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Which way do you see it?

Posted by Vern Edwards, 22 December 2009 · 3,273 views

I teach a class in which the students are given a scenario: They are told that the Government has awarded a firm-fixed-price contract for supplies and that the contracting officer changed the specification immediately after award. They are told about the contractor's original price proposal, the negotiated price, the change, and new price quotes. They are then asked to calculate the equitable adjustment, if any, that the contracting officer should make. Depending on a student's interpretation of the facts and understanding of the proper measure of an equitable adjustment, he or she might decide either that the Government is entitled to a price reduction or the contractor is entitled to a price increase. However, on many occasions students have said that there should be no equitable adjustment either way. This answer cannot be supported by any interpretation of the facts given or any understanding of the proper measure of an equitable adjustment. So, where does it come from?

Some students who answer $0.00 acknowledge that the cost of performance was affected by the change, but they cite the first sentence of FAR 16.202-1, the description of firm-fixed-price contracts, which reads as follows:

A firm-fixed-price contract provides for a price that is not subject to adjustment on the basis of the contractor's cost experience in performing the contract.

That sentence is terribly misleading. Several clauses in firm-fixed-price contracts provide for a price adjustment based on the contractor's cost experience upon the occurrence of a specified contingent event, such as the issuance of a change order. In every case, something must change in order for there to be entitlement to a price adjustment. In addition to the changes clauses, some of the clauses that provide for adjustments to firm-fixed prices based on the contractor's cost experience are:

FAR 52.211-18, Variation in Estimated Quantity (APR 1984);

FAR 52.227-21, Technical Data Declaration, Revision, and Withholding of Payment⎯Major Systems (DEC 2007);

FAR 52.233-3, Protest After Award (AUG 1996);

FAR 52.236-2, Differing Site Conditions (APR 1984);

FAR 52.236-11, Use and Possession Prior to Completion (APR 1984);

FAR 52.242-14, Suspension of Work (APR 1984);

FAR 52.242-17, Government Delay of Work (APR 1984); and

FAR 52.245-1, Government Property (JUN 2007).

There would be no problem if FAR 16.202-1 were to say: A firm-fixed-price contract provides for a price that is not subject to adjustment on the basis of the contractor's cost experience in performing the contract, except as otherwise provided by a contract clause. However, it does not say that, and newcomers to contracting (and some veterans) are misled by the FAR language.

The first time a student cited FAR 16.202-1 as the basis for a $0.00 answer, I was thrown off. It took me a few moments to understand where the student was coming from. Every time a student cites that FAR passage I cringe. It takes more than a few moments to explain things to literal-minded students, and I am sure that my explanations have left some unconvinced.

But it's not just students who get confused. Recently, while going through some old papers, I came across a copy of the September 2008 edition of Government Contract Costs, Pricing & Accounting Report, published by Thomson-West. Scanning it, I saw an article entitled, "Popular Concerns Regarding T&M and LH Contracts Are Overstated," by Darrell J. Oyer and Christyne K. Brennan. Reading the article, I came to this short paragraph:

Despite these current restrictions on T&M/LH contracts, procurement professionals, Congress and others contend that the use of T&M/LH contracts should be further restricted. These concerns, however, are misplaced. After all, a fixed unit price contract gives the Government the preferred contract type, i.e., a fixed-price, and a cost-reimbursable arrangement with no fee is equally favorable to the Government. Indeed, some contracts have contract line item numbers at fixed unit prices and other CLINs for cost reimbursable items. This is apparently acceptable to T&M/LH critics because the contract is not called a T&M/LH contract although the payment and reimbursement results are identical.

Emphasis added. I don't know how I missed that article a year ago, but I almost came unglued when I read it, because the payment and reimbursement results are absolutely not identical. It was then that I realized that some people do not understand that the main difference between fixed-price contracts and other types is not that the price of the one is fixed and the prices of the others are not. The price of a firm-fixed-price contract is neither firm nor fixed. The main difference between the fixed-price contracts and any of the others is that under a fixed-price contract the contractor must perform successfully in order to be entitled to payment or to keep any progress payments received, but successful performance is not a condition of payment under the cost-reimbursement and T&M/LH contracts. Thus, to equate a T&M or LH contract to a fixed unit price contract is to reveal a fundamental lack of understanding of the two types of contracts.

A few paragraphs later, I read this:

The publication of the final rule on commercial T&M/LH contracts emphasized Government concerns that T&M/LH contracts "pose the highest contract type risk to the Government." Apparently, the Government views T&M/LH contracts as more risky than cost-reimbursement contracts!

I presume that the exclamation point at the end of the second sentence signals the authors' astonishment at the government's ignorance. But a T&M/LH contract is riskier to the Government than a cost-reimbursement contract, because each hourly rate includes profit, so that the more hours delivered the more profit the contractor can make, while not being obligated to finish the work in order to get paid. That is a motive to be inefficient. A cost-reimbursement contract, on the other hand, while not providing a profit motive to be efficient, also provides no profit motive to be inefficient.

T&M/LH contracts have their uses, but to equate them with fixed unit price contracts and to think them no riskier than cost-reimbursement contracts is to reveal an astonishing level of misunderstanding.

It was my realization that so many do not understand the contract types that led me to write a two-part Briefing Paper on contract types: "Contract Pricing Arrangements⎯A Primer," published in October 2009 (cited 09-11 Briefing Papers 1) and November 2009 (cited 09-12 Briefing Papers 1). The first part describes the fixed-price, cost-reimbursement, time-and-materials, and labor-hour arrangements. The second part describes the incentive arrangements. The Briefing Papers are published by Thomson Reuters.

The publications are designed to be introductory in nature. They warn against relying on general descriptions in the FAR and elsewhere and emphasize the need to study the contract clauses applicable to each particular type in order to develop a true understanding of it and of the differences between it and any of the other types.

Writing those Briefing Papers confirmed in me the belief that contracting is a much deeper subject than most practitioners realize. The path to competence in contracting passes through a working life of never-ending study, observation, and reflection. Yet, how does one learn? There is a dearth of first-rate textbooks. Almost every topic is given only superficial treatment in this or that official handbook, guidebook, and magazine article. Deeper studies are published in law journals, but they are aimed primarily at legal practitioners. On-the-job training is awful and generally perpetuates many misperceptions, misconceptions, half-baked ideas, errors, and poor practices. Most classroom training falls far short of rigorous.

This is too bad, but there are two ways of looking at it: the first is from the point of view of those who need to have their hands held, who see it as a cause of frustration; the second is from the point of view of the curious, self-motivated, investigative, studious, reflective, and ambitious, who see it as an opportunity to gain a competitive edge over their "peers" and to be valued as knowledgeable pros.

Which way do you see it?

I see it as portions of both but probably more so of the later. Gaining a deeper understanding of contracting methods; call it the ability to skillfully analyze a requirement and fit an efficient contract vehicle for it is most satisfying. Unfortunately, more and more lately, I have had little lead time to do so to my satisfaction - due to poor execution of acquisition planning. Yet, the more thoughtful and analytical approach to training still pays off in that I can "salvage" some very awkward requirement packages.
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For five years as a military officer, four years in private practice, 27 years as a government civilian employee, and now as a rehired annuitant for the past 2 1/12 years, having been involved involved in acquisition and federal contract administration, I sought to learn beyond what the regulations say. Try to find out the background of them, how they stand up under caselaw and other challenges, how they are applied, how to effect change, etc.

If an organization can spend millions or even hundreds of thousands of dollars on acquisition, it can afford to purchase certain basic tools and references for continuous learning by the acquisition staff. The staff should take advantage of subscriptions and reference books, such as the various "Nash and Cibinic" books, free Internet sites, such as Claims Courts, Appeals Courts, Boards of Contract Appeals, Nash and Cibinic Report, Federal contracting periodicals, professional organizations, etc. I also personally bought engineering and acquisition books and subscriptions over the years. I bought many books as a relatively poor up and coming engineer with a family to support. Anyone who simply relies upon the Federal Acquisition regulations and supplements without aspiring to obtain and use other references and sources is intellectually lazy. Expand your horizons and insist that your agency subscribe to as many periodicals and professional pubs as possible. Use the Internet - it is superior to the sources I had while climbing the ladder...
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"Yet, how does one learn? There is a dearth of first-rate textbooks. Almost every topic is given only superficial treatment in this or that official handbook, guidebook, and magazine article. Deeper studies are published in law journals, but they are aimed primarily at legal practitioners. On-the-job training is awful and generally perpetuates many misperceptions, misconceptions, half-baked ideas, errors, and poor practices. Most classroom training falls far short of rigorous."

An excellent question. I think that the first step to learning is to gain an appreciation of your ignorance. The more you come to learn, the more you should come to realize how much more there is to learn. Michelangelo is famous for often repeating the phrase "I am still learning." I took a class with Ralph Nash a few years ago and he told me that "there was so much to learn" in contracting. Yet, I still get students in their first few years of their career that are truly convinced that they've got this contracting thing figured out. They become quite frustrated when it becomes self-evident that they do not.

Once you have come to accept your ignorance, you are ready to learn. How to go about learning in this field, which was the question posed, is difficult for the reasons stated. Asking and answering questions in the Wifcon forum, reading periodicals, and having good reference books has worked well for me.
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Well said DON! I just ran into that concept (again!) this weekend working on an assignment for my doctorate program. Here I am at the pinnacle of education, yet I sometimes feel as if I know far less now than I did while earning my BA a decade or two ago. It seems the more you learn, the more you become aware of what you do not know!

Unfortunately many workplaces do not assume the role of schoolhouse, so they could care less how knowledgeable their acquisition workforce is. As long as the workers have the precious certifications, that is enough for the managers and executives. Applying for any training beyond that is a study in resistance, and must be couched in the "I need Continuing Education (CE) hours" mantra rather than "I need knowledge" truth. Once a person has the required amount of CE hours for a given year or two years, it is assumed that no further knowledge is needed, so any requests for training will normally be rejected as I have found a number of times in the past.

I would like to see that change, but I doubt that any one person can effect any meaningful change across the Government. Perhaps a senior executive will wield that power in the future,. I doubt that anyone will ever accomplish such change due to resistance for that and any other changes not effected by law within the bureaucracy.
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Would such a change to the contract be outside of the scope of the competition?

It seems to me that the classroom exercise described above lacks practicality.

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