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Controlling Cost on a CPFF/LOE contract

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Scenario: There is a CPFF/LOE contract that was awarded in the competitive environment. The period of performance is for 1 year. There are many subcontractors under the prime contractor. After X months, the prime contractor notifies the Government that it will not be able to deliver the specified LOE within the negotiated contract cost. The Government takes the position the prime contractor can?t deliver the specified hours due to cost growth. The prime contractor takes the position that the ?cost growth? was a result of the Government, after contract award, directing the prime contractor to allocate more LOE to more expensive subcontractors on their team than the LOE the prime contractor originally allocated in their cost proposal during negotiations.

1. What control mechanism are present in a Cost type LOE contract that prevents a contractor from staffing positions with individuals with rates that far exceed their original cost estimates?

2.If you assume that there was some direction from the Government, how does the Government account for the difference between cost growth and ?directed cost growth??

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1. There are no standard contractual control mechanisms which do that. The contractor should control its costs. The government should keep its eyes on the contractor.

2. Why does it matter? No matter whose fault it was, the government must either come up with additional funds to cover the costs in excess of the estimated costs, or the contractor gets to quit working.

By the way, "cost growth" refers to increases in costs due to increases in requirements. When the original requirement is unchanged, but costs more than estimated, you have a cost overrun.

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1. There are no standard contractual control mechanisms which do that. The contractor should control its costs. The government should keep its eyes on the contractor.

2. Why does it matter? No matter whose fault it was, the government must either come up with additional funds to cover the costs in excess of the estimated costs, or the contractor gets to quit working.

By the way, "cost growth" refers to increases in costs due to increases in requirements. When the original requirement is unchanged, but costs more than estimated, you have a cost overrun.

Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates.

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Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates.

Hi KMY,

Why did you decide to go with a CPFF contract type if the situation you describe has been a concern? How did you justify the use of a cost-reimbursement type of contract?

What was the thinking?

H2H

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Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates.

Well,you should have negotiated labor rate ceilings if that has been a problem for you in the past. Why didn't you do that? Sounds to me like somebody didn't know what they were doing.

The contractor must have had some reason for paying higher rates. What was the reason?

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Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates.

Who's minding the store there,'anyway? Are you managing the contract or WATCHING it?

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Who's minding the damned store there,'anyway? Are you managing the contract or WATCHING it?

If I wanted to do more than WATCH the contract and wanted to manage the damned store, which was the question of this post, what would you suggest? Labor rate ceilings have been suggested; however, how would you implement this, invoicing of a cost type contract is not at a loaded rate at the labor category level?

How do you manage the store on a cost type contract?

Vern ? thanks for correcting my misuse of cost growth.

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Ref ceiling rates. A good example of this was the now expired Millennia GWAC. Contract allowed all contract types and the Section B clearly stated that the proposed T&M rates would act as ceiling rates for any Cost Plus orders. The way it wound up getting implemented (and some folks disagreed with this) was that the average rate charged to a labor category could not exceed the ceiling rate. It was a moving average for the contract year so there were times that a vendor got a rate adjustment that was in their favor but were unable to bill all of it. It also prevented them from replacing a bunch of folks in the same labor category with higher paid folks because it would force the average rate up. Plus the ordering CO could also negotiate into the Task Order lower ceiling rates from those that were in the contract itself.

This disagreement on the implementation was that some folks wanted the ceiling to be applied to each individual rate, instead of a labor category average rate. Interpretation was asked for from the PCO and he said that contract intent was labor category level but an RFP could certainly specify individual rate level, but if TO was silent labor category level average applied.

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That's interesting, but what does it have to do with what we're talking about? I don't know that Millennia is a good example of anything, much less ceiling rates.

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Scenario: There is a CPFF/LOE contract that was awarded in the competitive environment. The period of performance is for 1 year. There are many subcontractors under the prime contractor. After X months, the prime contractor notifies the Government that it will not be able to deliver the specified LOE within the negotiated contract cost. The Government takes the position the prime contractor can?t deliver the specified hours due to cost growth. The prime contractor takes the position that the ?cost growth? was a result of the Government, after contract award, directing the prime contractor to allocate more LOE to more expensive subcontractors on their team than the LOE the prime contractor originally allocated in their cost proposal during negotiations.

1. What control mechanism are present in a Cost type LOE contract that prevents a contractor from staffing positions with individuals with rates that far exceed their original cost estimates?

2.If you assume that there was some direction from the Government, how does the Government account for the difference between cost growth and ?directed cost growth??

Cost-plus-fixed-fee (CPFF) Term Form contracts are probably the worst contract type for controlling cost overruns (maybe T&M is worse). For CPFF Term Form contracts, the contractor is required to put forth its best effort to meet the Government's requirement up to the estimated level-of-effort negotiated and stated in the contract. If the contractor's performance is satisfactory (not "if the work was completed"), then the contractor is due the full payment of fixed fee.

If you are looking to "account for differences" between certain cost overruns under a contract, I believe you should start with your COTR. What are the documentation requirements that the COTR must follow when issuing technical direction? Ask the COTR to provide that documentation and compare it to contractor-provided invoices/progress reports. Review the contractor's progress reports/invoices for instances when there was a change in costs not initiated by government direction or their proposal. Discuss any changes with the contractor. Perhaps there is other rationale for a change, such as unknown site conditions. If you can substantiate that a contractor did not provide their best effort to perform some amount of services under the contract, the CO can require corrective performance in accordance with the contract's acceptance clause.

Lastly, if you have a COTR that is issuing a significant amount of technical direction that is significantly affecting the contract scope or cost, reign them in! If it's not already required, ensure that you are copied on all technical direction correspondence. Make sure its always in writing. Instruct the contractor not to accept any technical direction that is not in writing (or at least followed-up in writing). Review all technical direction from the COTR and make sure they are not exceeding their authority such as instructing the contractor to do something outside the terms of the contract. Some agencies even have policy against directed subcontracting (though that may not apply to team subcontractors). Document your file with all your findings so that the next time this requirement is competed, the placement CO can consider the historical information and perhaps choose a different contract type.

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Cost-plus-fixed-fee (CPFF) Term Form contracts are probably the worst contract type for controlling cost overruns (maybe T&M is worse)... If the contractor's performance is satisfactory (not "if the work was completed"), then the contractor is due the full payment of fixed fee.

I disagree with both of those statements.

First, under a CPFF/LOE/Term for contract, the stipulation of a level of effort reduces the likelihood of cost overruns, because the contractor is not working toward completion, but only to deliver a stipulated number of hours. An overrun will occur primarily if (1) labor costs more than anticipated and/or (2) indirect costs are higher than anticipated. Quantity of labor is not a source of risk. The main source of risk is the direct labor rate. But labor rates are relatively easy to track and manage, and a competent CO will establish ceilings, so that the contractor will need the CO's approval in order to be compensated for the use of more expensive labor after award. Also, the CO should write a clause to the effect that costs incurred for hours in excess of the level of effort will be unallowable, unless personally approved in advance by the CO.

Second, any competent CO writing a CPFF/LOE/Term form contract will include a clause to the effect that if the contractor does not deliver the entire level of effort it will be entitled only to a percentage of the fixed fee that is commensurate with the percentage of the level of effort actually delivered.

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If I wanted to do more than WATCH the contract and wanted to manage the damned store, which was the question of this post, what would you suggest? Labor rate ceilings have been suggested; however, how would you implement this, invoicing of a cost type contract is not at a loaded rate at the labor category level?

How do you manage the store on a cost type contract?

Vern – thanks for correcting my misuse of cost growth.

"Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates."

Cost contracts for LOE should have some controls included and there should be some oversight capability within your QA or management organization. Do you have any government surveillance provisions in the contract and/or in your organization to provide any kind of assurance that the contractor is being efficient and that effective cost control measures are in place (FAR 16.301-3 (2))? Even though the contract may not include more formal cost controls, there are ways to determine how closely costs track against the proposed rates.

All payment invoices must identify the reimbursable costs, correct? You said that the invoices don't allow you to determine the individual salaries? Why can't you require enough detail to determine how well they track against the negotiated or proposed rates/salaries? You have the right to require a reasonable level of detail. Whoever is managing the contract should be able to tell very early on whether the actual costs are tracking against the proposed labor mix and rates. There shouldn't be big surprises down the road.

If the contractor proposed - especially if it proposed and the parties negotiated - the applicable labor mix and salaries, then significantly overruns those rates, you'd certainly want the contractor to justify its cost. Per FAR 31.201-2 and -3, there is no presumption of reasonableness are attached to the incurrence of costs by a contractor. The burden of proof is upon the contractor to establish that such costs, when they are way out of line with those negotiated or proposed, are reasonable and allowable. That would seem to be the least one could do.

I agree that labor rate ceilings or other forms of advance agreements are good ideas, especially if this is a recurring problem for your organization.

Just saw Vern's response above and agree that cost control provisions can and should be written into the contract. This situation appeared to be, from the initial post: 1) recurring 2) discovered well into contract performance and 3) you know what the cause of the cost overruns are and have been.

So, next time, you can add some specific language. But you still have the power to challenge - and you must do this as early as possible - the reasonableness of labor rates or salaries, especially if they were specifically identified in the proposal and even more importantly if they were negotiated.

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I disagree with both of those statements.

First, under a CPFF/LOE/Term for contract, the stipulation of a level of effort reduces the likelihood of cost overruns, because the contractor is not working toward completion, but only to deliver a stipulated number of hours. An overrun will occur primarily if (1) labor costs more than anticipated and/or (2) indirect costs are higher than anticipated. Quantity of labor is not a source of risk. The main source of risk is the direct labor rate. But labor rates are relatively easy to track and manage, and a competent CO will establish ceilings, so that the contractor will need the CO's approval in order to be compensated for the use of more expensive labor after award. Also, the CO should write a clause to the effect that costs incurred for hours in excess of the level of effort will be unallowable, unless personally approved in advance by the CO.

Second, any competent CO writing a CPFF/LOE/Term form contract will include a clause to the effect that if the contractor does not deliver the entire level of effort it will be entitled only to a percentage of the fixed fee that is commensurate with the percentage of the level of effort actually delivered.

If a contractor's goal is to obtain the maximum amount of fee, then under a CPFF Term Form contract can't the contractor can best achieve that by incurring the maximum amount of costs allowed under the contract? There's no incentive for the contractor to find efficiencies or find other ways to reduce costs. Cost control on these contracts relies almost solely on Government surveillance, which would seem to make it the most difficult to control. In DBH's case where the contract also allows for the flexibility of government personnel to direct contractor performance, that technical direction may alter the technical approach and/or labor mix used by the contractor from what they had originally proposed. I agree the contractor is bound to the LOE and labor rates stated in the contract, but without an incentive to reach the contract's objective or a final end product for the Government to accept, the burden is on the Government to surveil the contract to ensure costs are being incurred wisely.

Perhaps its better to say that the worst contract for controlling cost overruns is the contract that does not include the proper controls and incentives for monitoring costs, and is administered by personnel who don't understand how or care about controlling contract costs.

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If a contractor's goal is to obtain the maximum amount of fee, then under a CPFF Term Form contract can't the contractor can best achieve that by incurring the maximum amount of costs allowed under the contract?

I don't understand that statement. The fee is fixed. Under a properly written CPFF/LOE/Term form contract, the contractor will earn all of its fee only by delivering the entire level of effort. If the contractor consumes all of the estimated cost at 80 percent of the level of effort, and if the government does not fund the overrun, then the contractor will earn only 80 percent of the fee. It would not be able to improve its chances of earning all of the fee by "incurring the maximum amount of costs allowed under the contract."

As for efficiency, if you want to motivate the contractor to deliver the level of effort at less than the estimated cost, use a CPIF contract.

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If a contractor's goal is to obtain the maximum amount of fee, then under a CPFF Term Form contract can't the contractor can best achieve that by incurring the maximum amount of costs allowed under the contract? There's no incentive for the contractor to find efficiencies or find other ways to reduce costs. Cost control on these contracts relies almost solely on Government surveillance, which would seem to make it the most difficult to control. In DBH's case where the contract also allows for the flexibility of government personnel to direct contractor performance, that technical direction may alter the technical approach and/or labor mix used by the contractor from what they had originally proposed. I agree the contractor is bound to the LOE and labor rates stated in the contract, but without an incentive to reach the contract's objective or a final end product for the Government to accept, the burden is on the Government to surveil the contract to ensure costs are being incurred wisely.

Perhaps its better to say that the worst contract for controlling cost overruns is the contract that does not include the proper controls and incentives for monitoring costs, and is administered by personnel who don't understand how or care about controlling contract costs.

I apologize, since I am confused about the scenario(s) presented in this thread. We apparently have two different posters with two separate problems.

In one case, "DBH" said yesterday at 11:29 AM that "[t]he prime contractor takes the position that the “cost growth” was a result of the Government, after contract award, directing the prime contractor to allocate more LOE to more expensive subcontractors on their team than the LOE the prime contractor originally allocated in their cost proposal during negotiations."

"KMY" appears to be another person with a separate problem (Yesterday, 04:47 PM) : "Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates."

I was responding to "KMY". Then "DBH" replied to me. Are you the same person or two individuals with separate scenarios?

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I don't understand that statement. The fee is fixed. Under a properly written CPFF/LOE/Term form contract, the contractor will earn all of its fee only by delivering the entire level of effort. If the contractor consumes all of the estimated cost at 80 percent of the level of effort, and if the government does not fund the overrun, then the contractor will earn only 80 percent of the fee. It would not be able to improve its chances of earning all of the fee by "incurring the maximum amount of costs allowed under the contract."

As for efficiency, if you want to motivate the contractor to deliver the level of effort at less than the estimated cost, use a CPIF contract.

My apologies for typing faster than thinking. I was attempting to draw the correlation between LOE and cost and did so inarticulately.

When a CPFF Term form contract includes a clause to the effect that if the contractor does not deliver the entire level of effort it will be entitled only to a percentage of the fixed fee that is commensurate with the percentage of the level of effort actually delivered (i.e. if contractor delivers 80% of LOE it is entitled to 80% of fixed fee), the contractor will "maximize" their fee (i.e. get 100% of fixed fee) by expending the entire level of effort (i.e. performing 100% of the LOE). This is, of course, allowed under the contract but provides no incentive for the contractor to achieve the objectives of the contract at less cost. I agree a CPIF contract is the way to so incentivize a contractor.

My experiences have been similar to DBH's where a contractor under a CPFF/LOE contract claims that government technical direction altered the contractor's technical approach / labor mix.

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I apologize, since I am confused about the scenario(s) presented in this thread. We apparently have two different posters with two separate problems.

In one case, "DBH" said yesterday at 11:29 AM that "[t]he prime contractor takes the position that the ?cost growth? was a result of the Government, after contract award, directing the prime contractor to allocate more LOE to more expensive subcontractors on their team than the LOE the prime contractor originally allocated in their cost proposal during negotiations."

"KMY" appears to be another person with a separate problem (Yesterday, 04:47 PM) : "Why does it matter if the contractor staffs the contract with personnel who far exceed the average rates used to win the contract. Well. if we contracted for a LOE of 1000 hours under a cost type contract and the contractor staffed the contract with individuals at rates twice as high as the proposed rates, we would only get 1/2 the level of effort we contracted for and use up all our funding. Sure, we could adjust the fee down, but what about the mission that is not being met. We have plenty of instances of contractors buying in with low rates and executing at much higher rates."

I was responding to "KMY". Then "DBH" replied to me. Are you the same person or two individuals with separate scenarios?

Two individuals. But to me it appears as the same scenario, with a slightly different take/expansion.

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I believe that KMY was responding to a remark that I made. I don't think he/she was proposing a different scenario.

Ok, I was responding to KMY's scenario, not to DBH. Didn't mean any disrespect to either but KMY's scenario indicated personnel cost overruns on a recurring basis, so it looked like they need to exercise some better surveillance, aggressively challenge what appear to be excessive salaries when they significantly exceed proposed or negotiated rates and need to write in some protections from free spending.

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DBH you need to file an equitable adjustment. To do this, you will need a consultant - I am not a consultant because I am too lazy and I am not retired, but you need one.

Here is the beauty of hiring a consultant for an equitable adjustment -- you hire the consultant once, then you can copy what he does forever and ever on all your contracts with the government.

When shopping for consultants, be aware most are frauds, so ask your friends in the industry. Here is a good example of some consultants to steer clear of; (1) everything they respond to you has a FAR clause in it (that means they are guessing), or (2) they use words like "DCAA approved", which does not exist.

Obviously, to recover the costs of the consultant, you need to figure that out for yourself based on your contract sizes and other cost-benefit consideration. A consultant might go for like $20K, varies wildly. If you have a high volume of cost and fixed price (does not matter) contracts, the second you are directed by the government (via email, do not let verbals direct you) to do more work or change the scope -- BOOM, file a claim. Its that easy..,

It is not immoral, or bad, it is reality. Claims are how the government process has worked for decades.., it really does make sense when the government side knows what it is doing (which most do not, but some do).

The down side is if you have a government office (most likely they have no idea what a claim is) that finds out you are doing this.., they might take it personal, and then you are doomed.., so its a fine line you walk.

Good luck.

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DBH:

I agree that a good consultant can be of help. But if you hire a consultant to assist you in the preparation of a request for equitable adjustment, and if the REA is a claim as defined in FAR 2.101, then you might not be able to recover the cost of the consultant from the government as either a direct or an indirect cost. Consultant cost incurred to further the prosecution of a claim is unallowable pursuant to FAR 31.205-47(f)(1). Make sure that you understand this before you incur the expense.

One further suggestion: Never let the consultant become directly involved with the government personnel. They are likely to resent it. The consultant should work with you behind the scenes.

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Good advice from Vern.

A few years back I took a teleconference course in REAs and claims. The attorney who presented it stressed the importance of doing as much of the work as possible while the matter is an REA, so that if it cannot be resolved without progressing to a claim under the disputes process, most of the work will already have been done as a matter of normal contract administration whose costs are allowable under FAR Part 31, while costs of pursuing a claim are not.

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