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lamkenar

CPFF / LOE (fixed fee per labor hour) Question

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Unsure what topic to post this under so this seemed appropriate.  Sorry in advance for a long read.  Wanted to provide background information as it is not a common structure I have encountered.

CPFF / LOE - hours and skill mix is given, cannot deviate in evaluation

In execution the customer will convert the fixed fee into a fixed fee per labor hour

If you deliver less than the evaluation hours (which are dictated) your fee will be reduced proportionally to the % of hours delivered

As the customer has LPTA award tendencies, no informed bidder would bid conservatively

My question is how (within the bounds of what is funded) not viewed as a cost + % of cost incurred type of situation

If you got $100M ceiling for 100,000 hours per year within the bounds of what is funded industry is incentivized to be as inefficient as possible in managing their costs.

Additionally what REA avenues are available.  If for example the customer prevents you from being able to execute close to how it was evaluated?  Not allowing hiring of the lower end skillsets needed to achieve the financial objectives bid.

Thanks in advance!

Andrew

 

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If I understand correctly, the contractor will earn its fixed fee as it delivers hours. If it delivers the exact hours called for in the LOE, by skill mix (labor classification) then the contractor will earn exactly the fixed fee. If it delivers less hours or does not hit the skill mix exactly, then it might earn less than (but never more than) the fixed fee.

Is this a CPPC contract? No, because the fee does not vary based on costs incurred.

What REA avenues are available? The contractor has the right to submit an REA when it believes the contract has been changed, either through a bilateral agreement or through a unilateral action (e.g., delay/disruption). I don't think that changes based on contract type.

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Yes your understanding is correct.  It is just counterintuitive as within certain limits the contractor is incentivized not to be cost efficient and is incentivized to deliver as many hours as possible.  Not an expert, but thought this construct is counter to FAR / CAS principles. 

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1 hour ago, lamkenar said:

If you deliver less than the evaluation hours (which are dictated) your fee will be reduced proportionally to the % of hours delivered

I'm not familiar with seeing this in a typical term form cost reimbursement effort.  The hours represent in the first instance the GOVERNMENT'S obligation.  "If the Government fails to order the specified LOE, it is liable for breach of contract damages...."  Nash & Cibinic, "Estimates in Level of Effort Contracts:  Wrong Contract Type, Wrong Breach," 19 Nash & Cibinic Report ¶ 23 (May 2005).  For more information on this contract type, see FAR 16.306(d)(2).  Vern's article in 09-11 Briefing Papers (October 2009) and Professor Nash's article at 25 Nash & Cibinic Report ¶ 55 (November 2011) are both useful when considering a CPFF term form effort.

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48 minutes ago, lamkenar said:

Yes your understanding is correct.  It is just counterintuitive as within certain limits the contractor is incentivized not to be cost efficient and is incentivized to deliver as many hours as possible.  Not an expert, but thought this construct is counter to FAR / CAS principles. 

Neither FAR nor CAS prohibit this type of billing mechanism. In particular, CAS is concerned with cost accounting practices, not billing practices. To be clear, you will cost the contract the same way regardless of type -- i.e., direct labor is still direct labor and indirect labor is still indirect labor, regardless of contract type.

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3 hours ago, lamkenar said:

If you got $100M ceiling for 100,000 hours per year within the bounds of what is funded industry is incentivized to be as inefficient as possible in managing their costs.

Why do you think this in regard to a CPFF LOE contract?

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The math turns in to a fixed fee per labor hour construct.  The contractor earns more fee dollars with each hour the deliver.  Therefore there is no incentive for the contractor to manage costs efficiently.  i.e. to do the job for 95,000 hours vs. 100,000.  If they are prudent with the government's budget, they receive less fee and likewise if they are not prudent they get more fee dollars.

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46 minutes ago, lamkenar said:

The math turns in to a fixed fee per labor hour construct.  The contractor earns more fee dollars with each hour the deliver.  Therefore there is no incentive for the contractor to manage costs efficiently.  i.e. to do the job for 95,000 hours vs. 100,000.  If they are prudent with the government's budget, they receive less fee and likewise if they are not prudent they get more fee dollars.

Wouldn't delivering the hours at a lower cost increase the contractor's return on revenue?

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There are other mechanisms which incentivize cost control.  1. The contractor’s ability to control costs in the form of cost control in the annual CPARS assessment as well as their ability to satisfactorily complete the work; 2. If the contractor exceeds the estimated cost, the government has the right to T4C If it cannot fund the increased cost. 

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13 hours ago, Don Mansfield said:

Wouldn't delivering the hours at a lower cost increase the contractor's return on revenue?

Yes, you are correct.  If a contractor was able to deliver a lower cost per hour they could achieve a higher fee.  The likelihood of this happening is very low due to the LPTA tendencies the customer has in their award trends.

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1 hour ago, lamkenar said:

The likelihood of this happening is very low due to the LPTA tendencies the customer has in their award trends.

What has this got to do with a CPFF LOE contract?  Was this the basis upon which the contract was awarded?

When a CPFF LOE contract is awarded, the contractor is paid for the effort devoted to the contract, not the results achieved.  Generally, this is thought of as the government buying a specified number of hours to be devoted toward a particular issue.  If the contractor provides the required number of hours, it receives the fee, not profit, specified in the contract.  If it provides less hours, the contractor receives less fee.  If the contractor provides the specified hours at the estimated cost, it has lived up to its end of the bargain.  If the government wants to incentivize the contractor to control cost, it should not use a CPFF LOE contract.  Generally, the way a contractor would control costs under a CPFF LOE contract would be to use less labor, which would frustrate the purpose of the contract, or use less qualified, cheaper labor than what was proposed.  The government could look upon this latter as a bait and switch tactic. Finally, there is an overtone here that fee and profit are the same.  That is far from true.  Fee is merely an amount the contractor is paid in addition to its allowable cost of performing the contract.  Fee is used to cover costs, that are frequently legitimate business costs, but are unallowable under the FAR.

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20 hours ago, lamkenar said:

As the customer has LPTA award tendencies, no informed bidder would bid conservatively

 

2 hours ago, lamkenar said:

The likelihood of this happening is very low due to the LPTA tendencies the customer has in their award trends.

Any contracting officer that releases a solicitation where a cost reimbursement contract will be awarded on an LPTA basis should lose their warrant.

EDIT:  I found the quote I was looking for!  To quote Mr. Edwards:

Quote

 Anyone who uses LPTA to award a cost-reimbursement contract is an idiot or an ass, should lose any warrant they have, should have their head shaved and their buttons cut off in front of a mob, should have their shoes set on fire, and should never, ever be allowed within 1,000 miles of another government contracting office, which probably means that they'll have to leave the country. And if you need me to explain why, you are a danger to national security.

http://www.wifcon.com/discussion/index.php?/topic/103-economical-lpta/page/2/&tab=comments

 

Edited by Jacques

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2 hours ago, lamkenar said:

Yes, you are correct.  If a contractor was able to deliver a lower cost per hour they could achieve a higher fee.  The likelihood of this happening is very low due to the LPTA tendencies the customer has in their award trends.

The tension between high quality and lower price/higher margin sounds like pretty much every government contract competition I've ever been involved in.

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37 minutes ago, Jacques said:

 

Any contracting officer that releases a solicitation where a cost reimbursement contract will be awarded on an LPTA basis should lose their warrant.

EDIT:  I found the quote I was looking for!  To quote Mr. Edwards:

http://www.wifcon.com/discussion/index.php?/topic/103-economical-lpta/page/2/&tab=comments

 

Thanks for agreeing and the laugh!  I guess I wasn't expecting a solution here anyhow.  CPFF/LOE has been the bane of my existence lately.  As I have told others lately, "I'm equally impressed and frustrated with how the Navy has perfected the process to screw contractors out of their financial well being."  Apologies anybody in the Navy, I'm sure it is a specific group within that is wreaking havoc on my life :)

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1 hour ago, Retreadfed said:

Solution to what?

Was just hoping that there was some FAR principal this set up violated.  Or that dictating that all bidders must have the same evaluation labor mix and hours would be all kinds of grounds for REA downstream.  I'm supporting a recompete where the hours are nowhere near what is being performed today and the customer uses it so they can get 7 years of funding into a 5 year PoP.  The program is performing at something close to 3% effective fee to date because of this construct.

 

I am advising them that after award, they need to go to the customer and tell them we are getting ready to post 30 requisitions to support the hours they MADE us bid.  When they tell us there is no space for 30 people to sit in, I'm going to suggest a renegotiation.  I don't even think this one customer has any idea how their gaming of the solicitation is impacting the program's financial performance.  This is one of several ongoing bids / projects i'm supporting with this construct, it is just the extreme example.

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1 hour ago, Retreadfed said:

Are you with a contractor?  If so, have you thought of a bid protest against the terms of the solicitation?

Yeah that is a great idea, might advise some of my small business friends to do so out of principal.  My company isn't going to protest a bid this small (not enough juice for the squeeze with unallowable costs) and basically tick off an important customer (in their eyes not mine!)

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22 hours ago, lamkenar said:

and basically tick off an important customer (in their eyes not mine!)

Why do you think filing a protest would tick of the customer?  Are they that petty?

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On 3/14/2020 at 2:23 PM, Retreadfed said:

Why do you think filing a protest would tick of the customer?  Are they that petty?

From the contractor's point of view.  Objectively and legally contracting officers and evaluation boards should not have decisions that are made with any bias based on past experiences and protests.  We all know that human nature comes into play and cannot be seen or proven easily.

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I have represented several contractors in bid protests against the government and have been successful in many of those protests.  In each case where the contractor's protest was sustained, that contractor ultimately got the award with no unwelcome repercussions.

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