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Subcontract Letter Definitization After Work is Performed


TNT1

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Hello All - 

I have come across a subcontract in which we are now negotiating with a supplier near the 180 mark after letter subcontract issuance. The catch - all of the work has been performed and we are now negotiating a price. In a new proposal (40% reduction in price than the original proposal 180 days ago), the supplier has submitted other than certified cost and pricing data based off their cost incurred in which they represent the costs to be actuals. They submitted their material, labor, travel, and ODC costs at cost + profit. Within the cost breakdown, they do not disclose profit. These costs were determined to be F&R but their travel and ODC costs were not evaluated. 

Even though the contract will be definitized as FFP - it certainly doesn't function like a FFP contract. This is a convoluted situation so I appreciate anyone bold enough to take a stab at it. 

1.) Is this a cost plus percentage of cost contract? 

2.) Is the expectation that travel, ODC, and profit all need to be determined to be F&R? 

 

thanks, 

 

TNT

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TNT, Please clarify- are you with the prime or the government?

I don’t understand the extent of the “cost breakdown”. Is it lump sum labor “cost plus profit”, lump sum material “cost plus profit”. That’s not really a “cost breakdown”. Thanks. 

If there is no pre-determined profit percentage based upon actual costs, this doesn’t appear to be a CPPC arrangement. See, for example https://www.mossadams.com/articles/2016/august/how-to-spot-illegal-cppc-contracts .

Due to the fact that performance is over and the costs should be known,  the risk to the subcontractor is considerably lower than had the FFP been negotiated prior to or early in performance. Thus, you should be able to see what the costs are reported to be and what profit rates have been applied. If you need to use cost analysis to determine reasonableness, then one should see both the actual represented cost and the profit markup. 

You say that “these costs”(what “costs” ?) are fair and reasonable. Is this based upon a using price analysis?

You did note that the current proposal is 40% lower than the initial proposal.

Travel and ODC’s should be determined to be reasonable, but recognizing that they should be represented as “they are what they are.”

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Does the prime contract specify conditions for allowability of travel or any other costs? If so, then you should evaluate those costs for allowability and reasonableness.  

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Aren't you supposed to definitive before reaching 50% of the NTE, or something like that?  When you wait so long to definitive, you may have to simply recognize actuals and pay them.  The overall contract price has to be reasonable.  When negotiating a contract price with several cost elements, it is not necessary to come to agreement on every element of cost.

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10 minutes ago, ji20874 said:

Aren't you supposed to definitive before reaching 50% of the NTE, or something like that?  When you wait so long to definitive, you may have to simply recognize actuals and pay them.  The overall contract price has to be reasonable.  When negotiating a contract price with several cost elements, it is not necessary to come to agreement on every element of cost.

It’s not clear here to me whether the negotiator can recognize how much the costs that are claimed to be “actuals” are, since the inclusive profit amount is apparently undefinable. 

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Joel -

Appreciate the input. This scenario is from the prime contractor perspective. The cost breakdown is the supplier essentially saying, here are all our hours, you figure out the rest. So as the price/cost individual figures out how to attempt some kind of analysis to determine F&R pricing, some of us are left wondering how we can't get our supplier to give us the data we need to make an adequate analysis.

I agree that the contractor's risk is low based on the work being completed, and I suppose the Gov't would expect that the profit the subcontractor applied to their actual costs is indicative of that risk. W

If the negotiator was someone who knew what they were doing, would the expectation be that they convince the supplier that they need to have a comprehensive cost breakdown that includes material, labor, travel, ODC, and profit applied to each of those categories? Couldn't the supplier in this case say, well its FFP so shove it?

 

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TNT, I was referring to the subcontractor’s risk not the prime’s.

I don’t know the terms of your letter contract or how it describes how to settle a price for the work. I’m assuming that it provides for negotiating a fair and reasonable price. I doubt that it provided for the sub to perform the work then issue an all or nothing proposal. If the after the fact proposal is represented as actual cost plus some profit, then the supplier needs to identify the actual costs and the basis for them within that proposal. What’s left is then the supposed profit.

It’s pretty late here. I need to go to sleep. catch you tomorrow. 

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TNT, I too think that the government would expect that the profit the subcontractor applied to their actual costs is indicative of that reduced risk. 

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13 hours ago, TNT1 said:

Hello All - 

I have come across a subcontract in which we are now negotiating with a supplier near the 180 mark after letter subcontract issuance. The catch - all of the work has been performed and we are now negotiating a price. In a new proposal (40% reduction in price than the original proposal 180 days ago), the supplier has submitted other than certified cost and pricing data based off their cost incurred in which they represent the costs to be actuals. They submitted their material, labor, travel, and ODC costs at cost + profit. Within the cost breakdown, they do not disclose profit. These costs were determined to be F&R but their travel and ODC costs were not evaluated. 

Even though the contract will be definitized as FFP - it certainly doesn't function like a FFP contract. This is a convoluted situation so I appreciate anyone bold enough to take a stab at it. 

1.) Is this a cost plus percentage of cost contract? 

2.) Is the expectation that travel, ODC, and profit all need to be determined to be F&R? 

 

thanks, 

 

TNT

TNT1,

The subcontract has already been awarded (via letter) based on the initial proposal. Now you are definitizing. You say that the supplier has submitted a definitization proposal that is 40% lower than the initial award value, which I assume was found to be F&R at that time. That certainly does not sound like a CPPC contract to me.

You don't tell us what the dollar value is but, since certified CoP data is not being provided, I assume it's less than $2 million.

I assume you are performing some type of cost analysis, given the lack of competition. I further assume you need a profit breakout in order to evaluate that component of the price. Make the supplier provide the cost information separately from the profit factor. And, as with all cost analyses, you need to evaluate each component of cost separately for reasonableness.

The supplier is going to tell you that they don't need to disclose profit information in a FFP contract. And to some extent, that's true! If the original price was determined to be F&R based on competition, they have a valid point. But the counter-point is that since the definitization proposal is being evaluated without the benefit of competition, a full cost analysis must be performed, including an evaluation of profit. Without disclosure of profit, you can reasonably tell the supplier that the definitization proposal is inadequate and send it back for a do-over.

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19 hours ago, TNT1 said:

I have come across a subcontract in which we are now negotiating with a supplier near the 180 mark after letter subcontract issuance.

Has any amount been paid and as Joel Hoffman indicated, was there any letter subcontract language regarding negotiation of a definitized contract (or not) and/or 180 days?

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18 hours ago, TNT1 said:

1.) Is this a cost plus percentage of cost contract? 

2.) Is the expectation that travel, ODC, and profit all need to be determined to be F&R? 

Not quite on point and spinning off of other comments already made, my thoughts....

Definitizing a letter contract by my experience is typically considered to be a modification to the letter contract.   This thought relates to @here_2_helpcomments. 

With regard to the prime contract under which the letter contract was issued as a subcontract consider.....

FAR 44.201-1(b); and

FAR 52.244-2, Subcontracts, that I believe flows down to subcontracts.

 

 

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This is a simple problem of negotiating a price for an undefinitized FFP contractual agreement that is now physically complete. The supplier understandably wants to recover its costs of performance and a profit.  Unless there is something that TNT1 has not told us, the supplier is entitled to a fair and reasonable price. The bottom line is that unless there is something he hasn't old us, the prime will probably have to pay the supplier its reasonable costs of performance, as described in FAR Subpart 31.2, and a reasonable profit as described in FAR 15.404-4. The government will then have to compensate the prime.

In the opening post TNR1 asked:

On 6/29/2021 at 12:40 AM, TNT1 said:

1.) Is this a cost plus percentage of cost contract? 

2.) Is the expectation that travel, ODC, and profit all need to be determined to be F&R? 

The answer to the first question is: No.

The answer to the second question is: Yes.

TNT1 subsequently asked:

On 6/29/2021 at 4:43 AM, TNT1 said:

If the negotiator was someone who knew what they were doing, would the expectation be that they convince the supplier that they need to have a comprehensive cost breakdown that includes material, labor, travel, ODC, and profit applied to each of those categories? Couldn't the supplier in this case say, well its FFP so shove it?

The answer to that is that the negotiator should tell the supplier that it will have to (1) submit documented evidence of the cost incurred in performance, (2) an explanation of why that cost is reasonable in terms of FAR 31.201-3, and (3) an explanation of why any proposed profit is reasonable in terms of FAR 15.404-4. Could the supplier say shove it? Yes, but then it wouldn't get the money it wants unless the prime is doling out charity.

Which means that TNT1 should sign out of Wifcon and educate himself by reading the FAR subsections cited above. He/she should then read the appropriate chapters of the DOD Contract Pricing Reference Guides, Vol. 4, Section 6.4, Definitizing Undefinitized Contract Actions.

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TNT1, since this is a beginners area question, I suggest you start with reading and understanding the contract between your company and the supplier with particular attention to the FAR and Agency clauses included therein, read and understand those as may relate to the situation and then proceed.

You should not wind up agreeing to any amount that exceeds the funded amount in the contract between your company and the supplier without getting internal approval.  You may find some language in the contract that permits your company to unilaterally determine a reasonable price due to a lack of agreed definitization in a timely manner. 

 

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45 minutes ago, Neil Roberts said:

TNT1, since this is a beginners area question, I suggest you start with reading and understanding the contract between your company and the supplier with particular attention to the FAR and Agency clauses included therein, read and understand those as may relate to the situation and then proceed.

You should not wind up agreeing to any amount that exceeds the funded amount in the contract between your company and the supplier without getting internal approval.  You may find some language in the contract that permits your company to unilaterally determine a reasonable price due to a lack of agreed definitization in a timely manner. 

 

Neil, I think that one of TNT’s concerns is about what the government reaction would be to a settlement that doesn’t breakout costs and profit and another is whether the travel and ODC’s are allowable and reasonable. Of course, this assumes that the government contract administration team has the knowledge, skills and abilities to to actively administer the contract. 

I also doubt that the government or the prime necessarily determined that the sub’s original proposed amount to be “fair and reasonable”, even if it was a rough order of magnitude (ROM) estimate. 

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56 minutes ago, joel hoffman said:

I also doubt that the government or the prime necessarily determined that the sub’s original proposed amount to be “fair and reasonable”, even if it was a rough order of magnitude (ROM) estimate. 

Interesting thought that reality would confirm but seems at odds with the FAR guiding principles for the government at least that a contract award is to be at fair and reasonable prices.  Seems it applies to a letter "contract".  As is the case here the concern sees to be whether modification to definititize is fair and reasonable.

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10 hours ago, C Culham said:

Interesting thought that reality would confirm but seems at odds with the FAR guiding principles for the government at least that a contract award is to be at fair and reasonable prices.  Seems it applies to a letter "contract".  As is the case here the concern sees to be whether modification to definititize is fair and reasonable.

Not all letter contract awards are based upon competition. I’ve seen some letter contracts awarded based upon Rough Order of Magnitude estimates because  of emergencies or other urgent and compelling circumstances, like fires, storm damage recovery or system failure. I haven’t been involved with supply or service type letter contracts. I think one was based upon contacting two or three contractors already working at an installation and seeing which one could start immediately.

Rough order of magnitude estimates are similarly and routinely used for change orders that can’t reasonably be definitized due to the need to avoid delay impacts.

Generally most of those situations preclude being able to evaluate or even obtain detailed proposals, especially for numerous trade subcontracts. That is the basis for my perspective.

 

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On 6/28/2021 at 8:40 PM, TNT1 said:

2.) Is the expectation that travel, ODC, and profit all need to be determined to be F&R? 

From my perspective, NO.  The bottom-line price has to be fair and reasonable, but it is not necessary that each individual cost element be found to be fair and reasonable.

See FAR 15.405(a):  "The purpose of performing cost or price analysis is to develop a negotiation position that permits the contracting officer and the offeror an opportunity to reach agreement on a fair and reasonable price. A fair and reasonable price does not require that agreement be reached on every element of cost..." (my emphasis)

See also (b):  "...the contracting officer should not become preoccupied with any single element and should balance the contract type, cost, and profit or fee negotiated to achieve a total result—a price that is fair and reasonable to both the Government and the contractor." (my emphasis)

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If I were a contractor, I’d request to be able to negotiate with ji. 

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I'm not a push-over in a price negotiation, but I get the job done honorably and with general satisfaction all the way around.  But tell me, Joel, did I quote the FAR accurately and appropriately within context?  If I did not, please let me know.

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7 hours ago, ji20874 said:

I'm not a push-over in a price negotiation, but I get the job done honorably and with general satisfaction all the way around.  But tell me, Joel, did I quote the FAR accurately and appropriately within context?  If I did not, please let me know.

Yes but not within the appropriate context. What you quoted relates to the negotiation step.

During the cost analysis evaluation process (context), the “expectation” is that each cost is allowable, allocable and reasonable. Same for profit allowance. My pre-negotiation objectives (expectations) would be consistent with the context of the evaluation process.

There may be some give and take during negotiations but my pre-negotiation objective (my expectation) wouldn’t be based upon “oh well, I can overlook certain costs or excessive profit as long as the bottom line is within…” 

For after the fact pricing, the proposal is supposed to reflect actuals. There is room to realize that you are dealing with a specific sub and it’s methods and resources versus theoretically most efficient or ideal performance. So you can take that into consideration regarding “reasonableness”.

But if a cost is expressly unallowable or not allocable or in excess of incurred costs (e.g., includes unincurred costs, contingencies or general estimates, as if the work hadn’t been performed), one should not overlook it during development of price objectives or negotiations. 

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The auto repair industry can routinely get away with charging book estimated labor hours after the fact, but one shouldn’t settle after the fact letter contracts that way.

It always irks me when I add up all the labor hours on my auto service bill and it only took 30-45 minutes from the time the mechanic drove it into the shop til it came out - washed even.

 

 

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One clarification. If a contractor’s  or sub’s proposal includes some incurred cost based upon pre-performance definitized FFP subcontracts, those subcontracts don’t necessarily have to reflect the actual costs incurred by those awarded subcontracts/ or lower tiered subcontracts…

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We're talking about the negotiations step.  The parties have to negotiate a fair and reasonable price to definitize the letter contract.  And they're negotiating a FFP definitization.  They are not approving items on a cost-reimbursement voucher or invoice.  So I think my input was properly within context.

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10 hours ago, ji20874 said:

We're talking about the negotiations step.  The parties have to negotiate a fair and reasonable price to definitize the letter contract.  And they're negotiating a FFP definitization.  They are not approving items on a cost-reimbursement voucher or invoice.  So I think my input was properly within context.

 

On 6/29/2021 at 3:47 PM, Vern Edwards said:

The answer to that is that the negotiator should tell the supplier that it will have to (1) submit documented evidence of the cost incurred in performance, (2) an explanation of why that cost is reasonable in terms of FAR 31.201-3, and (3) an explanation of why any proposed profit is reasonable in terms of FAR 15.404-4. Could the supplier say shove it? Yes, but then it wouldn't get the money it wants unless the prime is doling out charity.

Which means that TNT1 should sign out of Wifcon and educate himself by reading the FAR subsections cited above. He/she should then read the appropriate chapters of the DOD Contract Pricing Reference Guides, Vol. 4, Section 6.4, Definitizing Undefinitized Contract Actions

 

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