The statutory limit for a CPFF contract is 10%, as stated in FAR 15.404-4(c)(4)(i)(C), unless the CPFF contract is for experimental, developmental, or research work, and then the maximum fee is 15% (FAR 15.404-4(c)(4)(i)(A). In addition, FAR 15.404-4(c)(5) states the PCO's signature on the PNM or other documentation...documents the CO's determination that the statutory price or fee limitations have not been exceeded. Review of 10 U.S.C. 2306(d) and 41 U.S.C. 254(b) confirms this regulation is consistent with the statute.
In this scenario, it appears the proposal with the high fee has been evaluated as the highest technically. However, you cannot award to this most highly rated proposal as-is, for the proposed fee exceeds the statutory fee limit. This is essentially a proposal deficiency (consistent with the definition in FAR 15.001), and must be fixed in order to award to this offeror. Thus, consider the following possible outcomes:
1. Considering this deficiency did your team evaluate the other offeror's proposal to be awardable without discussions? Or does the other offer also include weaknesses and/or deficiencies that the Government team needs answers to? If awarding to the other offeror without discussion is reasonable, award to that offeror. If not, consider #2 below.
2. Given the situation, it appears both offers include weaknesses and/or deficiencies that the Government team needs answers to before awarding. Thus, open discussions with both offerors, and use this opportunity to state the fee limitation to the first offeror.
There would be some risk in opening discussions with the offeror proposing the higher fee, but not with the other. Be prepared for the other offeror to argue that if no discussions were held with him, why did the Government decide not to award without discussions? Thus, before making the decision of entering discussions, PCO should carefully review FAR 15.306(c), the latest DoD Source Selection Procedures (transmitted throughout DoD on March 09, 2011) regarding the decision to enter in to discussions, and seek peer review and legal counsel.