Would use of a fixed-price-incentive contract with an economic price adjustment be a deviation from FAR part 16?

7 hours ago, Don Mansfield said:

Would use of a fixed-price-incentive contract with an economic price adjustment be a deviation from FAR part 16?

What would the economic price adjustment apply to?  In other words, how broad an application would the adjustment cover?

It might complicate/ conflict with  the FPI cost savings sharing incentive if those savings are all or partly the result of lower costs subject to an E.P.A (results in lower profit). But if the cost share savings Target point moves to the left, the contractor could share more cost savings than if the target point remains constant.

For EPA upper adjustment, the government would theoretically bear the entire increase plus move the cost sharing target point to the right.

Im guessing that it would be a deviation. 

 

Part of my reasoning is that I was excoriated in this forum a few years ago for suggesting that the FAR would allow for using an FPI with the target price equals the cost ceiling, resulting in what the industry calls (and widely uses) “Guaranteed Maximum Price”.  Contractor and government share cost savings within a band and contractor bears all costs above the target cost.

 

2 hours ago, joel hoffman said:

Part of my reasoning is that I was excoriated in this forum a few years ago for suggesting that the FAR would allow for using an FPI with the target price equals the cost ceiling, resulting in what the industry calls (and widely uses) “Guaranteed Maximum Price”.  Contractor and government share cost savings within a band and contractor bears all costs above the target cost.

Yeah, having spent more than a decade in the engineering services/EPC industry, I think there are several commercial contract models that the government would do well to accept. The GMP is one of them. The other type I favor is a hybrid of cost-type and fixed-price, where the labor and material cost elements are reimbursable but the indirect costs are a fixed multiplier on those variable costs. Such an efficient approach, especially in a competition, where a one-tenth of a point difference in the multiplier may cost you the job. Also, nobody cares about auditing the indirect costs because they are fixed. *Sigh* 

6 hours ago, joel hoffman said:

What would the economic price adjustment apply to?  In other words, how broad an application would the adjustment cover?

100% of allowable direct labor, 95% of allowable indirect expense, and 100% of allowable direct materials. It gets applied after application of the price revision in the incentive clause. 

So, essentially all of the contract scope and price is subject to economic price adjustment. Wow!  It would seem that nothing is forecastable. 

18 hours ago, Don Mansfield said:

100% of allowable direct labor, 95% of allowable indirect expense, and 100% of allowable direct materials. It gets applied after application of the price revision in the incentive clause. 

What would not be included in the proposed "economic price adjustment."

1 hour ago, bob7947 said:

What would not be included in the proposed "economic price adjustment."

ODCs?

Yep if it was a commercial item contract.

Thus, almost everything  comprising the basis for an FPI target cost, except labor and material quantities, would be fluid. That seems to defeat the purpose of using fixed price incentive with a potentially virtually unlimited economic price adjustment scenario. 

On 11/17/2020 at 12:51 PM, Don Mansfield said:

95% of allowable indirect expense

16.203-4 Contract clauses

... (c) Adjustments based on actual cost of labor or material. ...

(4) In negotiating adjustments under the clause, the contracting officer shall—

(i) Consider work in process and materials on hand at the time of changes in labor rates, including fringe benefits (if any) or material prices;

(ii) Not include in adjustments any indirect cost (except fringe benefits as defined in 31.205-6(m)) or profit; and

(iii) Consider only those fringe benefits specified in the contract Schedule.

On 11/17/2020 at 12:51 PM, Don Mansfield said:

100% of allowable direct labor, 95% of allowable indirect expense, and 100% of allowable direct materials.

The direct labor and materials costs would have to change almost immediately after commencement for adjustments on 100% of labor and materials.

Most elements of indirect “expense” are excluded.

Thus “100%” and “95% “ for labor and materials and for indirect expense, respectively, subject to adjustment would be highly unlikely, in conflict with the EPA contract clauses and seemingly inappropriate for the EPA intents and purposes. .  

On 11/17/2020 at 12:46 AM, Don Mansfield said:

Would use of a fixed-price-incentive contract with an economic price adjustment be a deviation from FAR part 16?

These are common with Navy Shipbuilding contracts and less common with Coast Guard contracts but my thought is this lines up with 16.203-4(d) and is not a deviation. The EPA is pegged to BLS indices and projections (usually from IHS Global Insight)  and are incorporated into the contract and adjustment is made based on the percentage difference between the projections and actual index once published and usually contain an adjustment band say 3-5% where no adjustment is made.

d) Adjustments based on cost indexes of labor or material. The contracting officer should consider using an economic price adjustment clause based on cost indexes of labor or material under the circumstances and subject to approval as described in paragraphs (d)(1) and (d)(2) of this section.

           (1) A clause providing adjustment based on cost indexes of labor or materials may be appropriate when-

                (i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year after performance begins;

                (ii) The contract amount subject to adjustment is substantial; and

                (iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Government and the contractor, without this type of clause.

           (2) Any clause using this method shall be prepared and approved under agency procedures. Because of the variations in circumstances and clause wording that may arise, no standard clause is prescribed.

I actually stumbled onto this post looking for answers to a separate but closely related question. Assuming you can have a FPI with EPA, would you make adjustment before or after applying the incentive geometry to the target cost? I have a Navy contract applying it before and a CG contract applying after? Any benefit from the Government or Contractor's perspective to either strategy?

EPA Adjustment before calculating profit

(b)  The Total Final Price shall be established by adjusting the total final negotiated cost determined in paragraph (d) (1) of the Incentive Price Revision–Firm Target clause of this contract by an amount for profit or loss determined as follows:

 

(i)  Subtract the amount determined in accordance with the contract requirement, “Economic Price Adjustments” (EPA) adjustment (positive or negative) to calculate the EPA adjusted total final cost: then:

 

            (ii)   Calculate the amount for profit or loss as follows:

 

WHEN THE TOTAL FINAL NEGOTIATED COST IS:	THE AMOUNT FOR PROFIT OR LOSS IS:
Equal to the total target cost‑‑‑‑‑‑	Total target profit.
Greater than the total target cost‑‑	Total target profit less (see below) percent of the amount by which the total final negotiated cost exceeds the total target cost.   CLIN 0100: 30 percent CLIN 0200: 40 percent CLINs 0300,0400, 0500, 0600, 0700, 0800, 0900, and 1000: 50 percent
Less than the total target cost‑‑‑‑‑	Total target profit plus 50 percent of the amount by which the total final negotiated cost is less than the total target cost.

 

 

(iii)  The Total Final Price shall be the sum of: (A) the EPA adjusted total final negotiated cost, calculated in accordance with paragraph (i) above, and (B) the amount for profit or loss calculated in accordance with paragraph (ii) above; provided, however, that in no event shall the total final price exceed the Ceiling Price set forth in Section B of the Contract.

Adjustment After

 

(v)       The sum of the projected final cost, the projected final profit and the applicable EPA amount (positive or negative) shall be the final billing price

10 hours ago, MAY-D-FAR-B-WIT-U said:

These are common with Navy Shipbuilding contracts and less common with Coast Guard contracts but my thought is this lines up with 16.203-4(d) and is not a deviation. The EPA is pegged to BLS indices and projections (usually from IHS Global Insight)  and are incorporated into the contract and adjustment is made based on the percentage difference between the projections and actual index once published and usually contain an adjustment band say 3-5% where no adjustment is made.

d) Adjustments based on cost indexes of labor or material. The contracting officer should consider using an economic price adjustment clause based on cost indexes of labor or material under the circumstances and subject to approval as described in paragraphs (d)(1) and (d)(2) of this section.

           (1) A clause providing adjustment based on cost indexes of labor or materials may be appropriate when-

                (i) The contract involves an extended period of performance with significant costs to be incurred beyond 1 year after performance begins;

                (ii) The contract amount subject to adjustment is substantial; and

                (iii) The economic variables for labor and materials are too unstable to permit a reasonable division of risk between the Government and the contractor, without this type of clause.

           (2) Any clause using this method shall be prepared and approved under agency procedures. Because of the variations in circumstances and clause wording that may arise, no standard clause is prescribed.

I agree. This was a new one for me when I saw it in a shipbuilding RFP. I don't think it's a deviation.

10 hours ago, MAY-D-FAR-B-WIT-U said:

I actually stumbled onto this post looking for answers to a separate but closely related question. Assuming you can have a FPI with EPA, would you make adjustment before or after applying the incentive geometry to the target cost? I have a Navy contract applying it before and a CG contract applying after? Any benefit from the Government or Contractor's perspective to either strategy?

I don't know of anything regulating this. I guess you can do it either way.

1 hour ago, Don Mansfield said:

I don't know of anything regulating this. I guess you can do it either way.

Thank you Don