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Scenario: CPFF Contract - Supplier has overrun. Supplier submitted the overrun which included fee. I know overruns are non-fee bearing...I have searched for 2 days and can not find the FAR Clause that states overruns are non-fee bearing...Can ANYONE lead me in the right direction?

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Do you want to ask your supplier to find the FAR clause that says fee is payable?

In an overrun, if the Government chooses to cover the overrun, it does so by changing the contract's estimated cost.  This is explained in the clause at FAR 52.232-20, Limitation of Cost, and 52.232-22, Limitation of Funds.  One of these is probably in your contract.  Neither clause provides for an adjustment in fee for an overrun.

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It depends what form of CPFF was used. FAR 16.306(d):

 

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Completion and term forms. A cost-plus-fixed-fee contract may take one of two basic forms-completion or term.

           (1) The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form of contract normally requires the contractor to complete and deliver the specified end product (e.g.,a final report of research accomplishing the goal or target) within the estimated cost, if possible, as a condition for payment of the entire fixed fee. However, in the event the work cannot be completed within the estimated cost, the Government may require more effort without increase in fee, provided the Government increases the estimated cost.

           (2) The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. Under this form, if the performance is considered satisfactory by the Government, the fixed fee is payable at the expiration of the agreed-upon period, upon contractor statement that the level of effort specified in the contract has been expended in performing the contract work. Renewal for further periods of performance is a new acquisition that involves new cost and fee arrangements.

 

 

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Don makes a good point.  The word "overrun" is not defined in the FAR, and will be used differently by different people.  If Dana's contract is term form, I would think of an overrun only as meaning the contractor is costing more than it anticipated for the promised level of effort -- in such a case, I might agree to increase the estimated cost but I would not agree to additional fee.  I would only agree to additional fee as part of an agreement for additional effort beyond the promised level of effort, and I probably wouldn't call that an overrun -- I would call that a new agreement with its own cost and fee arrangement.

6 hours ago, Dana said:

Supplier has overrun.

Dana, you didn't say that the supplier is going to overrun -- you declare that the overrun has already occurred.  Whether your contract is completion or term, you will want to be mindful of whether the contractor gave you the notice required by (1) para. (b) of the -20 clause or (2) either para. (c) or (d) of the -22 clause, depending on which clause is in your contract.  A timely and complete notice may be crucial in establishing whether the contractor is entitlement to any additional payment at all.

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Should we mention that if the prime pays the supplier the same fixed fee percentage on its overrun as that which was originally negotiated, then we have a wonderful cost-plus-percentage-of-cost contract that is an expressly illegal contract type?

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11 hours ago, Dana said:

I have searched for 2 days and can not find the FAR Clause that states overruns are non-fee bearing...Can ANYONE lead me in the right direction?

I am unable to understand whether you work for the Government or a prime contractor.  In either case, FAR 52.216-8 should be included in the contract (with parties suitably modified if you are the contractor). It provides that The Government shall pay the Contractor for performing this contract only the fixed fee specified in the Schedule. You may inform the other party to the contract that you have no basis to, and do not wish to negotiate and pay for any additional fee.

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On 9/16/2020 at 12:26 PM, Dana said:

I have searched for 2 days and can not find the FAR Clause that states overruns are non-fee bearing.

There is no such clause now.  However, in ancient times, the LOC clause did specifically state that fee would not be adjusted if the government added more funding to a contract to cover costs in excess of the estimated cost of the contract.  Over time, it appears that this became the accepted doctrine under the LOC clause.  However, at some point, the language on fee was removed from the LOC clause and everybody, including the boards of appeals and COFC continued to apply the no increase in fee rule.  

As for Don's post, FAR 16.306 is generally not a part of a contract.  If it is not included in a contract, it is not binding on the contractor, but good luck getting a contracting officer to agree to an adjustment under the LOC clause.

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19 hours ago, here_2_help said:

Should we mention that if the prime pays the supplier the same fixed fee percentage on its overrun as that which was originally negotiated, then we have a wonderful cost-plus-percentage-of-cost contract that is an expressly illegal contract type?

If the prime uses the same percentage to derive a fixed fee in a sum certain of dollars, no CPPC contract exists.  Further, while there is a contractual prohibition on the use of a CPPC subcontract (see FAR 52.244-2(g)), the statutory prohibition only applies at the prime contract level and is a prohibition on government conduct.

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3 hours ago, Retreadfed said:

If the prime uses the same percentage to derive a fixed fee in a sum certain of dollars, no CPPC contract exists.  Further, while there is a contractual prohibition on the use of a CPPC subcontract (see FAR 52.244-2(g)), the statutory prohibition only applies at the prime contract level and is a prohibition on government conduct.

I'm sorry for being slow. You acknowledge there is a contractual prohibition, right? What is your correcting point?

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4 hours ago, Retreadfed said:

There is no such clause now.  However, in ancient times, the LOC clause did specifically state that fee would not be adjusted if the government added more funding to a contract to cover costs in excess of the estimated cost of the contract.  Over time, it appears that this became the accepted doctrine under the LOC clause.  However, at some point, the language on fee was removed from the LOC clause and everybody, including the boards of appeals and COFC continued to apply the no increase in fee rule.  

As for Don's post, FAR 16.306 is generally not a part of a contract.  If it is not included in a contract, it is not binding on the contractor, but good luck getting a contracting officer to agree to an adjustment under the LOC clause.

FAR 16.306 doesn't need to be in the contract nor does the LOC clause need to state what is otherwise true. The contractor has no entitlement to increased fee if the Government decides to fund an overrun under a CPFF arrangement.

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10 hours ago, Don Mansfield said:

FAR 16.306 doesn't need to be in the contract nor does the LOC clause need to state what is otherwise true. The contractor has no entitlement to increased fee if the Government decides to fund an overrun under a CPFF arrangement.

Right.  The LOC clause provides for the solution, at the Government's discretion, to modify the contract to raise the estimated cost.  The clause is silent on fee because fee is not part of that solution.

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On 9/16/2020 at 7:42 PM, here_2_help said:

Should we mention that if the prime pays the supplier the same fixed fee percentage on its overrun as that which was originally negotiated, then we have a wonderful cost-plus-percentage-of-cost contract that is an expressly illegal contract type?

 I agree with you if the prime expects the government to pay the additional fee. 

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3 minutes ago, joel hoffman said:

I agree with you, if the prime expects the government to pay the additional fee. 

This is a situation illustrating why Congress passed the law prohibiting CPPC. 

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17 hours ago, here_2_help said:

I'm sorry for being slow. You acknowledge there is a contractual prohibition, right? What is your correcting point?

There is a contractual prohibition against a prime contractor entering into a CPPC contract.  However, 52.244-2(g) does not define what is a CPPC contract.  We have to look elsewhere for such a definition.  In this regard, lets take a simple example of what is and what is not a CPPC contract.  Contractor X awards a CPFF subcontract with an estimated cost of $1M.  In determining what would be an appropriate fixed fee, X determines that a 7% fee is acceptable and includes a fixed fee of $70K in the subcontract.  Later, X determines that the subcontractor is entitled to a $100K increase in the estimated cost of the subcontract.  At the same time, the adjustment entitles the subcontractor to an increase in the fixed fee.  X again determines that a 7% fee is appropriate and increases the fixed fee by $7K.  There is no CPPC in this case because the fee that the subcontractor will be paid is fixed and not subject to adjustment based on the costs incurred by the subcontractor.  On the other hand, if X had said that the fee the subcontractor would receive would be 7% of the actual cost incurred in performing the subcontract a CPPC subcontract would exist.

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36 minutes ago, Retreadfed said:

There is a contractual prohibition against a prime contractor entering into a CPPC contract.  However, 52.244-2(g) does not define what is a CPPC contract.  We have to look elsewhere for such a definition.  In this regard, lets take a simple example of what is and what is not a CPPC contract.  Contractor X awards a CPFF subcontract with an estimated cost of $1M.  In determining what would be an appropriate fixed fee, X determines that a 7% fee is acceptable and includes a fixed fee of $70K in the subcontract.  Later, X determines that the subcontractor is entitled to a $100K increase in the estimated cost of the subcontract.  At the same time, the adjustment entitles the subcontractor to an increase in the fixed fee.  X again determines that a 7% fee is appropriate and increases the fixed fee by $7K.  There is no CPPC in this case because the fee that the subcontractor will be paid is fixed and not subject to adjustment based on the costs incurred by the subcontractor.  On the other hand, if X had said that the fee the subcontractor would receive would be 7% of the actual cost incurred in performing the subcontract a CPPC subcontract would exist.

Okay. I'm no lawyer, but my understanding is that there are four elements to a CPPC arrangement.

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(1) payment is on a predetermined percentage rate; (2) the predetermined rate is applied to actual performance costs; (3) the contractor's entitlement is uncertain at the time of contracting; and (4) the contractor's entitlement increases directly with an increase in performance costs.

(KBR, ASBCA No. 58051, 2/12/2016)

Your hypothetical example may be a valid hair-split but, then again, maybe not so much. I'm thinking it's going to be hard for the prime to argue that the subcontractor's entitlement did not increase directly with the increase in costs of performance. If I were advising the prime in your hypothetical, I would recommend caution.

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29 minutes ago, here_2_help said:

(1) payment is on a predetermined percentage rate; (2) the predetermined rate is applied to actual performance costs; (3) the contractor's entitlement is uncertain at the time of contracting; and (4) the contractor's entitlement increases directly with an increase in performance costs.

None of these elements are present in my hypothetical.

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2 hours ago, Retreadfed said:

There is a contractual prohibition against a prime contractor entering into a CPPC contract.  However, 52.244-2(g) does not define what is a CPPC contract.  We have to look elsewhere for such a definition.  In this regard, lets take a simple example of what is and what is not a CPPC contract.  Contractor X awards a CPFF subcontract with an estimated cost of $1M.  In determining what would be an appropriate fixed fee, X determines that a 7% fee is acceptable and includes a fixed fee of $70K in the subcontract.  Later, X determines that the subcontractor is entitled to a $100K increase in the estimated cost of the subcontract.  At the same time, the adjustment entitles the subcontractor to an increase in the fixed fee.  X again determines that a 7% fee is appropriate and increases the fixed fee by $7K.  There is no CPPC in this case because the fee that the subcontractor will be paid is fixed and not subject to adjustment based on the costs incurred by the subcontractor.  On the other hand, if X had said that the fee the subcontractor would receive would be 7% of the actual cost incurred in performing the subcontract a CPPC subcontract would exist.

Disagree.  fixed fee means that it is $70k. If there is an underrun of costs the fee is $70k.  If there is an overrun with no change in requirement and the contractor authorizes the additional costs, the fee is still fixed at $70k. 

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4 hours ago, Retreadfed said:

Later, X determines that the subcontractor is entitled to a $100K increase in the estimated cost of the subcontract.  At the same time, the adjustment entitles the subcontractor to an increase in the fixed fee.

You may want to clarify what would entitle the contractor to the increase. For example, a change order.

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14 hours ago, Don Mansfield said:

You may want to clarify what would entitle the contractor to the increase. For example, a change order.

Yes, and I included the condition of an overrun with no change in the requirement. 

I can’t believe that the question of paying additional fee for a cost overrun is a debate. If one is a veteran contracting person, I would hope that they have access to any edition of Formation of Government Contracts.  Mine is the Third Edition by Cibinic and Nash.

Read Chapter 8, Section III , “Cost Reimbursement Contracts” for discussion of “overruns”.

________________________________
EDIT: Cibinic and Nash use the term consistently with its standard dictionary meaning, e.g., “ an instance of something exceeding an expected or allowed time or cost. “

A supplier overrun is NOT added  or changed work. Dana never mentioned a change to the requirement, just an “overrun”. 

__________________________

Read Chapter 8 Section III, “Cost Reimbursement Contracts” ,  A “Cost Plus Fixed Fee Contracts” for what “fixed fee“ means. If a prime contractor issues a CPFF  subcontract, it should follow the basic rules of the prime contract

Regarding a question of CPPC, see Section I Basic Policies, B “Cost Plus Percentage of Costs” for the discussion of the statutory prohibition: “A Cost Plus Percentage of Costs system of Contracting shall not be used” and for the explanation  of the prohibition. “Generally, any contractual arrangement where the contractor is assured of greater profits by incurring additional costs [for the unchanged requirement] will be held illegal”. 
____________________________
EDIT: perhaps Dana independently found an answer to her/his question. Unless Dana is viewing this thread as a visitor, Dana hasn’t logged in to view it since Wednesday. 

Edited by joel hoffman
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On 9/18/2020 at 6:00 PM, Don Mansfield said:

You may want to clarify what would entitle the contractor to the increase. For example, a change order.

You are correct.  I was making a point about CPPC contracting, not an overrun under 52.232-20.  In my example, consider the adjustment to have been made because the contractor was entitled to an equitable adjustment under a clause in the contract.

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22 hours ago, Retreadfed said:

You are correct.  I was making a point about CPPC contracting, not an overrun under 52.232-20.  In my example, consider the adjustment to have been made because the contractor was entitled to an equitable adjustment under a clause in the contract.

In that event, yes of course fee is part of an equitable adjustment and CPPC is not applicable.

Fixed fee doesn’t increase for an overrun or decrease for underruns, if there were no changes in the requirement or other compensable cause.

                   FINIS.
 

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As an aside, I think we need to be careful in how we refer to overruns under 52.232-20 and -22.  As some of you may have observed, many in the media, like the Washington Post and some of our elected elites in congress refer to cost growth in a contract where the increased costs are caused by government change orders or delays, as cost overruns.  Obviously, most contracting professionals don't consider those cost increases as cost overruns.  Therefore, I hope we do not inadvertently do something that would allow the uninformed to conflate a cost growth and a cost overrun.

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