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Costs of Extending Period of Production


solyvive

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Scenario: Buyer issued an RFP in support of their prime contract to the US Government, which would result in a 5-year, FFP competitively awarded, sole-source production contract. Despite Seller's inexperience with manufacturing and delivering this production previously, they submitted the bid and were subsequently awarded the contract. In addition to submitting a proposal, Seller invested several million dollars in capital equipment investment in order to prepare for the contract. Per the contract, all material is provided by Buyer to Seller based on the schedule provided in the proposal. After award, Seller experienced numerous schedule delays caused by several rework cycles in manufacturing. As a result, deliveries are running significantly behind schedule and profitability continues to dwindle. To compound the matter, the Buyer recently provided Seller notification of significant material delays. After evaluating the impact of these material delays, Seller asserted its right to an equitable adjustment in accordance with the contract terms and conditions. Based on the current schedule, the material delays would push several of the product deliveries into years beyond what Seller proposed. This results in a higher cost of production due to increases in labor rates and requirements to outsource operations that were previously proposed to be handled in-house. Seller's management has given the program team the directive to find a way to work with the customer to help recover the costs of extending the period of production as well as to recoup the costs of the numerous rework cycles.  

Request: I'd appreciate any input or guidance you may have as to (1) how poor-performance costs can be recovered through a request for equitable adjustment. (I don't think they can as this is the risk a contractor takes in accepting an FFP  contract) and (2) the best way to document delays caused by rework versus delays  caused by customer furnished material delays.

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Assuming that the “buyer” is the prime contractor and the government is the “customer” (is that correct?). Who is responsible for the material delays - the buyer or the customer? 

Your REA is with the buyer. 

We don’t know the terms of the subcontract,  but the government doesn’t appear to be responsible for cost/delay time or other impacts for re- work on a firm fixed-price contract due to poor/non-conforming performance.

It will be incumbent upon the part of the contractor (thus the sub)  to be able to segregate Delays and associated costs between re-work and any government caused delays, in a claim or request for equitable adjustment made to the government.

You might not be familiar with the prime contract clauses to determine what prime contract clause might be applicable to any price or time adjustment to the prime contract.

By the way, some government clauses don't provide for "equitable adjustments"; they might only provide for time and/or cost adjustments  

An "equitable adjustment" may include an adjustment for profit or fee.

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