Should we be paying full OH cost on change orders since we have a FFP contract management line item that covers proposal preparation?
After speaking to the question submitter, discovered numerous issues. Thus, answer reflects more than initial question:
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Thus, as contracting officers, we must sometimes make a determination, even in a fixed priced or loaded labor rate environment, to request more information than the final proposed price for contract changes/modifications. However, ensure that while looking at details, we do not lose sight of the bottom line price. It is that price that should be compared to other information that can be found.
Because you are modifying the contract and adding a time and materials CLIN, you need to continue to use loaded labor rates. Even if the determination of price reasonableness needs extra information such as subcontractor costs, OH, etc, you are in a Fixed Price and Time and Materials contract; not a cost-type contract. For example, a project to repair generators may be proposed at $19,000 including subcontractor costs, OH, etc for the estimated 100 hours of work. In order to place this work on the contract into the T&M section, the work must be broken down into loaded labor rate categories plus materials. For this example, a specialized electrician may be all the direct labor that is needed to repair the generators. If this is the case, the CLIN that is added under T&M is a
0035 SPECIALIZED ELECTRICIAN
But, now you need a labor rate. If the proposed price for this project was $19,000 (including the subcontractor specialized electrician, OH, profit, etc) for the 100 hours of direct work and all of the indirect work (that you find fair and reasonable), then the loaded labor rate proposed is $190/hour, or
0035 SPECIALIZED ELECTRICIAN $190 $19,000
So, in essence, the contractor is not proposing $4,686 in OH and profit and $15,625 in labor; the contractor is proposing $190/hour for 100 hours.
The next step is to determine whether 100 hours is fair and reasonable and whether $190/hour is fair and reasonable.
Many times, our technical counterparts can assist us in judging the amount of hours proposed by a contractor. Other times, it may be necessary to hire an outside judge or “specialized electrician” using a GPC card to determine how many hours may be fair. In the case of hiring an outside contractor, the Government must (1) ensure that it does not reveal any information about the current contractor (processes, rates, proposed hours, performance, etc); and (2) ensure that the outside contractor understands that you are obtaining estimates only for the purposes of having an objective opinion, not for any repair work. In all cases, whether using a government technical representative or a third party, the internet, other sources, etc, market research must be performed to determine whether the proposed hours are fair since there is no competition for in-scope modifications.
While judging the fair and reasonableness of the hours performed, the contracting officer must also judge the fair and reasonableness of the rate itself. This can also be accomplished through market research – telephone calls, internet, e-mailing other installations, etc.
In conclusion, be careful to treat FFP/T&M contracts appropriately.