commercial item CPFF subcontract?

[Neil Roberts]

On 5/24/2023 at 6:43 PM, Fara Fasat said:

the effort required is too uncertain to price as FP

Fara, I am not comfortable leaving the impression and/or advising that a required commercial service effort that is too uncertain to price as fixed price, is a market or catalog price. If there were some facts provided to me that support a contrary conclusion, other than two parties said it is a market or catalog price, then maybe it is a commercial service.

[C Culham]

I will always wonder what is sold that is not a commercial service when the "or" is play.   

 "Market prices means current prices that are established in the course of ordinary trade between buyers and sellers free to bargain and that can be substantiated through competition or from sources independent of the offerors"

[joel hoffman]

On 6/4/2023 at 11:05 PM, Fara Fasat said:

the same services that are performed commercially, at established rates. The only unknown was the amount required -- as I said before, would it take 3 tests or 15 tests?

If there are established “rates”, then the services can be priced as unit priced services or perhaps as time and materials depending upon what Fara means by “rates”

Either unit priced tests or possibly T&M if applicable to the price of tests are suitable and allowable for commercial services with quantities that can be adjusted.

However, “standard rates” for tests  are incongruous for cost reimbursement services. Either there is an established rate or the subcontractor would charge actual costs. 

[Jacques]

32 minutes ago, joel hoffman said:

However, “standard rates” for tests  are incongruous for cost reimbursement services. Either there is an established rate or the subcontractor would charge actual costs. 

First, we don't know that paragraph (1) of the definition of "commercial service" in FAR Part 2 is off the table.  Under paragraph (1), "other services" can be a commercial service is they are "procured for support of a commercial product."  I don't know what the prime contract is for, but if it is a commercial product, you might not have to go to paragraph (2).  In any case, as Don already pointed out, paragraph (2) begins "services of a type," so just because this subcontractor wanted a CPFF pricing arrangement doesn't mean the service being furnished by the subcontractor doesn't qualify under paragraph (2).

Maybe this is just a long-winded way of saying I agree with the statement in the OP, "Using a CPFF contract does not change the services to non-commercial."  If they were commercial already, then the subcontract is "of a type."

[joel hoffman]

1 minute ago, Jacques said:

First, we don't know that paragraph (1) of the definition of "commercial service" in FAR Part 2 is off the table.  Under paragraph (1), "other services" can be a commercial service is they are "procured for support of a commercial product."  I don't know what the prime contract is for, but if it is a commercial product, you might not have to go to paragraph (2).  In any case, as Don already pointed out, paragraph (2) begins "services of a type," so just because this subcontractor wanted a CPFF pricing arrangement doesn't mean the service being furnished by the subcontractor doesn't qualify under paragraph (2).

I’m not disagreeing that the type of services are commercially sold and provided and Fara said they are sold at established “rates”. If there are established rates for the service, then pricing them at actual cost is incongruous. There are appropriate alternatives to adjust quantities if that is the only unknown. 

[Jacques]

1 minute ago, joel hoffman said:

I’m not disagreeing that the type of services are commercially sold and provided and Fara said they are sold at established “rates”. If there are established rates for the service, then pricing them at actual cost is incongruous. There are appropriate alternatives to adjust quantities if that is the only unknown. 

Got it.  I agree.  Valid point.  That said, I don't think the OP would recommend doing what the prime and sub did here.  I think the OP inherited it and is trying to make the best out of a bad situation.

[C Culham]

4 minutes ago, joel hoffman said:

then pricing them at actual cost is incongruous.

Why?  First, it is subcontract.   The Prime and sub can agree to use the type of contract they believe fits the situation.  

[Jacques]

@C Culham Your post doesn't rebut that the pricing arrangement is incongruous.  If there are established rates, then the subcontractor is in the best position to control costs.  In which case, it is in a better position than the prime to bear the cost risks embedded within the established rates.  Now, there are all sorts of circumstances that may have led to the subcontractor having a negotiation advantage over the prime here that might explain the result, but @joel hoffman's comment seems self-evident.

[joel hoffman]

39 minutes ago, C Culham said:

Why?  First, it is subcontract.   The Prime and sub can agree to use the type of contract they believe fits the situation.  

I don’t disagree that they can. But having established rates that can be charged by the unit, then charging actual costs is incompatible and contradictory. If the amount of the work is significant, the prime may be at some amount of risk.

In the instance that I was involved with on the government side, the cost plus electrical sub was 65% over budget and affected the productivity of most of the other fixed price trades and busted the schedule. The prime then tried to blame the government for the (huge) claimed losses. So, yes it affected the prime contract with the government. 

[joel hoffman]

Carl, If the problem is the amount of tests or other services that can be priced by established rates, there are appropriate methods to cover the actual quantities.

We don’t know the magnitude of the contract or the subcontract, the subcontract share of the total effort or if the unknowns are significant.

Ive already said that the contractor can use a cost reimbursement subcontract

Edit: However, that pricing method doesn’t fit the definition and circumstance for classifying the subcontract as a FAR commercial service and using the commercial services FAR clauses, etc. to avoid or manipulate required prime flow down clauses to its subcontracts. 

[Retreadfed]

3 hours ago, joel hoffman said:

However, “standard rates” for tests  are incongruous for cost reimbursement services.

Joel, FAR 31.201-1 states in part "The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred."  Does this have any impact on this statement?

[joel hoffman]

5 hours ago, joel hoffman said:

However, “standard rates” for tests  are incongruous for cost reimbursement services. Either there is an established rate or the subcontractor would charge actual costs. 

 

1 hour ago, Retreadfed said:

Joel, FAR 31.201-1 states in part "The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred."  Does this have any impact on this statement?

No.

The quoted part of FAR 31.201-1 refers to elements of total costs of a contract.

If I understand correctly what Fara refers to as “established rates”, those  are fixed prices charged for something such as products or services (e.g., the price of a test).

The problem Fara identified is that the number of tests are uncertain.

So, one can unit price the tests for an estimated quantity, including some type of provision for variation of estimated quantities in the subcontract.

Fixed price* contracts and subcontracts can include estimated quantities of unit priced line items.

* including FFP

Edited June 6 by joel hoffman

[joel hoffman]

Using or including unit priced line items for tests can be consistent with the description and pricing requirements of a FAR contract for commercial services. 

“[T]hen [the contractor] will only need to include the clauses applicable to commercial subcontracts.”

Edited June 6 by joel hoffman

[Fara Fasat]

If it would make the discussion easier and allow us to focus on the original question, assume that the services meet (1) of the definition -- services in support of a commercial product. There is no mention of price or rates in (1). 

[C Culham]

55 minutes ago, Fara Fasat said:

If it would make the discussion easier and allow us to focus on the original question, assume that the services meet (1) of the definition -- services in support of a commercial product. There is no mention of price or rates in (1). 

I think the discussion is easy.   My thoughts ......

Yes FAR clause 52.202-1 inserts the definition of "Contract" into the prime contract.  Yet that definition in FAR 2.201 states in part - "...It includes all types of commitments that obligate the Government to an expenditure of appropriated funds... "  A subcontract carries no such obligation as there is no privity of contract of a subcontract to the government.

Likewise Commercial item is defined yet the definition does not say a Commercial Item is only that that is fixed price. 

Subcontracts have no privity to government.  This general view can be construed otherwise if by example FAR part 44 is made applicable to the prime contract by contract clause.  Without detail I could see where, if CAS was applicable, the nexus to FAR guiding principles might be pulled in as well.

I find nothing in the statute that created commercial item acquisition for the Federal sector that says that subcontracts to a prime must be fixed price to be considered a commercial item contract.

My conclusion - It all depends on the prime contract and what it says.   I would like to say it is that easy but as this thread demonstrates it can become much more complicated in the eye of the beholder.  

PS - Sorry for this aside but the reason I keep providing my thoughts is consider this.   A prime wins a contract for a fixed priced construction project.  The prime issues a firm fixed priced subcontract for an element of the construction.  Is one to conclude that the subcontract can not be considered a commercial item subcontract by the prime?  After all only in Federal government "commercial item" for construction services is argued to be non-commercial item.

[joel hoffman]

Fara is the one who said that the services are priced “at standard rates”,  and “[use] established rates”, which isn’t on a cost reimbursement basis.

Fara said the only problem is that the amount of this effort isn’t known.

One can’t simply pick and choose what paragraphs of Part 12 it wants to use to classify a subcontract as a commercial service, then ignore 12.207, which doesn’t provide for commercial service contracts priced other than FFP or other FP types or T&M or labor-hour.

Fara wants to classify the subcontract as one for commercial services in order to use commercial items clauses to justify avoiding inclusion of other required flow down clauses.

Edited June 7 by joel hoffman
Corrections

[Jacques]

13 minutes ago, joel hoffman said:

One can’t simply pick and choose what paragraphs of Part 12 it wants to use to classify a subcontract as a commercial service, then ignore 12.207, which doesn’t provide for commercial service contracts priced other than FFP or other FP types or T&M or labor-hour.

Joel, no one is ignoring 12.207.  It simply doesn’t apply outside the Government.  Using your logic, a prime would have to compete its subcontracts or prepare justifications for other than full and open competition.  No one would claim that pointing out that CICA only applies to the Government amounts to “ignoring” FAR Part 6.

[joel hoffman]

Jacques, the prime and sub can agree to price a subcontract as CO. But it can’t then declare it to be a FAR commercial service for the expressed purpose of avoiding required flow downs of the non commercial service contract clauses in the prime contract to its sub.  That’s what I’m saying.

It’s not a “commercial service” under the FAR unless it’s compliant with all the applicable Part 12 procedures and requirements, including pricing in 12.207. 

And, of course it can’t negate the FFP contractual relationship between the government and the prime.

[joel hoffman]

1 hour ago, Jacques said:

Using your logic, a prime would have to compete its subcontracts or prepare justifications for other than full and open competition.

How so?  No, a prime contractor wouldn’t necessarily have to compete its subcontracts after being awarded a FFP contract. 

[Jacques]

14 hours ago, joel hoffman said:

It’s not a “commercial service” under the FAR unless it’s compliant with all the applicable Part 12 procedures and requirements, including pricing in 12.207. 

One looks solely to the definition of “commercial service” incorporated into the prime contract to decide how to interpret the requirements in the contract where the phrase “commercial service” is used.

My earlier comment about CICA was merely another example in an entirely different context where the FAR restricts what the Government can do but doesn’t apply to a prime.

Why do you think FAR 12.207 applies outside the Government?  Is there some clause upon which you’re relying?

[Jacques]

Perhaps another data point would be helpful.

In 70 Fed. Reg. 56318 (Sept. 26, 2005), when the Councils posted the proposed rule implementing the statutory change to expressly recognize the ability of the Government to use T&M and LH contract types for commercial items, they included the following:

Quote

w. One commenter at the public meeting said the rule should apply only at the prime contract level since the commercial sector does not compete awards at the subcontract level.

Response : The rule does not change how commercial contractors price subcontracts. As always, commercial contractors can use T&M contracts. However, the Councils believe commercial contractors often award subcontracts on a competitive basis.

(emphasis added).  If FAR 12.207 constrains the behavior of contractors, why, prior to the change in the rules, could a contractor use a T&M contract?  The answer is easy:  FAR 12.207 does not constrain the behavior of contractors because it only applies to the Government.

[joel hoffman]

Yep T&M is okay.

[Jacques]

Just now, joel hoffman said:

Yep T&M is okay.

Why was it OK before FAC 2005-15?

[joel hoffman]

1 minute ago, Jacques said:

Why was it OK before FAC 2005-15?

Don’t know. 

[joel hoffman]

Hey, Fara is going to do what he is going to do anyway. 

It will be interesting what will happen if there is a change or REA involving the cost plus sub, claiming exemptions from any normal requirements pertaining to the sub, based upon commercial services exemption.

Edit: I think that it is rare that a FFP prime contractor will issue CR subcontracts for anything other than minor requirements. I may be wrong.

The one that I was involved with turned out to be a financial disaster for the major DoD prime and the associated delays also impacted government treaty schedule obligations.

At least we were able to successfully assign most loss of productivity and delay REA back on the CR sub and also successfully documented how it impacted the productivity of the other trades. 🤠