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    There are so many: 1) What are the requirements for awarding a FFP Construction Contract based on percentage of work complete? i.e. responsibility requirements, accounting system requirements Reference terminology in FAR 52.232-5(I) and the differences between that and FAR 32.102(e), DFARS 209.104-1(e), DFARS 242.7502(a), and DFARS 242.7503(b) 2) Since Construction Progress Payments are based on a percentage of work complete and have nothing to do with actual costs incurred, why should there be any reference to an accounting system that can record costs? (Sorry, playing devil's advocate here, I know I would prefer a contractor with a system that is capable, but trying to play out the scenario here). 3) If a contract was awarded (regardless of whether the information relied upon was reliable in relation to the accounting system of a relatively new entity and the system is now subject to numerous high risk areas, likely significant deficiencies (informally documented), what are the recourses? (Some of this may be answered in the questions above) 4) Further complicate this with the fact that the contractor recently submitted a financial distress letter, so, not only are we highly suspect of the capabilities and adequacy of the system, the contractor is claiming that the current withholds (20%) are requiring them to obtain financing above an 8% interest rate.


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    QUESTION 1) What are the requirements for awarding a FFP Construction Contract based on percentage of work complete? i.e. responsibility requirements, accounting system requirements? Reference terminology in FAR 52.232-5(I) and the differences between that and FAR 32.102(e), DFARS 209.104-1(e), DFARS 242.7502(a), and DFARS 242.7503(b)
    RESPONSE 1)
    The clause FAR 52.232-5 is to be used in solicitations and contracts for construction when a fixed-price contract is contemplated.  So this clause shall be placed in your contract if it will be FFP at any dollar value.
    FAR 32.102(e) does not apply to construction contracts as this section is entitled “Description of Contract Financing Methods” and in accordance with FAR 32.001(1)(v) progress payments for construction contracts are NOT considered finance payments.

    First of all FAR part 9 and DFARS part 209 deal with determining the contractor’s responsibility to perform the contract. DFARS 201.104 is entitled “RESPONSIBLE PROSPECTIVE CONTRACTORS.” Paragraph (1)(e) that you refer to basically states that if a contractor is to receive progress payments based on a percentage of completion that as part of the responsibility determination you must assure that they have an accounting system and cost data that are reliable and can appropriately allocate costs to the different activities. 
    Part of the reason for this is that you would not want to overpay up front only to have them walk off the job and then not have sufficient funds remaining to complete the work with another contractor.  The contractor when doing their scheduling should also be allocating the associated costs with each activity and this would help you verify the progress payments. The required clause DFARS 252.242-7006(c) clearly states what a Contractor’s accounting system shall provide for and DFARS 242-7502(b) provides the contracting officer’s responsibility in this determination. Read both of these further in detail for more information.

    QUESTION 2)
    Since Construction Progress Payments are based on a percentage of work complete and have nothing to do with actual costs incurred, why should there be any reference to an accounting system that can record costs? (Sorry, playing devil's advocate here, I know I would prefer a contractor with a system that is capable, but trying to play out the scenario here).

    RESPONSE 2)
    This is not a correct assumption that the percent complete does not relate to actual costs incurred.  The contractor when doing their scheduling should also be allocating the associated costs with each activity.  It is the job of the contracting officer to approve the schedule and the associated costs with each activity.  The contract should then be tracking and reporting their actual cost incurred as well as progress.  If you see cost exceeding its anticipated percentage complete, that is a warning sign that the contractor could be in trouble and the contracting office needs to start asking questions.
     
    QUESTION 3) If a contract was awarded (regardless of whether the information relied upon was reliable in relation to the accounting system of a relatively new entity and the system is now subject to numerous high risk areas, likely significant deficiencies (informally documented), what are the recourses? (Some of this may be answered in the questions above)
    RESPONSE 3)
    Not sure what the heart of the issue is so the response will be general.
    1. If you have not formally document anything, you must start here if any other recourse is to be effective.
    2. Write the contractor a letter of concern (make sure you copy the bonding company) and have a face to face meeting with the contractor to discuss an document the issues. 
    3. If after giving them sufficient time from these notices and meeting then you can issues a cure notice, then a show cause and then termination for default would be your final recourse.  This should be a last resort.
    4. If they are not making progress, you should not pay them.  If you have over paid them (for deficient items) you should get your money back with interest per the payment clasue.

    QUESTIONS 4)
    Further complicate this with the fact that the contractor recently submitted a financial distress letter, so, not only are we highly suspect of the capabilities and adequacy of the system, the contractor is claiming that the current withholds (20%) are requiring them to obtain financing above an 8% interest rate.

    RESPONSE 4)
    As I have not seen the letter nor the contract, I can only offer general advice.
    In accordance with FAR clause 52.232-5(i), Payments Under Fixed-Price Construction Contracts, progress payments shall not exceed 80 percent on work accomplished on undefinitized contract actions.  The government is well within its rights to withhold the 20% of valid payment requests. The fact that this is causing the contractor to obtain a higher interest rate has nothing to do with the government unless we are failing to make at least monthly payments (when valid work is accomplished) or negotiating in good faith.

    The other question to ask is what is holding up the progress of definitizing the contract action. Once this contract is definitized, then you can increase your payments to the contractor to between 90% to 100%. 
    This could help with the contractor’s financial situation and progress of the construction contract.
     
    Overall by awarding this contract, the contracting officer had to make a determination of responsibility which includes the accounting system.  It is now time to administer the contract in accordance with the terms and conditions of the contract.  Read the clauses and know what your clauses say and what rights you and the contractor have. 
     

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