FrankJon

I don't assert that the Board ruled it, but that the Board erred in stating that subpart 16.4 "does not apply" without further analysis. In my view, the paragraph I quoted in the OP evidences a misunderstanding of what it means to combine FFP contract type with incentives. I say this because: The judge cites only to FAR 16.401(a) when considering the question, conspicuously omitting FAR 16.202-1; and The judge mentions "fixed-price incentive contracts," but these are defined at FAR 16.403, and have no bearing on the facts of this case or the Government's argument. This tells me she is seeking evidence that the contract type is other than FFP simply because she hasn't considered the language at FAR 16.202-1. I've thought about this paragraph quite a bit over the past week. Unless the judge is using "fixed-price incentive contracts" in some widely accepted generic sense that I'm unaware of, I still don't see how this paragraph can be interpreted any other way. Or, as Professor Nash points out, perhaps they would have been permissible if the Board had been willing to consider them as delivery incentives. But that would have required applying subpart 16.4. Appreciate the robust discussion, all, and looking forward to the article, Vern.

That’s right. That specific paragraph strikes me as unsound. The board appears to be seeking something formal—such as a clause or assigned contract type—to show it’s an incentive contract before considering subpart 16.4. If true, this contradicts FAR 16.202-1, which allows for the contract to remain FFP while incorporating certain incentives addressed under subpart 16.4. That’s my view anyway. Which part have I misunderstood?

Well, my thoughts in this post are specific to the quoted text. But overall I think that: 1. USTRANSCOM erred first by apparently failing to cite to FAR 16.202-1 or attempt to distinguish performance incentives from delivery incentives (the latter of which are not expressly addressed in part 37) in its argument. 2. ASBCA's finding that the NPIs were impermissible because they weren't tied to performance standards as required by FAR 37.601(b)(3) seems reasonable to me. 2. ASBCA erred by refusing to even consider FAR 16.402-2 or 16.402-3 based on the rationale that this was a FFP contract.

Thanks, Vern. I also came across Using Incentives on Commercial Item Contracts, 14 No. 9 Nash & Cibinic Rep. ¶ 44, in which you advocate for "award purchase" incentives in lieu of profit-based incentives for commercial goods and services. This sounds similar to the present-day "award term" contract.

Thanks, Retreadfed. Your interpretation assumes that a FFP contract with performance/delivery incentives is an "incentive contract" as the FAR uses that term, but I don't think the FAR is clear on this point at all. For example -- FAR 16.202-1 states that such a contract "remains firm-fixed-priced." FAR 16.401(a) states that "Incentive contracts as described in this subpart are appropriate when a FFP is not appropriate." FAR 16.401(c) states that "the two basic categories of incentive contracts" are addressed in FAR 16.403, 16.404, and 16.405 (not 16.402). FAR 12.207(d) explicitly permits the use of such incentives when purchasing commercial goods and services (likely since an "incentive contract" would be barred from use by 12.207(a)). (See also FAR Case 2000-013: "The changes made in this rule are intended to facilitate greater use of FAR Part 12 for commercial services acquisitions by providing the contract type flexibility embodied in statute." https://www.federalregister.gov/documents/2000/12/29/00-33153/federal-acquisition-regulation-contract-types-for-commercial-item-acquisitions) Putting that aside, I personally don't think the Board made its decision based on the absence of a D&F, or it would have pointed that out. Instead, the Board in its opinion is stating that subpart 16.4 "does not apply" because it's a FFP contract. It doesn't see how the positive or negative incentives discussed at 16.402-2(b) could apply unless the contract were other than FFP. But its reference to a "fixed-price incentive contract" completely misses the mark, since such contracts are defined at FAR 16.204, and this is clearly not what USTRANSCOM was doing. And its reference to "any type of incentive contract" is vague. Moreover, which clauses the Board would have wanted to see are unclear, as neither the FAR, DFARS, nor TRANSFARS prescribes a clause for FFP + performance/delivery incentives. Bottom line for me, it's not clear what beyond a deduction schedule and agreement from the contractor USTRANSCOM needed to establish negative performance incentives. If the ASBCA was indeed tracking FAR 16.202-1, I would have liked to have seen it explain that instead of discussing an unrelated concept like fixed-price incentive contracts or expecting clauses that are not prescribed.

In Red Bobtail Transportation (ASBCA No. 63771 (A.S.B.C.A.), 2024 WL 2873960), the ASBCA found what USTRANSCOM asserted were negative performance incentives pursuant to FAR 16.402-2(b) to be unenforceable penalties against the contractor. The contract type was FFP, and the contractor had made two late deliveries for which USTRANSCOM deducted partial payment. (It's not clear why USTRANSCOM characterized these as performance incentives instead of delivery incentives.)The contract contained a deduction schedule in the PWS, but no clauses pertaining to incentives. What caught my eye was the following quote by the ASBCA: In my view, the ASBCA clearly errs here by overlooking FAR 16.202-1: In doing so, it wrongly assumes that a FFP contract cannot contain incentives as described in subpart 16.4. It also wrongly assumes that such a contract must be formally designated as "a fixed-priced incentive contract (or any type of incentive contract)." Do others agree that the ASBCA in this case fundamentally misunderstands the use of performance/delivery incentives in a FFP contract, or am I missing something? Additional reading on the subject: PERFORMANCE INCENTIVES: Follow the Rules (38 Nash & Cibinic Rep. NL ¶ 50) (This is where I first learned about the ASBCA holding, although I was surprised that the article doesn't question the quoted text.)

Thanks Neil. Profit is discussed at 10 USC 3374. This would override my commerciality argument, although the term “substantial portion” still seems to present a great deal of ambiguity.

OK, well for starters neither 52.216-24 nor 52.232-16 are commercial clauses, so neither belongs in the scenario I described. Clause 52.216-25 is a commercial clause, but unfortunately DFARS 216.603-4(b)(3) tells us to replace that clause with 252.217-7027, which is not a commercial clause. In the scenario I described, what gives me the authority to audit the contractor’s costs and adjust its profit? What gives me the authority to demand cost data at all? Certainly no terms I included in my letter contract appear to convey this. Why would any of this be common knowledge among today’s practitioners if the use of UCAs is so limited? It’s amusing to me that the regulations so poorly describe this process we must look to audits and some level of experiential learning to piece together the true nature of UCAs, yet the confused practitioner asking reasonable questions (in this case me) is the a-hole. Thanks for your help, Vern.

Still seems like you’re talking to me. I didn’t say that.

Was this to me or @C Culham? I'm aware of that definition. It doesn't align to what Carl appears to think is very clearly stated by the regs.

If you'd like to point me to an authoritative discussion or rule on UCAs and letter contracts, I'd gladly read it. Apart from the regulations and DoDIG language I cited (which you then cited back to me), I've reviewed Formation of Government Contracts (5th Ed.) and The Government Contracts Reference Book seeking information the topic of UCA pricing. I've also discussed UCAs and LCs with multiple colleagues with experience awarding them, and each colleague has had unique ideas about the "right" way to do them. Likewise, it seems some your "regulars" don't quite agree on this topic either.

Can you provide a citation to this definition? This doesn't match any definition I've found.

Thank you for the substantive discussion, @ji20874, @formerfed, @Retreadfed. I really don't want to get bogged down with nomenclature here, as that was the least important part of my question. I'm more interested in the ability to adjust a contractor's profit under the circumstances I've described. If I've erred, I'll own it. But Vern's silly response aside, I've seen nothing definitive that would indicate this.

Well if 52.216-26 is properly excluded from the UCA because the CO anticipates a FFP definitized contract, how is the contractor apprised that the Government will reimburse allowable costs? Where does the Government explain how it will calculate allowable costs? How does the contractor know to submit cost data? Which contract term defines "qualifying proposal," and what if the contractor doesn't agree to submit cost data? I'm no expert in CR contracting, but it's not clear to me why the parties must necessarily assume the UCA is a CR contract type. Take my situation. I had a requirement for severable, commercial services. I loaded the UCA with commercial clauses as well as UCA- and letter contract-specific clauses I felt applied.* The contractor indicated it would view this as a labor-hour arrangement until definitization, and I saw no issue with this since the work provided an hourly benefit to the Government. In 252.217-7027 paragraph (b), I requested a FFP proposal. The contractor submitted a timely FFP proposal with two CLINs, one covering the UCA period, the other covering post-definitization work. The UCA period included LCATs, fully-burdened rates, and actual hours worked. The post-definitization period included the same LCATs and fully-burdened rates, but with estimated hours. Using FAR subpart 13.5 procedures, I determined the rates to be fair and reasonable and proceeded immediately to award the definitized contract. What is wrong with that? (*One thing that I learned may have been wrong after the fact was including 252.217-7027 at all, as this is not listed as a commercial clause in DFARS part 212. It was actually DFARS Case 2021-D0003 that tipped me off to this. This Case states of DFARS 252.217-7027: "The clause will continue to not apply to acquisitions at or below the SAT and to acquisitions of commercial services and commercial products.")

DFARS 217.7404-6 requires that "[w]hen the final price of a UCA is negotiated after a substantial portion of the required performance has been completed, the head of the contracting activity shall ensure the profit allowed reflects" any reduced risk to the contractor. In its 2020 report Audit of Military Department Management of Undefinitized Contract Actions, DoDIG states: Source: https://media.defense.gov/2020/May/13/2002298926/-1/-1/1/DODIG-2020-084.PDF. DoDIG repeats this assertion that a UCA is "essentially cost reimbursable" throughout the report. Questions: Why does DoDIG assume that all UCAs are cost-reimbursement contracts? Where does the FAR or DFARS support this assertion? I see clause 52.216-26, but that is only required when a cost-reimbursement definitive contract is contemplated. Assuming the contract is definitized on time in accordance with paragraph (d) of clause 252.217-7027 and the CO does not include any other terms authorizing the adjustment of profit, what gives the Government de facto authority to adjust a contractor's profit in accordance with DFARS 217.7404-6? Since unilaterally adjusting profit is not compatible with commercial procedures and utilizing weighted guidelines is not compatible with simplified acquisition procedures, would the inclusion of commercial terms in the UCA and the application of FAR subpart 13.5 procedures to the definitized contract action negate the requirement to follow DFARS 217.7404-6? Since "substantial portion" is not defined by the DFARS, it seems to me that the CO has total discretion to determine when the 217.7404-6 analysis applies, depending on her definition of "substantial" under the circumstances. Am I missing something?