I have a CPFF contract with many, many subcontracts. If the Prime awards a FFP contract for construction, to what standard can we hold him accountable when his sub does not complete on time and then wants double the cost due to the delay.

Government personnel at the site say the delay was about 80% the subs fault that he did not complete on time. The Prime wants us to pay 100% of a "equitable adjustiment" on the added cost. If the sub was my prime I would deny the REA and let them file a claim if they so chose. Should the prime not have to do the same due diligence.

I am not experienced with cost contracts and am not sure the level of scruitiny that is the Government norm on issues such as this.

I have a CPFF contract with many, many subcontracts. If the Prime awards a FFP contract for construction, to what standard can we hold him accountable when his sub does not complete on time and then wants double the cost due to the delay.

Government personnel at the site say the delay was about 80% the subs fault that he did not complete on time. The Prime wants us to pay 100% of a "equitable adjustiment" on the added cost. If the sub was my prime I would deny the REA and let them file a claim if they so chose. Should the prime not have to do the same due diligence.

I am not experienced with cost contracts and am not sure the level of scruitiny that is the Government norm on issues such as this.

Your question is pretty broad. You said that firm fixed price subcontracts are involved. You didn't clarify if the "equitable adjustment" that the prime wants you to pay is from the prime or from the sub(s) to the prime. How was it determined by the prime that the the subs are due extra cost and time under their subcontracts? What is the basis for paying the sub or subs additional costs on the delays?

Due to the nature of a cost reimbursement contract, the contractor might be entitled to additional cost for delays due to its subcontractors, depending upon the specific circumstances and types of subcontracts. Even if a FFP subcontractor is not due relief, that sub's cost impacts on the rest of the work may be reimbursable, assuming that the prime was performing a good faith effort to manage the contract effort. This is general and depends upon the circumstances.

Also, the term "equitable adjustment" is a term that generally implies that a contractor is seeking additional fee. A "cost adjustment" and/or "time adjustment" would not necessarily include additional fee. Is the contractor requesting additional fee under the "equitable adjustment"? Is this a cost/time overrun or is it a request for compensation as a change or under some other compensable clause?

Joel,

The subcontractor is requesting the Prime approve all their labor and management costs for 90 days of delay in finishing the project. The sub says the Government delayed them and our observer on site says it was mostly the fault of the subcontractor. The prime plans to approve the added cost and then charge it back to the Government under our cost reimbursement contract. We disagree that they should approve the majority of the costs and think they should make a bigger effort to deny the cost. What real leverage does the Government have in a case like this?

Joel,

The subcontractor is requesting the Prime approve all their labor and management costs for 90 days of delay in finishing the project. The sub says the Government delayed them and our observer on site says it was mostly the fault of the subcontractor. The prime plans to approve the added cost and then charge it back to the Government under our cost reimbursement contract. We disagree that they should approve the majority of the costs and think they should make a bigger effort to deny the cost. What real leverage does the Government have in a case like this?

It depends upon the terms of the contract and the FFP subcontract as well as the rules concerning allowability. See 31.201-2 -- Determining Allowability, in general and also more specifically, 31.201-3 -- Determining Reasonableness.

"(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer?s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

( What is reasonable depends upon a variety of considerations and circumstances, including --

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance;

(2) Generally accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations;

(3) The contractor?s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor?s established practices."

If the FFP subcontract provides for adjustments and if the prime properly determines that it or the government is reaponsible for the increased costs, the additional costs might be reasonable and allowable. However, if the government feels that prime is negligent in its subcontract administration and/or that the prime improperly recognizes some or all merit in the sub's claim or request, the the prime should bear the burden of proving that the costs are reasonable and that it and/or the government are responsible for those costs. It should have to justify the amount of the increase to the FFP subcontract before the government agrees to reimburse it for those costs.

Cost contracts may involve government delays, which might be associated with the nature of the scope of work or they might be compensable (fee bearing) as a change or under some other contract term. It depends upon the terms of the contract.

At any rate, you do have some leverage in a cost contract. You don't have to just roll over and pay all costs, regardless.

Some additional thoughts, for what they're worth.

1. The prime's decision regarding whether or not to modify its FFP subcontract for the subK's REA should not turn on whether the government customer will reimburse those additional costs. The government is not a party to the subcontract. Instead, the prime needs to (as Joel posted) "properly determine" whether the SubK is entitled to a price adjustment--and by how much the price should be adjusted. That activity normally falls under the heading of "subcontract management".

2. If the prime determines that the SubK has a valid REA through exercising its proper diligence over its SubK, and consequently then modifies the SubK price accordingly, then those costs would normally be allowable, assuming no negligence/collusion between the two parties is alleged. If the government believes that the prime did not act in good faith or had deficient processes, then not only is the SubK REA implicated, it calls into question the reasonableness and allowability of ALL of the prime's subcontract management costs allocated or charged to the prime contract in question.

3. Notwithstanding Points 1 & 2, the prime has apparently discussed the matter with the government personnel before reaching a determination on the SubK's entitlement. (Maybe it was during the process of evaluating the SubK's REA, but it didn't sound like that was the case from the original post.) So now the government is on notice and a smart prime would prepare a lot of documentation, and maybe put on a briefing for its CO, before attempting to pass on any REA costs in this situation.

Hope this helps.

I have a CPFF contract with many, many subcontracts. If the Prime awards a FFP contract for construction, to what standard can we hold him accountable when his sub does not complete on time and then wants double the cost due to the delay.

If the prime contract is CPFF, then the prime's only obligation is to make its best effort to do the work within the estimated cost. In short, you cannot hold the prime to much. It does not matter that the subcontract is FFP. If the prime must pay the sub more, then the government will have to reimburse the prime, within the estimated cost or the total amount allotted, unless it can show that the subcontract cost is unreasonable and, therefore, unallowable.

If the prime contract is CPFF, then the prime's only obligation is to make its best effort to do the work within the estimated cost. In short, you cannot hold the prime to much. It does not matter if the subcontract is FFP. If the prime must pay the sub more, then the government will have to reimburse the prime, within the estimated cost or the total amount allotted, unless it can show that the subcontract cost is unreasonable and, therefore, unallowable.

Agreed. My point is that if the subcontract is FFP, then in order to recover what it is asking for, the sub must be entitled to relief under the terms of its subcontract with the prime. The prime is required to make a good faith effort to properly manage the subcontract and not to arbitrarily just pay additional amounts to the subcontractor, if it wants to be reimbursed by the government for those costs.

There must be some justification for paying the additional cost to the sub, if the prime expects the government to reimburse it for those additional costs. Don't just send in a bill.

Thanks for the advice. I have some real doozie contracts that seem to have everything wrong on them. Oh well, that what they pay me the big bucks for.

Agreed. My point is that if the subcontract is FFP, then in order to recover what it is asking for, the sub must be entitled to relief under the terms of its subcontract with the prime. The prime is required to make a good faith effort to properly manage the subcontract and not to arbitrarily just pay additional amounts to the subcontractor, if it wants to be reimbursed by the government for those costs.

I agree. I wasn't addressing your point.

Oh well, that what they pay me the big bucks for.

Yes, and so you get your answers here for free. Is this a great country, or what?