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Hello, 

I'm a subcontract manager and I was recently moved to manage a supplier that has been on letter contract for nearly a year. During this time, they have been billing monthly their incurred cost but with no fee. Negotiations were finalized before I came onboard (T&Cs, cost, and fee structure) and the contract is ready to definitize.

My supplier expects that they are allowed to bill for fee on their incurred costs to date at the negotiated TARGET FEE and will continue to bill their efforts monthly at the TARGET FEE. If the cost targets are not achieved at the end of the POP, then the supplier owes us based on the adjustments of the fee formula.

However, the expectation at my company is that the supplier is only allowed to bill at the MIN FEE for their incurred costs while under letter contract and will continue to bill their efforts monthly at the MIN FEE. The fee formula adjustments are then made at the end of the POP.

I can't find anywhere in the FAR that clearly states the appropriate amount of fee to bill each month. Does anyone have any insight? Is this a topic that should have been negotiated?    

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20 hours ago, Biehb198 said:

Is this a topic that should have been negotiated?    

Yes.  If your contract includes the clause at FAR 52.216-10, Incentive Fee, see para. (c)(1) and (2) of that clause.

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21 hours ago, Biehb198 said:

I can't find anywhere in the FAR that clearly states the appropriate amount of fee to bill each month. Does anyone have any insight? Is this a topic that should have been negotiated?    

ji20874 gave you the correct clause citation. That clause, or one like it, should be in the subcontract. Assuming it is, then it clearly states that the target fee should be used--but that the target fee will be adjusted if the buyer (you) has reason to believe an overrun will happen. How would you know if an overrun is going to happen? Your subcontract should require the subcontractor to provide periodic reports (perhaps monthly) regarding current and projected financial status.

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On 9/21/2020 at 10:35 AM, Biehb198 said:

I can't find anywhere in the FAR that clearly states the appropriate amount of fee to bill each month.   

I assume the first place you looked was the contemplated definitized contract since FAR itself is generally not applicable to a contract unless incorporated into the contract. If 52.216-10 was not already incorporated into the contemplated definitized contract, I would do so and be inclined to review the entire contract before release as there may be other important clauses missing.  

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2 hours ago, here_2_help said:

ji20874 gave you the correct clause citation. That clause, or one like it, should be in the subcontract. Assuming it is, then it clearly states that the target fee should be used--but that the target fee will be adjusted if the buyer (you) has reason to believe an overrun will happen. How would you know if an overrun is going to happen? Your subcontract should require the subcontractor to provide periodic reports (perhaps monthly) regarding current and projected financial status.

Thank you! 52.216-10 was incorporated into the letter contract.  

The supplier has provided monthly cost performance reports which indicate that they are overrunning on 1 out of the 3 Contract Line Item Numbers (CLINs) to their target cost. However, at definitization, they will have the opportunity to re-baseline their cost. 

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1 hour ago, Biehb198 said:

However, at definitization, they will have the opportunity to re-baseline their cost. 

You have indicated in the initial post that the contract is "ready to definitize" and that "negotiations were finalized," so could you clarify what "opportunity to re-baseline" upon definitization means to you? It could affect the previous answers about the appropriate amount of fee billing you asked about in your initial post.

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2 hours ago, Biehb198 said:

Thank you! 52.216-10 was incorporated into the letter contract.  

The supplier has provided monthly cost performance reports which indicate that they are overrunning on 1 out of the 3 Contract Line Item Numbers (CLINs) to their target cost. However, at definitization, they will have the opportunity to re-baseline their cost. 

I trust you will also renegotiate the target fee at that time, based on such factors as reduced risks associated with incurred costs.

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Biehb, I don't understand why 52.216-10 was included as an operative clause in the letter contract because it requires agreed to target cost and target fee amounts to be operative. Those two items are usually what negotiations focus on to definitize and are usually undefinitized at the letter contract stage. Instead, in my mind, the letter contract should have included something like 52.216-26, Payments of Allowable Costs Before Definitization. 52.216-10 should be included in the definitized contract and the -26 clause not included. If there were actuals at the time of negotiation, that should have been disclosed until negotiations were considered complete and taken into account in establishing the agreed to target cost and target fee. I don't understand how there could be "overrun" during the letter contract stage because there is not normally a target to overrun. Even if there were, I assume "overrun" impact would have been taken into account during the establishment of agreed to target cost and target fee. Any overrun since then has no affect on target cost or target fee amounts that were previously negotiated. Perhaps the "overrun" reported was only relative to funding that was allocated to each line item.

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9 hours ago, Neil Roberts said:

Biehb, I don't understand why 52.216-10 was included as an operative clause in the letter contract because it requires agreed to target cost and target fee amounts to be operative. Those two items are usually what negotiations focus on to definitize and are usually undefinitized at the letter contract stage. Instead, in my mind, the letter contract should have included something like 52.216-26, Payments of Allowable Costs Before Definitization. 52.216-10 should be included in the definitized contract and the -26 clause not included. If there were actuals at the time of negotiation, that should have been disclosed until negotiations were considered complete and taken into account in establishing the agreed to target cost and target fee. I don't understand how there could be "overrun" during the letter contract stage because there is not normally a target to overrun. Even if there were, I assume "overrun" impact would have been taken into account during the establishment of agreed to target cost and target fee. Any overrun since then has no affect on target cost or target fee amounts that were previously negotiated. Perhaps the "overrun" reported was only relative to funding that was allocated to each line item.

Neil, I believe that the letter contract is for a subcontracted supplier. The Prime and supplier likely negotiated initial terms before the prime issued the letter contract. 

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2 hours ago, joel hoffman said:

Neil, I believe that the letter contract is for a subcontracted supplier. The Prime and supplier likely negotiated initial terms before the prime issued the letter contract. 

Joel, yes, the posted info says the letter contract is between a contractor and a supplier. I do not know what is likely but in my experience, it is inappropriate to issue a letter contract in your likely scenario.

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3 hours ago, Neil Roberts said:

Joel, yes, the posted info says the letter contract is between a contractor and a supplier. I do not know what is likely but in my experience, it is inappropriate to issue a letter contract in your likely scenario.

Neil, you know as well as I do that prime contractors often make choices that seem inappropriate to well-informed and experienced contract professionals. Add this one to the list.

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