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Evaluating Fixed Fee in Cost Type Contracts


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I have a question for Contracting Officers who deal often with Cost Type R&D Contracts for non-civilian agencies.  If you happen to consider an R&D CPFF Term (LOE) contract and the prime contractor proposes 1000 hours of level of effort, performed 50/50 with a subcontractor (no limitation on pass through charges issues).  The prime proposes a 15% Fixed Fee  (lets say $10,000) calculated on total costs including subcontractor costs using the weighted guidelines calculation.   The Subcontractor is also CPFF Term and its cost plus an 8%  (lets say $7,000) fee is included in the base for prime's proposed fixed fee.  Questions:

1.  Since CPFF Term is basically a deconstructed T&M, do you establish separate LOE targets for Prime & Sub and separate Fixed Fees for Prime and Sub per the proposed amounts?  if not, do you establish one total LOE amount (1,000 hours) and one total Fixed Fee ($17,000).  You will then pay $17 per each hour of delivered LOE and let the Prime pay out the fixed fee to sub under their subcontract from its fixed fee received for the delivered LOE.  Is there a chance that Prime will then treat the sub's cost and fee as cost and charge it to you directly and then will also claim the $17 against LOE of 1,000 (double charging)?  

2. Do you think establishing separate LOE and Fixed Fee for Prime and Subs is a better way (in the way T&M allows separate rates for subs)?

3.What if they change a sub and the new sub is fixed price?

4. Do you consider the 15% fee that prime proposes against the statutory limit on fixed fees?15.404-4(c)(4)(i) - i.e. sub's cost and fee are treated as cost.  Or do you consider a combined fee of the prime and sub against the statutory limit?  

5. As a CO do you evaluate this proposal any different in terms of cost reasonableness compared to another prime, which proposes a Fixed Fee Per Hour for all LOE, lets say at $15 per hour and commits to pay all fees to its subs from that amount?

Now, what about the same situation in CPFF Completion contract ?  What about CPAF?  

Any suggestions or thought are appreciated.  

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6 minutes ago, Vern Edwards said:

Please explain that.  

What I mean is that CPFF Term is basically ordering hours in specific labor categories at cost plus indirects plus a fixed fee.  So to me it looks like a T&M contract but its less risky since you can see actual costs of labor and burdens etc and control costs a bit better this way.  

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1 hour ago, Tzarina of Compliance said:

Since CPFF Term is basically a deconstructed T&M, do you establish separate LOE targets for Prime & Sub and separate Fixed Fees for Prime and Sub per the proposed amounts?

No, unless there were unusual circumstances.

1 hour ago, Tzarina of Compliance said:

if not, do you establish one total LOE amount (1,000 hours) and one total Fixed Fee ($17,000).

Yes, usually.

1 hour ago, Tzarina of Compliance said:

You will then pay $17 per each hour of delivered LOE and let the Prime pay out the fixed fee to sub under their subcontract from its fixed fee received for the delivered LOE.  

No, I will not.

 

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10 minutes ago, Vern Edwards said:

No, basically, it's not. But if it were, that would not make it a "deconstructed" (whatever that means) T&M.

Why not?  Isn't it what CPFF Term doing is ordering specific level of effort to perform on best effort basis towards some kind scope?  How is T&M different other than it fixes the rates and is a lot more risk due to overcharging hours at fixed rates, substandard labor in specified categories etc.?   What I mean by de-constructed is that you are getting labor hours at cost plus fees, vs fixed priced hours.  

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1 minute ago, Tzarina of Compliance said:

Why not?

Several reasons. I'll give you one—the deals are fundamentally different.

A T&M contract does not specify a level of effort; it specifies a task to be completed, if possible, within a ceiling price, with payment at fixed hourly rates that include indirect costs and profit. The contractor is not obligated to deliver a specified number of hours, but inefficiency increases the contractor's profit.

A CPFF Level of Effort Term contract does not specify a task to be completed; it specifies a level of effort (usually, a number of labor hours) to be delivered within an estimated cost, if possible. The contractor is obligated to deliver that number of hours.

Just now, Tzarina of Compliance said:

No need to respond if you can not help.  

The contractor is reimbursed for its allowable incurred costs up to an estimated cost and is paid a fixed fee. Inefficiency does not increase the contractor's profit.

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1 minute ago, Vern Edwards said:

Several reasons. I'll give you one—the deals are fundamentally different.

A T&M contract does not specify a level of effort; it specifies a task to be completed, if possible, within a ceiling price, with payment at fixed hourly rates that include indirect costs and profit. The contractor is not obligated to deliver a specified number of hours, but inefficiency increases the contractor's profit.

A CPFF Level of Effort Term contract does not specify a task to be completed; it specifies a level of effort (usually, a number of labor hours) to be delivered within an estimated cost, if possible. The contractor is obligated to deliver that number of hours.

The contractor is reimbursed for its allowable incurred costs up to an estimated cost and is paid a fixed fee. Inefficiency does not increase the contractor's profit.

Thanks.  Good point on T&M, but most of my agency's T&M contracts do specify a ceiling on level of effort as well $$ ceiling with performance toward a task.  And CPFF Term contracts specify tasks to be performed within the ceiling level of effort and total estimated cost plus fixed fee.   I understand that under T&M the contractor gets paid regardless of how many hours it delivers against the total ordered hours and its profit is not reduced.    Under CPFF term this is obviously less risky.    What I am trying to understand is how you evaluate fixed fees etc. per my questions.

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3 minutes ago, Vern Edwards said:

I am helping you, by showing you that you apparently do not understand either CPFF Level of Effort Term contracts or T&M contracts.

No need to be grateful. Knowledge is its own reward.

I do understand the difference.  CPFF Term is a less risky proposition than T&M but both order labor in specific categories on hourly or daily basis - even though performance is defined differently.   Forgetting about this, since that is not a principal reason for the questions, my questions are specific to evaluation of fees in CPFF Term contracts.  V. Grateful for your input, but not your delivery tone - even though, earned as it may be.....    I do recognize your superior status as the Demi God of Govcon...   I am one of your students.   They say if you can not explain it simply you do not understand it well enough.  I am hoping for simple and understandable without judgement.   Many thanks as always.

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1 minute ago, Tzarina of Compliance said:

Good point on T&M, but most of my agency's T&M contracts do specify a ceiling on level of effort as well $$ ceiling with performance toward a task.

That's unorthodox.

1 minute ago, Tzarina of Compliance said:

And CPFF Term contracts specify tasks to be performed within the ceiling level of effort and total estimated cost plus fixed fee.  

A CPFF Level of Effort Term contract specifies tasks, but does not specify completion. It might, for instance, specify: Spend 1,000 hours observing and recording interactions between mature and juvenile bald eagles at the confluence of the Wind River and the Columbia River. That's task, but it has no natural end. The level of effort sets the scope of the undertaking.

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3 minutes ago, Tzarina of Compliance said:

CPFF Term is a less risky proposition than T&M but both order labor in specific categories on hourly or daily basis - even though performance is defined differently.  

Less risky for whom, buyer or seller?

There is no inherent requirement that a CPFF Level of Effort Term contract order specific labor categories. It might, but it also might not. T&M contracts, on the other hand, must specify labor categories and rates.

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1 minute ago, Vern Edwards said:

That's unorthodox.

A CPFF Level of Effort Term contract specifies tasks, but does not specify completion. It might, for instance, specify: Spend 1,000 hours observing and recording interactions between mature and juvenile bald eagles at the confluence of the Wind River and the Columbia River. That's task, but it has no natural end. The level of effort sets the scope of the undertaking.

Agree - its best effort and completion is not require per se, but the hours are intended towards a scope of work, which does not involve bald eagles, but lets say may involve trying to accomplish some kind of improvement in mortality efforts for infants in Africa.   The level of effort has a ceiling and once you get through all the hours the contract ends.    

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1 minute ago, Vern Edwards said:

Less risky for whom, buyer or seller?

There is no inherent requirement that a CPFF Level of Effort Term contract order specific labor categories. It might, but it also might not. T&M contracts, on the other hand, must specify labor categories and rates.

There is no completion under T&M either.  

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14 minutes ago, Tzarina of Compliance said:

There is no completion under T&M either.  

A standard T&M contract specifies a task to be completed, and requires the contractor to makes its best effort to complete that task within a ceiling price. If the contractor cannot do so it need not continue to perform unless the government increases the ceiling price.

A standard CPFF LOE Term specifies work it be done up to a level of effort, and requires the contractor to make its best effort to deliver that level of effort within an estimated cost.

They are not the same kind of deal.

Look, I'm happy to help, but in order to do that it's necessary to clear up misconceptions.

Ordinarily you would not establish a CLIN for a subcontractor task, with its own estimated cost and fee for the subcontractor, because there is no privity between the government and subcontractors. An exception might be made in a case in which part of the deal is to use Subcontractor X and only Subcontractor X to perform a specific task. Using anyone else would be a breach. Such an arrangement would essentially be a form of directed subcontracting.

But even then, setting a separate fee for a subcontractor is problematical, because there is a statutory limit on fees under cost-reimbursement contracts, and a subcontractor's fee is usually an element of the prime contractor's cost.

I'm not saying that you cannot do it, but it would be very unorthodox and, thus, potentially problematical. If you are going to do that, why not award a contract to the prospective subcontractor?

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2 minutes ago, Vern Edwards said:

A standard T&M contract specifies a task to be completed, and requires the contractor to makes its best effort to complete that task within a ceiling price. If the contractor cannot do so it need not continue to perform unless the government increases the ceiling price.

A standard CPFF LOE Term specifies work it be done up to a level of effort, and requires the contractor to make its best effort to deliver that level of effort within an estimated cost.

They are not the same deal.

Look, I'm happy to help, but in order to do that it's necessary to clear up misconceptions.

Ordinarily you would not establish a CLIN for a subcontractor task, with its own estimated cost and fee, because there is no privity between the government and subcontractors. An exception might be made in a case in which part of the deal is to use Subcontractor X and only Subcontractor X to perform a specific task. Setting a separate fee for a subcontractor is problematical, because there is a statutory limit on fees under cost-reimbursement contracts, and a subcontractor's fee is usually an element of the prime contractor's cost.

I'm not saying that you cannot do it, but it would be very unorthodox and, thus, potentially problematical. If you are going to do that, why not award a contract to the prospective subcontractor?

Thank you.  Thats is EXACTLY why I am asking this question.   So the statutory limit would apply to the prime's fee only if the subcontractor's total price (cost plus fee) is treated as a cost.  This makes sense to me from structural prospective.    Thank you as ever... 

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1 minute ago, Tzarina of Compliance said:

Thank you.  Thats is EXACTLY why I am asking this question.   So the statutory limit would apply to the prime's fee only if the subcontractor's total price (cost plus fee) is treated as a cost.  This makes sense to me from structural prospective.    Thank you as ever... 

 

7 minutes ago, Vern Edwards said:

A standard T&M contract specifies a task to be completed, and requires the contractor to makes its best effort to complete that task within a ceiling price. If the contractor cannot do so it need not continue to perform unless the government increases the ceiling price.

A standard CPFF LOE Term specifies work it be done up to a level of effort, and requires the contractor to make its best effort to deliver that level of effort within an estimated cost.

They are not the same deal.

Look, I'm happy to help, but in order to do that it's necessary to clear up misconceptions.

Ordinarily you would not establish a CLIN for a subcontractor task, with its own estimated cost and fee, because there is no privity between the government and subcontractors. An exception might be made in a case in which part of the deal is to use Subcontractor X and only Subcontractor X to perform a specific task. Setting a separate fee for a subcontractor is problematical, because there is a statutory limit on fees under cost-reimbursement contracts, and a subcontractor's fee is usually an element of the prime contractor's cost.

I'm not saying that you cannot do it, but it would be very unorthodox and, thus, potentially problematical. If you are going to do that, why not award a contract to the prospective subcontractor?

My agency's CPFF Term contracts specify a scope of work and then require the contractor to propose Level of Effort for the scope of work, even though no completion is presumably necessary since once you run out of LOE you stop working.   In that I see a lot of similarity to the same agency's T&M where the agency establishes the price ceiling and labor rates and often also often (ill advisedly) includes level of effort per labor rate/category and a scope of work to be performed.  Once again once the price  ceiling is reached the work stops or if the specified level of effort by category hours need to be exceeded but ceiling is not reached, then a labor category realignment is done.  I can see why you would think it is not how it is supposed to work, but here we are.   Also noted on CPFF not requiring specific labor categories, but it often requires professional labor LOE and professional/technical labor is defined. 

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12 hours ago, Tzarina of Compliance said:

So the statutory limit would apply to the prime's fee only if the subcontractor's total price (cost plus fee) is treated as a cost.

No. That is not what I said.

The statutory fee limitations apply to the prime's fee no matter what its costs include. They do not apply to contractor negotiations with subcontractors. But if you break out the subcontract as a separate CLIN in the prime contract, with its own estimated cost and fee, then the limitations would apply. But that's only one of the issues that would be raised by a separate CLIN for a subcontract.

 

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54 minutes ago, Vern Edwards said:

No. That is not what I said.

The statutory fee limitations apply to the prime's fee no matter what its costs include. They do not apply to contractor negotiations with subcontractors. But if you break out the subcontract as a separate CLIN in the prime contract, with its own estimated cost and fee, then the limitations would apply. But that's only one of the issues that would be raised by a separate CLIN for a subcontract.

 

Yes, that is what I understood although had not articulated as efficiently.  Thank you again for your generous help as always. 

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So to be clear what the calculation should look like is:

Prime Costs

+

Subcontractor Costs + Fixed Fee

=

Total Prime Costs

+

Fixed Fee at X% applicable to the Total Prime Costs, where X% can not exceed statutory limit

=

Total Estimated Cost Plus Fixed Fee

 

Under CPFF Term, the total ordered LOE would then include subcontractors' LOE and the prime would only be paid full fee is the total LOE is delivered?

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6 hours ago, Tzarina of Compliance said:

So to be clear what the calculation should look like is...

    Prime's total estimated cost (which includes the sub's estimated cost and fee) for the specified level of effort 

+ Prime's fee (limited to 15 percent of prime's total estimated cost)

= Total contract estimated cost and fee.

Keep in mind that the prime is obligated only to make its best effort to deliver the specified level of effort within the estimated cost, so see ji20874's FAR reference to fee payment if the prime is unable to deliver the total level of effort within the estimated cost and the government decides not to fund a cost overrun.

 

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  • 1 month later...
On 7/29/2021 at 3:22 PM, Vern Edwards said:

    Prime's total estimated cost (which includes the sub's estimated cost and fee) for the specified level of effort 

+ Prime's fee (limited to 15 percent of prime's total estimated cost)

= Total contract estimated cost and fee.

Keep in mind that the prime is obligated only to make its best effort to deliver the specified level of effort within the estimated cost, so see ji20874's FAR reference to fee payment if the prime is unable to deliver the total level of effort within the estimated cost and the government decides not to fund a cost overrun.

 

Thank you as ever!

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