Jump to content
The Wifcon Forums and Blogs

Recommended Posts

I think the acquisition in question is for some kind of support service. What follows is based on that assumption.

We all (should) know that a contract may be of any type or combination of types. The issue in this case seems to be the buyer's inability to forecast demand and the decision to pay for services performed at fixed and burdened hourly rates. It can be hard to establish "burdened" labor rates (unit prices) when demand is uncertain, because "burden" is generally allocated on the basis of expected demand. Burden includes fixed costs, variable costs, and semi-variable costs. The fixed and semi-variable costs are the problem.

If the parties underestimate demand, the contractor may overly absorb fixed and semi-variable costs, which become additional profit past the break-even point. If the parties overestimate demand, the contractor may not fully absorb those costs, and might make less profit or even lose money. If you are going to pay a contractor at fixed rates for hours worked, then the problem is the same whether you call the contract L-H or FFP-LOE.

In my experience, the government usually (but not always) underestimates demand for support services.

Link to comment
Share on other sites

  • Replies 59
  • Created
  • Last Reply

Top Posters In This Topic

1 hour ago, Vern Edwards said:

I think the acquisition in question is for some kind of support service. What follows is based on that assumption.

We all (should) know that a contract may be of any type or combination of types. The issue in this case seems to be the buyer's inability to forecast demand and the decision to pay for services performed at fixed and burdened hourly rates. It can be hard to establish "burdened" labor rates (unit prices) when demand is uncertain, because "burden" is generally allocated on the basis of expected demand. Burden includes fixed costs, variable costs, and semi-variable costs. The fixed and semi-variable costs are the problem.

If the parties underestimate demand, the contractor may overly absorb fixed and semi-variable costs, which become additional profit past the break-even point. If the parties overestimate demand, the contractor may not fully absorb those costs, and might make less profit or even lose money. If you are going to pay a contractor at fixed rates for hours worked, then the problem is the same whether you call the contract L-H or FFP-LOE.

In my experience, the government usually (but not always) underestimates demand for support services.

Can one incorporate a form of variation in estimated quantity term or clause in a unit priced (e.g., L-H) service contract, if variation in workload is anticipated? I’m thinking of something that would address the over and under risks you mentioned. 

Link to comment
Share on other sites

Thanks, Vern.  It reinforces my thinking that LOE is not appropriate here when the anticipated workload is variable. 

Link to comment
Share on other sites

36 minutes ago, Vern Edwards said:

They could write an "LOE" contract that includes an option for periodic incremental increases in the LOE. It wouldn't be a "traditional" LOE contract, but it might work.

But what about decreases?

My early experience using a form of LOE was back in the early 80’s where the Corps of Engineers’ Mobile District Procurement and Supply Office issued LOEs for x months of materials testing of concrete and soil densities, etc. on civil type construction programs. “Procurement and Supply” or “P&S” was the term for the Contracting Office back then. The demand for testing services was overestimated and we had to pay one contractor a huge balance at the end of the contract period.

Another testing lab voluntarily billed us only for the actual tests performed or labor hours (don’t remember which, as it was almost 40 years ago)  and offered to extend the period of services to use up the remaining balance on their contract. They were really great to work with. 

I remember my Resident Engineer and the Area Engineer were very angry with the P&S Office for issuing a level of effort type contract.

Edited by joel hoffman
Replaced “ only direct” with “early”
Link to comment
Share on other sites

28 minutes ago, joel hoffman said:

But what about decreases?

You could easily make provision for that. If the parties can think of and agree to a solution, they can implement it contractually.

None of this is hard, if the parties are willing to put their brains to it. Once you understand the core problem, uncertain demand, you can fashion a contractual solution.

It ain't rocket science.

Link to comment
Share on other sites

 

This is a type of usage-based contract, which is a thing I do.  I am writing this relatively lengthy example here, but will use it outside of Wifcon.  

Background

Contract is for a new call center.  Pricing is $1/call - or some FFP measure of actual usage.  We expect to get somewhere between 3,000 - 36,000 calls over a year, with point estimate of 12,000.  Call volume may fluctuate a lot from month to month.  The funding office is unwilling to obligate $12,000 (let alone $36,000), wait a year, and maybe get some back. You want to avoid this call: "Oh no, the ceiling will be hit in a few days, we missed that email, and we must get additional quantity immediately.  No, we don't yet have the funds, but please start exercising the option now, we promise we'll get you the money before the lights turn off."  

Plan for periodic reconciliation and modification of contract to account for uncertain usage/demand

Contract has a pre-planned agreed-to schedule of periodic bilat modifications, to account for actual usage and changes to expected future usage. Set up these periodic reviews like options, even though they aren't options.  So they have dates, and quantities, and the rest.  Otherwise, it gets confusing.  Start with low end of usage estimate, since its easier to increase quantity and $ over time.

Line Items

1) Licenses.  [Quantity 3,000] [Call]  [$1]  [$3,000 FFP]  This is enough licenses for 3,000 calls.  Covers low end of usage estimate.   Only obligates $3,000 at time of award.

2) Option 2nd Quarter.  Q 3,000 

3) Option 3rd Quarter.  Q 3,000 

4) Option 4th Quarter.  Q 3,000 

5) Option Reserve.  Q 24,000 

Optional line 2-4 are for additional quantity, and are planned to be 'exercised' quarterly.  These aren't options, but set up as-if they were.

Option line 5 is for an additional 24,000 calls, a sort of strategic reserve in event that demand is high, and so that the contract incl. options total value = $36,000.

Quarterly Reconciliation based on Usage

Each quarter, actual usage of current period and forecast usage next period are reconciled to produce a Net Quantity.   The Q on the 'option' for that quarter is changed from 3,000 to this Net Quantity, which may be more than or less than 3,000.  Then the option is 'exercised' via bilat mod.  Net Quantity calculated like this:    

  • Net Quantity = [3,000] - [Unused $ from prior quarter, which roll forward] + [forecast increase in demand over and above 3,000/period]
  • If Net Quantity > 3,000, then the excess quantity is deducted from CLIN 5 so total contract value does not exceed $36,000.
  • Net Quantity should not be less than zero, except at end of PoP maybe.

Annual Reconciliation

At end of the year long PoP, the government very likely will have paid for un-used services that will expire (if the call center is considered a severable service, and the funds are annual, and no trickery).   For example, the GVT paid for total of 13,500 calls, but on December 31, has only gotten 13,100.  So $400 over. If the contract has another PoP, the contractor 'credits' the GVT at the start of the next PoP (which is common, if not necessarily compliant with federal regs), so at the start of the new PoP the GVT pays $2,600 but gets 3,000.  Otherwise, deob.

 

 

 

Link to comment
Share on other sites

I’m going to have a talk with the PM, esp re contract types for the next gen IDIQ program. Industry seems to prefer FFP LOE. Other than this task order, which is a outlier, the rest have predictable hours 8 hours a day. The task orders lay out all the positions job description and duties, some of which are very technical. There’s also optional positions that can be exercised. So I think, FFP may be more appropriate, and have the invoice terms reflect invoicing based on actual hours using the negotiated FBLR from the IDIQ that’s discounted on the TO further. Like I surmised previously it comes down to the terms and how you tell them to invoice. A lot of what many of us do in the 1102 field is kind of maintain the status quo and repeat what others have done-even though it’s not actually right. 
 

I don’t think I agree with the PM’s view  that unless you get into gnarly details of duties  that “general terms” is represented by duties such as “take detailed notes in meetings, conduct analysis of x, monitor y etc.” 
 

“General terms” I would take to reflect no specificity of what you intend them to do. 

Link to comment
Share on other sites

This is through a IDIQ task order and as I had mentioned it’s being filled through a labor category that aligns with the requirement. We released a draft RFP and made revisions based on the feedback received. As I stated it’s not merely a call center position, as I used that descriptor to illustrate the sort of work that will be performed. Really, it doesn’t matter, as the question comes down to more of a philosophical question of how you want to interpret the FAR with respect to the unique circumstances of this requirement. The way I described it was “call center with lipstick.” There’s coordination responsibilities, some data work, etc. 

Link to comment
Share on other sites

55 minutes ago, DCDOD2020 said:

This is through a IDIQ task order and as I had mentioned it’s being filled through a labor category that aligns with the requirement. We released a draft RFP and made revisions based on the feedback received. As I stated it’s not merely a call center position, as I used that descriptor to illustrate the sort of work that will be performed. Really, it doesn’t matter, as the question comes down to more of a philosophical question of how you want to interpret the FAR with respect to the unique circumstances of this requirement. The way I described it was “call center with lipstick.” There’s coordination responsibilities, some data work, etc. 

Is it a Government call center staffed with contractor employees (or a mix of government/contractor employees)? Or is it a contractor call center?

Link to comment
Share on other sites

FAR Part 16 is not well-adapted to the kinds of contracts, especially service contracts, being awarded today. Agencies are jury-rigging pricing arrangements that suit their needs, call them what they will. But some of those arrangements are ill-devised, because people at the working level don't get the pricing education that they need.

It is fruitless to look in FAR Part 16 for solutions to all of today's contract pricing needs, and it is silly to insist that agencies squeeze their practical adaptations into Part 16's ancient "type" descriptions,  which have changed little since my first days in contracting, almost 50 years ago. Unfortunately, we will get no solutions from OFPP and the FAR councils.

What we need is a critical study of the pricing arrangements that agencies are actually using and a catalog of the modern pricing problems encountered in the field, developed by people who understand, which means people other than the go-to usual suspects (Rand).

FAR Part 16 needs a rethink (not a rewrite), and we need a policy brain trust of creative adapters and forward thinkers to take the point.

Link to comment
Share on other sites

Good idea. In the interim, let's change the last sentence in FAR 16.102(b) to say:

"Contract types not described in this regulation shall not be used, except as a deviation under subpart  1.4unless market research demonstrates a different contract type is consistent with customary commercial practice." 

Link to comment
Share on other sites

@Don Mansfield Think about this, from FAR 16.102(b), which consists of two sentences:

1. "Contracts negotiated under Part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 USC 2306(a) and 41 USC 3901)."

Then, in the very next sentence:

2. "Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4"

Now, is a combination of contract types itself a contract type?

If so, does the FAR describe every possible combination of contract types?

If not, does that mean that a contracting officer may not use any combination of contract type that is not already described in the FAR without a deviation?

If so, what combinations of contract types does the FAR describe?

Are there any combinations of contract types that we can use without a deviation?

 

Link to comment
Share on other sites

@Don Mansfield Here's something to think about---a quote from the Armed Services Procurement Regulation (ASPR) of 1974, the year I entered the contracting world. Citation: 32 CFR 3.401(b):

Quote

Pursuant to the authority of 10 U.S.C. 2306, a contract negotiated under this part may be of any type or combination of types described herein which will promote the best interests of the Government, subject to the restrictions described below. Types of contracts not described herein shall not be used, unless pursuant to a deviation under § 1.109 of this chapter.

Haven't we made progress!

Link to comment
Share on other sites

31 minutes ago, Vern Edwards said:

@Don Mansfield Think about this, from FAR 16.102(b), which consists of two sentences:

1. "Contracts negotiated under Part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 USC 2306(a) and 41 USC 3901)."

Then, in the very next sentence:

2. "Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4"

Now, is a combination of contract types itself a contract type?

If so, does the FAR describe every possible combination of contract types?

If not, does that mean that a contracting officer may not use any combination of contract type that is not already described in the FAR without a deviation?

If so, what combinations of contract types does the FAR describe?

Are there any combinations of contract types that we can use without a deviation?

 

Since the language isn't very clear, I would interpret it in a way that creates the least amount of work for the contracting officer. Old habit.

So, I would not interpret a combination of contract types as a distinct contract type. I think "combination" in this context means that some line items are one permissible contract type and other line items are another permissible contract type. I also think that "contract type" in this context is referring to cost or pricing arrangement. 

Link to comment
Share on other sites

15 minutes ago, Vern Edwards said:

@Don Mansfield Here's something to think about---a quote from the Armed Services Procurement Regulation (ASPR) of 1974, the year I entered the contracting world. Citation: 32 CFR 3.401(b):

Haven't we made progress!

Max Planck suggested that science progresses one funeral at a time. In other words, much faster than procurement policy.

Quote

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. -Max Planck

 

Link to comment
Share on other sites

Twenty years ago, I really thought the Courts had recognized that the FAR did not prescribe the universe of possible transactions between those acquiring goods/services and those providing them. Unfortunately my optimism was short-lived, as the Federal Circuit reversed. It would have been interesting to see how the rule-makers dealt with the situation, had the ASBCA decision been affirmed.

Link to comment
Share on other sites

2 hours ago, Don Mansfield said:

So, I would not interpret a combination of contract types as a distinct contract type. I think "combination" in this context means that some line items are one permissible contract type and other line items are another permissible contract type. I also think that "contract type" in this context is referring to cost or pricing arrangement.

My point was that the wording of FAR 16.102(b) is logically absurd.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

 Share


×
×
  • Create New...