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Hello Everyone,

I have had little luck researching this topic and would much appreciate your input/comments.

Scenario: We are adding a new requirement to an existing CPFF contract. The contract has an established 6% fixed fee. This new requirement is for services at a location identified as a Hazard/Danger pay location. The contractor's position is that the fee should be based on all direct costs such as base pay, fringe, labor overhead, G&A, and other premiums paid (including hazard/danger pay).

Question: Is the government supposed to pay fee (6%) on hazard/danger pay?

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Hello Everyone,

I have had little luck researching this topic and would much appreciate your input/comments.

Scenario: We are adding a new requirement to an existing CPFF contract. The contract has an established 6% fixed fee. This new requirement is for services at a location identified as a Hazard/Danger pay location. The contractor's position is that the fee should be based on all direct costs such as base pay, fringe, labor overhead, G&A, and other premiums paid (including hazard/danger pay).

Question: Is the government supposed to pay fee (6%) on hazard/danger pay?

Hi Blitz,

I'm not clear on why this is different from any other modification under the Changes clause, for which the contractor would be entitled to an equitable adjustment--including fee on any additional costs.

That being said, were I the contractor preparing a price proposal for this work, I would DEFINITELY expect fee on all of my costs, including hazardous duty and danger pay salary uplifts. I would be paying my employees those additional payroll costs (and would be paying payroll withholding taxes on those costs) and I would very likely be paying Defense Base Act insurance premiums -- and I would expect to make a profit on those costs.

Hope this helps.

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Hello Everyone,

I have had little luck researching this topic and would much appreciate your input/comments.

Scenario: We are adding a new requirement to an existing CPFF contract. The contract has an established 6% fixed fee. This new requirement is for services at a location identified as a Hazard/Danger pay location. The contractor's position is that the fee should be based on all direct costs such as base pay, fringe, labor overhead, G&A, and other premiums paid (including hazard/danger pay).

Question: Is the government supposed to pay fee (6%) on hazard/danger pay?

Blitz, why wouldn't the government pay fee on premium pays made by the contractor? The only cost that FAR 15.404-4 requires to be excluded from the government's profit or fee objective is facilities capital cost of money.

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Blitz, why wouldn't the government pay fee on premium pays made by the contractor? The only cost that FAR 15.404-4 requires to be excluded from the government's profit or fee objective is facilities capital cost of money.

The government does not pay fee "on" a cost. Fee is not a surcharge or tax on costs. Government policy is to negotiate fee based on the effort that will be required of the contractor and the degree of risk that the contractor accepts. In structured approaches to establishing negotiation objectives for profit or fee, like the DOD Weighted Guidelines, the measure of cost is only one of the factors used to measure the extent of the effort and risks. Such use of dollar amounts does not mean that the fee is "on" the dollars. This has been government and DOD policy since I was a newbie, and it is astonishing to see that people still speak of fee as being "on" this or that cost.

The contractor is not entitled to fee "on" hazardous duty pay. The key question is what if any additional effort will be required of the contractor in response to the change in performance location, and what additional risk will the contractor accept. The fact that a contractor must pay its employees for hazardous duty is not, in and of itself, a basis for fee. The contractor is entitled to fee for the additional effort and risk that it must undertake in response to the change in performance location. The change in effort and risk might not justify additional fee equal to six percent of the hazardous duty pay. Then again, it might justify more.

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Hi Blitz,

I'm not clear on why this is different from any other modification under the Changes clause, for which the contractor would be entitled to an equitable adjustment--including fee on any additional costs.

That being said, were I the contractor preparing a price proposal for this work, I would DEFINITELY expect fee on all of my costs, including hazardous duty and danger pay salary uplifts. I would be paying my employees those additional payroll costs (and would be paying payroll withholding taxes on those costs) and I would very likely be paying Defense Base Act insurance premiums -- and I would expect to make a profit on those costs.

Hope this helps.

Hi,

Thank you everyone for your comments. I wasn't sure what was allowed is the cost pool before we could determine the amount of fee to be paid. This is the first time we've come across danger pay and since it is a tax free allowance for employees we thought perhaps it shouldn't be part of the cost pool.

By the way, I am new to this whole Cost-Reimbursement type contracts. I've worked on FFP pretty much for the first 10 years of my career. So please bear with me.

Thank you retreadfed for direct me to 15-404-4. It clearly states that facilities capital cost of money shall be excluded. No mentioning of danger/hazard pay.

Have a great day everyone,

Blitz

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This is the first time we've come across danger pay and since it is a tax free allowance for employees we thought perhaps it shouldn't be part of the cost pool.

Have a great day everyone,

Blitz

Blitz, I'm glad the WIFCON forum could help you. I have a nagging question, though, as to why you think that salary uplifts are a "tax free allowance" to contractor employees? If that's true, it would be news to me and many, many contractors.

Best wishes!

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The government does not pay fee "on" a cost. Fee is not a surcharge or tax on costs. Government policy is to negotiate fee based on the effort that will be required of the contractor and the degree of risk that the contractor accepts. In structured approaches to establishing negotiation objectives for profit or fee, like the DOD Weighted Guidelines, the measure of cost is only one of the factors used to measure the extent of the effort and risks. Such use of dollar amounts does not mean that the fee is "on" the dollars. This has been government and DOD policy since I was a newbie, and it is astonishing to see that people still speak of fee as being "on" this or that cost.

The contractor is not entitled to fee "on" hazardous duty pay. The key question is what if any additional effort will be required of the contractor in response to the change in performance location, and what additional risk will the contractor accept. The fact that a contractor must pay its employees for hazardous duty is not, in and of itself, a basis for fee. The contractor is entitled to fee for the additional effort and risk that it must undertake in response to the change in performance location. The change in effort and risk might not justify additional fee equal to six percent of the hazardous duty pay. Then again, it might justify more.

Vern,

My understanding from Blitz's original post was that the contractor had an existing CPFF contract. The existing fixed fee was negotiated (presumably via a structured approach) at 6% of estimated costs. Now, the Government wants to modify the contract to have work performed at a new location, one in which the contractor's costs will be demonstrably higher than previously negotiated. The contractor wants an equitable adjustment to compensate it for the additional costs it will incur, and wants the fixed fee pool modified as well.

I agree with you that the additional fee is negotiable, and will be based on a structured approach analysis; it will not be a matter of simply adding 6% to the additional costs. That was not Blitz's question, however; Blitz wanted to know if an element of the contractor's cost should be excluded from the fee analysis because it should not be fee-bearing. Now, I may have been semantically "loose" in the language used, but I believe the response was correct -- all of the contractor's costs (less Cost of Money, as retreadfred pointed out) should be included in the fee analysis.

From the contractor's perspective, it expects to earn a profit and it proposes (and generally measures) the amount of profit/fee as a percentage of proposed costs. Thus, it proposes a fee "on" its costs. I understand that the Government doesn't analyze proposed profit/fee in that manner, but that's what a contractor does, with few exceptions.

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Maybe I am misunderstanding something. Blitz stated ?We are adding a new requirement to an existing CPFF contract. The contract has an established 6% fixed fee? By making the ?fixed fee? a percentage aren?t you doing a cost plus percentage of cost type contract (forbidden by FAR 16.102©)?

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Maybe I am misunderstanding something. Blitz stated ?We are adding a new requirement to an existing CPFF contract. The contract has an established 6% fixed fee? By making the ?fixed fee? a percentage aren?t you doing a cost plus percentage of cost type contract (forbidden by FAR 16.102?)?

Not if the fixed fee was 6% of estimated costs. However, if the contract were written to say that the contractor would be paid 6% of incurred costs, then you would have an illegal CPPC arrangement.

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Fixed fee is always stated as a dollar amount, not a percentage. I think that what Blitz was saying is that the fixed fee on the contract amounted to six percent of the esimated cost and that the contractor wanted to use that percentage as the basis for calculating fee on the hazardous duty pay.

It would not have made sense to write the contract to say:

Estimated Cost: $1,000,000.

Fixed Fee: Six (6) percent.

What would that be about? Why not just state dollars? However, if the contract were to say that the fee would be calculated by applying the percentage to allowable incurred cost, then you would have an illegal contract.

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Blitz, I'm glad the WIFCON forum could help you. I have a nagging question, though, as to why you think that salary uplifts are a "tax free allowance" to contractor employees? If that's true, it would be news to me and many, many contractors.

Best wishes!

Bremen, Thanks for point this out. That was a a wrong assumption made in our office. You are right. It is not a tax free allowance. The Department of States website states: "all Danger Pay is considered an "incentive" rather than a "reimbursement" and therefore is taxable (DSSR 054.2)."

Regards

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Not if the fixed fee was 6% of estimated costs. However, if the contract were written to say that the contractor would be paid 6% of incurred costs, then you would have an illegal CPPC arrangement.

That is exactly right! The contract fee amount was set up based on the estimated cost from the contractor's proposal. Then based on that estimate, a CLIN was created to cover the fee. It was done by calculating 6% of the estimated cost to come up with a $ figure to be paid in 12 Fixed Priced monthly payments during the contract year.

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Fixed fee is always stated as a dollar amount, not a percentage. I think that what Blitz was saying is that the fixed fee on the contract amounted to six percent of the esimated cost and that the contractor wanted to use that percentage as the basis for calculating fee on the hazardous duty pay.

It would not have made sense to write the contract to say:

Estimated Cost: $1,000,000.

Fixed Fee: Six (6) percent.

What would that be about? Why not just state dollars? However, if the contract were to say that the fee would be calculated by applying the percentage to allowable incurred cost, then you would have an illegal contract.

I've seen contracts with option CLINs that only state a fee percentage. The estimated cost for the options is not negotiated until after the contract is awarded. For example, NAVSEA's multi-ship multi-option (MSMO) contracts for ship repair, which are CPAF contracts, contain numerous option CLINs that look like this:

Estimated Cost: $

Base Fee: 0%

Award Fee Pool: 10%

I'm not advocating stating fee as a percentage, just pointing out that agencies do it.

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I've seen contracts with option CLINs that only state a fee percentage. The estimated cost for the options is not negotiated until after the contract is awarded. For example, NAVSEA's multi-ship multi-option (MSMO) contracts for ship repair, which are CPAF contracts, contain numerous option CLINs that look like this:

Estimated Cost: $

Base Fee: 0%

Award Fee Pool: 10%

I'm not advocating stating fee as a percentage, just pointing out that agencies do it.

Don,

So they are awarding unpriced options?

Vern

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Vern,

That's a good question and one that I have been thinking about lately. I'm not sure if they are unpriced options. Consider FAR 17.207(f)(3):

To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g.?

[...]

(3) In the case of a cost-type contract, if?

(i) The option contains a fixed or maximum fee; or

(ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102©);

NAVSEA would argue that their options meet those criteria. I don't know that they're wrong.

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Vern,

That's a good question and one that I have been thinking about lately. I'm not sure if they are unpriced options. Consider FAR 17.207(f)(3):

To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g.?

[...]

(3) In the case of a cost-type contract, if?

(i) The option contains a fixed or maximum fee; or

(ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102©);

NAVSEA would argue that their options meet those criteria. I don't know that they're wrong.

Don,

I'm not familiar with the terms of NAVSEA's MSMO contracts, but from your comment, I conclude that the contract doesn't specify an amount at which the option may be exercised, so are you suggesting that "the option [was] evaluated as part of the initial competition and [is] exercisable at an amount specified in or reasonably determinable from the terms of the basic contract" based on the fact that there's a "maximum fee amount [that] is determinable by applying a formula contained in the basic contract"? Without some estimate or ceiling on the estimated cost of the option, how do you "reasonably determine" the amount at which the option is exercisable?

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Navy,

When the contract is awarded, the contract does not specify an amount at which the option may be exercised. All the parties have agreed to is the percentage for the base and award fee. After award and before exercise of an option, the parties agree to an estimated cost for that option and apply the predetermined percentages to determine the amount of base fee and the size of the award fee pool.

I'm not suggesting that NAVSEA's interpretation of FAR 17.207(f)(3) is correct, because I'm not sure I know what it means. It doesn't require that an option in a cost-type contract state an estimated cost to be "exercisable at an amount specified in or reasonably determinable from the terms of the basic contract." It only requires that i) the option contain a fixed or maximum fee or (ii) the fixed or maximum fee amount is determinable by applying a formula contained in the basic contract.

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I'm not suggesting that NAVSEA's interpretation of FAR 17.207(f)(3) is correct, because I'm not sure I know what it means. It doesn't require that an option in a cost-type contract state an estimated cost to be "exercisable at an amount specified in or reasonably determinable from the terms of the basic contract." It only requires that i) the option contain a fixed or maximum fee or (ii) the fixed or maximum fee amount is determinable by applying a formula contained in the basic contract.

FAR means what it says, you don't need an estimated cost. But you didn't quote the entire sentence about cost-type contracts. The entire sentence reads:

To satisfy requirements of Part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract, e.g.?(3) In the case of a cost-type contract, if?(i) The option contains a fixed or maximum fee; or (ii) The fixed or maximum fee amount is determinable by applying a formula contained in the basic contract (but see 16.102?)[.]

FAR 16.102? says:

The cost-plus-a-percentage-of-cost system of contracting shall not be used (see 10 U.S.C. 2306(a) and 41 U.S.C. 254(B)).

Stating fee as a percentage of an as yet to be determined cost means (1) that the option is unpriced and (2) that it violates the CPPC prohibition.

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Vern,

I don't believe that NAVSEA's MSMO contracts violate the CPPC prohibition because fee is not paid as a percentage of incurred cost. At award, the parties have agreed to a percentage for base and award fee. After award and before the option is exercised, the parties agree to an estimated cost for that option and apply the predetermined percentages to determine the amount of base fee and the size of the award fee pool. After this negotiation, the parties will have agreed to an estimated cost, a base fee amount (expressed in dollars), and the size of the award fee pool (expressed in dollars). The base fee and award fee pool amounts remain the same regardless of the contractor's incurred cost.

Would you say that such an option is unpriced? If so, how does it fail to meet the criteria at FAR 17.207(f)(3)?

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The reason the MSMO contracts do not have the price for future options listed in the contract is that the contractor is allowed to inspect a vessel before work begins and then negotiate the price of the work based on the condition of the ship.

There is enough variation in each vessel that even similar work packages can have a wide variance in price. If the Navy tried to pre-price the work, it would likely result in even higher costs as the vendor would have to assume each vessel was as poor as the worst in order to protect his company from losses.

In addition, the actual MSMO work packages are not identical for each vessel in the class of ships that the contract deals with. One ship in an earlier phase of construction may not have the same equipment of a vessel constructed later in time. During the MSMO phase, which maintains a previously constructed vessel, equipment that was added or changed during the construction phase is updated in earlier vessels so that each ship's capabilities are equalized.

Work packages that are considered upon the award of a MSMO contract also change based upon how much funding is allocated to the contract per vessel. That amount sometimes changes based on various environmental and management functions, and of course political factors count too.

All of these reasons are part of why the amounts are not listed. When I worked for NAVSEASYSCOM in Code 024 on MSMO contracts, we only listed the prices for CLINS where we already had the vessel work package finalized and the vendor had inspected the vessel and agreed to the pricing. The balance of CLINS were left blank until they too were finalized and agreed upon. SUPSHIP is the organization that negotiaed the CLIN prices after the contracts had been awarded as the ACO organization.

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Vern,

I don't believe that NAVSEA's MSMO contracts violate the CPPC prohibition because fee is not paid as a percentage of incurred cost. At award, the parties have agreed to a percentage for base and award fee. After award and before the option is exercised, the parties agree to an estimated cost for that option and apply the predetermined percentages to determine the amount of base fee and the size of the award fee pool. After this negotiation, the parties will have agreed to an estimated cost, a base fee amount (expressed in dollars), and the size of the award fee pool (expressed in dollars). The base fee and award fee pool amounts remain the same regardless of the contractor's incurred cost.

Would you say that such an option is unpriced? If so, how does it fail to meet the criteria at FAR 17.207(f)(3)?

Don:

Your point about payment is a good one. But the statute does not define CPPC, it only prohibits the cost-plus-percentage-of-cost "system." I wonder if the GAO would find that agreeing in advance to pay six percent of an as yet unknown cost does not violate the prohibition.

In light of dwgerard's explanation for why there is no estimated cost, it makes even less sense to agree to a fee percentage in advance. It doesn't conflict with weighted guidelines because the fee is award fee, but it seems dubious to agree to pay a fee that will be a percentage of an unknown cost before you know what kind and extent of work will be done.

I have to believe that the Navy has considered these things and has covered itself. Perhaps they obtained an advance opinion from the GAO. In my opinion, agreeing to a fee percentage in advance of determination of the nature and extent of the work and stating that the fee amount will be a stipulated percentage of an as yet unknown cost are questionable practices.

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The reason the MSMO contracts do not have the price for future options listed in the contract is that the contractor is allowed to inspect a vessel before work begins and then negotiate the price of the work based on the condition of the ship.

There is enough variation in each vessel that even similar work packages can have a wide variance in price. If the Navy tried to pre-price the work, it would likely result in even higher costs as the vendor would have to assume each vessel was as poor as the worst in order to protect his company from losses.

In addition, the actual MSMO work packages are not identical for each vessel in the class of ships that the contract deals with. One ship in an earlier phase of construction may not have the same equipment of a vessel constructed later in time. During the MSMO phase, which maintains a previously constructed vessel, equipment that was added or changed during the construction phase is updated in earlier vessels so that each ship's capabilities are equalized.

Work packages that are considered upon the award of a MSMO contract also change based upon how much funding is allocated to the contract per vessel. That amount sometimes changes based on various environmental and management functions, and of course political factors count too.

All of these reasons are part of why the amounts are not listed. When I worked for NAVSEASYSCOM in Code 024 on MSMO contracts, we only listed the prices for CLINS where we already had the vessel work package finalized and the vendor had inspected the vessel and agreed to the pricing. The balance of CLINS were left blank until they too were finalized and agreed upon. SUPSHIP is the organization that negotiaed the CLIN prices after the contracts had been awarded as the ACO organization.

dwgerard,

When you awarded MSMO contracts, did you consider the options to be priced or unpriced?

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