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With a push to award more FFP contracts (versus T&M/LH/Cost types), what suggestions does anyone have to allocate the risks between the Gov. and the contractor? We all have situations where the contractor (heck, even the customer) scream for T&M and cite risk as their justification.

For example, I currently administer an IDIQ (single award) for training services. It is 100% T&M/LH. To allocate risk to both parties, I could have done FFP on the training portion and T&M for the travel. A hybrid would work in this situation.

Can we award a FFP and mitigate risk in areas other than contract type? I am searching for answers, but am coming up with very little. Most recent published work cite things like "study best practices" or "review internal policies" and give no definitive plans of action. This post relates to service and R&D efforts.

Here are some ideas I came up with:

Pricing databases for historical data (I have not seen one yet).

More use of reverse auctions (might be very hard for services).

More liberal use of IDIQ MACs.

I am hoping that the experience and knowledge here can give me a kick in the right direction. I understand that no one answer will fit every situation.

Thanks in advance.

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Guest Vern Edwards

Risk arises when some process might have different possible outcomes, dependent upon circumstances and conditions, one or more of which are harmful in some degree. Thus, for example, if work must be done outside and cannot be done when it's raining, and if money will be lost if completion is delayed by rain, then there is a risk that rain may happen that will delay completion of the work and cause the loss of money. What to do?

First, you can try to avoid the risk entirely. You might refuse to do the work. If you can't do that, then maybe the work can be moved to a location where it is highly unlikely to rain, or maybe you can build a shelter around the worksite to protect it from rain.

If you cannot avoid the risk entirely, maybe you can mitigate it (reduce it) in some way. Perhaps you can reduce the chance that it will rain by rescheduling the work to a less rainy season. Maybe you can lessen the harm that you will suffer if it does rain, perhaps by buying "rain insurance" Or maybe you can write a clause that requires the other party to compensate you for any loss due to rain-caused delay. Maybe you can do some combination of those things.

As you can see, avoidance and mitigation depend upon the nature of the work and the circumstances and conditions in which it must be done.

You have asked for suggestions about mitigating risk, but you have not told us the nature, extent, or sources of the risk. So it is not possible (for me) to answer you intelligently.

.

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With a push to award more FFP contracts (versus T&M/LH/Cost types), what suggestions does anyone have to allocate the risks between the Gov. and the contractor? We all have situations where the contractor (heck, even the customer) scream for T&M and cite risk as their justification.

FYI, DOD and other agencies are pushing back against the widespread use of T&M contracts because post award audits show that contractors are paying far less for labor than proposed and are earning profits far above that anticipated when the T&M rates are negotiated. Profits of 25% are not uncommon.

If "risk" in the form of uncertainty (i.e. one can't define exactly what one wants, how much one wants, or when one wants it) is too great, use a cost contract vice a FFP. Cost contracts are preferred over T&M or LH types.

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FYI, DOD and other agencies are pushing back against the widespread use of T&M contracts because post award audits show that contractors are paying far less for labor than proposed and are earning profits far above that anticipated when the T&M rates are negotiated. Profits of 25% are not uncommon.

Hi napolik,

I have not seen any reports or studies that show such large unanticipated contractor profits. Can you provide a link or a reference citation to any such, please?

Thanks

H2H

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Hi napolik,

I have not seen any reports or studies that show such large unanticipated contractor profits. Can you provide a link or a reference citation to any such, please?

Thanks

H2H

I have not seen it in writing. However, I have heard Shay Assad and his staff say this several times at 3 or 4 meetings during 2 DOD conferences. At one meeting, Assad said he was ready to ban use of T&M / LH types due to the large profits.

BTW, FPLOE contracts are beginning to receive the same scrutiny as T&M / LH contracts.

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Guest Vern Edwards

I don't want to be too technical, but risk and uncertainty are not the same thing. For a quick discussion of this go to http://knol.google.com/k/risk-and-uncertainty#. For a much deeper discussion, see Risk, Uncertainty and Profit, by Frank Knight, Chapter VII, "The Meaning of Risk and Uncertainty." You can read it online via http://hayekcenter.org/?p=678.

By the way, banning the use of T&M/LH contracts would be mismanagement. The right thing to do would be to teach the workforce when and how to use them properly and to make sure that they do, and to find out why the workforce has misused them and correct that problem. To ban their use is to admit that the workforce is not competent and that you do not know how to make it competent, which means that you should step aside or be replaced.

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I have not seen it in writing. However, I have heard Shay Assad and his staff say this several times at 3 or 4 meetings during 2 DOD conferences. At one meeting, Assad said he was ready to ban use of T&M / LH types due to the large profits.

BTW, FPLOE contracts are beginning to receive the same scrutiny as T&M / LH contracts.

Hi napolik,

Thanks for your response. My initial thought is that anybody can say anything, but it's nice to have some evidence to back up assertions. I say this to you and I would say it to Mr. Assad, if I ever met him. I know from first-hand experience that DCAA routinely questions costs that a Contracting Officer or ACO eventually determines to be fully allowable, and that DCAA routinely questions proposed costs that are eventually negotiated into a contract price. That's not to say that contractors are blameless--they are not--but in my view assertions based on nothing are worthless, and assertions based on DCAA audit findings aren't much better.

The DOD has remedies available to it under the Truth-in-Negotiations Act as well as the False Statements Act. Until I see contractor settlements related to false or misleading statements in their Bases of Estimates related to proposed T&M rates, or contractor settlements under TINA (or even the False Claims Act) related to defective cost or pricing data (or false claims), then I'm going to ignore what DCAA and DPAP have to say on this matter. I suggest others way want to consider doing the same.

Hope this helps

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Hi napolik,

Thanks for your response. My initial thought is that anybody can say anything, but it's nice to have some evidence to back up assertions. I say this to you and I would say it to Mr. Assad, if I ever met him. I know from first-hand experience that DCAA routinely questions costs that a Contracting Officer or ACO eventually determines to be fully allowable, and that DCAA routinely questions proposed costs that are eventually negotiated into a contract price. That's not to say that contractors are blameless--they are not--but in my view assertions based on nothing are worthless, and assertions based on DCAA audit findings aren't much better.

The DOD has remedies available to it under the Truth-in-Negotiations Act as well as the False Statements Act. Until I see contractor settlements related to false or misleading statements in their Bases of Estimates related to proposed T&M rates, or contractor settlements under TINA (or even the False Claims Act) related to defective cost or pricing data (or false claims), then I'm going to ignore what DCAA and DPAP have to say on this matter. I suggest others way want to consider doing the same.

Hope this helps

The problem appears to be that the contractors are cleverer than the contracting officers. The contractors submit commerical rates for commercial items, which the CO accepts. No C or P data are involved. Then, the contractors hire someone at a cost that enables them to earn a 25% profit.

I suppose a cost contract would elimate such a significant profit.

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Guest carl r culham

Vern's comment about banning in his most recent post is right on. "Teaching" the workforce includes the program side of the house that requests a TM/LH contract as they have no idea about the additional effort required to administer such a contract. This includes the resources they must provide in the way COTR's and most especially inspectors to provide proper contract administration. As a tool the TM/LH contract is a must to have available, folks just need to understand that administering the same requires significant effort on the part of the Federal agency.

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The problem appears to be that the contractors are cleverer than the contracting officers. The contractors submit commerical rates for commercial items, which the CO accepts. No C or P data are involved. Then, the contractors hire someone at a cost that enables them to earn a 25% profit.

I suppose a cost contract would elimate such a significant profit.

Now you are just speculating. Right? And if we're discussing "commercial items" and commercial services, then Cost-type contracts are prohibited, I believe. And if we are discussing commercial items, who cares what profit a contractor makes, since the market has already determined that the alleged excessive profit is fair & reasonable? By definition, commercial rates are fair and reasonable, regardless of what profit rate the provider makes.

And in any case, how would the government be harmed, since it can only pay for "all labor performed on the contract that meets the labor qualifications specified in the contract"? (See 52.212-4(i)(1)(i)(A).) If you're telling me that Mr. Assad is upset because commercial entities are making a profit in excess of what his defense contractors have been beaten down over time into accepting as "reasonable," and thus would like to eliminate use of T&M contracts altogether so that commercial entities no longer obtain a market-derived profit rate, then I don't know what to say. What ever happened to the idea of a free market?

Vern is right (as usual). The problem -- if there is a problem, and neither you nor Mr. Assad have provided any evidence to support that assertion -- has nothing to do with contractors making a profit on qualified services they provide to DOD. Nope. The problem lies elsewhere, right where Vern says it does.

H2H

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The problem -- if there is a problem, and neither you nor Mr. Assad have provided any evidence to support that assertion -- has nothing to do with contractors making a profit on qualified services they provide to DOD. Nope. The problem lies elsewhere, right where Vern says it does.

H2H

I report; you decide.

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I inherited a contract that had been modified from FFP into a hybrid FFP/T&M type of contract because the customer claimed they needed that control due to budget fluctuations.

In doing so, they claimed they would "cut costs" and ensure that budget constraints would be met. In reality, neither the customer nor the PM office were able to manage the contract properly. The contractor, who "reluctantly" agreed to the change from FFP to FFP/T&M, promptly added positions where it was short under the T&M CLINS, which the customer, PM and 1102 at that time did not catch.

The result? The costs went up under the T&M CLINS above what they would have been should they have remained FFP by about 20%. The problem is that invoice reviewers did not even know what they were reviewing, COR's did not know what the contract called for in the PWS, and when changes occured, they did not know enough to recognize them.

While I personally disagree with Mr. Assad about banning T&M, in this case it would not be a bad thing. The management abilities of the customer, PM, 1102 staff at that time and individual site representatives is not up to dealing with T&M and should be restricted to FFP.

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The problem appears to be that the contractors are cleverer than the contracting officers. The contractors submit commerical rates for commercial items, which the CO accepts. No C or P data are involved. Then, the contractors hire someone at a cost that enables them to earn a 25% profit.

I suppose a cost contract would elimate such a significant profit.

If the contract is for commercial services, what mechanism did the government use to determine that there was a 25% profit? Audit of actual costs of labor and indirect costs under such contracts is not allowed.

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The problem appears to be that the contractors are cleverer than the contracting officers. The contractors submit commerical rates for commercial items, which the CO accepts. No C or P data are involved. Then, the contractors hire someone at a cost that enables them to earn a 25% profit.

I suppose a cost contract would elimate such a significant profit.

If that's the case, the contracting officers aren't doing their job and either are lazy or dumb. It's easy to verify commercial rates and determine if they are good prices.

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Guest Vern Edwards
FYI, DOD and other agencies are pushing back against the widespread use of T&M contracts because post award audits show that contractors are paying far less for labor than proposed and are earning profits far above that anticipated when the T&M rates are negotiated. Profits of 25% are not uncommon.

The principal concern about T&M/LH contracts should not be that some contractors have earned 25 percent profit on each hour. The principal concern should be that those contracts motivate contractors to take more time than necessary to perform a task. Deliberate labor inefficiency, not realized profit per labor hour, should be the main cause of concern about T&M/LH contracts. But deliberate labor inefficiency is probably difficult to verify by audit if the work is not repetitive in nature, and I doubt that DCAA has proof of a pattern of deliberate inefficiency among T&M/LH contractors.

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Guest Vern Edwards
The DOD has remedies available to it under the Truth-in-Negotiations Act as well as the False Statements Act. Until I see contractor settlements related to false or misleading statements in their Bases of Estimates related to proposed T&M rates, or contractor settlements under TINA (or even the False Claims Act) related to defective cost or pricing data (or false claims), then I'm going to ignore what DCAA and DPAP have to say on this matter. I suggest others way want to consider doing the same.

The realization of 25 percent profit in a T&M/LH labor hour is not necessarily the result of defective pricing. false statements, or fraud. After award, the contractor may simply have found a person who has the qualifications to do the work and who will accept less money than the contractor thought it would have to pay. That's capitalism. That is not defective pricing or fraud. Moreover, there is nothing inherently wrong with 25 percent profit. It may lead DOD to conclude that it agreed to pay more than it should have, i.e., that it did not negotiated a good deal, but it is not a ripoff.

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The realization of 25 percent profit in a T&M/LH labor hour is not necessarily the result of defective pricing. false statements, or fraud. After award, the contractor may simply have found a person who has the qualifications to do the work and who will accept less money than the contractor thought it would have to pay. That's capitalism. That is not defective pricing or fraud. Moreover, there is nothing inherently wrong with 25 percent profit. It may lead DOD to conclude that it agreed to pay more than it should have, i.e., that it did not negotiated a good deal, but it is not a ripoff.

Vern, we agree. See my other posts.

My point was, if DPAP or DCMA or DCAA have any evidence that they are paying more than the contractor is entitled to receive, then they should publish it. Better yet, they should take the contractor to court. Otherwise, the contractor's actual profit is irrelevant to the decision as to use T&M types, or not. Which is a statement you have previously posted.

See--we agree!

H2H

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Guest Vern Edwards
Vern, we agree. See my other posts.

My point was, if DPAP or DCMA or DCAA have any evidence that they are paying more than the contractor is entitled to receive, then they should publish it. Better yet, they should take the contractor to court. Otherwise, the contractor's actual profit is irrelevant to the decision as to use T&M types, or not. Which is a statement you have previously posted.

See--we agree!

H2H

No. We don't agree. I think you've gone over the top. Here is what Napolik said:

FYI, DOD and other agencies are pushing back against the widespread use of T&M contracts because post award audits show that contractors are paying far less for labor than proposed and are earning profits far above that anticipated when the T&M rates are negotiated. Profits of 25% are not uncommon.

He did not say that either DPAP or DCAA said that contractors are being paid more than they are entitled to receive. He said that contractors are paying less for labor than [DOD] anticipated that they would and are making more profit. I read that as meaning that DOD thinks COs have made bad deals, not that contractors are doing anything for which they should be taken to court. I see no indication of any suspicion of wrong doing. Nor did I say that profit is irrelevant. I said that profits on labor hours are not the principal problem.

Chill. Cool your jets. Get a grip.

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This entire subject on cost reimbursable contracts, including T&M/LH contracts, risks, and profits goes full circle. The Administration, including OMB, wants to reduce their use because they provide little incentive for contractors to control costs.

On one hand, many agency program offices like their use because:

a) they don't have to write detailed statement of requirements

B) they don't have to do a lot of work coming up with detailed information on workload to help contractors understand and mitigate risks

c) they have more flexibility telling the contractor what to do/what to not do

d) contractors tend to provide everything they can to satisfy the agency within the dollar ceiling so that all the money gets spent

e) contractors don't cut corners trying to save money to maximize profits in a fixed price arrangement

Then some program people and CO's don't like fixed price contracts because:

a) they think the contractor will earn too much profit

B) they think contractors will do only what's minimally required

c) they anticipate claims for work outside the scope

Then there's the issue that fixed price contracts often are priced higher than LH/T&M.

It's a shame that we don't have more knowledgable, skilled, and trained CO's throughout the government so everyone can just let them do their job and strike the best business deals for the situation at hand.

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