whether a cap would be prudent in a specific set of circumstances. That's a judgment to be debated at the negotiation table. Putting it another way, it's a matter of what is wise a given case, and negotiators may differ in their opinions.

Cost caps in a cost-reimbursement contract are not inherently unfair.

Vern, your point ignores the timing of the negotiation. As I noted in a previous post, we apparently have different impressions of that timing.

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