Hi all, I'm being asked to determine whether or not a proposed profit of 10% is fair and reasonable on a sole source T&M contract we're planning on awarding. We haven't done this type of work before and I don't really have anything to base our decision off. I've read through FAR 15.404-4,  The Time-and-Materials Contract: The Time Has Come for A Long, Hard Look, the DoD's weighted guidelines, and GSA's structured profit/fee approach and it doesn't seem like 10% is even close to something that should be fair and reasonable considering the contract type and risk involved, though I understand there's other factors to consider. GSA's GSAM says that only fixed price contract should be towards the high end of the profit range which they max out at 7%. I was also looking at the link below (table starting on page 18) where it appears to recommend a profit of 0% to 1% for a T&M contract. 

https://www.acq.osd.mil/dpap/cpf/docs/contract_pricing_finance_guide/vol3_ch11.pdf

Am I off base in my thinking that 10% doesn't appear to be fair and reasonable at first glance for this type of contract? I was thinking, considering the factors in the GSAM, that a high profit objective for us should be closer to 3% which is leagues away from their proposed 10%. Appreciate any insight anyone can provide, thanks!

Are you requiring certified cost or pricing data for the sole-source T&M contract?
- A.  YES; or
- B.  NO

Which will your contract include?
- A.  FAR 52.232-7 and 52.216-7; or
- B.  FAR 52.212-4 with its Alternate I

Really, you don't have to negotiate a profit for a T&M contract.  Rather, you need to negotiate hourly rates and a ceiling price -- profit is included in the hourly rates.

30 minutes ago, Freyr said:

I'm being asked to determine whether or not a proposed profit of 10% is fair and reasonable on a sole source T&M contract

Why are you worrying whether the profit is a reasonable amount instead of focusing on the total hourly rate?  The determination you have to make is whether the price is fair and reasonable.

3 minutes ago, ji20874 said:

Are you requiring certified cost or pricing data for the sole-source T&M contract?
- A.  YES; or
- B.  NO

Which will your contract include?
- A.  FAR 52.232-7 and 52.216-7; or
- B.  FAR 52.212-4 with its Alternate I

Really, you don't have to negotiate a profit for a T&M contract.  Rather, you need to negotiate hourly rates -- profit is included in the hourly rates.

A. YES (we are requiring certified cost/pricing data) and A. FAR 52.232-7 and 52.216-7. 

That was my initial thought too (just negotiate the fully burdened hourly rates and they'll adjust profit accordingly right?) but my CO said she wanted a breakdown of each of the individual elements of their price (I pointed her to FAR 15.405(a) but she held her ground). 

21 minutes ago, Freyr said:

my CO said she wanted a breakdown of each of the individual elements of their price

Just because you get a breakdown of the elements of the hourly rate doesn't mean you ignore the reasonableness of the hourly rate as a whole.

29 minutes ago, Retreadfed said:

Just because you get a breakdown of the elements of the hourly rate doesn't mean you ignore the reasonableness of the hourly rate as a whole.

The format we've got in our analysis document is a breakdown of each of the individual elements and an overall analysis of the fully burdened rates, so we're absolutely not ignoring the full rate. 

Freyr, I agree with you that profit is one of the elements to negotiate. If the contract has a ceiling price (which only has estimated hours) and the contract terms and work statement is such that Seller is required to continue to perform to complete the stated work even after the ceiling price has been exceeded), I don't see why 10% is unreasonable, given that seller's risk includes potentially losing money on the contract.I don't know the extent to which some of the analysis methods you mentioned ( about determining profit) take this risk into account.

Neil,

A T&M contract using the clauses at FAR 52.232-7 and 52.216-7 does not require to continue to perform to complete the stated work even after the ceiling price has been exceeded.  A T&M contract is a zero risk contract for the contractor, provided the contractor knows how to count direct and indirect costs plus profit in the hourly rates it negotiates for.  The Government bears 100% of both contract cost risk and performance risk.

1 hour ago, ji20874 said:

A T&M contract is a zero risk contract for the contractor, provided the contractor knows how to count direct and indirect costs plus profit in the hourly rates it negotiates for.  The Government bears 100% of both contract cost risk and performance risk.

Let me tell you that a contractor's ability to forecast its direct labor costs is somewhat tied to things outside its control, such as the labor market. A contractor's ability to forecast its indirect rates is somewhat tied to things outside its control, such as its ability to forecast its future business base and its ability to know exactly how many new contract awards it will win and what their value will be. Thus, I take issue with your assertion that a T&M contract is "zero risk" for the contractor. In my view, it's much more risky than a FFP contract type, which permits the contractor to earn extra profit by more efficient operations than originally estimated. In a T&M contract, any change to the labor market or to the contractor's guess as to its future business base or to its ability to control indirect costs is likely to result in planned profit degradation. Plus, it can't earn any profit on the "M" side (by the terms of the clause) so its profit on labor hours needs to cover such things as unallowable travel costs.

A 10% profit is entirely reasonable to my way of thinking, because it's really a percentage of the contract value not just burdened labor dollars.

Ji,

1 hour ago, ji20874 said:

A T&M contract using the clauses at FAR 52.232-7 and 52.216-7 does not require to continue to perform to complete the stated work even after the ceiling price has been exceeded.

Ji, I was trying to present a situation where 10% could more clearly be seen as reasonable profit compared to what lower profit % may be reasonable given the ceiling price requirement in the clauses. I should have been clearer. I think here 2 help has a point, especially if there was a long period of permance. I don't see why Freyr couldn't respond to the ACO by presenting the analyses that show up to 7% as a potential government negotiation objective with a 10% upper limit for rationale such as indicated by here 2 help.

Freyr,

Certainly, use can use 3% as your objective for profit for each hourly rate negotiation.  But it’s really a game, isn’t it?  If you insist on 3% for profit, the contractor might raise its direct or indirect cost projections, and you really haven’t achieved any savings.  I really recommend negotiating the hourly rates — that is what really matters in a T&M contract.

59 minutes ago, ji20874 said:

Freyr,

Certainly, use can use 3% as your objective for profit for each hourly rate negotiation.  But it’s really a game, isn’t it?  If you insist on 3% for profit, the contractor might raise its direct or indirect cost projections, and you really haven’t achieved any savings.  I really recommend negotiating the hourly rates — that is what really matters in a T&M contract.

That's exactly how I'm trying to look at it since it's a sole source as well, we're playing a game with the contractor by saying 10% is too high for us to justify try to come down a little. That said, if they come down on profit and up on direct labor rate that could, and probably will, increase the loaded labor rates. Some folks here have mentioned that 10% seems reasonable, my question to that is why? We're supposed to use a structure approach to negotiating profit, so for a T&M requirement what would drive up our objective on profit? 

50 minutes ago, Freyr said:

Some folks here have mentioned that 10% seems reasonable, my question to that is why? We're supposed to use a structure approach to negotiating profit, so for a T&M requirement what would drive up our objective on profit? 

I'm at a loss to understand why a 10% profit would not be considered reasonable when a T&M contract is essentially a fixed-price-per-labor-hour contract. Would you allow a contractor 10% profit on its costs on an FFP contract? Why treat T&M differently? As I stated above, I believe T&M is a more risky contract type (to both parties) than straight FFP.

If I were the contractor I'd offer you an 8% fee on estimated costs if you award me a CPFF contract. Otherwise I'd stick with 10% and wonder why I wasn't getting 15%. After all, it's sole source. Who am I competing with on price?

1 hour ago, here_2_help said:

I'm at a loss to understand why a 10% profit would not be considered reasonable when a T&M contract is essentially a fixed-price-per-labor-hour contract. Would you allow a contractor 10% profit on its costs on an FFP contract? Why treat T&M differently? As I stated above, I believe T&M is a more risky contract type (to both parties) than straight FFP.

If I were the contractor I'd offer you an 8% fee on estimated costs if you award me a CPFF contract. Otherwise I'd stick with 10% and wonder why I wasn't getting 15%. After all, it's sole source. Who am I competing with on price?

Negotiations may also depend upon whether or not the government has  other source options. It is still a negotiated contract. If you aren’t locked in to a single contractor, you don’t have to agree to the price. 

40 minutes ago, joel hoffman said:

Negotiations may also depend upon whether or not the government has  other source options. It is still a negotiated contract. If you aren’t locked in to a single contractor, you don’t have to agree to the price. 

True. At least that was Transdigm's argument. "If you don't like my price, find another contractor." Unfortunately, it didn't work out for the company in the end. Let the record show that the DoD IG found a profit of 15% to be reasonable. Anything over? Not so much.

31 minutes ago, here_2_help said:

True. At least that was Transdigm's argument. "If you don't like my price, find another contractor." Unfortunately, it didn't work out for the company in the end. Let the record show that the DoD IG found a profit of 15% to be reasonable. Anything over? Not so much.

https://www.defensenews.com/industry/2019/02/27/pentagon-requests-voluntary-refund-of-millions-of-dollars-from-contractor-transdigm/

Transdigm should refund the money under the condition that it be redistributed to DoD contractors that suffered losses of more than 15% and the agencies awarding those contracts be publicly shamed for allowing such losses to happen.

12 hours ago, here_2_help said:

I'm at a loss to understand why a 10% profit would not be considered reasonable when a T&M contract is essentially a fixed-price-per-labor-hour contract. Would you allow a contractor 10% profit on its costs on an FFP contract? Why treat T&M differently? As I stated above, I believe T&M is a more risky contract type (to both parties) than straight FFP.

If I were the contractor I'd offer you an 8% fee on estimated costs if you award me a CPFF contract. Otherwise I'd stick with 10% and wonder why I wasn't getting 15%. After all, it's sole source. Who am I competing with on price?

This is one of the things that's been confusing me. Looking at the CPRG it states that T&M/L-H/FP-LOE contracts are "are considered cost plus-fixed-fee contracts for the purpose of assigning profit/fee values." Why is that? It seems that T&M could be anywhere in a risk continuum between CR and FFP depending on the mix of labor vs materials but most the guidance I've read treats T&M as very risky to the Government but not as risky as cost reimbursable work. In our situation the large portion of the costs would be labor costs. 

47 minutes ago, Freyr said:

This is one of the things that's been confusing me. Looking at the CPRG it states that T&M/L-H/FP-LOE contracts are "are considered cost plus-fixed-fee contracts for the purpose of assigning profit/fee values." Why is that? It seems that T&M could be anywhere in a risk continuum between CR and FFP depending on the mix of labor vs materials but most the guidance I've read treats T&M as very risky to the Government but not as risky as cost reimbursable work. In our situation the large portion of the costs would be labor costs. 

FAR 30.001:

Quote

Fixed-price contracts and subcontracts means-

           (1) Fixed-price contracts and subcontracts described at 16.202, 16.203(except when price adjustments are based on actual costs of labor or material, described at 16.203-1(a)(2)), and 16.207;

           (2) Fixed-price incentive contracts and subcontracts where the price is not adjusted based on actual costs incurred (subpart  16.4);

           (3) Orders issued under indefinite-delivery contracts and subcontracts where final payment is not based on actual costs incurred (subpart  16.5); and

           (4) The fixed-hourly rate portion of time-and-materials and labor-hours contracts and subcontracts (subpart  16.6).

 

10 hours ago, Don Mansfield said:

Transdigm should refund the money under the condition that it be redistributed to DoD contractors that suffered losses of more than 15% and the agencies awarding those contracts be publicly shamed for allowing such losses to happen.

Too late. The company already paid to get Congress & DoD off its back. It didn't really work, though, as the latest NDAA evidences.