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In a CPFF with options, will the Fee remain fixed in Option periods ? We are the prime on a DoD contract that has a subcontractor who submitted a base year proposal, and an option year proposal approximately 12 months ago. The contract and subcontract are CPFF.  There were some Scope changes from the customer that will require additional labor from our subcontractor, so an ECP came from the customer, and I sent an RFP to the subcontractor with the changes to incorporate into the option period.  The subcontractor doubled the Fee in this proposal, with no explanation in the proposal. Just to be clear, the proposal submitted from  this subcontractor 12 months ago had the Fixed Fee the same for both base year and Option period.   I don't see how adding 2.5 FTE in the Option period would merit enough risk to double the Fee.  The current value of the subcontract is 1.6M, and the option period was originally only 200K.  With the ECP, the Option Period proposal price from the subcontractor went from ~200K, to 950K.  The Labor hours appear appropriate, the rates are fair, but since Fee is always arbitrary to an extent, and in a CPFF if under 15%, it's fair game, has anyone else experienced or prepared or a negotiation when something like this happens?  

 

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Hmmm...  Adding 2.5 FTEs means an increase of ~$750K?  Really?

Anyway, has the subcontractor's risk increased?

And, are you sure the scope has changed?  An increase in cost or even a change in circumstances does not mean the contract scope has changed.

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For the original scope of the option, from the limited information here, there should be no change to the fee - if the  Nature of effort for the original scope hasn’t been changed.

For additional services, the cost and fee are negotiable.

Did the nature of the original scope change as part of the ECP?

$750k for 2 1/2 FTE at first glance, looks strange. makes me wonder what else changed with the ECP.

Similar to what ji asked, has the subcontractor’s risk (for  the original and/or the revised scope of the option) increased?

The details/impacts of the ECP on the original scope of the option are likely important. Also important are the Subcontract terms and conditions. 

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20 hours ago, general_correspondence said:

In a CPFF with options, will the Fee remain fixed in Option periods ?

I'm not going to get into the amount of the proposed changes, but focus on this question.  Here, you changed the work the contractor was to do.  As a result of this change, the contractor had to add additional personnel to the contract.  In pricing this change, the contractor proposed additional fee for an option period.  In your recitation of the facts, you seem to agree that the contractor is entitled to some additional fee.  Thus, it is unclear to me as to what you meant by this question in the context of the facts you have presented.  Can you clarify this question?

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10 minutes ago, Retreadfed said:

I'm not going to get into the amount of the proposed changes, but focus on this question.  Here, you changed the work the contractor was to do.  As a result of this change, the contractor had to add additional personnel to the contract.  In pricing this change, the contractor proposed additional fee for an option period.  In your recitation of the facts, you seem to agree that the contractor is entitled to some additional fee.  Thus, it is unclear to me as to what you meant by this question in the context of the facts you have presented.  Can you clarify this question?

Agree.

 

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53 minutes ago, Retreadfed said:

... Here, you changed the work the contractor was to do.  As a result of this change, the contractor had to add additional personnel to the contract.  In pricing this change, the contractor proposed additional fee for an option period.  In your recitation of the facts, you seem to agree that the contractor is entitled to some additional fee.  Thus, it is unclear to me as to what you meant by this question in the context of the facts you have presented.  Can you clarify this question?

Agree - but according to Nash and Cibinic in “Cost-Reimbursement Contracting”, In order for a prime contractor to recover additional fee for performing any additional work that is required by orders of the government, the contractor must establish that such work was not required by the original contract. The contractor (generally) isn’t entitled to additional fee for the work originally required by the contract. 

How the subcontract is written may make a difference. 

 

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On 8/30/2020 at 12:05 PM, general_correspondence said:

 I don't see how adding 2.5 FTE in the Option period would merit enough risk to double the Fee. 

I recommend you do fact finding with the subcontractor before you incorporate the proposed into the prime responsive proposal to the customer. In the event the subcontractor  is unable to adequately substantiate the rationale for proposed fee, you may wish to consider proposing to the subcontractor that the option period be a cost plus Incentive fee contract type with an incentive on fee. One such structure would be the proposed fee would be earned when the target cost for the option period is underrun by the $ amount of the negotiated fee that exceeds the previous base fee $ amount. Thus, it would tend to not cost the prime any more cost plus fee that it would have paid. Financial controls for this include requiring the subcontractor to separately track incurred costs (and perhaps funding) allocable to the option period from all other costs in the contract. This may cause the subcontractor to assess its proposed fee.    

Edited by Neil Roberts
change incurred to target and reduced to underrun
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Retread, what is it you need me to clarify about my question "does the Fee remains fixed?"

It's understood rates, escalation, and other factors effect costs on option years proposed, but if the subcontractor proposed fee the same in base and throughout, that's my question?  I've never seen it, and it would have to be rare, to see the Fee on a subcontractors proposal change in the Option years, keep in mind, this is engineering services CPFF, not a construction contract.

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48 minutes ago, general_correspondence said:

Retread, what is it you need me to clarify about my question "does the Fee remains fixed?"

It's understood rates, escalation, and other factors effect costs on option years proposed, but if the subcontractor proposed fee the same in base and throughout, that's my question?  I've never seen it, and it would have to be rare, to see the Fee on a subcontractors proposal change in the Option years, keep in mind, this is engineering services CPFF, not a construction contract.

1 ) Did you or the prime contract define what fixed fee means And it’s applicability, if any,  to changes in the subcontract?

2) You are negotiating this change with your subcontractor, correct? If so negotiate 

From the governments perspective, it should not have to pay more fee for work that the contractor and its sub are already required to perform and the fee charged by a prime or a sub must be fair and reasonable  

I believe that the statutory fee limit For cost plus fixed fee prime contract is still 10%. In addition to not re-pricing the originally required work not affected by the change, its a good yardstick for negotiating a limit with a CPFF sub. But the sub should be required to justify its fixed fee regardless .

 

 

Edited by joel hoffman
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On 9/1/2020 at 8:29 AM, general_correspondence said:

I am reading FAR 52.215-10, and if the subcontractor increases their Fee by 35% - with no explanation as of yet, they may be putting themselves and us in a bad situation?   thoughts?   I intend to fact find and negotiate, I have adequate time before I begin negotiations 

You said earlier that it doubled the fee. Now it is 35%? I am assuming that this is the same prime and subcontract as in another active thread on the Forum. Correct? 

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On ‎9‎/‎1‎/‎2020 at 9:29 AM, general_correspondence said:

I am reading FAR 52.215-10, and if the subcontractor increases their Fee by 35% - with no explanation as of yet, they may be putting themselves and us in a bad situation?

Why?  What is your rationale for this conclusion?  A 35% increase would mean, for example, that the subcontractor increased its fee from 6% to a little over 8%. 

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On ‎9‎/‎1‎/‎2020 at 8:26 AM, general_correspondence said:

Retread, what is it you need me to clarify about my question "does the Fee remains fixed?"

A fixed fee is stated in a specific dollar amount.  Thus, a contractor could be proposing a fixed fee of $100K for the base year of a contract that has an estimated cost of $1.5M.  For an option period, the fee proposed could be $100K with an estimated cost of $1M. 

On the other hand, you could be meaning that the subcontractor proposed a 7% fee for both the base period and option period, but the dollar amount of the fee would be different based on the estimated cost of each performance period.

Finally, you could have had something totally different in mind.

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I don’t think that you ever answered the basic question. The subcontractor’s option period work had a fixed fee. You said that due to some suggestions, the option was revised to add 2 1/2 more fte’s. Perhaps there were other revisions too. You haven’t clarified whether the sub now wants a higher % fee for ALL of its work or just the additional and any revised duties.   Please clarify WHAT Is 35% higher. The fee for the original work and new work? The fee for only the new work, etc.? You should not and don’t have to increase a fixed fee for work originally and still required. The bargain for the original work still to be performed should remain as is. The sub should  

als o justify why new or altered work should include a higher fixed fee rate.  

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I agree Joel.  The Sub had the option fee at X%, when they were required to submit option pricing a year ago. But then we had "ideas" that would upgrade their 'system" and the customer likes our idea.

Due to our suggestions that the customer accepted and agreed to fund, the Sub is asking for 35% more Fee than they originally proposed.  I like what Neil was writing about, Neil mentioned it a couple times, "there is not government order" that really kicks this action into gear.  From the government perspective and what the historical record will show is that the government increased funding on the contract, with no RFP, ECP, or change in SOW. When the Option is exercised here in a couple weeks, the government will simply increase the funding from what was originally proposed.  But to answer your questions:

1. sub now wants a higher % fee for ALL of its work or just the additional and any revised duties?  Answer: Our suggested changes in the upcoming Option period is the original work, but the work now consists of new software, tools, systems, than originally asked for.  it can be argued the complexity has increased as a result. 

2. Please clarify WHAT Is 35% higher: Answer:  overall, they simply want 35% more in the option period  from what they originally proposed. You interject a good argument we wouldn't increase fee for work originally required, I will have to look at that.   the Sub will be asked, and they will need to go point by point justifying the risk and complexity factors to merit the requested fee.  

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