UCA Contract Type and Pricing

[FrankJon]

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:

Quote

Once a UCA is awarded, the contractor immediately begins working and the Government must reimburse the contractor’s allowable costs during the undefinitized period. As a result, a UCA is essentially a cost-reimbursable contract during the undefinitized period. When the contractor and Government agree on contract terms, specifications, price, and profit, the UCA is then definitized.

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?

[Vern Edwards]

3 hours ago, FrankJon said:

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.

From the IG report:

Quote

UCAs are agreements that allow a contractor to begin work and incur costs before the Government and the contractor have reached a final agreement on contract terms, specifications, or price. Once a UCA is awarded, the contractor immediately begins working and the Government must reimburse the contractor’s allowable costs during the undefinitized period. As a result, a UCA is essentially a cost-reimbursable contract during the undefinitized period. When the contractor and Government agree on contract terms, specifications, price, and profit, the UCA is then definitized.

Emphasis added. What don't you understand about that?

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

For more info, see this: https://apps.dtic.mil/sti/tr/pdf/ADA432582.pdf

and this: https://www.gao.gov/products/gao-07-559

[FrankJon]

14 hours ago, Vern Edwards said:

From the IG report:

Emphasis added. What don't you understand about that?

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

For more info, see this: https://apps.dtic.mil/sti/tr/pdf/ADA432582.pdf

and this: https://www.gao.gov/products/gao-07-559

 

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.")

 

[ji20874]

The IG did not say a UCA is a cost-reimbursable contract during the undefinitized period; rather, the IG said a UCA is essentially a cost-reimbursable contract during the undefinitized period (emphasis added).  There is a difference, driven by the word "essentially."  I am okay with the IG's formulation.

Yes, FrankJon, you can have an undefinitized FFP contract with appropriate fixed-price clauses, and you can definitize it as a FFP contract.  

[Vern Edwards]

3 hours ago, FrankJon said:

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.

🤔😂 I'm going to let the regulars help you.

[formerfed]

5 hours ago, ji20874 said:

The IG did not say a UCA is a cost-reimbursable contract during the undefinitized period; rather, the IG said a UCA is essentially a cost-reimbursable contract during the undefinitized period (emphasis added).  There is a difference, driven by the word "essentially."  

@FrankJonThis also is similar language used by GAO on page 17 of the report linked above by Vern.  We can split hairs on contract terminology all day but a contractor performing under a UCA is essentially reimbursed.  That’s why it’s critical to definitiize a fixed price contract as soon as possible.

[Retreadfed]

20 hours ago, Vern Edwards said:

The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

Vern, I'm confused by this statement.  Can you clarify it for me.  Are you saying that as work progresses on the UCA, that the contractor can bill the government for its incurred allowable costs?  I see that if FAR 52.216-26 is in the UCA, however, if the definitized contract is anticipated to be FFP, 52.216-26 should not be in the UCA.

[C Culham]

Geez everyone is not the language of the FAR and its supplements specific?   A UCA is not essentially anything it has specific definition in the DFARS.  My thought DoDIG and GAO erred in their language.  A UCA is an arrangement that provides for payment of allowable incurred costs and profit/fee to the extent negotiated and agreed to by the parties in the definitized action.  The definitized action is either a type of contract allowed by the FAR or a modification to a contract.

That's it!

 

[FrankJon]

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.

[FrankJon]

12 minutes ago, C Culham said:

A UCA is an arrangement that provides for payment of allowable incurred costs and profit/fee to the extent negotiated and agreed to by the parties in the definitized action.

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

[formerfed]

From DFARS 217.74

Quote

Undefinitized contract action” means any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the action.  Examples are letter contracts, orders under basic ordering agreements, and provisioned item orders, for which the price has not been agreed upon before performance has begun. For policy relating to definitization of change orders, see 243.204-70.

 

 

[jjj]

I think the boards of contract appeal also have repeatedly used wording that a change order and a T4C on FFP contracts are "essentially" cost-reimbursement until agreement on equitable adjustment or settlement occurs.  I am okay with that wording, while still thinking of the contracts as fixed-price.

[FrankJon]

5 hours ago, Vern Edwards said:

🤔😂 I'm going to let the regulars help you.

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.

[FrankJon]

3 minutes ago, formerfed said:

From DFARS 217.74

 

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.

[formerfed]

35 minutes ago, FrankJon said:

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.

16.603-1 Description.

A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.  
 

It’s a contract and not an “arrangement” whatever that is

[FrankJon]

7 minutes ago, formerfed said:

16.603-1 Description.

A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.  
 

It’s a contract and not an “arrangement” whatever that is

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

[Vern Edwards]

18 hours ago, Retreadfed said:

Vern, I'm confused by this statement.  Can you clarify it for me.  Are you saying that as work progresses on the UCA, that the contractor can bill the government for its incurred allowable costs?  I see that if FAR 52.216-26 is in the UCA, however, if the definitized contract is anticipated to be FFP, 52.216-26 should not be in the UCA.

@Retreadfed

No. That's not what I said. I said:

Quote

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

Just like under a change order.

Assume an FFP letter contract. The contract must contains 52.216-24 and 52.216-25.  The -24 clause limits the government's liability if the contract is terminated. The -25 clause prescribes a procedure for definitization, requires the contractor to submit a proposal, and, if the contract was awarded based on price competition (which in my experience would be unusual), a maximum negotiated price, assuming that the contract is not modified prior to definitization. 

Presumably, the contractor will want some kind of revenue flow during performance unless its is willing to provide its own financing. So it seeks progress payments based on costs, which will be anchored to the Government's maximum liability. See 52.232-16.

At the time of award, the contractor is not obligated to complete the work for any specific amount, because the contract is undefinitized.

So the contractor starts working, starts incurring costs, and eventually submits a proposal, which has been delayed due to government changes. The government initiates an audit and starts price analysis. The contractor submits a revised proposal, while still incurring costs, and the government has had to increase its maximum liability because it has changed the contract a few times. Oh, and all the while indirect cost rates are being adjusted.

All of this is why Congress enacted legislation to try to limit and control the use of UCAs. See 10 USC 3371, which is  why DFAR 214.74 exists. And don't forget the PGI 217.74. And all of that is why the DOD IG said what it did.

Honest to God, I thought all this was common knowledge.

BTW, here's the GAO in 2007:

Quote

All UCAs are essentially cost-reimbursement contracts until definitized, as contractors are reimbursed for all incurred costs that are reasonable, allocable, and allowable during the undefinitized period. This contract type places the greatest cost risk on the government.

Here's from the Congressional Research Service in 2020:

Quote

[U]ndefinitized contract actions, such as letter contracts, can be useful when an agency must move quickly to award a contract. Generally, it may take less time to draft a letter contract (or other types of undefinitized contracts) because these types of contractual agreements do not include all of the terms and conditions usually found in a procurement contract. As GAO has noted, the downside to using undefinitized contract actions is that they “can pose risks to the government, such as when contractors lack incentives to control costs before all contract terms and conditions are defined.”

@FrankJon

16 hours ago, FrankJon said:

If you'd like to point me to an authoritative discussion or rule on UCAs and letter contracts, I'd gladly read it.

You're no newbie. You've been a member of this forum since 2016.

Do your own research. (Heard of Google or Google Scholar?) 

[formerfed]

24 minutes ago, FrankJon said:

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

Sorry, I meant my comment was directed to Carl and others interested here

edit:  @Vern Edwards Thanks again for the informative and comprehensive response

[C Culham]

2 hours ago, FrankJon said:

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

I crafted that response myself, aka my thought.  

1 hour ago, formerfed said:

It’s a contract and not an “arrangement” whatever that is

Ok not good.   I would argue not a "essentially" even.  I could, could I not in negotiating the UCA come to agreement that something is reasonable, allowable and allowable reach agreement with the contractor that the something will not be in the definitized contract or modification.

Following Vern's references I will use agreement I guess.

[Neil Roberts]

@FrankJon, does this shed any light for you? https://www.federalregister.gov/documents/2023/05/25/2023-11139/defense-federal-acquisition-regulation-supplement-undefinitized-contract-actions-dfars-case

[formerfed]

1 hour ago, C Culham said:

I crafted that response myself, aka my thought.  

Ok not good.   I would argue not a "essentially" even.  I could, could I not in negotiating the UCA come to agreement that something is reasonable, allowable and allowable reach agreement with the contractor that the something will not be in the definitized contract or modification.

Following Vern's references I will use agreement I guess.

Where does Vern’s reference support use of agreement?

 

[Neil Roberts]

@FrankJon, also see United States Code (USC), 10 USC 2326 entitled, Undefinitized Contractual Action; restrictions at https://www.govinfo.gov/content/pkg/USCODE-2010-title10/html/USCODE-2010-title10-subtitleA-partIV-chap137-sec2326.htm (this was the law as of 2010. It was repealed in 2021 and relocated to different USC section and may have been amended in some way thereafter. Still working on it. It is somewhat complex to run it down in its final language of today, if it was subsequently changed. Still working on it but I hope you get the picture about the top level requirement related to undefinitized contractual actions is federal law approved by Congress and the President, which then is "interpreted" and approved for FAR as a regulation.) 

Edited April 5 by Neil Roberts
explain status of citation

[C Culham]

2 hours ago, Vern Edwards said:

contractual agreements

From the Congressional Research document he referenced.

[FrankJon]

14 hours ago, Vern Edwards said:

Do your own research.

 

14 hours ago, Vern Edwards said:

Assume an FFP letter contract. The contract must contains 52.216-24 and 52.216-25.  The -24 clause limits the government's liability if the contract is terminated. The -25 clause prescribes a procedure for definitization, requires the contractor to submit a proposal, and, if the contract was awarded based on price competition (which in my experience would be unusual), a maximum negotiated price, assuming that the contract is not modified prior to definitization. 

Presumably, the contractor will want some kind of revenue flow during performance unless its is willing to provide its own financing. So it seeks progress payments based on costs, which will be anchored to the Government's maximum liability. See 52.232-16.

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. 

 

14 hours ago, Vern Edwards said:

The government initiates an audit and starts price analysis.

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. 
 

14 hours ago, Vern Edwards said:

All of this is why Congress enacted legislation to try to limit and contract the use of UCAs.

 

14 hours ago, Vern Edwards said:

Honest to God, I thought all this was common knowledge.

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. 

[FrankJon]

12 hours ago, Neil Roberts said:

@FrankJon, also see United States Code (USC), 10 USC 2326 entitled, Undefinitized Contractual Action; restrictions at https://www.govinfo.gov/content/pkg/USCODE-2010-title10/html/USCODE-2010-title10-subtitleA-partIV-chap137-sec2326.htm (this was the law as of 2010. It was repealed in 2021 and relocated to different USC section and may have been amended in some way thereafter. Still working on it. It is somewhat complex to run it down in its final language of today, if it was subsequently changed. Still working on it but I hope you get the picture about the top level requirement related to undefinitized contractual actions is federal law approved by Congress and the President, which then is "interpreted" and approved for FAR as a regulation.) 

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.