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  • Question

    Will a CPIF help mitigate this cost risk? Can we change the contract type since we believe doing so will not affect the award decision after FPR?


    Answer

    1. The FAR references quoted below in pertinent part are applicable to this response.

    FAR 15.204-2 -- Part I—The Schedule
    (h) Section H, Special contract requirements. Include a clear statement of any special contract requirements that are not included in Section I, Contract clauses, or in other sections of the uniform contract format.

    FAR 15.206 -- Amending the solicitation
    (a) When, either before or after receipt of proposals, the Government changes its requirements or terms and conditions, the contracting officer shall amend the solicitation.

    (c) Amendments issued after the established time and date for receipt of proposals shall be issued to all offerors that have not been eliminated from the competition.

    (g) At a minimum, the following information should be included in each amendment:
      (5) Description of the change being made,
      (7) Revision to solicitation closing date

    FAR 15.306 -- Exchanges with offerors after receipt of proposals
    (d) Exchanges with offerors after establishment of the competitive range.
      (3) The contracting officer also is encouraged to discuss other aspects of the offeror’s proposal that could, in the opinion of the contracting officer, be altered or explained to enhance materially the proposal’s potential for award.

    FAR 16.103 -- Negotiating Contract Type
    (a) Selecting the contract type is generally a matter for negotiation and requires the exercise of sound judgment. Negotiating the contract type and negotiating prices are closely related and should be considered together. The objective is to negotiate a contract type and price (or estimated cost and fee) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical performance.

    FAR 16.306 -- Cost-plus-fixed-fee contracts
    (a) Description. A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost … .

    FAR 16.405-1 -- Cost-plus-incentive-fee contracts
    (a) Description. … The cost-plus-incentive-fee contract … provides for the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. … [The] increase or decrease [in the negotiated fee] is intended to provide an incentive for the contractor to manage the contract effectively.

    (b) Application. (1) A cost-plus-incentive-fee contract is appropriate for services or development and test programs when—
      (i) A cost-reimbursement contract is necessary, and
      (ii) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.

    FAR 31.109 -- Advance agreements
    (a) The extent of allowability of the costs covered in this part applies broadly to many accounting systems in varying contract situations. … [C]ontracting officers and contractors should seek advance agreement on the treatment of special or unusual costs.

    (b) Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the costs involved. The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts. An advance agreement shall contain a statement of its applicability and duration.

    (d) Advance agreements may be negotiated with a particular contractor for a single contract … .

    FAR 31.201-2 -- Determining allowability
    (a) A cost is allowable only when the cost complies with all of the following requirements:
      (1) Reasonableness
      (2) Allocability
      (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances
      (4) Terms of the contract
      (5) Any limitations set forth in this subpart

    FAR 52.216-7 -- Allowable Cost and Payment
    (a) Invoicing
      (1) The Government will make payments to the Contractor when requested as work progresses, but (except for small business concerns) not more often than once every 2 weeks, in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract.

    2. The following GAO Protest Decision is also applicable to this response.

    B-297915.2 – CIGNA Government Services, LLC, May 4, 2006
    http://www.gao.gov/products/A54120

    Agency failed to conduct meaningful discussions with CIGNA and permitted Palmetto to materially revise its proposal after final proposal revisions had been submitted.  We sustain the protest.

    "Communications between a procuring agency and an offeror that permit the offeror to materially revise or modify its proposal generally constitute discussions. FAR sect. 15.306(d); Lockheed Martin Simulation, Training & Support, B-292836.8 et al., Nov. 4, 2004, 2005 CPD para. 27. … If an agency does conduct discussions with one offeror, it must conduct discussions with all competitive range offerors, and provide all such offerors an opportunity to submit revised proposals. KPMG Peat Marwick, LLP, B-259479, May 9, 1995, 95-2 CPD para. 13; Paramax Sys. Corp., B-253098.4 et al., Oct. 27, 1993, 93-2 CPD para. 282."

    3. First, our response will address two very similar questions posed in this inquiry: “Can I change contract type after FPR without reopening discussion?” and “Can we change the contract type since we believe doing so will not affect the award decision after FPR?” Pursuant to FAR 15.206(a), (c) & (g), when the Government changes the terms and conditions of the solicitation after the established time and date for receipt of proposals, the Contracting Officer must issue an amended solicitation to all offerors that have not been eliminated from the competition and specify the revised closing date for the submittal of revised proposals. As described above, the fee arrangements under CPFF and CPIF type contracts are markedly different from one another. As indicated in FAR 16.103(a), negotiating the contract type and prices are closely related and are generally considered together. So, even though Offeror A was determined to provide the “Best Value” to the Government under a CPFF solicitation, this may not necessarily be the case under a CPIF arrangement. Therefore, any change in the contract type from CPFF to CPIF would represent a fundamental modification to the terms and conditions of the solicitation and the resulting contract, and consequently subject to the requirements as set forth in FAR 15.206.

    4. Additionally, in decision B-297915.2 referenced above, the GAO sustained a protest where, after receipt of final proposal revisions (FPRs) from the offerors, the procuring agency conducted discussions with one offeror and permitted that offeror to materially modify its proposal, but improperly did not conduct discussions with the other competitive range offeror and permit that offeror the same opportunity to revise its proposal. Based on this decision, because the Contracting Officer would need to reopen discussions with “Offeror A” in order to negotiate a change in the contract type from CPFF to CPIF, the Contracting Officer would also be required to do likewise with the other offerors in the competitive range and cannot hold discussions with Offeror A alone. Consequently, based upon the GAO ruling in B-297915.2 and the express requirements as set forth in FAR 15.206, we conclude that in this case, the contracting activity cannot change the contract type from CPFF to CPIF after the FPR without amending the solicitation accordingly, reopening discussions with all CR offerors, and obtaining new FPRs certainly to avoid the possibly high risk of a sustainable protest.

    5. Regarding the last question posed by this inquiry: “Will a CPIF help mitigate this cost risk?”, our opinion is “not really”. As described above, the purpose of a CPIF contract is to provide an incentive for the contractor to effectively manage overall actual contract (or CLIN) costs incurred (i.e., both direct and indirect costs) by reducing the earned fee for any overrun of the total target cost, versus managing an individual cost element (e.g., labor hours incurred). For instance, the contractor could find ways to reduce indirect costs and still bill more FTE labor hours than proposed, thereby not incurring any fee loss under a CPIF arrangement. Or on the other hand, depending upon the share ratios and minimum fee amount that are negotiated, any fee loss due to invoicing greater than the proposed FTE hours could be more than offset by the associated amount of fixed overhead and G&A costs that would have otherwise been absorbed by any fixed-priced contracts, rendering those contracts more profitable. Finally, for this reason and others, negotiating the CPIF share ratios and the minimum fee percentage may not be as simple as it might appear.

    6. Unless contract award to Offeror A would be governed by FAR Part 30 -- Cost Accounting Standards Administration regarding the use of its “Normalized accounting procedure” for the treatment of FTE hours, then under a cost-reimbursement contract, the only other effective way of holding Offeror A to their proposed FTE hours during contract performance would be to negotiate an advance agreement under the authority of FAR 31.109(a) & (d) stating that the direct and indirect costs associated with any FTE hours incurred in excess of the specific number of FTE hours in the proposal are unallowable costs under the contract. Consistent with FAR 31.109(b), such advance agreement could be set forth in the contract terms and conditions via the inclusion of a special provision in Section H, Special contract requirements. As a result, Offeror A would be precluded from invoicing overtime hours beyond their proposed hours for an FTE pursuant to the express provisions of contract clause FAR 52.216-7, paragraph (a).

    7. Finally, of course, should the Contracting Officer reopen discussions with Offeror A after FPRs in order to negotiate an advance agreement as described above, then pursuant to GAO Protest Decision B-297915.2, the Contracting Officer must also conduct another round of meaningful discussions with the other offerors in the competitive range, and subsequently provide all offerors the opportunity to submit new FPRs. In accordance with FAR 15.306(d)(3), the Contracting Officer could discuss other areas of each of those proposals that were not covered in the previous round of discussions that could be improved in order to enhance each proposal’s potential for award. However, if the “FTE hours” issue is not unique to Offeror A, then similar discussions concerning this issue must also be held with the other offerors in the competitive range, as applicable.




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