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Is anyone aware of any GAO decisions or case law where the Government deemed an Offeror's proposed profit unreasonable (too high) during a competitive negotiation? The outcome of the decision does not matter and it could be eliminating an offeror from the competitive range or not awarding to an offeoror for unreasonable profit.

Background

A FPI(F) contract where no cost realism will be performed and total evaluated price (TEP) is based on ceiling prices not target price. The concern is that an offeror could possibly propose profit as high as 25% and still come under the ceiling and this will not affect the offeror's TEP since ceiling is a % of target cost and the profit never comes into play. The RFP will include a language that the Government will evaluate the the reasonableness of the proposed price to include profit but the concern is there is no possible way the Government could argue the proposed profit is unreasonable.

I appreciate all feedback.

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50 minutes ago, Retreadfed said:

Have you read FAR 15.405?

   (d) If, however, the contractor insists on a price or demands a profit or fee that the contracting officer considers unreasonable, and the contracting officer has taken all authorized actions (including determining the feasibility of developing an alternative source) without success, the contracting officer shall refer the contract action to a level above the contracting officer. Disposition of the action should be documented

 

Thanks Retreadfed, but I am not sure how to execute 15.405 in a competitive environment, or more accurately how it will hold up in a protest.  In a sole-source environment all of 15.405 makes sense but lets say in a competitive environment the "contracting officer has taken all authorized action without success" and decides to eliminate this Offeror from the competitive range or does not award to the Offeror, how will this hold up in a protest?

I guess this is one of the disadvantages of not performing price realism, in our case there is a scenario for understated or hidden target cost where the lowest price offeror will have a low target cost, very high profit and the ceiling price will also be low because its based on the target cost. In this worst case scenario, the offeror will blow past the target cost but will have plenty of profit to cover the overrun and the Govt will end up paying more when compared to other offerors with a more realistic target cost and reasonable profit.

More specifically we are weighing two options, imposing a limit on profit, say 15%, versus stating in the RFP that we will evaluate profit for reasonableness based on comparison to other offerors. If we impose a limit then everyone will simply propose to that limit. There is a concern that there is no way to argue that a profit is unreasonable or at least we will not be able to eliminate anyone for unreasonable profit. The ceiling percentage as well as share ratios will also be called out in the solicitation and be the same for all offerors.

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1 hour ago, MAY-D-FAR-B-WIT-U said:

A FPI(F) contract where no cost realism will be performed and total evaluated price (TEP) is based on ceiling prices not target price. The concern is that an offeror could possibly propose profit as high as 25% and still come under the ceiling and this will not affect the offeror's TEP since ceiling is a % of target cost and the profit never comes into play.

Does the RFP dictate any of the parameters of the FPIF arrangement (e.g., share ratios, ceiling price as a percentage of target cost, etc.)?

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8 minutes ago, Don Mansfield said:

Does the RFP dictate any of the parameters of the FPIF arrangement (e.g., share ratios, ceiling price as a percentage of target cost, etc.)?

Don, yes it does. The share ratios, ceiling prices as a percentage of target cost are all dictated in the RFP. The ceiling price for some of the CLINs are as high as 130% leaving plenty of room for as much as 29% profit while still allowing offerors to propose below the ceiling.

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I am not seeing a problem with a potential of 25% profit on a FPIF contract, especially in a competitive acquisition.  You should not be analyzing profit anyway.  See FAR 15.404-4(c)(1).  The contracting officer's primary concern is the overall price (not the profit) the Government will actually pay.  See FAR 15.405(b).  

A FPIF contract has a price ceiling, but it does not have a profit ceiling.  See FAR 16.403-1(a).

So forget about potential maximum profit.  Take care in establishing the share ratios and the ceiling price, and then let competition be the invisible hand that makes it all work out.  If the winning contractor eventually gets 25% profit at the end of the contract, that is okay.  Right?

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3 minutes ago, MAY-D-FAR-B-WIT-U said:

Don, yes it does. The share ratios, ceiling prices as a percentage of target cost are all dictated in the RFP. The ceiling price for some of the CLINs are as high as 130% leaving plenty of room for as much as 29% profit while still allowing offerors to propose below the ceiling.

What is the overrun share ratio?

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10 minutes ago, MAY-D-FAR-B-WIT-U said:

The ceiling price for some of the CLINs are as high as 130% leaving plenty of room for as much as 29% profit while still allowing offerors to propose below the ceiling.

Does this mean the ceiling price is 130% of the target cost?  I am okay with that, if your market research supports it.  But supposing that that this leaves room for 29% profit suggests you may not be understanding FPIF correctly.  In your FPIF arrangement, the offeror should propose a target cost and a target profit (your RFP already establishes the share ratios and ceiling price).  Let's say, for the successful offeror, that the target cost is $100,000 and the target profit is $10,000.  If the actual cost is less than the target cost, then the formula will result in a higher profit return for the contractor.  If the actual cost is higher, then the formula will result in a lower profit return for the contractor, potentially even a zero profit or a loss.

So if the contractor performs successfully and its actual cost is less than the target cost, why should paying a higher profit, maybe even up to 25%, be a problem?  I am not seeing the problem, especially in a competitive environment where you should not be analyzing profit in the first place.

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42 minutes ago, MAY-D-FAR-B-WIT-U said:

...the contracting officer . . . decides to eliminate this Offeror from the competitive range or does not award to the Offeror, how will this hold up in a protest?

Be careful -- don't do this hastily -- I don't think you understand enough about FPIF to eliminate the offeror.  Why would you want to?  If this offeror provides the best price (target cost plus target profit) and is otherwise the best value offeror, what do you care about a profit rate?  I don't know all of your facts, only that an offeror is proposing a potential for 25% profit in a FPIF arrangement -- my advice is to look at the big picture and not overly focus on profit.  An eventual 25% profit for underrunning (but successfully performing) a competitively-awarded FPIF contract is not necessarily bad.

Help me understand -- are you talking about a target profit of 25% (before application of the formula), where the final profit might end up higher or lower at the end of contract performance depending on the contractor's actual costs, or are you talking about a potential of 25% profit at the end of contract performance (after application of the formula)?

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34 minutes ago, ji20874 said:

Be careful -- don't do this hastily -- I don't think you understand enough about FPIF to eliminate the offeror.  Why would you want to?  If this offeror provides the best price (target cost plus target profit) and is otherwise the best value offeror, what do you care about a profit rate?  I don't know all of your facts, only that an offeror is proposing a potential for 25% profit in a FPIF arrangement -- my advice is to look at the big picture and not overly focus on profit.  An eventual 25% profit for underrunning (but successfully performing) a competitively-awarded FPIF contract is not necessarily bad.

Help me understand -- are you talking about a target profit of 25% (before application of the formula), where the final profit might end up higher or lower at the end of contract performance depending on the contractor's actual costs, or are you talking about a potential of 25% profit at the end of contract performance (after application of the formula)?

ji20874,

Consider the following scenario, FPIF with 130% Ceiling and 70/30 unsplit share ratio. Total evaluated price (TEP) is based on ceiling price, the Govt's maximum liability not the target price. I apologize for omitting the math but the scenario is accurate mathematically.

Offeror A

Target Cost of $100, target profit of 15%. Offeror A TEP will be $130 since we are not evaluating at target price, we are evaluating at ceiling. A's actual cost comes in at $105, 5% overrun and Govt pays a total of $118.50 after applying the incentive geometry. Final profit is 13%

Offeror B

Target cost $95, target profit 20%, Offeror B TEP is $123.50 (ceiling price). Actual cost is $115, 21% overrun and the Govt pays $123.59 the ceiling price. Total price is $128.00 which exceeds the ceiling. final Profit is 11%

Offeror C

Target Cost $93, target profit 23%, Offeror C TEP is $120.90 (ceiling price). Actual is $120, 29% overrun, Govt pays $120.90 the ceiling. Final profit is 11%

 

In the scenario above the Govt awards to a contractor with the lowest ceiling (offeror (B ) but ends up paying more because the Offeror has plenty of profit to offset their portion of the overrun.

 

The two options I am weighing is establish a limit on profit but this will lead to everyone proposing to that limit OR go into discussions with an offeror whose profit is unreasonable based on comparison with other offerors. The more I structure my FPIF the more I feel like there is always a hole to be exploited in a FPIF contract.

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B-417984, B-186873, B-233029, B-238496, B-249497.

You're going to be disappointed. They don't say much other than that the agency thought profit was too high. Literally one or two sentences, at most. There is no detailed analysis or discussion beyond that. There have been no protests sustained on that basis. Waste of time.

On the other hand, there have been 142 protest decisions involving FPI contracts since 1981. I have no idea what they have been about.

No, I'm not going to send you a list. I'm too busy. Get your lawyer to download the list for you from LEXIS or Westlaw, then use the B-numbers to Google them.

And I agree with ji20874 that you should look at the target price (or ceiling price) and forget about the profit.

Fixed-price incentive contracts are the most studied of all contract types, and they have never, ever, been shown to work as advertised. They are needless complications. They are a public nuisance, and should be banned. If I were running a contracting shop today I would absolutely prohibit their use. If I were your boss and if the RFP were still on the street I would order you to amend it and change the pricing arrangement to firm-fixed-price or cost-plus-fixed-fee---anything but FPI.

And be glad you're not doing a price realism analysis. Price realism is a protest swamp. Price realism for FPI(F) is a grave.

 

 

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52 minutes ago, ji20874 said:

Be careful -- don't do this hastily -- I don't think you understand enough about FPIF to eliminate the offeror.  Why would you want to?  If this offeror provides the best price (target cost plus target profit) and is otherwise the best value offeror, what do you care about a profit rate?  I don't know all of your facts, only that an offeror is proposing a potential for 25% profit in a FPIF arrangement -- my advice is to look at the big picture and not overly focus on profit.  An eventual 25% profit for underrunning (but successfully performing) a competitively-awarded FPIF contract is not necessarily bad.

Help me understand -- are you talking about a target profit of 25% (before application of the formula), where the final profit might end up higher or lower at the end of contract performance depending on the contractor's actual costs, or are you talking about a potential of 25% profit at the end of contract performance (after application of the formula)?

"If this offeror provides the best price (target cost plus target profit) "

We are evaluating at the ceiling price to avoid hidden target cost and offerors gaming the FPIF geometry, this is best practice within DoD at least in the last 5 years or so.

An eventual 25% profit for underrunning (but successfully performing) a competitively-awarded FPIF contract is not necessarily bad.

Ji,

In an ideal situation yes but in this industry, they never underrun.

Help me understand -- are you talking about a target profit of 25% (before application of the formula)

Yes, proposed target profit not the actual final profit.

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4 minutes ago, Vern Edwards said:

B-417984, B-186873, B-233029, B-238496, B-249497.

You're going to be disappointed. They don't say much other than that the agency thought profit was too high. Literally one or two sentences, at most. There is no detailed analysis or discussion beyond that. There have been no protests sustained on that basis. Waste of time.

On the other hand, there have been 142 protest decisions involving FPI contracts since 1981. I have no idea what they have been about.

No, I'm not going to send you a list. I'm too busy. Get your lawyer to download the list for you from LEXIS or Westlaw, then use the B-number to Google them.

And I agree with ji20874 that you should look at the target price and forget about the profit. 

 

 

Thank you Vern.  Our attorney is digging and does not like the idea of deeming proposed profit unreasonable. Looking at target price also brings in the need for a price realism analysis which we are trying to avoid due to the high protest risk and I think Robert Antonio's 2003 article (The Fixed-Price Incentive Firm Target Contract:  Not As Firm As the Name Suggests) makes a good case as to why price realism is necessary when evaluating FPIF at target price. Our workaround or DoD is general is to evaluate at ceiling, the Govt's maximum liability but that creates one or two other problems.

I appreciate all the input, I am leaning towards dictating the the maximum profit in the RFP, run the WGL and use that as a reasonable profit and all offerors will likely propose that profit percentage.

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@MAY-D-FAR-B-WIT-UOne day, probably when the Four Horsemen of the Apocalypse show up on the horizon, you people in the field will learn to keep it simple. You're well-intentioned, but incorrigible complexity fanatics. A threat to national security.

Source selection is child's play until it's in the hands of the "professionals."

I'm serious.

Deadly serious.

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1 minute ago, Vern Edwards said:

@MAY-D-FAR-B-WIT-UOne day, probably when the Four Horsemen of the Apocalypse show up on the horizon, you people in the field will learn to keep it simple. You're well-intentioned, but incorrigible complexity fanatics. A threat to national security.

Source selection is child's play until it's in the hands of the "professionals."

I'm serious.

Deadly serious.

Thanks for the advice and a good laugh. Reminds me of my all time Vern Edwards post

"Anyone who uses LPTA to award a cost-reimbursement contract is an idiot or an ass, should lose any warrant they have, should have their head shaved and their buttons cut off in front of a mob, should have their shoes set on fire, and should never, ever be allowed within 1,000 miles of another government contracting office, which probably means that they'll have to leave the country. And if you need me to explain why, you are a danger to national security."

I have a poster in my cubicle with the Guinness guys saying "LPTA for CPFF, Brilliant"

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Anyone who uses low price (rather than tradeoff) to award FPIF contract might also be an ass.  If you set up an arrangement where offerors can game it, they just might.  Possible tradeoff factors:  your confidence in the offeror's understanding and approach, as well as your confidence in the offeror's pricing approach.  You can look at past performance in cost estimating and cost control.  

In your scenario looking only at ceiling price, you would award to offeror to offeror C ( not offeror B ).

  • A = target cost $10000 + target profit $1500 = target price $11500; ceiling = $13000
  • B = target cost $9500 + target profit $1900 = target price $11400; ceiling = $12400
  • C = target cost $9300 + target profit $2139 = target price $11439; ceiling = $12090

If all else among the offerors is the same, award to offeror C.  You have price reasonableness with adequate price competition.

Why do you think B's or C's proposed target profit figures are too high?  I cannot tell that they are.

Edited by ji20874
to correct math
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37 minutes ago, ji20874 said:

Anyone who uses low price (rather than tradeoff) to award FPIF contract might also be an ass.  If you set up an arrangement where offerors can game it, they just might.  Possible tradeoff factors:  your confidence in the offeror's understanding and approach, as well as your confidence in the offeror's pricing approach.  You can look at past performance in cost estimating and cost control.  

In your scenario looking only at ceiling price, you would award to offeror to offeror C ( not offeror B ).

  • A = target cost $10000 + target profit $1500 = target price $11500; ceiling = $13000
  • B = target cost $9500 + target profit $1900 = target price $11400; ceiling = $12400
  • C = target cost $9300 + target profit $2139 = target price $11439; ceiling = $11700

If all else among the offerors is the same, award to offeror C.  You have price reasonableness with adequate price competition.

Why do you think B's or C's proposed target profit figures are too high?  I cannot tell that they are.

Thanks Ji,

I meant C not B and your math is off on the ceiling price for C, 130% of $93 is $120.90. This will be a trade-off with non-price factors significantly more important than price but this is a ACAT I acquisition in an industry where for the most part they can all do the job and source selection often becomes a price shootout. We are doing all we can including those factors your mentioned to differentiate between offers and to make sure our source selection decision does not come down to price. Thanks again for your input.

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7 hours ago, ji20874 said:

Possible tradeoff factors:  your confidence in the offeror's understanding and approach, as well as your confidence in the offeror's pricing approach.

What follows is not a criticism of ji20874. It is a criticism of an idea.

Apparently, the idea is that offerors will describe their "approach" and the agency will draw inferences about their relative understanding based on what it reads those descriptions and then make understanding/price tradeoffs.

I wish the folks who evaluate "understanding" and "approach" would explain those terms in their solicitations.

What is "understanding" and how do you measure it? On what kind of scale? Is it a dichotomous or polytomous attribute?

Whose understanding is being evaluated? Can a company have a discernible "understanding" or do only particular persons in a company have an "understanding"? If a company, in what consciousness does it reside? If only particular persons, do you ask for the names of those persons? Must they be the authors of the "approach" description? Would it matter if the "approach" description were authored by or with the assistance of a consultant or team of consultants who won't actually work on the contract?

What is an "approach"? Is it a set of promises about what an offeror will do or refrain from doing, or is it contractually irrelevant? If a set of promises, does a lawyer check it for essential language of promise?

The idea of the paper "technical" proposal can be traced back to the Air Corps Act of 1926, 44 Stat. 780, Section 10, which authorized the conduct of design competitions for airplanes. That was a major departure from the otherwise required method of "formal advertising" (now called "sealed bidding").The design competition idea was never fully successful, and in the early 1960s the military, led by the Air Force, began conducting "management" competitions, instead. They instructed offerors to describe their "approach" to design and program management, because paper designs were not sufficiently reliable. You can judge from the histories of weapon system programs how effective management competitions have been.

When CICA opened the doors to widespread use of competitively negotiated procurements by all agencies, instead of sealed bidding, everyone looked to the military for how to conduct source selections, and now we see requirements for technical proposals and descriptions of "approaches," and evaluations of "understanding" in all kinds of procurements---a product of our cut-and-paste, bandwagon-chasing acquisition culture. (It's what we have instead of a critical thinking culture.)

All that source selection hoorah that takes so long and costs so much and prevents contracts from being awarded at "the speed of relevance." The important DOD JEDI procurement has been delayed for more than a year due to a protest of a "technical evaluation." Other procurements have actually taken longer than World War II to complete, from release of the solicitation to successful source selection.

Oh, well. Never mind. Our acquisition "leaders" and their followers don't know the history of their business and don't have a simplicity gene.

And so we solicit essay type proposals and make understanding/price tradeoffs, as if we know what we are doing and what we are paying for. 

 

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1 hour ago, Vern Edwards said:

What follows is not a criticism of ji20874. It is a criticism of an idea.

Apparently, the idea is that offerors will describe their "approach" and the agency will draw inferences about their relative understanding based on what it reads those descriptions and then make understanding/price tradeoffs.

I wish the folks who evaluate "understanding" and "approach" would explain those terms in their solicitations.

What is "understanding" and how do you measure it? On what kind of scale? Is it a dichotomous or polytomous attribute?

Whose understanding is being evaluated? Can a company have a discernible "understanding" or do only particular persons in a company have an "understanding"? If a company, in what consciousness does it reside? If only particular persons, do you ask for the names of those persons? Must they be the authors of the "approach" description? Would it matter if the "approach" description were authored by or with the assistance of a consultant or team of consultants who won't actually work on the contract?

What is an "approach"? Is it a set of promises about what an offeror will do or refrain from doing, or is it contractually irrelevant? If a set of promises, does a lawyer check it for essential language of promise?

The idea of the paper "technical" proposal can be traced back to the Air Corps Act of 1926, 44 Stat. 780, Section 10, which authorized the conduct of design competitions for airplanes. That was a major departure from the otherwise required method of "formal advertising" (now called "sealed bidding").The design competition idea was never fully successful, and in the early 1960s the military, led by the Air Force, began conducting "management" competitions, instead. They instructed offerors to describe their "approach" to design and program management, because paper designs were not sufficiently reliable. You can judge from the histories of weapon system programs how effective management competitions have been.

When CICA opened the doors to widespread use of competitively negotiated procurements by all agencies, instead of sealed bidding, everyone looked to the military for how to conduct source selections, and now we see requirements for technical proposals and descriptions of "approaches," and evaluations of "understanding" in all kinds of procurements---a product of our cut-and-paste, bandwagon-chasing acquisition culture. (It's what we have instead of a critical thinking culture.)

All that source selection hoorah that takes so long and costs so much and prevents contracts from being awarded at "the speed of relevance." The important DOD JEDI procurement has been delayed for more than a year due to a protest of a "technical evaluation." Other procurements have actually taken longer than World War II to complete, from release of the solicitation to successful source selection.

Oh, well. Never mind. Our acquisition "leaders" and their followers don't know the history of their business and don't have a simplicity gene.

And so we solicit essay type proposals and make understanding/price tradeoffs, as if we know what we are doing and what we are paying for. 

 

Vern,

What is your recommendation for source selection on these billion dollar weapon system contracts? I know on some older posts we have discussed how to speed up source selection and oral presentations comes to mind but I am not sure oral presentations answers the questions below

Whose understanding is being evaluated? Can a company have a discernible "understanding" or do only particular persons in a company have an "understanding"? If a company, in what consciousness does it reside? If only particular persons, do you ask for the names of those persons? Must they be the authors of the "approach" description? Would it matter if the "approach" description were authored by or with the assistance of a consultant or team of consultants who won't actually work on the contract?

What happens when the understanding rests with a particular persons and source selection decision is based on the individual's understanding and this person moves on from the company? Does this nullify the source selection decision?

Please share your other ideas and recommendation.

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Vern,

I agree with your disdain for essay writing contests -- but I didn't suggest such as approach.  I  just hope that the selection decision is not made on the basis of price alone.  Factors such as I suggested could be helpful, and can be done right.  For example, imagine an oral presentation with robust two-way dialogue where an offeror explains how it arrived at its price, the assumptions it made, and so forth -- the confidence the agency gains as a result of that dialogue could certainly be a valuable part of a tradeoff decision, and could help the original poster get away from a mechanistic approach to selecting the awardee.

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MDFBWU,

I did a multi-billion dollar source selection many years ago for a satellite system -- all the satellites, all the sensors on the satellites, all the ground stations, and all the data processing for an eighteen-year period of performance.  We had two offerors, both very big names.  We did a two-week oral presentation at each offeror's facility -- ten working days with evaluators from DoD, NASA, and Commerce.  And we allowed for multiple sessions at any given time.  As the contracting officer, I could only attend one session at any time, but I allowed other sessions to happen without me.  I issued a rules of engagement document to set the boundaries for all participants, government and contractor.  This was an oral presentation as part of the proposal submission process as contemplated by FAR 15.102, not a discussions session.

Think broadly.  Think strategically.  Understand your requirement, and then design an acquisition approach that fits.  Please don't use a cookie-cutter approach for an important acquisition.

If you are the contracting officer, let me recommend that you try to arrange for a private meeting with you and the source selection authority.  He or she can give you top cover for any good ideas you might have.  

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