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  • Question

    Is this rate adjustment considered a cost overrun?


    Answer

    The Allowable Cost and Payment clause (Jun 2011) found at FAR 52.216-7 addresses payments under cost reimbursement contracts.  Careful reading of paragraphs (d) Final indirect cost rates, (e) Billing rates, and (h) Final payment will outline the process of how a contractor utilizes billing rates, makes adjustments to those billing rates as more information becomes known, and then determines the final rates that will be used for final payment.
    When a cost plus fixed fee (CPFF) contract is initially awarded, it is awarded with an estimated cost and fixed fee.  That estimated cost is subject to adjustment throughout the life of contract performance.  These adjustments aren’t considered a bad thing necessarily.  If we had a more firm idea of what the effort entailed, we would have gone with a fixed price type contract, so adjustments in specific effort and/or rates may be expected.  Because of fiscal law, the Anti-deficiency Act specifically, a CPFF contract initially has to be funded to the “most likely” cost, that is to say the estimated cost plus the fixed fee.  However, the acquirer should anticipate that costs may rise given the unknowns this type of contract envisions.  Therefore, an increase in a billing rate due to indirect rate adjustments should be anticipated.  It certainly is in the Allowable Cost and Payment clause in the FAR.

    To directly answer your question, it would be “technically correct” to call an increase in a billing rate or final rate that creates a situation where final costs end up greater than estimated costs a cost overrun.  However, by sheer operation of this type of contractual instrument, although cost overruns aren’t necessarily encouraged, we shouldn’t be surprised when they occur.  This is especially true in the area of billing rate adjustments on a CPFF term contract.  Unlike a CPFF completion contract where the Government might be subject  to some additional cost risk (increased ceiling) for performance if a contractor is very close to accomplishing the effort we are pursuing; under a CPFF term contract, the only true cost risk the Government has is a billing rate adjustment. 

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