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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:
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:
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:
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?
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:
QUOTE
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:
QUOTE
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:
QUOTE
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?
