types of contracts and contractual vehicles in federal (dod) procurements 1 jerome c. burke (jerry)...

Types of Contracts andContractual Vehicles in

Federal (DOD) Procurements

1

Jerome C. Burke (Jerry)BAE SystemsGroup Vice President, ContractsElectronics, Intelligence & Support

NCMA Boston Chapter March WorkshopBentley College16 March 2011

Course Objective

• An overview of the various types of contract vehicles used in Federal (DoD) Procurement.

• A basic Understanding of the differences in Fixed Price and Cost Reimbursable Contract arrangements.

• An appreciation for the “Allocation of Risk” in the selection and application of contract type.

• An understanding of the true nature of the concepts of “Fee” and “Profit” and how they differ.

• An appreciation of the different “Behaviors” of Buyer and Seller in different contract types.

J.C. Burke NCMA March Workshop Bentley College 16 March 2011

Determination of Contracting Environment

Allocation of Risk

Fixed Price Environment

Cost TypeEnvironment

Motivation &Behaviors

PRODUCT

Buyer

Seller

SALES &PROFIT

OUTCOME

Flow-Charting the Contracting ProcessFlow-Charting the Contracting Process


• Fixed Price Arrangements

• Cost Reimbursement Arrangements

The Procurement World Can be Divided Between Two Primary Contract Types

… And there are numerous variations of the themes. The “Variations” create what some texts Identify As a Third Primary Contract Type

•The Incentive Arrangement


Primary Contract TypesPrimary Contract Types

Contract Type and the Profit Factor...Contract Type and the Profit Factor...

• Fixed Price Arrangements

– Generally Involve Profit Discussions

• Cost Reimbursable Arrangements

– Generally Involve Fee Discussions


Definitions to RememberDefinitions to Remember

Profit: The difference between the cost of a product or service and the price charged for that product or service. The Seller of the product or service can impact his profit through positive or negative performance.

Fee: A set sum certain to be paid by the Buyer to the Seller for providing a product or rendering a service. The fee as a real dollar amount is not impacted by fluctuations in performance.


Striking The Critical BalanceStriking The Critical Balance

RiskRewards


Fixed Price

• Firm Fixed Price (FFP)• Fixed Price Incentive (FPI)

– Firm Target (FPIF)– Successive Targets (FPIS)

• Fixed Price Level of Effort (FP LOE)• Fixed Price Award Fee• Fixed Price w/ Redetermination

– Economic Price Adjustment– Prospective Price Redetermination– Retroactive Price Redetermination

Cost Reimbursable

• Cost Sharing• Cost Plus Fixed Fee (CPFF)• Cost Plus Incentive Fee (CPIF)• Cost Plus Award Fee (CPAF)

Primary Contract Types Primary Contract Types


Primary Contract Types Primary Contract Types

• Time & Material– Elements of both Fixed Price (Established Firm Labor Rate) & CR

(only what is used)

• Indefinite Delivery/Indefinite Quantity (ID/IQ)

• Basic Ordering Agreements

• Level of Effort and/or Term

• Any Combination of the above, including the prior page…

And worthy of mention, although not technically a “contract” …

• Other Transactions Agreements (U.S.C. 2371, Section 845’s)


Federal Procurement Basis For Federal Procurement Basis For Contract TypesContract Types

• 48 CFR Part 16 (CFR = Code of Federal Regulations)

• FAR Part 16 (FAR = Federal Acquisition Regulations)

Other Good Resources For Information on Contract TypesOther Good Resources For Information on Contract Types

• Formation of Government Contracts, John Cibinic & Ralph Nash, Government Contracts Program, George Washington University.

• NASA Guide on Incentive Contracting• A Bunch of Websites• Your Favorite Local Contracts Professional!


Fundamental PrincipleFundamental Principle

• The selection of Contract Type is the Primary Factor in the Allocation of Risk and the Nature of the Profit Determination

- or - conversely

• The allocation of risk and the nature of profit determination are the primary factors in the selection of a contract type.


Selection of Contract Type….Selection of Contract Type….Straight From the RegsStraight From the Regs

• Contract types vary according to:

1 The degree and timing of the responsibility assumed by the contractor for the costs of performance; and

2 The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.


Of Risk and Profit …Of Risk and Profit …

Allocation of Risk: Who bears the financial risk of performance of the effort under contract between Buyer and Seller?

Profit Determination: How variablevariable is the margin potential to the seller of the effort under contract?– “Variable” is the Key Word.


Allocation of RiskAllocation of Risk

– Fixed Price Arrangement - allocation of financial risk is solely on the Seller.

• Addresses Financial Risk - There are other tangible risks but not discussed here.

• Effort is performed for a pre-established, agreed, negotiated price. Seller will Provide “X” for set price “Y”

Who bears the Financial Risk of performance of the effort under contract between buyer and seller


Allocation of Risk

– Cost Reimbursable Arrangement - allocation of financial risk is primarily on the Buyer.

• Cost of performance negotiated as an ESTIMATE (not a set price)

• Buyer benefits or is injured by fluctuations from estimate versus actual costs

• Profit dollars to seller is established as a “Fixed Fee” - does not change with fluctuations in estimated cost

Who bears the Financial Risk of performance of the effort under contract between buyer and seller


Factors To Be Considered When Factors To Be Considered When Selecting A Contract TypeSelecting A Contract Type

• Price Competition - market pressures• Price Analysis - Comparison of products and price

• Cost Analysis - when price comparison insufficient, a detailed analysis of cost elements

• Adequacy of the Contractor’s accounting system - important for CR Contracts

• Contractor’s Technical Capability and Financial Responsibility

• Type and complexity of the requirement

• Urgency of the requirement

• Period of Performance or Length of Production Run

• Concurrent Contracts• Extent and Nature of Proposed Subcontracting

• Acquisition History - Risk decreases as item is repetitively orderedJ.C. Burke NCMA March Workshop Bentley College 16 March 2011

The Important Difference The Important Difference Between Cost and PriceBetween Cost and Price

• “Cost” and “Price” are not the same.• The consumer never (rarely?) pays the “Cost”

of an item - they pay the price• “Profit” is the difference between a product’s

“Cost” and it’s “Price”


The Important Difference The Important Difference Between Cost and PriceBetween Cost and Price

– Cost: The actual costs incurred or realized in the manufacture of a product of the providing of a service. “Cost” is the actual amounts paid for the necessary elements of providing a good or service, such as labor, factory overheads, cost of materials, and other relevant support costs.

– Price: Whatever a consumer of a Good or Service is willing to pay for that Good or Service - or…….conversely - whatever a provider of a Good or Service is able to charge a consumer for that Good or Service

• Market conditions dictate


A Quick Comparative IllustrationA Quick Comparative Illustration

The U.S. Army wishes to procure a WIDGET from ECDC, Inc..

Firm Fixed Price Basis• ECDC charges $103,500 (Price) and the Army agrees to pay $103,500

Total CostProfitPriceProfit as % of Cost =Profit as % of Price =Army PaysECDC Makes (Looses)

85,00018,500

$ 103,50021.7%

17.87%$ 103,500$ 18,500

$ 98,0005,500

$ 103,5005.6%5.3%

$ 103,500$ 5,500

$ 118,000(14,500)

$ 103,500(-12.2%)(-14.0%)

$ 103,500($14,500)

$ 90,00013,500

$ 103,50015%

13.1%$ 103,500$ 13,500

ECDC Estimate@ Proposal

Scenario 1Actual Performance

Scenario 2 Scenario 3


The Contracting Environment The Contracting Environment and It’s Impact on Contract Typeand It’s Impact on Contract Type

• Allocation of risk is all about when to use a specific contract type

• What is the contracting environment?

– Known, certain or almost certain, environment => Fixed Price– Uncertainties, unquantifiable elements of performance => CR


Now….Let’s Examine the Particulars Now….Let’s Examine the Particulars of the Specific Contract Typesof the Specific Contract Types


Firm Fixed Price (FFP)Firm Fixed Price (FFP)


Firm Fixed Price (FFP)Firm Fixed Price (FFP)Defined:

• Provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.

• Places on Contractor maximum risk and full responsibility for all costs and resulting profit or loss.

• Maximum incentive on Contractor to control costs and perform effectively

• Minimum administrative burden on parties

– No detailed cost reports to customerJ.C. Burke NCMA March Workshop Bentley College 16 March 2011

A Quick Comparative IllustrationA Quick Comparative Illustration

Same Widget, Cost Reimbursable Basis• ECDC has an Estimated Cost Plus Fixed Fee of $100,000

Estimated CostFCCMFixed FeeTotal CPFF (Price)Profit as % of Cost =Profit as % of Price =Army PaysECDC Makes (Looses)

85,000900

9,000$ 94,90010.59%9.53%

$ 94,900$ 9,000

$ 98,0001,1009,000

$ 108,1009.1%

8.32%$ 108,100

$ 9,000

$ 118,0001,3009,000

$ 128,3007.6%7.0%

$ 128,300$9,000

$ 90,0001,0009,000

$ 100,00010%

9%$ 100,000

$ 9,000

ECDC Estimate@ Proposal

Scenario 1 Actual PerformanceScenario 2

Scenario 3

Although the Cost of Performance (Price) Increases, Fee Remains the same (Fixed), as Cost of Performance Increases, Fee as Margin Decreases



Application:

• Used to procure standard and commercial items

• When reasonably definite functional or detailed specification exists

• When adequate price competition exists

• When reasonable price comparisons with prior or similar purchases can be made


Elements of a Firm Fixed Price (FFP)Elements of a Firm Fixed Price (FFP)ContractContract

PricePrice


Elements of a Firm Fixed Price (FFP)Elements of a Firm Fixed Price (FFP)Contract (Continued)Contract (Continued)

• In DoD Procurements, regulations require insight into the separate elements

• FFP has the most basic elements:– Cost– Profit– Total FFP

• Sometimes the separate elements are separately negotiated, sometimes negotiations are at the “bottom line”

• FFP is the simplest contract type from the stand point of both Buyer and Seller.



• Over-riding element: Is Price– Bind the contractor to complete the work at a fixed amount (price) of

compensation regardless of the costs of performance.

• Best Utilizes the basic profit motive of business– “If I perform efficiently (or increase my efficiency), I make more

money”– “If I perform inefficiently, I make less or even lose money”

• Used when risk involved is minimal or can be predicted with an acceptable degree of certainty.

• Requires reasonable basis for Firm Prices.


FFP and The Allocation of Risk ...FFP and The Allocation of Risk ...

• Allocation of financial risk is on the Contractor

• Because of the allocation of risk, must have a clear, thorough definition of the work scope– Clear, precise, unambiguous specifications– Clear, precise, unambiguous Statement of Work– Need firm delivery and end date– Need clear, unambiguous sell-off criteria (“Definition of

‘Done’”)

• FFP contract type assumes minimal Government intervention during performance.

Leave as little to interpretation as possibleLeave as little to interpretation as possible


FFP and Contracting Party BehaviorsFFP and Contracting Party Behaviors

• Contractor is reluctant to accept even minor changes or interference.– This is why “contract scope” needs to be precisely defined– All “uncompensated” changes impact bottom line– All changes subject to Equitable Adjustment (“Send

Money”)

• Buyer often tries to get more than he bargained for– Stretches scope of work interpretations– “Just Do It”– Threats to follow-on work


Fixed Price Incentive Fixed Price Incentive (FPI)(FPI)


Fixed Price IncentiveFixed Price Incentive

Defined:• Provides for adjusting profit and establishing the final contract price by a

formula based on the relationship of final negotiated total cost to the target cost

• Final Price is subject to a price ceiling (negotiated up front)• Two (2) Types

– Fixed Price Incentive, Firm– Fixed Price Incentive, Successive Target

When Applied:• When a straight FFP contract is not suitable• Contractors assumption of a degree of cost responsibility will provide a

positive profit incentive for cost control and performance• When other incentives (technical performance or delivery) are being used.


Elements of a FPI ContractElements of a FPI Contract

• Involves a pre-negotiated formula for sharing cost over-runs and under-runs

• Target Cost

• Target Profit

• Ceiling Price

• Share Ratio


Elements of a FPI Contract Defined

Target Cost

• Represents a reasonable estimate that both parties are willing to accept of the anticipated total cost of performance– “Represents the most likely outcome to be attained through efficient

performance of the work”

• Establish prior to performance

Target Profit

• A reasonable return on the anticipated cost of performance as agreed by the parties prior to performance

• Is not (necessarily) the final profit


Elements of a FPI Contract Defined (Cont’d)

Ceiling Price

• The maximum dollar value the buyer is willing and obligated to pay for the goods or services

• Unique to fixed price incentive contracts

• Most critical element of an FPI contract

• Represents the point at which financial responsibility is 100% on the contractor (Well, not really ... But bare with me ... It’s the PTA)

• Final price never exceeds ceiling (what the Buyer will pay)


Elements of a FPI Contract Defined (Cont’d)

• Share Ratio (Sometimes expressed simply as “Contractor’s Share”) -– Represents the percentage of sharing above and below the target cost to

determine the profit and price.

• When two percentages expressed, first percentage always refers to the Government (Buyer) and the second percentage to Contractor (Seller)

Example:75% / 25% Share Ratio

Government (75%)/Contractor (25%)


... And Unique to FPI Contracts is....

• Defined– Identifies the mathematical point at which the

contractor’s risk changes from the negotiated incentive sharing to a fixed price risk - 100% responsibility for cost incurred.

– PTA = The point at which for every dollar you spend, you lose a dollar of profit.

– PTA is the mathematical point at which Government sharing has maximized, and Government sharing ends.

The Point of Total Cost AssumptionThe Point of Total Cost Assumption


The Point of Total Cost Assumption

• Expressed as a formula

PTA = Ceiling Price - Target Price Government Share

+ Target Cost


FPI Example - Actual Performance (Under-run)

Negotiated Scenario 1 Comment

(Target) Cost $ 10,000,000 $ 9,000,000 $1M Under-run

(Target) Profit 1,500,000 1,500,000 Original Profit Target

(Target) Price $ 11,500,000 $10,500,000 Unadjusted Price

Ceiling Price $12,500,000 $12,500,000 Absolute $$ value not to be exceeded

Share Ratio 75/25 $250,000 25% share of $1M under-run

Actual Profit TBD $1,750,000 Actual profit increasesby share of under-run

Final Price TBD $10,750,000 Final price is $750K less than target

75% is Governmentshare of $1M under-run


FPI Example - Actual Performance (Over-run)


(Target) Cost $ 10,000,000 $ 11,000,000 $1M cost overrun

(Target) Profit 1,500,000 1,500,000 Original Profit - tobe decremented


Ceiling Price $12,500,000 $12,500,000 Absolute $ value not to be exceeded

Share Ratio 75/25 ($250,000) 25% share of $1M over-run -

Reduces fee to $1.25M

Actual Profit TBD $1,250,000 Reduced Target Profitby Share

Final Price TBD $12,250,000 Actual cost plus finalprofit


FPI Example - Actual Performance (Over-run)


(Target) Cost $ 10,000,000 $ 12,250,000 $2.25M cost overrun

(Target) Profit 1,500,000 1,500,000 Original Profit - tobe decremented


Ceiling Price $12,500,000 $12,500,000 Absolute $ value not to be exceeded

Share Ratio 75/25 ($562,500) 25% share of $2.25M over-run - reduces

fee to $937.5K

Actual Profit TBD $250,000* Additional fee decrementof $687.5K necessary to

stay within ceiling

Final Price TBD $12,500,000


• Fixed Price Incentive, Firm (FPIF)– Don’t say “Fixed Price Incentive Fee” - WRONG!!!!!– Simply means a firm incentive target has been established at the

outset

• Fixed Price Incentive, Successive Targets (FPIS)– Same “initial” elements as a FPIF - cost elements termed as “initial”

targets– Identifies a point in contract performance where “initial targets” are

converted to “firm” targets– Often a production point where some performance experience has

been collected– Can have multiple future points (successive targets)

2 Variations of Fixed Price Incentive


FPI and The Impact on Behavior

• Same basic motivations and behaviors exist as in FFP

• Buyer may be slightly more flexible to changes given sharing and ceiling

.... Nonetheless....

• Must protect profit position through cost control


Fixed Price Contracts w/Economic Price Fixed Price Contracts w/Economic Price Adjustment (EPA)Adjustment (EPA)

• A type of Fixed Price contract that allows a price redetermination based on circumstances largely outside of the control of either contracting party

• Adjustment can be either upward or downward• Three (3) General Types of EPA

– Adjustments based on established prices• Market conditions• Ex: Cost of Silicon rises, driving the chip market up - impacts many products

– Adjustments based on actual costs of labor and material• Market conditions - public indexes

– Adjustments based on cost indexes of labor or material• Ex: Producer Price Index for a commodity

• Application: When there is serious doubt concerning the stability of market or labor conditions that will exist during the extended period of contract performance.

• Limitations: Only used when necessary to protect Contractor, Government, or both, from significant cost fluctuations.


Fixed Price Award FeeFixed Price Award FeeFAR 16.404FAR 16.404

• A Fixed Price Arrangement that provides for an element of Profit (Fee) to be earned through an Award Fee Process

• Provides additional incentive to encourage optimum performance

• Buyer and Seller may be slightly more flexible to changes given Award Fee potential

• Award Fee Element is SUBJECTIVE – (vs. Incentive Fee Objective)


Cost Reimbursable Cost Reimbursable TypesTypes


Cost Plus Fixed Fee (CPFF)Cost Plus Fixed Fee (CPFF)


Cost Plus Fixed Fee (CPFF)

• A cost reimbursement contract that provides for payment to the contractor of all allocable and allowable costs incurred PLUS a negotiated fee that is fixed at definitization

• Fixed Fee does not vary with the actual costs of performance• Assuming no changes to initial baseline

• Fee may be increased as a result of changes to the workscope that are outside of the original contract requirements– Considered a “fee bearing” equitable adjustment

• Fee may be decreased as a result of changes to the workscope that remove effort that was part of the contract


Cost Plus Fixed Fee (CPFF)

• Common vehicle for R&D efforts, prototypes, preliminary exploration, and concept formation phases of programs

• Sometimes used for Proof of Concept and LRIP phases

• Used when level of effort required cannot be easily (and fairly) determined

• Used when Spec’s and SOWs are “Open” - Requirements not able to be defined with certainty

• Contractor must have an acceptable accounting systems to collect and report costs

• Used when a CPIF contract is not practical


Elements of a CPFF Contract

• Very simple, straightforward type:• Estimated Cost

• Fixed Fee

• Total CPFF

•Estimated Cost

•Profit

•Price

•Estimated Cost

•Profit

•Price

NOTNOT


CPFF and the Fee Percentage

• The amount of Fixed Fee is limited by regulation:– (FAR 15.404-4(4)(i), which cites 10 U.S.C. 2306(d) and 41 U.S.C.

254(b))

– Maximum of 15% for pure Research and Development (R&D efforts– Maximum of 6% for all Architecture Engineering contracts– Maximum of 10% for all other CPFF efforts

• Important Point: – Cost and Fee are separate legally (contractually) recognized

elements of a contract– Both must be separately expressed in separate relevant contract

clauses


Two Types of CPFF Contracts

• CPFF Completion:– Describes the scope of work by stating a definite goal or target and specifying an end

product– Requires the contractor to deliver the specified end products WITHIN the estimated

costs• Less risk to contractor - not spending his own money if additional funds needed

– If work cannot complete within estimated cost, Gov’t may increase cost, but does not have to increase fee

– Gov’t can end work when it has had enough!

• CPFF Term:– Describes the scope of work in general terms and obligates the contractor to devote a

specified level of effort for a stated period of time– If Gov’t considers performance satisfactory, fixed fee is paid at end upon contractor

statement that he has provided the level of effort specified in the contract


Cost Plus Incentive Fee Cost Plus Incentive Fee (CPIF)(CPIF)


Cost Plus Incentive Fee (CPIF)Cost Plus Incentive Fee (CPIF)

• Provides for an initially negotiated fee to be adjusted later based on relationship of actual costs to target costs.

• Similar to FPI except no ceiling price in CPIF – all allocable and allowable costs reimbursed

• Opportunities for increases or decreases in fee intended to motivate the contractor for efficient performance


Cost Plus Incentive Fee (CPIF)Elements

Target Cost

Target Fee

Minimum Fee - at which fee is “fixed” (floor)

Maximum Fee - at which fee is “fixed” (ceiling)

Fee Adjustment Formula - Share Ratios


Cost Plus Incentive Fee (CPIF)Elements

• Fee increases when actual cost are less than target cost• Fee is decreased when actual costs are more than target cost• Fee is only decreased to the “minimum” - may be $0• “Range of Incentive Effectiveness” - the points between

minimum and maximum fee• CPIF referred to as a “objective” incentive - fee determined by

fact and formula


When/Why Use CPIF?When/Why Use CPIF?

• When allocation of risk cannot be determined such that high probability of appropriate profit/fee results

• When neither party has reliable knowledge of the exact work required

• When SOW’s and Specifications are “open”– “..... As required .....”– “..... Contractors best efforts ....”– “... If necessary ...”

• Often used in Research and Development programs, SDD & LRIP Programs


CPIF Example


Target Cost $ 10,000,000 $ 8,000,000 $2M under-run

Target Fee 1,000,000 1,000,000

Minimum Fee 400,000

Maximum Fee 1,500,000

Share 80 / 20 400,000 20% of $2M under-runadds to target fee

Final Fee 1,400,000 Under-run share plustarget - is within

maximum fee

Final Price $ 9,400,000 Actual Cost ($8M) plusfinal fee


CPIF Example


Target Cost $ 10,000,000 $ 11,500,000 Contract over-run by $1.5M

Target Fee 1,000,000 1,000,000

Minimum Fee 400,000


Share 80 / 20 (300,000) 20% of $1.5M over-run -is decrease to fee

Final Fee 700,000 $1M target less $300Kshare of over-run

Final Price $12,200,000 $11.5M cost plus $700Kfee


CPIF Example


Target Cost $ 10,000,000 $ 7,000,000 $3M under-run

Target Fee 1,000,000 1,000,000

Minimum Fee 400,000


Share 80 / 20 600,000 20% of $3M under-run

Final Fee 1,500,000 Max fee cap applies @$1.5M even though $1Mtarget plus $600K share

Final Price $8,500,000


CPIF Type and Procurement Behavior

• Less contentious than fixed price

• Contractor still “cautious” of changes, but more accommodating

• Buyer tempted to ask for more, feels he bears majority of cost increases (he does, depending on share)

• Seller (Contractor) still looking to preserve and increase fee position

• Recognition that procurement documents (specifications, SOW) more open


Cost Plus Award Fee (CPAF)Cost Plus Award Fee (CPAF)


Incentives vs. Award FeesIncentives vs. Award Fees

Objective Criteria

Subjective Criteria


Cost Plus Award Fee (CPAF)

• A cost reimbursement contract that provides for a fee consisting of:– A base amount fixed @ negotiation of the contract -

does not vary with performance– An award amount that the contractor may earn in

whole or in part based on performance

CPAF - Fairly Popular Contract Type For Both

Product and Service Contracting


Cost Plus Award Fee (CPAF)

• Used as a motivational tool to encourage efficient performance through the possibility of additional fee

• CPAF contracts provide for evaluation of contractor performance at stated intervals and the award of fee (or not) based on this performance– Regular intervals provides feedback on the quality of performance– Allows contractor the opportunity to address short comings or

continue positive aspects

CPAF - Fairly Popular Contract Type For Both

Product and Service Contracting


Elements of a CPAF Contract

• Base fee represents a floor on fee - incentive is all in the “Award Fee Pool” -– All incentive, no penalties– (Well, in reality, the penalty occurs by not earning the incentive! Gotcha!!)

• Award Fee Pool - The dollar value of the difference between the maximum fee and the base fee.

Estimated Cost

Base Fee

Maximum Fee

Award Periods

Evaluation criteria

Award Procedure“The Award Fee Plan”


The Award Fee Plan

• A written document attachment to the contract that defines ....

– The amount of award fee available, by period and for the total contract– The award fee periods

• Usually 6 months or longer to be meaningful• Often 11 months in a large, multi-year development effort• Cannot exceed 12 months (without agency exception)

– The accomplishment criteria for each period– The Customer’s award fee process - Procedures for determination - how and who

• Fee Determining Official (FDO) - a named individual• Award Fee Review Board - representatives from

– Program Office– Technical Office– PCO (Contracts)– Finance– Security– Support Contractors


The Award Fee Plan and Evaluations and Determinations

• The award fee evaluation and determination is SUBJECTIVE– It is based largely on relationships between Contractor

Program personnel at all levels and their Government counterparts

– It is the determination of one individual based (maybe) on the collective inputs of other individuals

• with all the “human baggage” an individual carries

• The award fee determination can be $0 - ouch!!!!!!!


Award Fee Pool Capture Example

Given: - $1.0M award fee pool- Five equal periods of 1/5th of pool

AwardPeriod

AmountAvailable $’s

Award FeeRating

Dollar Capture CumulativeAward Fee $’s

Award Fee$’s Lost *

1 200,000 70% 140,000 140,000 60,000

2 200,000 50% -0- 140,000 200,000

3 200,000 86% 172,000 312,000 28,000

4 200,000 90% 180,000 492,000 20,000

5 200,000 94% 188,000 680,000 12,000

$ 1,000,000 $ 680,000 $ 320,000

As % 100% 68% 32%

* Award Fee Lost Assumes No Rollover


Award Fee Administration

• CPAF contracts have significant administrative burden– As cost reimbursable contract, have many cost reporting

requirements– Administration of the award fee plan is an effort

• Lots of “data gathering” by lots of people on both sides of the contract

– The “self assessment” and review process is an effort– Award requires the issuance of a contract modification– Must constantly work the “interpersonal aspect”

• CPAF Contract Use Under Great Scrutiny

As “Extra - Curricular” Contract Activity


Award Fee Contracts and the Behavior of the Parties

• Government has both the carrot and the stick– Carrot: attractive award fee capture potential– Stick: “You want some of this, right?”

• The interpersonal relationships of individuals become very important

• Contractor tendency to appease– Reluctance to object in hopes of favorable award fee determination– Push back is touchy, but can be done

• Government tendency to push for more work - stretch the scope– Costs are reimbursed and a favorable fee determination


Award Fee Contracts - Final Thoughts

• Is a subjective determination of individuals– That tries to be based on some objective criteria

• Requires some significant additional administrative effort not present in other contract types.

• Very formal, very structured• Can provide attractive Profit potential when performance is optimized• Can be tremendously creative and complex vehicles -

– Fee roll-overs, multiple evaluation criteria, split periods, etc.

Editorial comment of instructor: Only contract vehicle that allows the Government to encourage a contractor to exceed the contract requirements and withhold profit if they do not exceed.


Time and Material ContractsTime and Material Contracts

Labor Hour ContractsLabor Hour Contracts


T&M Contracts

• A cross between fixed price and cost reimbursable– Fixed Price nature: Has fixed hourly rate for reimbursement of labor– Cost Type nature: Material and ODC reimbursed at cost

Labor reimbursed at fixed rate but based on number of hours incurred

• Allows for the reimbursement of labor based on hours incurred at a predetermined hourly rate– Includes all burdens and profit

• Allows for the reimbursement of all material and ODC at cost plus applicable burdens - but no fee/profit on material/ODC

• Contract limits set in terms of dollars to be expended.– Contractor should have flexibility to utilize different labor categories– Contractor cannot exceed ceiling except at own risk


T&M Contracts (Continued)

• Application– When extent or duration of the contract cannot be easily estimated at the

outset– Difficult to anticipate costs with any reasonable degree of confidence– Often used in Engineering Services environments

• Training courses• Field support• Testing• Documentation writing

• Behavior/Relationship– Contractor is very loose - open to direction– Government is fairly loose - willing to change tasks– Little risk to contractor– Only risk to Government is the inability to complete all work contemplated

within the ceiling


T&M Contracts - An Example

Category Contract Hourly Rate $’s

Hours Incurred

Total Price $’s

Engineer 185.45 218 40,428.10

Programmer 226.51 412 93,322.12

Manager 215.14 139 29,904.46

Administrator 181.14 100 8,114.00

Shipping 45.19 50 2,259.50

Total Labor 919 174,028.18

Burdened Material 86,413.12

ODC (Travel), etc. 29,694.13

Total T&M Value $290,135.43


Labor Hour Contract

• A variation of the T&M except material is not provided by the contractor nor is travel (ODC) required.

• Labor only is provided at pre-determined rates that include profit


Other Contract Types

• Indefinite Delivery/Indefinite Quantity (ID/IQ)

– Multi-year contracts with a specified period of the contract– Like a BOA, contract structure established in advance of firm

requirements– Unknown delivery dates– Unknown quantities - up to a maximum– Used for both products and services procurements– Must state some minimum purchase thresholds

• in terms of dollars ... Or ...• in terms of quantity

– Reasonable general statements of the scope, complexity, nature and purpose of supplies/services to be ordered


Other Contract Types

• Level of Effort (LOE)– Can be fixed price or cost reimbursable– Specific level of labor effort is contracted to be

supplied– May state a “Term” for which that LOE is to be

provided


Other Contract Types (Cont’d)

• Cost Plus-A-Percentage of Cost– Never used - they’re illegal– Would provide for a fee percentage based on cost incurred– Illegal because they only motivate the contractor to incur cost– No motivation for cost control or efficient performance

• Cost Share Contract– Simply means the Government and contractor will share the

cost of performance– Often with No Fee– Share amounts or values stated in the contract .... Or ......– Government funded amount stated with language that

contractor will augment to accomplish contract requirements



• Basic Ordering Agreements (BOA)– A contract vehicle established in advance of firm requirements

• But future requirements are anticipated– Established contract structure, terms and conditions, limitations

• Can be fixed price, cost type, T&M - whatever the customer wants– One benefit is to have a “QRC” (Quick Reaction Capability) to place urgent

requirements on contract– The BOA is not in itself a “contract” (no agreement to buy or sell) - orders under

the BOA are contracts– Often multiple agencies/commands can use a BOA provided they are specified as

authorized ordering agents• Blanket Purchase Agreements (BPA)

– More for commercial items– Like a BOA, established contract structure in advance of firm need– Can order quantity needed from price list



• LETTER CONTRACTS– A written (sometimes only a letter) preliminary contractual instrument that authorizes

the contractor to begin immediately manufacturing supplies or performing services.– Issued in advance of the final negotiations of a complete contract.– Can only be used with agency head approval in urgent situations– Can not be used to circumvent competition where competition is otherwise required.– General rules of issuance:– Must have a firm NTE ceiling from the contractor– PCO can authorize 50% of ceiling upon receipt of NTE– PCO can authorize 75% of ceiling upon receipt of qualified proposal– Letter contract must state firm schedule for:

• Submittal of proposal• Completion of negotiations - can not exceed 180 days after

issuance


Other Transaction Other Transaction Agreements (OTA’s)Agreements (OTA’s)


Other Transaction Agreements

• About 15 years old - from U.S.C. 2371 and Section 845 of the Defense Appropriation Action of 1996

• Technically, Not a Contract but an “Agreement”• Sometimes referred to as “Section 845 OTA”• Suspends standard FAR procurement rules

– FAR does not apply– CAS does not apply

• Provides certain cost flexibility– May treat as traditional contract– May treat as IRAD – potential cost accounting differences

• May require company matching funds .... May Not!



• Background– Initially developed for DARPA-funded R&D efforts (USC 2371)– Section 845 - extended application to other Government

agencies and allowed use for certain prototype and production efforts.

– May require competition for award - May Not !

• Behavior– Both parties generally cooperative– Both parties interested in program success– Contractor motivated that 845 phase is first step towards larger

program that will be a traditional contract



• OTA’s Can Be Considered Either …

• Cost Reimbursable• Fixed Price

• Must Coordinate With Agreements Officer For Clear Definition

• Can Be Paid Via Milestone Payments Or Other Methods

• Intellectual Property Rights Tend To Be An Important Element Of The Agreement And The Negotiations

• Resource: “OTA Guide for Prototype Projects” – Issued By UnderSecretary for Defense, Acquisition, Technology and Logistcs– Updated April 2004– Check the Web for Latest and Greatest


Knowledge Is PowerKnowledge Is Power

In Any Acquisition Environment, Knowledge is Power!

The “Wish List” of Both Buyer and Seller

•I wish I knew what it would cost.

•I wish I knew what performance issues I might encounter.

•I wish I had done this before (or someone else).

•I wish I could get a good estimate.

But We Rarely (Never) Have Perfect Knowledge

Industry and Government Need To Partner … We’re Both In This Together!


Questions ?Questions ?


BACKUPBACKUP


FPI Example - Negotiated Value

Target Cost $10,000,000

Target Profit 1,500,000

Target Price $ 11,500,000

Ceiling Price (125%) 12,500,000

Share Ratio 75% / 25%

These elements arestated in the

Contract

• Point of Total Cost Assumption (PTA)

$ 12,500,000 - $ 11,500,000 .75

+ 10,000,000 = $11,333,333


Mechanics of the PTA(Illustrative Examples)

• Total Cost @ PTA $11,333,333• Overrun @PTA $ 1,333,333• Gov’t Share (75%) $1,000,000• Contractor Share (25%) $

333,333

• Contractor Target Profit $1,500,000• Less Contractor Share $ 333,333• Delta = Profit Remaining $1,166,667



• Ceiling Price $12,500,000• Total Cost @ PTA

$11,333,333• Delta to Ceiling $

1,166,667

• Contractor Profit Remaining @ PTA $ 1,166,667 NOTE THE COINCIDENCE…?



Ceiling $12,500,000 Target Profit $1,500,000PTA $11,333,333 K’or Share (25%) $ 333,333Delta $ 1,166,667 Delta (Profit Left) $ 1,166,667

If Cost Goes to …. $11,333,334 ….Then Profit Drops to …$1,166,666

If Cost Goes to ….$11,450,000 ….Then Profit Drops To….$1,050,000

$1 additional cost… equals… $1 less in Contractor Profit

Cost Increase of $116,667… means …Further Profit Erosion of $116,667


Real Life Abstract from a Real Life Award Fee Plan

• “Award fee plan describes the organization, criteria, standards and procedures for evaluating contractor performance for determining and awarding an award fee, if any ...”

• “Provides an incentive for contractor to produce timely, high quality outputs that meet or exceed the requirements of the contract while stimulating efficient contractor performance”.

• Involves subjective determination(s) of Award Review Board (ARB) and Fee Determining Official (FDO).

• Determination made on their impression of your performance and what you tell them (informally and formal self-evaluation)

“IF ANY”“IF ANY”


CPAF Example

• Under-runs to estimated cost simply means Government pays less– Hopefully, under-run is through good performance and thus

high award fee captures

• Over-runs to estimated cost means Government must pay more and may reflect in AF capture.

Estimated Cost 10,000,000Base Fee (2%) 200,000Maximum Fee (12%) 1,200,000Award Periods (See Plan)Evaluation Criteria (See Plan)Award Procedure (See Plan)

Award fee pool is $1,000,000


More Real Life Award Fee Plan Examples

Evaluation Periods and Fee Allocations:

Period Evaluation Period Available FeeI Contract Award to PDR 13%II PDR to CDR 15%III CDR to TRR 22%IV TRR to TRR plus 6 months 18%V TRR plus 6 months to end 32%

• Evaluation period ends at Milestone completion• Government may UNILATERALLY change criteria PRIOR to start of period, and only by

mutual agreement during a period.

Program Specific Award Fee Data

Our responsibility - No, Objective - To Manage to the CriteriaOur responsibility - No, Objective - To Manage to the Criteria


More Real Life Award Fee Plan Examples....

Performance Evaluation Areas, Emphasis and Weightings

Area Period I Period II Period III Period IV Period V

Management 40% 30% 30% 20% 20%

Technical 25% 35% 35% 40% 40%

Cost 20% 20% 20% 20% 20%

Schedule 15% 15% 15% 20% 20%

Total 100% 100% 100% 100% 100%

Available Award Fee 13% 15% 22% 18% 32%


More Real Life Award Fee Plan Examples....

Rating Description Effective RatingExcellent 91 - 100Very Good 81 - 90Good 61 - 80Marginal 41 - 60Sub-Marginal 0 - 40

Total Effectiveness Rating

Our Objective Must Be “Excellent”Our Objective Must Be “Excellent”


Criteria Straight From an Award Fee Plan....

• Provides Government visibility into critical tasks. Responds to request for information accurately.

• Implements directed changes within a reasonable time. Changes are complete.

• Provides timely responses to most critical action items.

• Adheres to all security practices and procedures, with only minor deviations. Maintains routine level of security awareness.

• Tracks progress and maintains close control of all subcontracted efforts. Keeps program office informed of status of major subcontract issues.

• Provides effective communication with program office, associate contractors, and other Government agencies by “keeping lines open”. The contractor has maintained a satisfactory working relationship with Government representatives and has been responsive.

Critical Standards to Meet for Performance Ratings

Management StandardsManagement Standards


Criteria Straight From an Award Fee Plan...

1. Technical: “Provides good expertise in most technical tasks”.

“Considers several factors and approaches to solving the problem.”

2. Cost:: “Cost variances (including subcontractor) are identified early and plans for recovery are revised, reported and implemented”.

“Changes are suggested in a timely manner to achieve maximum cost savings when implemented”.

“All cost reports are clear and reconcile to a common data base. Funds requirements data are projected accurately and clearly and are received in a timely manner.”

3. Schedule: “All schedule reports are clear. Schedule variances (including subcontractors are identified early and plans for recovery are revised, reported and implemented.

Critical Standards to Meet for Performance Ratings (Cont’d)

Select Comments From Other StandardsSelect Comments From Other Standards


Criteria Straight From an Award Fee Plan...

Critical Standards to Meet for Performance Ratings (Cont’d)

If you meet all the positive standards expressed on the previous two (2) slides

What you get is ........

A MARGINAL RATING AND NO AWARD FEEA MARGINAL RATING AND NO AWARD FEE


types of contracts and contractual vehicles in federal (dod) procurements 1 jerome c. burke (jerry)...

Documents

burke ncma

workshop bentley college

different contract types

fixed fee cpffcost

contract types48 cfr

application of contract

fee discussionsj

concepts of fee