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  • Question

    How would the fee be structured in the LOE scenarios outlined above and what types of problems would we run into if we executed one of the structures above? Ultimately, given the conflicting guidance in the link above and what it states in FAR 16.306(a) "...The fixed fee does not vary with actual cost..." We have no idea how to structure the fixed fee.


    Answer

    1. The FAR and DFARS references quoted in pertinent part below is applicable to this response.

    FAR 16.503 -- Requirements Contracts
    (a) Description. A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period (from one contractor), with deliveries or performance to be scheduled by placing orders with the contractor
      (2) The contract shall state, if feasible, the maximum limit of the contractor’s obligation to deliver and the Government’s obligation to order. The contract may also specify maximum or minimum quantities that the Government may order under each individual order and the maximum that it may order during a specified period of time.

    (b) Application.
      (1) A requirements contract may be appropriate for acquiring any supplies or services when the Government anticipates recurring requirements but cannot predetermine the precise quantities of supplies or services that designated Government activities will need during a definite period.

    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, but may be adjusted as a result of changes in the work to be performed under the contract.

    (d) Completion and term forms. A cost-plus-fixed-fee contract may take one of two basic forms -- completion or term.
      (1) The completion form describes the scope of work by stating a definite goal or target and specifying an end product. This form of contract normally requires the contractor to complete and deliver the specified end product within the estimated cost, if possible, as a condition for payment of the entire fixed fee. However, in the event the work cannot be completed within the estimated cost, the Government may require more effort without increase in fee, provided the Government increases the estimated cost.

      (2) The term form describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated time period. Under this form, if the performance is considered satisfactory by the Government, the fixed fee is payable at the expiration of the agreed-upon period, upon contractor statement that the level of effort specified in the contract has been expended in performing the contract work. Renewal for further periods of performance is a new acquisition that involves new cost and fee arrangements.

      (3) Because of the differences in obligation assumed by the contractor, the completion form is preferred over the term form whenever the work, or specific milestones for the work, can be defined well enough to permit development of estimates within which the contractor can be expected to complete the work.

      (4) The term form shall not be used unless the contractor is obligated by the contract to provide a specific level of effort within a definite time period.

    2. The following reference is also applicable to this response.
     
    DoD Class Deviations DARS 2012-O0016 dated Oct 11, 2012, “Approval Threshold for Time-and-Materials and Labor-Hour Contracts and Preference for Cost-Plus-Fixed-Fee Term Contracts”
    http://www.acq.osd.mil/dpap/policy/policyvault/USA005335-12-DPAP.pdf 
     
    3. Based on the DoD direction in Class Deviation 2012-O0016 concerning the use of T&M contracts and the preference for the use of CPFF type contracts instead, and given the information provided in this inquiry concerning the nature of the contemplated acquisition, we would suggest that the Contracting Officer consider the use of a Requirements type contract as described in FAR 16.503, utilizing both the CPFF term form and CPFF completion form pricing arrangements as described in FAR 16.306(d) to perform the two distinct parts of the overall contract work.

    4. Under this approach, CLIN 0001 would be structured as a CPFF term form contract as described in FAR 16.306(d)(2) & (d)(4) with a total estimated cost and fixed fee for a specific level of effort (i.e., labor hours) to be provided by the contractor during the period of performance to perform inspection, tear down and other efforts associated with determining the exact nature of any emergency repairs required. This CLIN would also include the labor effort required by the contractor to develop a CPFF completion type cost estimate covering labor costs, material costs, other direct costs, indirect costs and fixed fee to perform the actual repair effort needed. The effort to perform the CLIN 0001 work would be authorized by individual task orders. Because this is a Requirements type contract, the overall level of effort to perform the CLIN 0001 effort can be increased from time-to-time during the period of performance as the need arises. Also, because FAR 16.306(d)(2) & (d)(4) obligates the contractor to perform the precise level of effort stipulated for CLIN 0001, then if there are any hours remaining under CLIN 0001 at the completion of the contract performance period, then the actual allowable costs of the hours performed would be paid, but the fixed fee would be reduced for the labor hours not performed on a prorated basis using an “average fee dollar per hour” method.

    5. Additionally under this approach, CLIN 0002 would be structured as a CPFF completion form contract as described in FAR 16.306(d)(1), under which additional subCLINS would be established for each repair effort (or group of closely related repair efforts) that is to be performed with a separate estimated cost and fixed fee specified for each subCLIN. The estimated cost and fixed fee of each subCLIN would be separately negotiated with the contractor based on the evaluation of their cost estimate for that repair effort submitted under the applicable CLIN 0001 task order.  Upon the completion of negotiations, each of these separate subCLINs would be incorporated into the contract and authorized by individual task orders. Because this is a Requirements type contract, any number of repair effort subCLINs could be authorized during the contract period of performance. Once the work under each subCLIN is complete, then the contractor would be paid its actual allowable costs and the fixed fee associated with that subCLIN. Pursuant to FAR 16.306(a), the fixed fee of the subCLIN will not vary with the actual costs required to perform the work, unless the work requirements under the subCLIN are changed.
     
    6. Finally, regarding the comment in this inquiry concerning the previous AAP response #23889 covering this general subject matter, the writer of this response concurs that the AAP #23889 response is not entirely consistent with the FAR, and therefore that response will be revised accordingly. Thank you for bringing this matter to our attention.



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