Negotiate with a Sub?

[FLContracts]

As a young contract specialist, I recently had the opportunity to take the lead on negotiating my first major contract. With my contracting officer (CO) on extended leave, I knew this was my chance to really make an impression.

The contract was a FAR Part 15 cost-plus-fixed-fee term contract to continue services a contractor had been providing to our agency for over 15 years. In hopes of encouraging competition, my tech code loosened some of the requirements. Despite this, we still only received one bid from the incumbent contractor.

I dove into negotiations with the prime contractor and was able to get them to reduce some of their proposed rates, which will result in decent cost savings. We also had about 10 proposed subcontractors to review. The prime contractor was receptive and negotiated most of the subs down as well.

However, there were still 3 subcontractors proposing extremely high fully burdened rates that I couldn't confidently determine fair and reasonable. My tech code agreed the rates seemed excessive. Despite pushing back, the prime contractor insisted the subs would not negotiate down further.

To complicate matters, the subs fell under the cost and pricing data threshold. When I requested invoices to support the high rates, the subs had no relevant invoices to provide. I'm now facing a dilemma on how to proceed. Should the government try to negotiate directly with the subs even though the prime was unsuccessful? Or do I just move forward since the overall contract price came down considerably?

[joel hoffman]

2 hours ago, FLContracts said:

To complicate matters, the subs fell under the cost and pricing data threshold.

So what? Ask for “data other than cost or pricing data”. See 15.402 and 15.403-3. You can make them justify the reasonableness of their rates and price, including asking for cost information if necessary. We don’t know the nature of their pricing but you mentioned “rates”. What is the makeup of their rates?

You said this is cost plus fixed fee??? Are the subcontracts FFP or CPFF??  Rates appear to refer to some type of fixed pricing. 

Edit-Add: By the way, I used to negotiate some subcontract prices with the subs present at negotiations. On occasion, directly negotiated subcontract pricing and schedule impacts with the sub with the concurrence of the prime, particularly for impact REA’s.

And yes, we got price breakdowns. 

Edited February 21 by joel hoffman

[FLContracts]

I understand that. Doing research via DAU, it stated multiple times that our contract is with the prime, not the subs. While the government can leverage its buying power in negotiations, we don't have privity of contract with subs and need to be careful not to overstep. The prime is responsible for managing subs. This is my issue. You negotiated directly?

[joel hoffman]

11 hours ago, FLContracts said:

You negotiated directly?

Yes, on occasion, a key sub would be in the room while involved in negotiation of its non-competitive subcontract.

And on at least one occasion, directly with a sub off-site. A few years ago I was assigned, as a rehired annuitant to lead the negotiations on a $42 million REA for a contract to construct a new, large auxiliary spillway and control structure at an existing flood control dam and reservoir. The REA was for time and schedule impacts of numerous mods that had been settled, with those aspects reserved. In addition, the government had directed acceleration due to the criticality of maintaining the schedule. There was a high risk of flooding overtopping the reservoir which would cause major flood damages.

My cost engineer and I travelled to a major subcontractor in another state who was the fabricator,  supplier and installer of the lift gates, tainter gates and gate machinery, to negotiate their subcontract acceleration and schedule impact issues. Over the course of the meetings, we mutually agreed to revised subcontractor impacts and costs.

The prime agreed with that approach.

This overall assignment was very complex and took almost 8 months to resolve. In the process, we devised some significant changes in the contractor’s technical approach to minimize impact delays at a significantly lower cost.

We settled the REA for about $25 million and the contractor agreed that the project could be completed several months ahead of its proposed impacted/extended scheduled completion date. The contract required completion date was thus revised.

In response to your question and your understanding of the privity of contract and management issues, the bottom line is still that the burden of proof is on the the contractor and its subs to establish that their costs are reasonable  and necessary (see FAR 31.201, etc.)…

 

[C Culham]

13 hours ago, FLContracts said:

As a young contract specialis

Not mentioned in your post is FAR subpart 44.2 and its applicability to the procurement.  If applicable have you considered the guiding principles in the subpart?

[Don Mansfield]

@FLContracts,

Did the prime do a price or cost analysis of the subcontractors' proposals? Does the prime have an approved purchasing system?

[Retreadfed]

FL, have the subs' rates been audited by DCAA?  If so, what was the result?  Are these 3 subs also CPFF term subcontracts?  On what basis do you base your conclusion that their rates are "extremely high"?  Do you believe that the estimated cost you have been able to negotiate with the prime is fair and reasonable?

[Neil Roberts]

19 hours ago, FLContracts said:

I dove into negotiations with the prime contractor and was able to get them to reduce some of their proposed rates, which will result in decent cost savings.

Just a point of information regarding reducing proposed rates and quantifying proposed cost savings. Proposed contractor rates are included in overall estimated costs, which is used as a basis for establishing fixed fee, which in a cost plus fixed fee contract can not exceed 10% or 15% of estimated costs per FAR 15.404-4, depending. The contractor is reimbursed actual costs, not estimated costs. So, if you "save" $100,000 in proposed (estimated) costs through negotiation, the actual "savings" may be no more than $10,000 or $15,000 in fixed fee not $100,000, and the contractor's actual cost reimbursement may eat up $10,000 or $15,000 or maybe $100,000 anyhow. 

Edited February 21 by Neil Roberts
add "or $15,000 in places.

[Retreadfed]

19 minutes ago, Neil Roberts said:

Just a point of information regarding reducing proposed rates and quantifying proposed cost savings.

Negotiated cost savings may not be real cost savings because of the Limitation of Cost/Limitation of Funds clauses.  At the end of the contract, a contractor may recover more costs than it originally proposed with the so called "cost savings" being illusory.

[FLContracts]

Fortunately, the prime contractor has an approved purchasing and accounting system, which provides some assurance of their processes. The concerning subs are all proposed for time and materials contracts.

To conduct my cost analysis, I compiled hundreds of data points from invoiced rates across over 30 comparable contracts. This provided me with a solid baseline to evaluate the proposed subcontractor rates.

Despite my in-depth analysis indicating excessive rates, I'm struggling to firmly determine fair and reasonable pricing with the limited data the subs have provided. The prime contractor provided cost and price analysis on the subcontractors via a salary.com. All rates are in the above 99%  percentile and the KTR attempted negotiations before proposal submissions with no luck. 

 

[Neil Roberts]

You should ask the prime to make a presentation to you with in depth details regarding the justification for salary.com being the only source for comparable prices, and a complete review of each and every detail input into salary.com by the prime that led to the results proposed. Also they should provide the job description of each position from each sub. In addition, you should tell them how many subcontract dollars your analysis yields vs the total for each proposed subcontract.

[Retreadfed]

17 hours ago, FLContracts said:

To conduct my cost analysis, I compiled hundreds of data points from invoiced rates across over 30 comparable contracts.

By comparable contracts, do you mean contracts comparable to the prime or contracts comparable to each of the 3 subs?  Because I presume we are talking about labor rates, have you looked at FAR 31.205-6(b) for the criteria for determining reasonable compensation for the subs' employees? 

[Don Mansfield]

On 2/21/2024 at 2:36 PM, FLContracts said:

Fortunately, the prime contractor has an approved purchasing and accounting system, which provides some assurance of their processes. The concerning subs are all proposed for time and materials contracts.

To conduct my cost analysis, I compiled hundreds of data points from invoiced rates across over 30 comparable contracts. This provided me with a solid baseline to evaluate the proposed subcontractor rates.

Despite my in-depth analysis indicating excessive rates, I'm struggling to firmly determine fair and reasonable pricing with the limited data the subs have provided. The prime contractor provided cost and price analysis on the subcontractors via a salary.com. All rates are in the above 99%  percentile and the KTR attempted negotiations before proposal submissions with no luck. 

 

Is the overall estimated cost fair and reasonable?

[Neil Roberts]

@Retreadfed, could you elaborate about the point in your post reference to FAR 31.205-6(b), which concerns personal services? The FAR definition of personal services is: "Personal services contract means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees (see 37.104)."

Edited February 22 by Neil Roberts
add "you"

[Don Mansfield]

5 hours ago, Neil Roberts said:

@Retreadfed, could you elaborate about the point in your post reference to FAR 31.205-6(b), which concerns personal services? The FAR definition of personal services is: "Personal services contract means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees (see 37.104)."

FAR 31.205-6 refers to the cost to the contractor for compensating its employees. FAR 37.104 refers to personal service contracts awarded by the Government. Two different things.

[Retreadfed]

9 hours ago, Don Mansfield said:

FAR 31.205-6 refers to the cost to the contractor for compensating its employees. FAR 37.104 refers to personal service contracts awarded by the Government. Two different things.

Thanks, Don.  You beat me to the punch.

 

15 hours ago, Don Mansfield said:

Is the overall estimated cost fair and reasonable?

I asked a similar question on Wednesday, but have not received an answer yet.

[Neil Roberts]

3 hours ago, Retreadfed said:

13 hours ago, Don Mansfield said:

FAR 31.205-6 refers to the cost to the contractor for compensating its employees. FAR 37.104 refers to personal service contracts awarded by the Government. Two different things.

Thanks, Don.  You beat me to the punch.

@Retreadfed, still unclear to me what you are trying to tell the poster. Are you saying that the poster gathered comparable labor rates are not valid with respect to a prime contractor's subcontracted labor rates unless:

"Factors that may be relevant include, but are not limited to, conformity with compensation practices of other firms-

(i) Of the same size;

(ii) In the same industry;

(iii) In the same geographic area; and

(iv) Engaged in similar non-Government work under comparable circumstances."???

In any event, the issue is the prime contractor's review, evaluation and substantiation of its subcontractor proposed rates.

 

[Neil Roberts]

On 2/21/2024 at 5:01 PM, Neil Roberts said:

You should ask the prime to make a presentation to you with in depth details regarding the justification for salary.com being the only source for comparable prices, and a complete review of each and every detail input into salary.com by the prime that led to the results proposed. Also they should provide the job description of each position from each sub. In addition, you should tell them how many subcontract dollars your analysis yields vs the total for each proposed subcontract.

@FLContracts, Additionally, from the prime contractor you should request a copy of the memorandum supporting the subcontractor proposed rates and a copy of the SOW and RFP/ITQ sent by the prime to each subcontractor. Should you wind up not finding the proposed rates supported enough, you may wish to consider proposing adding special surveillance contract requirements to the prime contract for each of the subcontracts that have questionable rates . The surveillance should include but may not be limited to advance notification and prior consent for each such subcontract/change.

[Retreadfed]

1 hour ago, Neil Roberts said:

Are you saying that the poster gathered comparable labor rates are not valid with respect to a prime contractor's subcontracted labor rates unless:

No.  FL said (s)he gathered data points on invoiced rates from comparable contracts.  While the contracts may be "comparable" (whatever that means), we don't know if the labor rates from those contracts are a good comparator for the rates proposed by each of the 3 subs in question.  For example, if the "comparable contracts" were performed by contractors in low cost areas of the country, you would expect the rates to be lower than those proposed by companies in high cost areas of the country.  Therefore, just looking at invoiced rates from "comparable contracts" may not be a valid marker in this case.  Consequently, using the criteria from 31.205-6 to judge the reasonableness of the compensation provided by the subs to their employees may be a more useful tool for judging the reasonableness of the proposed rates than invoiced rates from "comparable contracts."  We don't know all the facts of FL's case, but maybe this is something that should be considered in order for him/her to get a warm fuzzy about the subs' rates.

[Neil Roberts]

20 hours ago, Retreadfed said:

We don't know all the facts

Agreed. Specifically we don't know if the subcontractors' proposed/disclosed an hourly rate and indirect costs or an hourly selling price only. We don't know the details surrounding the prime contractor's justification/review of the subcontractors' proposed and we don't know if the government poster bench marked either or both. My take on FAR Part 31 is that it is associated with cost analysis. I don't agree the government needs to do a cost analysis of hourly rates, but I agree with what I think is your bottom line, that whatever the government comes up with should be defensible as reasonable.