Cost Plus Fixed Fee - Rate Increase

[OuterSpace]

We have a 5 year CPFF contract for approx $10m. As I understand it, the Fee is fixed, so if our rates increase during the life of the contract, this would eat in to our Fee. Or do we get a chance to bill at the new higher rates, and increase the fee as well (or would this only apply to a cost plus percentage of cost)?

 

[ji20874]

The fee is fixed.  An increase in your costs will not reduce or "eat in to" your fee.

The Government has promised to pay all of your costs (reasonable, allowable, and so forth) plus a fixed fee.  You have zero cost risk.  Are you now wanting the Government to pay more than the fixed fee you already bargained for?  Why?

[Vern Edwards]

@OuterSpace See FAR 16.306, Cost-plus-fixed-fee contracts:

Quote

A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs.

See, also, the contract clause at FAR 52.216-8, Fixed Fee:

Quote

(a) The Government shall pay the Contractor for performing this contract the fixed fee specified in the Schedule.

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total fixed fee or $100,000, whichever is less, to protect the Government’s interest. The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of an adequate certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the Contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years’ settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor’s past performance related to the submission and settlement of final indirect cost rate proposals.

However, if the government changes the contract pursuant to the Changes clause, FAR 52.243-2, Changes—Cost-Reimbursement, and if the change increases the cost of performance, then your company would be entitled to an equitable adjustment in the fee:

Quote

(a) The Contracting Officer may at any time, by written order, and without notice to the sureties, if any, make changes within the general scope of this contract in any one or more of the following:

           (1) Drawings, designs, or specifications when the supplies to be furnished are to be specially manufactured for the Government in accordance with the drawings, designs, or specifications.

           (2) Method of shipment or packing.

           (3) Place of delivery.

      (b) If any such change causes an increase or decrease in the estimated cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, or otherwise affects any other terms and conditions of this contract, the Contracting Officer shall make an equitable adjustment in the-

           (1) Estimated cost, delivery or completion schedule, or both;

           (2) Amount of any fixed fee; and

           (3) Other affected terms and shall modify the contract accordingly.

Emphasis added.

[Neil Roberts]

2 hours ago, OuterSpace said:

We have a 5 year CPFF contract for approx $10m. As I understand it, the Fee is fixed, so if our rates increase during the life of the contract, this would eat in to our Fee. Or do we get a chance to bill at the new higher rates, and increase the fee as well (or would this only apply to a cost plus percentage of cost)?

FAR 16.102 is as follows:

"c) The cost-plus-a-percentage-of-cost system of contracting shall not be used..."

[OuterSpace]

My confusion is, if we proposed $5m total ($4m cost + $1m Fee), but then our cost went up to $6m, would we still only receive $1m (plus the $6m), or could we add fee on top of those new cost? It sounds like we cannot. Thank you for your replies.

[Vern Edwards]

5 hours ago, ji20874 said:

You have zero cost risk. 

That's a common myth about cost-reimbursement contracts. The fact is that many legitimate business costs are unallowable under such contracts.

[ji20874]

Well, if you look at what I actually wrote, and if you read the zero cost risk statement within the context it was presented, then what I wrote is true.  However, if you strip it from its context, then yes, it is no longer true -- but stripping it from its context is unfair, and I want to expect better here.

[Vern Edwards]

8 hours ago, ji20874 said:

Well, if you look at what I actually wrote, and if you read the zero cost risk statement within the context it was presented, then what I wrote is true.  However, if you strip it from its context, then yes, it is no longer true -- but stripping it from its context is unfair, and I want to expect better here.

Emphasis added.

Okay. Here's what you "actually" wrote, in context:

16 hours ago, ji20874 said:

The fee is fixed.  An increase in your costs will not reduce or "eat in to" your fee.

The Government has promised to pay all of your costs (reasonable, allowable, and so forth) plus a fixed fee.  You have zero cost risk.  Are you now wanting the Government to pay more than the fixed fee you already bargained for?  Why?

Emphasis added. Here's what I wrote in reaction:

10 hours ago, Vern Edwards said:

That's a common myth about cost-reimbursement contracts. The fact is that many legitimate business costs are unallowable under such contracts.

Cost-reimbursement contracts are not "zero cost risk," because if the contractor overruns, and the government funds the overrun and requires the contractor to continue performing, then the contractor will likely incur additional, legitimate, yet unallowable business costs, but it will not receive additional fee. That's a risk which, if realized, would "eat into" the contractor's fixed fee.

Now, as for expectations—I expect knowledgeable, experienced people responding to inquiries to respond with more than half-baked, toss-off, remarks such as yours to the OP in this thread. I don't know why you bother posting your standard, hasty, one or two-sentence, insubstantial, unsupported flimsies. Given your knowledge and experience, I expect more, and so should everyone else. And every time you post one of those things, I am going to show you the kind of thing you should have posted. Every single time.

That's something you can expect. You can count on it.

P.S. "Unfair" is whining.

[Retreadfed]

19 hours ago, ji20874 said:

An increase in your costs will not reduce or "eat in to" your fee.

I'm not sure exactly what Outerspace meant by eat into the contractor's fee.  However, some people seem to equate "fee" with "profit" which is a mistake.  As Vern pointed out, a contractor may incur costs that are allocable to a contract, but not allowable.  Thus, the profit rate on that contract will be less than the fee "rate."  In Outerspace's situation, if the contractor incurs increased costs and does not receive an increase in fee, the contractor's profit rate will be reduced.

[Vern Edwards]

To add to what Retreadfed said, fixed fee is not stated as a rate and, ideally, should not be thought of in terms of a rate. It is a fixed dollar amount that is paid to the contractor for undertaking the contract. The amount should reflect the degree of effort and uncertainty associated with performance, within statutory limits. The parties presumably enter into the contract knowing that the actual cost is very likely to be greater than the estimated cost. Thus, if the contractor thinks of fee as a percentage of the estimated cost (almost everybody does at one time or another), then they should know that there is always a significant risk that the realized percentage will end up being less than the negotiated percentage.

[here_2_help]

21 hours ago, OuterSpace said:

We have a 5 year CPFF contract for approx $10m. As I understand it, the Fee is fixed, so if our rates increase during the life of the contract, this would eat in to our Fee. Or do we get a chance to bill at the new higher rates, and increase the fee as well (or would this only apply to a cost plus percentage of cost)?

At this point, you have a contract with both (1) an estimated cost and (2) a fixed fee amount. During performance, if your costs increase (because, say, your indirect rates were higher than you expected) you may still bill those costs (assuming they are allowable, reasonable, etc., as ji20874 wrote) up to either (a) the amount funded if incrementally funded or else (b) the full amount of your estimated costs.

HOWEVER, if your contract includes 52.232-20 or 52.232-22, then you must comply with those clauses. Normally (with a few exceptions for unforeseen situations) you must notify your customer before spending all the money. If you adhere to the notification requirements, the customer may choose to fund an overrun (regardless of cause); but it need not and then you stop work when you have no more funds or have reached the total estimated cost of the contract. In that manner, your fixed fee is preserved. Note that if your contract includes either or both of those clauses (and it should), then your failure to comply essentially converts your CPFF contract into a FFP contract and you must deliver and the customer has no obligation to fund any overrun/cost growth whatsoever.

Increasing indirect rates just burns the available contract funds faster than planned. Whether that situation impacts your expected profit largely depends on your ability to comply with those contract clauses I cited above.

[Retreadfed]

49 minutes ago, here_2_help said:

Whether that situation impacts your expected profit largely depends on your ability to comply with those contract clauses I cited above.

H2H, I generally agree with what you have written.  However, I do not understand this sentence.  Can you explain what you meant by it?

[here_2_help]

1 hour ago, Retreadfed said:

H2H, I generally agree with what you have written.  However, I do not understand this sentence.  Can you explain what you meant by it?

If the contractor fails to comply with the LoC or LoF clause (as applicable) then the government is not obligated to provide additional funds but the contractor is still expected to perform the contracted work. In the event performance costs more than available contract funds, then the contractor will incur a loss on performance of the work. I'm talking about project gross margin erosion into negative territory.

Okay?

[Retreadfed]

3 hours ago, here_2_help said:

If the contractor fails to comply with the LoC or LoF clause (as applicable) then the government is not obligated to provide additional funds but the contractor is still expected to perform the contracted work.

Does the LOC or LOF clause require the contractor to complete the contract if the contractor exceeds the estimated cost or amount allotted to the contract but does not give the government prior notice of the overrun?

[joel hoffman]

5 hours ago, here_2_help said:

5 hours ago, here_2_help said:

Note that if your contract includes either or both of those clauses (and it should), then your failure to comply essentially converts your CPFF contract into a FFP contract and you must deliver…

 

H2H, can you clarify this statement and this statement: 

3 hours ago, here_2_help said:

…but the contractor is still expected to perform the contracted work.

Both clauses state that the contractor is not obligated to continue performance beyond the LOF or LOC.

52:232-22 Limitation of funds

(f) (2) …”The Contractor is not obligated to continue performance under this contract (including actions under the Termination clause of this contract) or otherwise incur costs in excess of (i) the amount then allotted to the contract by the Government”

52.232-20 Limitation of Cost

(d) (2) “The Contractor is not obligated to continue performance under this contract (including actions under the Termination clause of this contract) or otherwise incur costs in excess of the estimated cost specified in the Schedule, until the Contracting Officer (i) notifies the Contractor in writing that the estimated cost has been increased and (ii)  provides a revised estimated  total cost of performing this contract.”

Once the Contractor knows or believes that it has exceed an LOF or LOC it can stop further performance but the Government isn’t obligated to pay for the overrun.

** But it will pay for the overrun,  if it decides to continue funding the effort beyond the Limit at least up to the amount of the overrun.

Edit**

Edited February 8, 2023 by joel hoffman
Clarified that if the government provides additional funding to cover the overrun, the overrun is payable.

[here_2_help]

37 minutes ago, joel hoffman said:

H2H, can you clarify this statement and this statement: 

Both clauses state that the contractor is not obligated to continue performance beyond the LOF or LOC.

Joel, I'm sorry I wasn't clear. My statement: "…but the contractor is still expected to perform the contracted work" was in the context of a FAILURE to comply with the requirements of the clause(s).

 

 

[here_2_help]

1 hour ago, Retreadfed said:

Does the LOC or LOF clause require the contractor to complete the contract if the contractor exceeds the estimated cost or amount allotted to the contract but does not give the government prior notice of the overrun?

Hmm. I would say yes but I can't point to a case at the moment. How about let's just say the contractor is in material breach?

 

EDITED: I'm willing to concede that the failure to notify simply means that the government is not required to fund any overruns. A failure to notify does not carry with it an obligation to keep performing. Sorry about that.

[Retreadfed]

18 hours ago, here_2_help said:

EDITED: I'm willing to concede that the failure to notify simply means that the government is not required to fund any overruns. A failure to notify does not carry with it an obligation to keep performing. Sorry about that.

Thanks for the clarification.