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Change Order Pricing for Receipt of CFM


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Good Day.  We have been providing production parts under a FFP contract for several years at agreed-upon annual prices.  Our customer wants to start providing one of the raw material items as Customer Furnished Material.  They have asked us to provide a price for the part that no longer contains that raw material item.  I see this as a Change Order and I am looking for the proper method to price it in accordance with FAR 15.408.  This was originally awarded as a sole source and the value is over $2M, so completion of a Certificate of Current Cost or Pricing Data was required.  With this re-price, a Certificate will again be required.  I don't think it is as simple as removing the raw material costs because the price was agreed upon 5 years ago and other costs (labor, material, indirect rates) have changed since then.  Is it proper to re-price the entire part, bottoms-up less the CFM, and provide that new price to the customer?  Thanks.

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3 hours ago, ScottR said:

Is it proper to re-price the entire part, bottoms-up less the CFM, and provide that new price to the customer?

An equitable price adjustment is based on the cost impact of the change. The measure of the cost impact is the difference between the current estimate of the cost to complete the contract as changed and the current estimate of what the cost would have been to complete the contract had there been no change. In your case, this would be a negative number (i.e., there should be a downward price adjustment). Your estimates from five years ago are irrelevant.

See III.B of FAR Table 15-2.

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3 hours ago, ScottR said:

I see this as a Change Order...

I don't, because I don't see anything in the standard FAR Changes clauses that allows for this sort of change.  But maybe you are a subcontractor?  If so, I suppose the Changes clause in your subcontract will control whether this is a permissible change order.

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Thank you Don.  I think what you are saying is that we should re-price the part, less the CFM, using current costs and profit.  In this scenario, the new price could actually end up higher than the existing price.

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4 minutes ago, ji20874 said:

I don't, because I don't see anything in the standard FAR Changes clauses that allows for this sort of change.  But maybe you are a subcontractor?  If so, I suppose the Changes clause in your subcontract will control whether this is a permissible change order.

I'm starting to talk myself into that as well.  No change to drawings, specs, production process.  No change to the raw materials either - it's just that one item will be provided as CFM, not purchased by us.

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5 minutes ago, ScottR said:

No change to the raw materials either - it's just that one item will be provided as CFM, not purchased by us.

Is there a government property clause in the contract?  If so, what does it say about the consequence of the government changing the amount of GFP?

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1 hour ago, Retreadfed said:

Is there a government property clause in the contract?  If so, what does it say about the consequence of the government changing the amount of GFP?

  We are a subcontractor, not the prime contractor.  The prime has flowed down the standard FAR GFP clauses.

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4 hours ago, ScottR said:

The prime has flowed down the standard FAR GFP clauses.

See paragraph (d)(3) of that clause.

6 hours ago, ScottR said:

Thank you Don.  I think what you are saying is that we should re-price the part, less the CFM, using current costs and profit.  In this scenario, the new price could actually end up higher than the existing price.

No, that's not what I'm saying. Assuming the prime flowed down FAR 52.215-21, you would be required to submit your proposal in the format of FAR Table 15-2. In section III.B, there's a format for the submission of line item summaries for change orders, modifications, and claims. In your case, the cost of all deleted work would be the current estimate of what the raw material cost would have been to complete the contract (plus whatever other costs you would have incurred in purchasing the raw materials). That cost goes in column 2. Assuming your column 3 entry would be $0, your net cost to be deleted in column (4) would be the same as the entry in column (2). In column 5, you are going to estimate additional costs caused by the change (e.g., managing the CFM, etc.). If the entry in column 4 is greater than the entry in column 5, then the net cost of the change in column 6 is going to be a negative number. That would suggest a downward price adjustment would be appropriate.

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I'll add a word or two in support of Don's position. You have a project ETC and EAC now with the part(s) being purchased. The customer wants to provide the part(s) as CFM. Great. Now redo the ETC and EAC (excluding profit), assuming no purchase of the part(s). What's the difference? Don't forget to look at ripple effects that may offset the cost decrease. One I can think of is the labor cost associated with handling the CFP and preventing it from being commingled with other parts.

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