Can someone please provide info to a newbie regarding merit increases in a CPFF environment. I am a Contracts Specialist providing support to a CPFF contract. The prime has requested that the govt CO approve an 18% increase for one of its subs. It was proposed during the soliciation phase a rate of 3% escalation; .the sub is requesting an 18% increase. Do have to "eat" this , can the CO just say no, that its between the sub and the prime, why get us involved, what am i missing.

Under a CPFF contract, the contracting officer must determine the prime's cost to be "allowable" in order for the costs to be reimbursable. See FAR 52.216-7(a). One of the five tests of allowability is reasonableness. See FAR 31.201-2(a). See also FAR 31.201-3, Determining Reasonableness, which says, in part:

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.

The prime has asked for approval of the 18 percent increase because it wants to make sure that the CO will consider it to be reasonable before giving it to the subcontractor. If it agrees to an 18 percent increase before getting the CO's approval, it may be bound to pay the increase to the sub but unable to obtain reimbursement for it from the government.

The CO cannot just say no. He or she must make a determination as to whether the increase is reasonable and, therefore, allowable. The prime is getting you involved because it wants that determination.

Thank you for your response, it did provide great assistance ...one additional question ..... if the CO continues to agree to the raises doesn't the estimated cost get eaten up quickly

Thank you for your response, it did provide great assistance ...one additional question ..... if the CO continues to agree to the raises doesn't the estimated cost get eaten up quickly

The CO wouldn't agree to the raise, per se. The CO would determine the amount of the raise to be allowable. The CO would not be determining that the contractor should go ahead with the raise.

If the contractor were to give the raise to the subcontractor, it would incur a higher cost for the subcontract work than it had originally planned to incur. Assuming that it did not cut costs elsewhere, then its total incurred costs would exceed the contract estimated cost.

Your question was very basic, which tells me that you haven't had any training about cost-reimbursement contracts. If you are going to work with cost-reimbursement contracts, then you should buy Cost-Reimbursement Contracting, 3d ed., by Cibinic and Nash, or get your office to send you to a class about cost-reimbursement contracting, such as Cost-Reimbursement Contracting, offered by Federal Publications Seminars. http://www.fedpubseminars.com/Finance-Acco...nt-Contracting/. You would get the book as a course text.

Under a CPFF contract, the contracting officer must determine the prime's cost to be "allowable" in order for the costs to be reimbursable. See FAR 52.216-7(a). One of the five tests of allowability is reasonableness. See FAR 31.201-2(a). See also FAR 31.201-3, Determining Reasonableness, which says, in part:

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.

The prime has asked for approval of the 18 percent increase because it wants to make sure that the CO will consider it to be reasonable before giving it to the subcontractor. If it agrees to an 18 percent increase before getting the CO's approval, it may be bound to pay the increase to the sub but unable to obtain reimbursement for it from the government.

The CO cannot just say no. He or she must make a determination as to whether the increase is reasonable and, therefore, allowable. The prime is getting you involved because it wants that determination.

FAR 31.201-3 also continues:

"...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."

In other words, the cost is not automatically presumed to be reasonable. The Contractor and its sub should justify why it is both necessary and reasonable to change from a proposed escalation rate of 3% now to 18%. Congress added this language back in the late 1980's (1987, I think) to make it clear that just because the Contractor incurs a cost, it isnt automatically "reasonable". If you dont think it is reasonable, make sure that you clearly communicate it to the Contractor in writing. I'd require justification from the Contractor before I'd approve or recommend approval of such an increase. No justification - no approval.

FAR 31.201-3 also continues:

"...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."

In other words, the cost is not automatically presumed to be reasonable. The Contractor and its sub should justify why it is both necessary and reasonable to change from a proposed escalation rate of 3% now to 18%. Congress added this language back in the late 1980's (1987, I think) to make it clear that just because the Contractor incurs a cost, it isnt automatically "reasonable". If you dont think it is reasonable, make sure that you clearly communicate it to the Contractor in writing. I'd require justification from the Contractor before I'd approve or recommend approval of such an increase. No justification - no approval.

Thanks again for the added info, I just ordered the book online ...your right, not alot of cost type experience

Thanks again for the added info, I just ordered the book online ...your right, not alot of cost type experience

When you get the book, you'll find that the treatment of cost allowability is in Chapter 8. It is a complex topic and you will have to study carefully over several weeks, but it will be worth it.