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Everything posted by bob7947

  1. This topic is being closed due to no response from the OP, in accordance with . . . 17. Original posters must not disappear after they post a question. Disappearing makes it impossible to provide clarifications of the original post so that others may respond intelligently. It is normal for the original poster to be asked for clarification. The Orginal Poster has 5 calendar days after the original post to answer any questions. After that, the Topic will be locked.
  2. I will keep this topic open for a little time to see if the original poster comes back. If not, I will delete the topic.
  3. In two recent articles, Ralph Nash and Vern looked into whether the process of competitive negotiation (source selection) “works” to encourage firms to do business with the Government. See Our Competitive System: Does It Work?, 36 NCRNL ¶ 70, and Postscript II: Our Competitive System, 38 NCRNL¶ 3. They think the process is cumbersome, takes too long, and is too expensive. In Postscript II, they argued that the competitive system (rules and procedures) is badly designed and maladapted to present circumstances. In this article, they want to show, by way of example, that the system is worse when the bad design is poorly executed. See POSTSCRIPT III: OUR COMPETITIVE SYSTEM by Vernon J. Edwards.
  4. This bill was introduced on January 18, 2024. Unfortunately, the bill hasn't been posted yet. That is why you don't see it yet. It should be posted by the end of the week. Check here.
  5. Thanks Retread. Quite often all an agency needs is to be reminded.
  6. It is now more than half way through the month of January 2024 and the Armed Services Board of Contract Appeals (ASBCA) has not checked in, paid for itself, or something or other. This is not out of the ordinary for a U. S. government site. Many of the government sites that I use to post contracting information have not issued anything since December 2023 or earlier than that. Here is what I currently get when I try to access the ASBCA. If you find the ASBCA, please let me know by posting it here. Thankyou.
  7. I was late in approving this account. Could anyone help the original poster?
  8. Jamaal: I remember trying to find the first instance of that line being used in the FAR, FPR or ASPR. If I remember correctly, it was a cut and paste job from the predecessors of the FAR to the FAR.
  9. I'm running late and I haven't had a chance to read this protest. If you have time, give it a try. Superior Waste Management v U. S., No. 23-1319C, January 8, 2024.
  10. This topic is closed but a poster pointed this out. https://www.wbdg.org/ffc/dod/unified-facilities-guide-specifications-ufgs
  11. It may not be a Perfect Storm but your reading could be during a Nor'easter if the storm forms properly. If it forms, I hope it doesn't match The Storm of the Century. (I can't help myself.)
  12. Comparing the subway (from the article) as "a generalized order of events in the acquisition contracting process" is a terrible idea. I still remember Metro Center in the D. C. Metro. Three levels of crazies running up the steps and down the steps to meet in the middle and running into each other while trying to squeeze into an open subway door before it closed. It was always a near death experience.
  13. Over the years, I have used the FAR's order to set up pages on this site. That hasn't been easy all the time. However, I wasn't using it to manage actions within the contracting process. That may be more troubling. After about 50 years, there is no single Federal Acquisition Regulation nor System. As Vern and I have discussed here there is a Defense Contracting Regulation, Other Agency Contracting Regulations, and the "Balkanized" Agency Contracting Regulations, eg., FAA. I used Balkanized from Nash and Cibinic. I am in the process of seting up Wifcon.com's analysys of the NDAA for FY 2024--the "annual congressional perfections" to what is referred to as the FAR. I'll probably be done by this weekend. There have been hundreds, if not thousands, of congressional perfections added to the FAR System. I've got some good news. There are less new requirements in Title VIII. However, there are more "Legislative Proposals Not Adopted" than before. The NDAA became law just days ago. Apparently, the "perfectors" wanted to get home and couldn't find places in time for all the junk (LPNAs). Section 802 is "Modification of truthful cost or pricing data submissions and report." I guess there is always room for congressional perfection.
  14. Please read: POSTSCRIPT II: Our Competitive System by Vernon J. Edwards
  15. By Irvin Gray, JD, MBA, LLM, CPCM, CFCM, CCCM and Jamaal Valentine, MBA, Deputy Chief of Compliance and Oversight for the National Guard Bureau, Directorate of Acquisitions. This article examines a Government Accountability Office bid protest filed by a small business applying to the U.S. Small Business Administration 8(a) Business Development program whose proposal was excluded from consideration. Please Read: Adequate Accounting System for Flexibly Priced Contracts – Who Determines Adequacy?
  16. Daniel E. Schoeni, U.S. Air Force JAG, Corps A volume on the ethical dilemmas in the defense industry would be incomplete without a chapter on defense offsets. Offsets are a prominent feature of an industry whose character is increasingly defined by its dependence on exports. In the post-Cold War business environment, which is definitely a buyer’s market, offsets are here to stay. Understanding them is thus an essential task. Such an understanding would enable policymakers to identify or perhaps to mitigate the associated dangers, including the corruption risks and other ethical perils outlined in this chapter. Please read: Some Ethical Dimensions of Defense Offset
  17. Topic locked in accordance to Rule 17.
  18. I was trying to help GABE in his request about splitting purchases and found the following report from 2014. FEDERAL CONTRACTING:  Noncompetitive Contracts Based on Urgency Need Additional Oversight, (p. 35)
  19. The Judge Advocate General's Legal Center and School. (TJAGLCS) I've been trying to find the online Deskbook. All I'm getting is a dead site. Has the Judge Advocate site moved to another url or is it unavailable due to maintenance, etc.?
  20. When I spelled out JOFOC I used the wrong acronym. I corrected it now.
  21. This entry was written in 2003 and has been viewed many thousands of times. It was written for the Analysis Page of this site and I was able to convert it from that page to a blog entry with no immediate problems. For now, all appears to be working. I will check it during the day for sompletion and other problems.
  22. The Fixed-Price Incentive Firm Target Contract: Not As Firm As the Name Suggests By Robert Antonio November 2003 At the end of 1976, I met the Director of the Procurement Control and Clearance Division of the Naval Material Command in Arlington, Virginia. The Director was a legend of the contracting community and any significant Navy contract had to be approved by his office prior to award. I was there because of a controversy involving a contract to acquire a new class of nuclear cruisers. The attendees at the meeting surrounded a conference table and waited for the Director to make his appearance. After several minutes, the Director entered the room and placed a chart on the table. "What do you see?" "What do you see?" He demanded. The fellow next to me said, "It says fixed-price incentive." "No, no, look at it," the Director said. It was a chart that depicted a fixed-price incentive (firm target) contract (FPIF). "Look how flat it is," the Director said. I tried to look at the chart but I was more interested in seeing the Director. Out of the corner of my eye, I saw him dressed in a dark suit, vest, watch chain connected to the middle button of his vest and dangling perfectly from one side to the other. He had a paunch and tufts of white hair on his head and he looked like Winston Churchill—the World War II Prime Minister of the United Kingdom. He was Gordon Wade Rule—the highest-ranking civilian in Navy contracting. Years later, I met a colleague of Gordon Rule and told him about my first impressions. The colleague looked at me and laughed, "Gordon not only looked like Churchill, he thought he was Churchill." Since this first meeting with Gordon Rule, I have been interested in the FPIF contract type and how it can be used on government contracts. The Rule Contract Table 1 is the pricing structure that Gordon Rule was talking about during our meeting. For the purpose of discussion in this article, it will be referred to as the "Rule Contract." Table 1: FPIF Structure on the Navy Contract Provided by Gordon Rule. Structure Description Target Cost $76,000,000 Target Profit $9,700,000 Target Price $85,700,000 Ceiling Price 133 percent of Target Cost at $101,000,000 Share Ratio 95/5 between $64,600,000 and $87,400,000 90/10 below $64,600,000 and from $87,400,000 to Point of Total Assumption Point of Total Assumption $92,366,660 Someone familiar with an FPIF contract will notice what Gordon Rule was talking about. For those who are not, the following discussion explains the mechanics of an FPIF contract pricing structure. Mechanics of the FPIF Contract The FPIF contract includes cost and price points, a ratio, and a formula. They include Target Cost (TC): The initially negotiated figure for estimated contract costs and the point at which profit pivots. Target Profit (TP): The initially negotiated profit at the target cost. Target Price: Target cost plus the target profit. Ceiling Price (CP): Stated as a percent of the target cost, this is the maximum price the government expects to pay. Once this amount is reached, the contractor pays all remaining costs for the original work. Share Ratio (SR): The government/contractor sharing ratio for cost savings or cost overruns that will increase or decrease the actual profit. The government percentage is listed first and the terms used are "government share" and "contractor share." For example, on an 80/20 share ratio, the government's share is 80 percent and the contractor's share is 20 percent. Point of Total Assumption (PTA): The point where cost increases that exceed the target cost are no longer shared by the government according to the share ratio. At this point, the contractor’s profit is reduced one dollar for every additional dollar of cost. The PTA is calculated with the following formula. PTA = (Ceiling Price - Target Price)/Government Share + Target Cost All of these points and shares have an effect on costs, profit, and price. However, two tools in the structure—the ceiling price and the share ratio—dramatically affect the potential costs, profits, and prices. For the examples in tables 3, 4, and 5, I use the target cost, target profit, profit rate at target cost, and target price identified in Table 2. The ceiling price and share ratio will vary according to example. Table 2: FPIF Structure Used for Examples in Tables 3, 4, and 5. Structure Elements Structure Amounts Target Cost $10,000,000 Target Profit $1,000,000 Profit Rate at Target Cost 10% Target Price $11,000,000 Ceiling Price At the ceiling price, the government's liability for cost within the terms of the original contract ends and the contractor pays for all costs above the ceiling price. The setting of the ceiling price significantly affects the relationship between the government and the contractor once the target cost has been reached. The example in Table 3 includes 4 different ceiling prices and the same 70/30 share ratio. Remember, the ceiling price is stated as a percentage of the target cost. Table 3: FPIF Target Costs and Profit with Different Ceiling Prices and Constant 70/30 share ratio. Dollar Costs Ceiling Prices (Percent of Target Cost) 115 120 125 130 $8,000,000 $1,600,000 $1,600,000 $1,600,000 $1,600,000 9,000,000 1,300,000 1,300,000 1,300,000 1,300,000 10,000,000 1,000,000 1,000,000 1,000,000 1,000,000 10,500,000 850,000 850,000 850,000 850,000 11,000,000 500,000 700,000 700,000 700,000 11,500,000 0 500,000 550,000 550,000 12,000,000 500,000 0 400,000 400,000 12,500,000 1,000,000 500,000 0 250,000 13,000,000 1,500,000 1,000,000 500,000 0 PTA $10,714,286 $11,428,571 $12,142,857 $12,857,143 As can be seen, there is no difference in profit for any of the examples where costs are less than the target cost. This is because the ceiling price affects the cost and profit structure somewhere after the target cost is exceeded. Since the ceiling price is used to determine the PTA, it also results in different PTAs. Notice the PTAs for each ceiling price. Prior to the PTA, but after the target cost is reached, the 70/30 share ratio is in effect and the government shares 70 percent of all overruns and the contractor shares 30 percent of all overruns. Once the PTA is reached, the contractor’s profit will be reduced on a dollar-for-dollar basis up to the ceiling price. Remember when Gordon Rule said "Look how flat it is?" He was referring to the incentive curve. The incentive curve reflects the amount of potential profit for each cost level throughout the FPIF structure. The smaller the profit increment as costs increase, the flatter the incentive curve becomes. The flatter the curve becomes, the closer it approaches a cost plus fixed-fee (CPFF) contract since the fixed-fee on a CPFF remains constant for all levels of costs. By increasing the ceiling price on an FPIF contract, the government's share in cost overruns and the contractor's opportunity to recover costs is placed at a higher dollar level. The higher the ceiling price, the flatter the FPIF incentive curve is because it is being stretched in length. Share Ratios To compare the effect of share ratios on an FPIF structure, Table 4 includes 5 different share ratios ranging from 50/50 to 90/10. As mentioned earlier, the government's share of savings or overruns is the first number in the share ratio. In Table 4, a simple share ratio structure is used—one with the same share ratio throughout the structure— to analyze the effect of different share ratios. Share ratios can be complex and can include more than one share ratio. However, to explain the effects of different share ratios, a simple structure is adequate. Table 4: FPIF Target Costs and Profits with Different Share Ratios. Dollar Costs Share Ratios (Government/Contractor) 50/50 60/40 70/30 80/20 90/10 Contractor's Profit Based on Share Ratios Above and Costs In Left Column $8,000,000 $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 8,500,000 1,750,000 1,600,000 1,450,000 1,300,000 1,150,000 9,000,000 1,500,000 1,400,000 1,300,000 1,200,000 1,100,000 9,500,000 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 10,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 10,500,000 750,000 800,000 850,000 900,000 950,000 10,600,000 700,000 760,000 820,000 880,000 900,000 10,700,000 650,000 720,000 790,000 800,000 800,000 10,800,000 600,000 680,000 700,000 700,000 700,000 10,900,000 550,000 600,000 600,000 600,000 600,000 11,000,000 500,000 500,000 500,000 500,000 500,000 11,500,000 0 0 0 0 0 PTA $11,000,000 $10,833,333 $10,714,286 $10,625,000 $10,555,556 Prior to the target cost, the different share ratios provide profits based on the contractor’s share of saved costs alone. Under the 50/50 share ratio, a contractor can increase its profit by $1 million when costs are $2 million less than the target cost because its share is 50 percent of any savings. On the other hand, with the 90/10 share ratio, a contractor can increase its profit by only $200,000 when costs are $2 million less than the target cost because its share is only 10 percent of any savings. The message is clear—there is less incentive to reduce costs as the government share increases. Once the target cost is exceeded, a contractor with a 50/50 share ratio has its profit reduced quickly below the PTA because it is sharing in half of the cost overruns above the target cost. On the other hand, the reduction in profit is less dramatic for the 90/10 ratio. In effect, the incentive curve is being flattened below the PTA. Take another look at the overrun structure for the 50/50 and 90/10 share ratios. Ceiling Prices and Share Ratios Working Together Now that you have seen the basics for different ceiling prices and different share ratios, it is time to see how they can work together. Table 5 illustrates the effect of different share ratios coupled with different ceiling prices. Compare a 50/50 share ratio with a 115 percent ceiling price structure to that of a 90/10 share ratio with a 135 percent ceiling price structure. Quite a difference! Table 5: FPIF Target Costs and Profits with Different Ceiling Prices and Share Ratios. Dollar Costs Share Ratios Combined with Ceiling Prices 50/50 115 60/40 120 70/30 125 80/20 130 90/10 135 $8,000,000 $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 8,500,000 1,750,000 1,600,000 1,450,000 1,300,000 1,150,000 9,000,000 1,500,000 1,400,000 1,300,000 1,200,000 1,100,000 9,500,000 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 10,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 10,500,000 750,000 800,000 850,000 900,000 950,000 11,000,000 500,000 600,000 700,000 800,000 900,000 11,500,000 0 400,000 550,000 700,000 850,000 12,000,000 (500,000) 0 400,000 600,000 800,000 12,500,000 (1,000,000) (500,000) 0 500,000 750,000 13,000,000 (1,500,000) (1,000,000) (500,000) 0 500,000 13,500,000 (2,000,000) (1,500,000) (1,000,000) (500,000) 0 PTA $11,000,000 $11,666,667 $12,142,857 $12,500,000 $12,777,778 The 50/50 share ratio and 115 percent ceiling price structure is referred to as a “tight structure” because it places a good deal of cost control incentive on the contractor. On the other hand, the 90/10 share ratio and 135 percent ceiling price structure is referred to as a “loose structure” because there is less cost control incentive placed on the contractor. With the combination of a high ceiling price and a high government share, we have flattened the incentive curve significantly. Now, with what we have seen so far, let's go back to the contract that Gordon Rule was complaining about in 1976. To do this, we will compare a moderate FPIF structure with a 70/30 share ratio and 125 percent ceiling price to the Rule contract. Table 6: Moderate FPIF Structure Compared to the Rule Contract. Dollar Costs Profit Dollars Profit Rate 70/30 125 Rule Contract 70/30 125 Rule Contract $60,000,000 $14,500,000 $10,730,000 24,17% 17.88% 65,000,000 13,000,000 10,250,000 20.00% 15.77% 70,000,000 11,500,000 10,000,000 16.43% 14.29% 75,000,000 10,000,000 9,750,000 13.33% 13.00% 76,000,000 9,700,000 9,700,000 12.76% 12.76% 80,000,000 8,500,000 9,500,000 10.63% 11.88% 85,000,000 7,000,000 9,250,000 8.24% 10.88% 90,000,000 5,000,000 8,870,000 5.56% 9.86% 95,000,000 0 6,000,000 0% 6.32% 100,000,000 5,000,000 1,000,000 Loss 1.00% 101,000,000 6,000,000 0 Loss 0% As Table 6 shows, there is quite a difference between our moderate FPIF structure and the Rule contract. Look at the $95 million dollar cost level. Here the moderate FPIF results in no profit while the Rule Contract provides a 6.32 percent profit rate and a dollar profit of $6 million. This difference is caused by the higher ceiling price and the higher government share of overruns on the Rule Contract. Take a look at the profit rate on costs before the target cost is reached. It increases more slowly on the Rule contract as costs are reduced below the target cost of $76 million. Here, the flattening effect of the higher government share on any cost savings is evident. What Was Gordon Rule Saying? With the basic mechanics of an FPIF contract under your belt, we can go back to that day in 1976 when Gordon Rule said "What do you see?" "What do you see?” "Look how flat it is." Well, a CPFF is a flat curve. For example, on a CPFF contract, the share ratio is 100/0 because the government shares all of the cost savings and overruns within the original contract terms. Additionally, the ceiling price could be infinite if the government wishes. So, a CPFF contract has a 100/0 share ratio and whatever ceiling price the government is willing to accept. Gordon Rule was claiming that the FPIF example in the "Rule Contract" was, in fact, a CPFF contract. Was he right? In Table 7, a CPFF contract structure is compared to the structure of the Rule Contract. Table 7: CPFF Contract Structure Compared with the Rule Contract Structure Dollar Costs Profit Comparison (Dollars) Profit Comparison (Profit Rate) CPFF Rule Contract CPFF Rule Contract $60,000,000 $9,700,000 $10,730,000 16.17% 17.88% 65,000,000 9,700,000 10,250,000 14.92% 15.77% 70,000,000 9,700,000 10,000,000 13.86% 14.29% 75,000,000 9,700,000 9,750,000 12.93% 13.00% 76,000,000 9,700,000 9,700,000 12.76% 12.76% 80,000,000 9,700,000 9,500,000 12.13% 11.88% 85,000,000 9,700,000 9,250,000 11.41% 10.88% 90,000,000 9,700,000 8,870,000 10.78% 9.86% 95,000,000 9,700,000 6,000,000 10.21% 6.32% 100,000,000 9,700,000 1,000,000 9.70% 1.00% 101,000,000 9,700,000 0 9.60% 0% For the CPFF contract in Table 7, the fixed-fee is set at the same rate as the target profit on the Rule contract—$9.7 million at a cost of $76 million. Remember that between $64,600,000 and $87,400,000, the share ratio on the Rule contract was 95/5. So, the CPFF share ratio of 100/0 is quite close to that of the Rule contract at 95/5 between $64.6 million and $87.4 million. After $87.4 million, the Rule contract converts to a 90/10 share ratio until the PTA which is between $92 and $93 million. Notice how the percent of fee on costs closely parallels the percent of profit on the Rule contract. As Gordon Rule emphasized, it is flat—it is nearly a CPFF contract. Abuses of the FPIF The Federal Acquisition Regulation (FAR) at 16.403-1 (b) explains that an FPIF contract is appropriate when a fair and reasonable incentive and a ceiling can be negotiated that provides the contractor with an appropriate share of the risk and the target profit should reflect this assumption of responsibility. The FAR further points out that an FPIF is to be used only when there is adequate cost or pricing information for establishing reasonable firm targets at the time of initial contract negotiation. Further, FAR 16.401 explains that incentives are designed to motivate contractors to meet government goals and objectives. The guidance in the FAR, although general, appears sound. However, what happens when people and the survival of their programs or their organizations are involved? Unfortunately, the FPIF can be manipulated and abused by government and/or industry. It can be used to submit below anticipated cost offers, to hide huge anticipated overruns, or to deceive the uninitiated who only recognize the phrase "fixed-price." One Industry’s Experience with the FPIF In the 1970s, 1980s, and into the 1990s, a series of General Accounting Office (GAO) reports discussed cost overruns on shipbuilding contracts. For the most part, these reports discussed FPIF contracts. Table 8 provides a summary of the anticipated cost overruns on most shipbuilding contracts during this period. Table 8: Anticipated Cost Overruns and Savings Reported on Shipbuilding FPIF Contracts. Report Date Number of FPIF Contracts Expected Costs Above Target Costs Expected Savings Below Target Costs Number of Contracts Expected to Finish at Target Number Dollars Number Dollars 1987a 22 19 $1,413,000,0000 3 $25,900,000 N/A 1989b 46 25 3,297,000,000 6 315,000,000 15 1990c 44 24 3,784,100,000 6 230,800,000 14 1992d 45 32 4,400,000,000 3 102,000,000 10 a Navy Contracting: Cost Overruns and Claims Potential on Navy Shipbuilding Contracts, GAO/NSIAD-88-15, October 16, 1987, p. 7 b Navy Contracting: Status of Cost Growth and Claims on Shipbuilding Contracts, GAO/NSIAD-89-189, August 4, 1989, p. 2 c Navy Contracting: Ship Construction Contracts Could Cost Billions Over Initial Target Costs, GAO/NSIAD-91-18, October 5, 1990, p. 12 d Navy Contracting: Cost Growth Continues on Ship Construction Contracts, GAO/NSIAD-92-218, August 31, 1992, p. 11 As we can see from the table, the majority of the contracts had cost estimates for completion that exceeded the original target costs. Additionally, the amount of estimated cost overruns dwarfed the amount of estimated savings in each GAO report. These numbers defy the law of averages. If we simply look at these results without asking questions, we would declare the FPIF contract type as ineffective. However, there is more to it than that. During the 1970s and 1980s, the commercial shipbuilding market was shrinking for U. S. shipbuilders and the U. S. Navy became the “sole-customer” for their work. At the same time, the Navy emphasized competition on its contracts and placed more emphasis on price in making decisions for contract awards. Price became more important because of tight budgets. The industry, recognizing that its commercial market had dried-up, placed survival above profit and cut prices in a frenzy of low-ball offers. Since the government was the sole customer, it had pricing power over its contractors. According to the GAO One shipbuilder said the Navy has sent a message that ship contracts will be awarded based on price and the response has been to bid aggressively. 1 How aggressive was the bidding? Here is one example. Navy analyses indicate that both contracts were awarded at a substantial cost risk to the government based on comparisons of the proposed prices with the Navy's estimates. In both of these awards, the Navy believes that there is a strong possibility that the contractors will exceed ceiling prices. 2 Yes, under these two contracts target cost was not the issue. The Navy concluded that the contractors offered to work at a loss somewhere beyond the ceiling price. Beware of the Hidden Target Cost If an industry or a contractor is trying to survive in a competitive environment, how might it approach the FPIF. As we have seen, contractors will bid below cost when they believe it is in their interest. Does the FPIF provide an opportunity for a contractor to offer a very low price, expect a very large overrun, and hope for a small profit? Yes, it does. Table 9 provides a theoretical example that includes an FPIF with a 95/5 share ratio and a 135 percent ceiling price. Included in the table is a "proposed target cost" which is the official offer amount that the contractor submits to the government. In the second column, there are a range of the contractor's real goals for its target cost. Table 9: Example of a Potential Contractor's View of a FPIF. Contractor's Proposed Target Cost Contractor's Actual Goals Target Cost Cost Overrun Overrun Rate Dollar Profit Profit Rate $100,000,000 $100,000,000 $0 0.00% $10,000,000 10.00% 100,000,000 105,000,000 5,000,000 5.00% 9,750,000 9.29% 100,000,000 110,000,000 10,000,000 10.00% 9,500,000 8.64% 100,000,000 115,000,000 15,000,000 15.00% 9,250,000 8.04% 100,000,000 120,000,000 20,000,000 20.00% 9,000,000 7.50% 100,000,000 125,000,000 25,000,000 25.00% 8,750,000 7.00% 100,000,000 126,315,789 26,315,789 26.32% 8,684,211 6.88% 100,000,000 129,807,000 29,807,000 29.81% 5,193,000 4.00% 100,000,000 130,000,000 30,000,000 30.00% 5,000,000 3.85% 100,000,000 135,000,000 35,000,000 35.00% 0 0 100,000,000 140,000,000 40,000,000 40.00% 5,000,000 Loss Assume that the contractor sets a goal of a 4 percent profit on costs. From past experience, the contractor expects that the government will be willing to negotiate a 95/5 share ratio, a 135 percent ceiling price, and a 10 percent profit rate at target cost. The contractor proposes a target cost of $100,000,000 but is really focusing on the 4 percent profit amount. At that profit rate, the contractor's actual target cost goal is $129,807,000. The government determines that the offer is fair and reasonable and negotiations are completed. At the time of agreement on the pricing structure, $100,000,000 is the contractual target cost and the contractor's actual goal is $129,807,000 for a target cost. In effect, the contract is negotiated with nearly a 30 percent cost overrun and a 4 percent profit. A Government Incentive to Underestimate Costs Does a government organization ever have an interest in understating the cost of an item? The President's Blue Ribbon Commission on Defense Procurement, popularly known as the Packard Commission, gave us the following answer. Once military requirements are defined, the next step is to assemble a small team whose job is to define a weapon system to meet these requirements, and "market" the system within the government, in order to get funding authorized for its development. Such marketing takes place in a highly competitive environment, which is desirable because we want only the best ideas to survive and be funded. It is quite clear, however, that this competitive environment for program approval does not encourage realistic estimates of cost and schedule. So, all too often, when a program finally receives budget approval, it embodies not only overstated requirements but also understated costs. 3 If the government has an interest in underestimating the cost of a system, it can use an FPIF to its advantage by simply loosening the pricing structure of the FPIF contract. Let's look at an actual example—the original contract for the Trident submarine awarded in 1974. Table 10: Fixed-Price Incentive Pricing Structure for the Trident Submarine.4 Pricing Elements Pricing Structure Target Cost $253,000,000 Target Profit $32,400,000 (12.8% of Target Cost) Target Price $285,400,000 Ceiling Price $384,000,000 (152% of target cost) Share Ratio 95/5 from target cost to $279,600,000 85/15 from $279,600,000 to PTA 70/30 below target cost As can be seen, the contract had a 95/5 share ratio and an incredible ceiling price of 152 percent of target cost. Here is what Gordon Rule had to say about this pricing structure When the Navy negotiates a 95/5 share above target cost for the first 26 million of overrun of target, the target cost figure is patently phoney. Moreover, when the Navy negotiates a 95/5 share and then also a 152% ceiling, the target cost figure is patently ridiculous. First priority for the future must be the negotiation of more reasonable target costs for our FPI shipbuilding contracts and if the budget has to be changed, then change it. 5 Once a system receives budget approval with an understated cost, the government must find a way to contract for it at that underestimated cost. The FPIF provides the opportunity in two ways. First, it allows the government to hide expected overruns at the time the contract is awarded. Or, in Gordon Rule's words, it allows the government to include "an obvious overrun of target cost built in." 6 Second, the term "fixed-price" can be used to disguise a cost-reimbursement contract. For example, in regard to the Trident contract, the Commander of the Naval Ship Systems Command, explained 7 People said, "That's a CPFF [cost-plus-fixed-fee] contract under another name," and I said, "Right. You want to call it that, do what you like. Call it what you please." ... I suppose it's a matter for some slight chagrin that what really ought to have been a CPFF contract turned out to be something else, or to have a different label on it, but I don't feel bad about it. 8 Some Final Thoughts Does the FPIF contract have a place in federal contracting? I think it does when it is used as it is intended. However, it can and has been abused. In testing an FPIF structure, there are a number of things I ask. Here are several. Is the government's share of savings significantly lower below the target cost than its share of losses above the target cost. For example, is there a 50/50 share ratio below the target cost while a 95/5 share ratio exists above target cost. This alerts me to the possibility that the real target cost exceeds the negotiated target cost in the contract. Is the ceiling price above 135 percent of target cost? Although a 135 percent ceiling price is generous, anything above it is excessive. Does the share ratio flatten out around the target cost for an extended period? For example, is there a share ratio of 95/5 or 100/0 from 10 percent below target cost to 10 percent above target cost? This effectively converts the extended part of the FPIF structure to a cost plus fixed-fee contract. If I do identify a suspicious FPIF structure, I turn to the facts surrounding the negotiation of the target cost. For example, Is the government's budget for the item unrealistically low? Does the government have pricing power over the contractor? In short, can the government dictate the contractor's price because of market conditions? Is the contractor in survival mode or is the contractor trying to gain a foothold in a program area? If there was a final proposal revision, did the contractor's price drop substantially? 1 Navy Contracting: Cost Overruns and Claims Potential on Navy Shipbuilding Contracts, GAO/NSIAD-88-15, October 16, 1987, p. 9 2 Ibid 3 President's Blue Ribbon Commission on Defense Procurement, Final Report, June 30, 1986, p. 45. 4 J. Ronald Fox and Mary Schumacher, "Trident Contracting (C): Negotiating the Contract," John F. Kennedy School of Government, 1988, pps 6 and 7. 5 Hearings before the Committee on Armed Services, United States Senate, 94th Congress, Second Session, Part 8, Shipbuilding Cost Growth and Escalation, p. 4658. 6 Fox and Schumacher, p. 8. 7 In 1976, the Naval Ship Systems Command was renamed the Naval Sea Systems Command. Copyright © 2023 by Robert Antonio
  23. Here is a letter from Senator Warren and Congressman John Garamendi about contract pricing.
  24. This COFC opinion involves "a software developer’s claim for copyright infringement." It involves actions by contracting officers and contracting officer's technical representatives.
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