Types of Contracts and
Contractual Vehicles in
Federal (DOD) Procurements
NCMA Boston Chapter March Workshop
Bentley College
10 March 2010
Jerome C. Burke (Jerry)
BAE Systems
Group Vice President, Contracts
Electronics, Intelligence & Support
1
Template 1

 An overview of the various types of contract vehicles used in Federal
(DoD) Procurement.
 A basic Understanding of the differences in Fixed Price and Cost
Reimbursable Contract arrangements.
 An appreciation for the “Allocation of Risk” in the selection and application of contract type.
 An understanding of the true nature of the concepts of “Fee” and
“Profit” and how they differ.
 An appreciation of the different “Behaviors” of Buyer and Seller in different contract types.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 2

Fixed Price
Environment
Allocation of Risk
Determination of
Contracting
Environment
Cost Type
Environment
Motivation &
Behaviors
OUTCOME
PRODUCT
SALES &
PROFIT
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 3

The Procurement World Can be Divided
Between Two Primary Contract Types
 Fixed Price Arrangements
 Cost Reimbursement Arrangements
… And there are numerous variations of the themes.
The “Variations” create what some texts Identify
As a Third Primary Contract Type
• The Incentive Arrangement
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 4

 Fixed Price Arrangements
– Generally Involve Profit Discussions
 Cost Reimbursable Arrangements
– Generally Involve Fee Discussions
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 5

Profit: The difference between the cost of a product or service and the price charged for that product or service. The Seller of the product or service can impact his profit through positive or negative performance.
Fee: A set sum certain to be paid by the Buyer to the
Seller for providing a product or rendering a service.
The fee as a real dollar amount is not impacted by fluctuations in performance.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 6

Risk
Rewards
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 7

Fixed Price


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

Firm Fixed Price (FFP)
Fixed Price Incentive (FPI)
– Firm Target (FPIF)
– Successive Targets (FPIS)
Fixed Price Level of Effort (FP LOE)
Fixed Price Award Fee
Fixed Price w/ Redetermination
– Economic Price Adjustment
– Prospective Price
Redetermination
– Retroactive Price Redetermination
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Cost Reimbursable




Cost Sharing
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Cost Plus Award Fee (CPAF)
Template 8

 Time & Material
– Elements of both Fixed Price (Established Firm Labor Rate) &
CR (only what is used)
 Indefinite Delivery/Indefinite Quantity (ID/IQ)
 Basic Ordering Agreements
 Level of Effort and/or Term
 Any Combination of the above, including the prior page…
And worthy of mention, although not technically a “contract” …
 Other Transactions Agreements (U.S.C. 2371, Section 845’s)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 9

 48 CFR Part 16 (CFR = Code of Federal Regulations)
 FAR Part 16 (FAR = Federal Acquisition Regulations)
Other Good Resources For Information on Contract Types
• Formation of Government Contracts, John Cibinic & Ralph Nash,
Government Contracts Program, George Washington University.
• NASA Guide on Incentive Contracting
• A Bunch of Websites
• Your Favorite Local Contracts Professional!
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 10

 The selection of Contract Type is the Primary Factor in the Allocation of Risk and the Nature of the Profit Determination
- or - conversely
 The allocation of risk and the nature of profit determination are the primary factors in the selection of a contract type.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 11

 Contract types vary according to:
1 The degree and timing of the responsibility assumed by the contractor for the costs of performance; and
2 The amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 12

Allocation of Risk: Who bears the financial risk of performance of the effort under contract between Buyer and Seller?
Profit Determination: How variable is the margin potential to the seller of the effort under contract?
– “Variable” is the Key Word.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 13

Allocation of Risk
Who bears the Financial Risk of performance of the effort under contract between buyer and seller
– Fixed Price Arrangement - allocation of financial risk is solely on the
Seller.


Addresses Financial Risk - There are other tangible risks but not discussed here.
Effort is performed for a pre-established, agreed, negotiated price. Seller will
Provide “X” for set price “Y”
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 14

Allocation of Risk
Who bears the Financial Risk of performance of the effort under contract between buyer and seller
– Cost Reimbursable Arrangement - allocation of financial risk is primarily on the Buyer.



Cost of performance negotiated as an ESTIMATE (not a set price)
Buyer benefits or is injured by fluctuations from estimate versus actual costs
Profit dollars to seller is established as a “Fixed Fee” - does not change with fluctuations in estimated cost
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 15

Factors To Be Considered When
Selecting A Contract Type
 Price Competition - market pressures
• Price Analysis - Comparison of products and price
• Cost Analysis - when price comparison insufficient, a detailed analysis of cost elements
• Type and complexity of the requirement
• Urgency of the requirement
• Period of Performance or Length of Production Run
• Contractor’s Technical Capability and Financial Responsibility
• Adequacy of the Contractor’s accounting system - important for CR
Contracts
• Concurrent Contracts
• Extent and Nature of Proposed Subcontracting
• Acquisition History - Risk decreases as item is repetitively ordered
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 16




“Cost” and “Price” are not the same.
The consumer never (rarely?) pays the “Cost” of an item - they pay the price
“Profit” is the difference between a product’s “Cost” and it’s “Price”
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 17

– Cost: The actual costs incurred or realized in the manufacture of a product of the providing of a service. “Cost” is the actual amounts paid for the necessary elements of providing a good or service, such as labor, factory overheads, cost of materials, and other relevant support costs.
– Price: Whatever a consumer of a Good or Service is willing to pay for that Good or Service or…….conversely - whatever a provider of a Good or Service is able to charge a consumer for that Good or
Service
 Market conditions dictate
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 18

The U.S. Army wishes to procure a WIDGET from ECDC, Inc..
Firm Fixed Price Basis
 ECDC charges $103,500 (Price) and the Army agrees to pay
$103,500
ECDC Estimate
@ Proposal
Scenario 1
Actual Performance
Scenario 2
Total Cost
Profit
Price
Profit as % of Cost =
Profit as % of Price =
Army Pays
ECDC Makes (Looses)
$ 90,000
13,500
$ 103,500
15%
13.1%
$ 103,500
$ 13,500
85,000
18,500
$ 103,500
21.7%
17.87%
$ 103,500
$ 18,500
$ 98,000
5,500
$ 103,500
5.6%
5.3%
$ 103,500
$ 5,500
Scenario 3
$ 118,000
(14,500)
$ 103,500
(-12.2%)
(-14.0%)
$ 103,500
($14,500)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 19

 Allocation of risk is all about when to use a specific contract type
 What is the contracting environment?
– Known, certain or almost certain, environment => Fixed Price
– Uncertainties, unquantifiable elements of performance => CR
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 20

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 21

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 22

Defined:
 Provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract.
 Places on Contractor maximum risk and full responsibility for all costs and resulting profit or loss.
 Maximum incentive on Contractor to control costs and perform effectively
 Minimum administrative burden on parties
– No detailed cost reports to customer
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 23

Same Widget, Cost Reimbursable Basis
 ECDC has an Estimated Cost Plus Fixed Fee of $100,000
Estimated Cost
FCCM
Fixed Fee
Total CPFF (Price)
Profit as % of Cost =
Profit as % of Price =
Army Pays
ECDC Makes (Looses)
ECDC Estimate
@ Proposal
$ 90,000
1,000
9,000
$ 100,000
10%
9%
$ 100,000
$ 9,000
Scenario 1
85,000
900
9,000
$ 94,900
10.59%
9.53%
$ 94,900
$ 9,000
Actual Performance
Scenario 2
$ 98,000
1,100
9,000
$ 108,100
9.1%
8.32%
$ 108,100
$ 9,000
Scenario 3
$ 118,000
1,300
9,000
$ 128,300
7.6%
7.0%
$ 128,300
$9,000
Although the Cost of Performance (Price) Increases, Fee Remains the same
(Fixed), as Cost of Performance Increases, Fee as Margin Decreases
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 24

Application:
 Used to procure standard and commercial items
 When reasonably definite functional or detailed specification exists
 When adequate price competition exists
 When reasonable price comparisons with prior or similar purchases can be made
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 25

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 26

 In DoD Procurements, regulations require insight into the separate elements
 FFP has the most basic elements:
– Cost
– Profit
– Total FFP
 Sometimes the separate elements are separately negotiated, sometimes negotiations are at the “bottom line”
 FFP is the simplest contract type from the stand point of both Buyer and Seller.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 27

 Over-riding element: Is Price
– Bind the contractor to complete the work at a fixed amount (price) of compensation regardless of the costs of performance.
 Best Utilizes the basic profit motive of business
– “If I perform efficiently (or increase my efficiency), I make more money”
– “If I perform inefficiently, I make less or even lose money”
 Used when risk involved is minimal or can be predicted with an acceptable degree of certainty.
 Requires reasonable basis for Firm Prices.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 28

 Allocation of financial risk is on the Contractor
 Because of the allocation of risk, must have a clear, thorough definition of the work scope
– Clear, precise, unambiguous specifications
– Clear, precise, unambiguous Statement of Work
– Need firm delivery and end date
– Need clear, unambiguous sell-off criteria (“Definition of ‘Done’”)
 FFP contract type assumes minimal Government intervention during performance.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 29

 Contractor is reluctant to accept even minor changes or interference.
– This is why “contract scope” needs to be precisely defined
– All “uncompensated” changes impact bottom line
– All changes subject to Equitable Adjustment (“Send Money”)
 Buyer often tries to get more than he bargained for
– Stretches scope of work interpretations
– “Just Do It”
– Threats to follow-on work
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 30

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Template 31



Defined:
 Provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to the target cost
Final Price is subject to a price ceiling (negotiated up front)
Two (2) Types
– Fixed Price Incentive, Firm
– Fixed Price Incentive, Successive Target
When Applied:
 When a straight FFP contract is not suitable
 Contractors assumption of a degree of cost responsibility will provide a positive profit incentive for cost control and performance
 When other incentives (technical performance or delivery) are being used.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 32

 Involves a pre-negotiated formula for sharing cost over-runs and underruns
• Target Cost
• Target Profit
• Ceiling Price
• Share Ratio
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 33

Target Cost
 Represents a reasonable estimate that both parties are willing to accept of the anticipated total cost of performance
– “Represents the most likely outcome to be attained through efficient performance of the work”
 Establish prior to performance
Target Profit
 A reasonable return on the anticipated cost of performance as agreed by the parties prior to performance
 Is not (necessarily) the final profit
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 34

Ceiling Price
 The maximum dollar value the buyer is willing and obligated to pay for the goods or services
 Unique to fixed price incentive contracts
 Most critical element of an FPI contract
 Represents the point at which financial responsibility is 100% on the contractor (Well, not really ... But bare with me ... It’s the PTA)
 Final price never exceeds ceiling (what the Buyer will pay)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 35

 Share Ratio (Sometimes expressed simply as “Contractor’s Share”) -
– Represents the percentage of sharing above and below the target cost to determine the profit and price.
 When two percentages expressed, first percentage always refers to the
Government (Buyer) and the second percentage to Contractor (Seller)
Example:
75% / 25% Share Ratio
Government (75%)/Contractor (25%)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 36

 Defined
– Identifies the mathematical point at which the contractor’s risk changes from the negotiated incentive sharing to a fixed price risk
- 100% responsibility for cost incurred.
– PTA = The point at which for every dollar you spend, you lose a dollar of profit.
– PTA is the mathematical point at which Government sharing has maximized, and Government sharing ends.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 37

 Expressed as a formula
PTA =
Ceiling Price - Target Price
Government Share
+ Target Cost
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 38

(Target) Cost
(Target) Profit
(Target) Price
Ceiling Price
Share Ratio
Actual Profit
Final Price
Negotiated
$ 10,000,000
1,500,000
$ 11,500,000
$12,500,000
75/25
Scenario 1
$ 9,000,000
1,500,000
$10,500,000
$12,500,000 to be exceeded
$250,000
TBD
TBD
$1,750,000
$10,750,000
Comment
$1M Under-run
Original Profit Target
Unadjusted Price
Absolute $$ value not
25% share of $1M under-run
Actual profit increases by share of under-run
Final price is $750K less than target
75% is Government share of $1M under-run
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 39

(Target) Cost
(Target) Profit
(Target) Price
Ceiling Price
Share Ratio
Negotiated
$ 10,000,000
1,500,000
$ 11,500,000
$12,500,000
75/25
Scenario 2
$ 11,000,000
1,500,000
$12,500,000
$12,500,000 to be exceeded
($250,000)
Actual Profit
Final Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
TBD
TBD
$1,250,000
$12,250,000
Comment
$1M cost overrun
Original Profit - to be decremented
Unadjusted Price
Absolute $ value not
25% share of $1M over-run -
Reduces fee to $1.25M
Reduced Target Profit by Share
Actual cost plus final profit
Template 40

(Target) Cost
(Target) Profit
(Target) Price
Ceiling Price
Share Ratio
Negotiated
$ 10,000,000
1,500,000
$ 11,500,000
$12,500,000
75/25
Scenario 2
$ 11,000,000
1,500,000
$12,500,000
$12,500,000 to be exceeded
($250,000)
Actual Profit
Final Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
TBD
TBD
$1,250,000
$12,250,000
Comment
$1M cost overrun
Original Profit - to be decremented
Unadjusted Price
Absolute $ value not
25% share of $1M over-run -
Reduces fee to $1.25M
Reduced Target Profit by Share
Actual cost plus final profit
Template 41

(Target) Cost
(Target) Profit
(Target) Price
Ceiling Price
Share Ratio
Negotiated
$ 10,000,000
1,500,000
$ 11,500,000
$12,500,000
75/25
Scenario 2
$ 12,250,000
1,500,000
$13,750,000
$12,500,000 to be exceeded
($562,500)
Actual Profit TBD $250,000*
Comment
$2.25M cost overrun
Original Profit - to be decremented
Unadjusted Price
Absolute $ value not
25% share of $2.25M over-run - reduces fee to $937.5K
Additional fee decrement of $687.5K necessary to stay within ceiling
Final Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
TBD $12,500,000
Template 42

 Fixed Price Incentive, Firm (FPIF)
– Don’t say “Fixed Price Incentive Fee” - WRONG!!!!!
– Simply means a firm incentive target has been established at the outset
 Fixed Price Incentive, Successive Targets (FPIS)
– Same “initial” elements as a FPIF - cost elements termed as “initial” targets
– Identifies a point in contract performance where “initial targets” are converted to “firm” targets
– Often a production point where some performance experience has been collected
– Can have multiple future points (successive targets)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 43

 Same basic motivations and behaviors exist as in FFP
 Buyer may be slightly more flexible to changes given sharing and ceiling
.... Nonetheless....
 Must protect profit position through cost control
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 44






A type of Fixed Price contract that allows a price redetermination based on circumstances largely outside of the control of either contracting party
Adjustment can be either upward or downward
Three (3) General Types of EPA
– Adjustments based on established prices
 Market conditions
 Ex: Cost of Silicon rises, driving the chip market up - impacts many products
– Adjustments based on actual costs of labor and material
 Market conditions - public indexes
– Adjustments based on cost indexes of labor or material
 Ex: Producer Price Index for a commodity
Application: When there is serious doubt concerning the stability of market or labor conditions that will exist during the extended period of contract performance.
Limitations: Only used when necessary to protect Contractor, Government, or both, from significant cost fluctuations.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 45

FAR 16.404
 A Fixed Price Arrangement that provides for an element of Profit (Fee) to be earned through an Award Fee Process
 Provides additional incentive to encourage optimum performance
 Buyer and Seller may be slightly more flexible to changes given Award
Fee potential
 Award Fee Element is SUBJECTIVE
– (vs. Incentive Fee Objective)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 46

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 47

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 48

 A cost reimbursement contract that provides for payment to the contractor of all allocable and allowable costs incurred PLUS a negotiated fee that is fixed at definitization
 Fixed Fee does not vary with the actual costs of performance
 Assuming no changes to initial baseline
 Fee may be increased as a result of changes to the workscope that are outside of the original contract requirements
– Considered a “fee bearing” equitable adjustment
 Fee may be decreased as a result of changes to the workscope that remove effort that was part of the contract
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 49

 Common vehicle for R&D efforts, prototypes, preliminary exploration, and concept formation phases of programs
 Sometimes used for Proof of Concept and LRIP phases
 Used when level of effort required cannot be easily (and fairly) determined
 Used when Spec’s and SOWs are “Open” - Requirements not able to be defined with certainty
 Contractor must have an acceptable accounting systems to collect and report costs
 Used when a CPIF contract is not practical
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 50

 Very simple, straightforward type:
• Estimated Cost
• Fixed Fee
• Total CPFF
• Estimated Cost
• Profit
• Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 51

 The amount of Fixed Fee is limited by regulation:
– (FAR 15.404-4(4)(i), which cites 10 U.S.C. 2306(d) and 41
U.S.C. 254(b))
– Maximum of 15% for pure Research and Development (R&D efforts
– Maximum of 6% for all Architecture Engineering contracts
– Maximum of 10% for all other efforts
 Important Point:
– Cost and Fee are separate legally (contractually) recognized elements of a contract
– Both must be separately expressed in separate relevant contract clauses
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 52

 CPFF Completion:
– Describes the scope of work by stating a definite goal or target and specifying an end product
– Requires the contractor to deliver the specified end products WITHIN the estimated costs

Less risk to contractor - not spending his own money if additional funds needed
– If work cannot complete within estimated cost, Gov’t may increase cost, but does not have to increase fee
– Gov’t can end work when it has had enough!
 CPFF Term:
– Describes the scope of work in general terms and obligates the contractor to devote a specified level of effort for a stated period of time
– If Gov’t considers performance satisfactory, fixed fee is paid at end upon contractor statement that he has provided the level of effort specified in the contract
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 53

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Template 54

 Provides for an initially negotiated fee to be adjusted later based on relationship of actual costs to target costs.
 Similar to FPI except no ceiling price in CPIF
– all allocable and allowable costs reimbursed
 Opportunities for increases or decreases in fee intended to motivate the contractor for efficient performance
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 55

Target Cost
Target Fee
Minimum Fee at which fee is “fixed” (floor)
Maximum Fee at which fee is “fixed” (ceiling)
Fee Adjustment Formula - Share Ratios
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 56

 Fee increases when actual cost are less than target cost
 Fee is decreased when actual costs are more than target cost
 Fee is only decreased to the “minimum” - may be $0
 “Range of Incentive Effectiveness” - the points between minimum and maximum fee
 CPIF referred to as a “objective” incentive - fee determined by fact and formula
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 57

 When allocation of risk cannot be determined such that high probability of appropriate profit/fee results
 When neither party has reliable knowledge of the exact work required
 When SOW’s and Specifications are “open”
– “..... As required .....”
– “..... Contractors best efforts ....”
– “... If necessary ...”
 Often used in Research and Development programs, SDD & LRIP
Programs
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 58

Target Cost
Target Fee
Minimum Fee
Maximum Fee
Share
Final Fee
Final Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Negotiated
$ 10,000,000
1,000,000
400,000
1,500,000
80 / 20
Scenario 1
$ 8,000,000
1,000,000
400,000
1,400,000
$ 9,400,000
Comment
$2M under-run
20% of $2M under-run adds to target fee
Under-run share plus target - is within maximum fee
Actual Cost ($8M) plus final fee
Template 59

Target Cost
Target Fee
Minimum Fee
Maximum Fee
Share
Final Fee
Final Price
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Negotiated
$ 10,000,000
1,000,000
400,000
1,500,000
80 / 20
Scenario 2
$ 11,500,000
1,000,000
(300,000)
700,000
$12,200,000
Comment
Contract over-run by $1.5M
20% of $1.5M over-run is decrease to fee
$1M target less $300K share of over-run
$11.5M cost plus $700K fee
Template 60

Target Cost
Target Fee
Minimum Fee
Maximum Fee
Share
Final Fee
Final Price
Negotiated
$ 10,000,000
1,000,000
400,000
1,500,000
80 / 20
Scenario 3
$ 7,000,000
1,000,000
600,000
1,500,000
$8,500,000
Comment
$3M under-run
20% of $3M under-run
Max fee cap applies @
$1.5M even though $1M target plus $600K share
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 61

 Less contentious than fixed price
 Contractor still “cautious” of changes, but more accommodating
 Buyer tempted to ask for more, feels he bears majority of cost increases
(he does, depending on share)
 Seller (Contractor) still looking to preserve and increase fee position
 Recognition that procurement documents (specifications, SOW) more open
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 62

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 63

Objective Criteria
Subjective Criteria
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 64

 A cost reimbursement contract that provides for a fee consisting of:
– A base amount fixed @ negotiation of the contract - does not vary with performance
– An award amount that the contractor may earn in whole or in part based on performance
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
CPAF - Fairly Popular Contract Type For Both
Product and Service Contracting
Template 65

 Used as a motivational tool to encourage efficient performance through the possibility of additional fee
 CPAF contracts provide for evaluation of contractor performance at stated intervals and the award of fee (or not) based on this performance
– Regular intervals provides feedback on the quality of performance
– Allows contractor the opportunity to address short comings or continue positive aspects
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
CPAF - Fairly Popular Contract Type For Both
Product and Service Contracting
Template 66

Estimated Cost
Base Fee
Maximum Fee
Award Periods
Evaluation criteria
Award Procedure
“The Award Fee Plan”


Base fee represents a floor on fee incentive is all in the “Award Fee Pool” -
– All incentive, no penalties
– (Well, in reality, the penalty occurs by not earning the incentive! Gotcha!!)
Award Fee Pool - The dollar value of the difference between the maximum fee and the base fee.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 67

 A written document attachment to the contract that defines ....
– The amount of award fee available, by period and for the total contract
– The award fee periods

Usually 6 months or longer to be meaningful
 Often 11 months in a large, multi-year development effort
 Cannot exceed 12 months (without agency exception)
– The accomplishment criteria for each period
– The Customer’s award fee process - Procedures for determination - how and who
 Fee Determining Official (FDO) - a named individual
 Award Fee Review Board - representatives from
– Program Office
– Technical Office
– PCO (Contracts)
– Finance
– Security
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
– Support Contractors
Template 68

 The award fee evaluation and determination is SUBJECTIVE
– It is based largely on relationships between BAE Program personnel at all levels and their Government counterparts
– It is the determination of one individual based (maybe) on the collective inputs of other individuals
 with all the “human baggage” an individual carries
 The award fee determination can be $0 - ouch !!!!!!!
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 69

Given: - $1.0M award fee pool
- Five equal periods of 1/5th of pool
Award
Period
1
2
3
4
5
As %
Amount
Available $’s
200,000
200,000
200,000
200,000
200,000
$ 1,000,000
100%
Award Fee
Rating
70%
50%
86%
90%
94%
Dollar Capture Cumulative
Award Fee $’s
140,000
-0-
172,000
140,000
140,000
312,000
180,000
188,000
$ 680,000
68%
492,000
680,000
Award Fee
$’s Lost *
60,000
200,000
28,000
20,000
12,000
$ 320,000
32%
* Award Fee Lost Assumes No Rollover
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 70

As “Extra - Curricular” Contract Activity
 CPAF contracts have significant administrative burden
– As cost reimbursable contract, have many cost reporting requirements
– Administration of the award fee plan is an effort

Lots of “data gathering” by lots of people on both sides of the contract
– The “self assessment” and review process is an effort
– Award requires the issuance of a contract modification
– Must constantly work the “interpersonal aspect”
 CPAF Contract Use Under Great Scrutiny
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 71

 Government has both the carrot and the stick
– Carrot: attractive award fee capture potential
– Stick: “You want some of this, right?”
 The interpersonal relationships of individuals become very important
 Contractor tendency to appease
– Reluctance to object in hopes of favorable award fee determination
– Push back is touchy, but can be done
 Government tendency to push for more work - stretch the scope
– Costs are reimbursed and a favorable fee determination
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 72

 Is a subjective determination of individuals
– That tries to be based on some objective criteria
 Requires some significant additional administrative effort not present in other contract types.
 Very formal, very structured
 Can provide attractive Profit potential when performance is optimized
 Can be tremendously creative and complex vehicles -
– Fee roll-overs, multiple evaluation criteria, split periods, etc.
Editorial comment of instructor: Only contract vehicle that allows the
Government to encourage a contractor to exceed the contract requirements and withhold profit if they do not exceed.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 73

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 74

 A cross between fixed price and cost reimbursable
– Fixed Price nature: Has fixed hourly rate for reimbursement of labor
– Cost Type nature: Material and ODC reimbursed at cost
Labor reimbursed at fixed rate but based on number of hours incurred
 Allows for the reimbursement of labor based on hours incurred at a predetermined hourly rate
– Includes all burdens and profit
 Allows for the reimbursement of all material and ODC at cost plus applicable burdens - but no fee/profit on material/ODC

Contract limits set in terms of dollars to be expended.
– Contractor should have flexibility to utilize different labor categories
– Contractor cannot exceed ceiling except at own risk
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 75



Application
– When extent or duration of the contract cannot be easily estimated at the outset
– Difficult to anticipate costs with any reasonable degree of confidence
– Often used in Engineering Services environments


Training courses
Field support


Testing
Documentation writing
Behavior/Relationship
– Contractor is very loose - open to direction
– Government is fairly loose - willing to change tasks
– Little risk to contractor
– Only risk to Government is the inability to complete all work contemplated within the ceiling
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 76

Category
Engineer
Programmer
Manager
Administrator
Shipping
Total Labor
Burdened Material
ODC (Travel), etc.
Total T&M Value
Contract Hourly
Rate $’s
185.45
226.51
215.14
181.14
45.19
Hours
Incurred
218
412
139
100
50
919
Total
Price $’s
40,428.10
93,322.12
29,904.46
8,114.00
2,259.50
174,028.18
86,413.12
29,694.13
$290,135.43
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 77

 A variation of the T&M except material is not provided by the contractor nor is travel (ODC) required.
 Labor only is provided at pre-determined rates that include profit
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 78

 Indefinite Delivery/Indefinite Quantity (ID/IQ)
– Multi-year contracts with a specified period of the contract
– Like a BOA, contract structure established in advance of firm requirements
– Unknown delivery dates
– Unknown quantities - up to a maximum
– Used for both products and services procurements
– Must state some minimum purchase thresholds
 in terms of dollars ... Or ...
 in terms of quantity
– Reasonable general statements of the scope, complexity, nature and purpose of supplies/services to be ordered
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 79

 Level of Effort (LOE)
– Can be fixed price or cost reimbursable
– Specific level of labor effort is contracted to be supplied
– May state a “Term” for which that LOE is to be provided
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 80

 Cost Plus-A-Percentage of Cost
– Never used - they’re illegal
– Would provide for a fee percentage based on cost incurred
– Illegal because they only motivate the contractor to incur cost
– No motivation for cost control or efficient performance
 Cost Share Contract
– Simply means the Government and contractor will share the cost of performance
– Often with No Fee
– Share amounts or values stated in the contract .... Or ......
– Government funded amount stated with language that contractor will augment to accomplish contract requirements
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 81



Basic Ordering Agreements (BOA)
– A contract vehicle established in advance of firm requirements
 But future requirements are anticipated
– Established contract structure, terms and conditions, limitations
 Can be fixed price, cost type, T&M - whatever the customer wants
– One benefit is to have a “QRC” (Quick Reaction Capability) to place urgent requirements on contract
– The BOA is not in itself a “contract” (no agreement to buy or sell) orders under the BOA are contracts
– Often multiple agencies/commands can use a BOA provided they are specified as authorized ordering agents
Blanket Purchase Agreements (BPA)
– More for commercial items
– Like a BOA, established contract structure in advance of firm need
– Can order quantity needed from price list
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 82

 LETTER CONTRACTS
– A written (sometimes only a letter) preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.
– Issued in advance of the final negotiations of a complete contract.
– Can only be used with agency head approval in urgent situations
– Can not be used to circumvent competition where competition is otherwise required.
– General rules of issuance:
– Must have a firm NTE ceiling from the contractor
– PCO can authorize 50% of ceiling upon receipt of NTE
– PCO can authorize 75% of ceiling upon receipt of qualified proposal
– Letter contract must state firm schedule for:


Submittal of proposal
Completion of negotiations - can not exceed 180 days after issuance
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 83

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
Template 84

 About 15 years old - from U.S.C. 2371 and Section 845 of the
Defense Appropriation Action of 1996
 Technically, Not a Contract but an “Agreement”
 Sometimes referred to as “Section 845 OTA”
 Suspends standard FAR procurement rules
– FAR does not apply
– CAS does not apply
 Provides certain cost flexibility
– May treat as traditional contract
– May treat as IRAD – potential cost accounting differences
 May require company matching funds .... May Not!
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 85

 Background
– Initially developed for DARPA-funded R&D efforts (USC 2371)
– Section 845 - extended application to other Government agencies and allowed use for certain prototype and production efforts.
– May require competition for award - May Not !
 Behavior
– Both parties generally cooperative
– Both parties interested in program success
– Contractor motivated that 845 phase is first step towards larger program that will be a traditional contract
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 86

 OTA’s Can Be Considered Either …
 Cost Reimbursable
 Fixed Price
 Must Coordinate With Agreements Officer For Clear Definition
 Can Be Paid Via Milestone Payments Or Other Methods
 Intellectual Property Rights Tend To Be An Important Element Of The Agreement
And The Negotiations
 Resource: “OTA Guide for Prototype Projects”
– Issued By UnderSecretary for Defense, Acquisition, Technology and Logistcs
– Updated April 2004
– Check the Web for Latest and Greatest
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 87

In Any Acquisition Environment, Knowledge is Power!
The “Wish List” of Both Buyer and Seller
•I wish I knew what it would cost.
•I wish I knew what performance issues I might encounter.
•I wish I had done this before (or someone else).
•I wish I could get a good estimate.
But We Rarely (Never) Have Perfect Knowledge
Industry and Government Need To Partner … We’re Both In This Together!
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 88

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 89

J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 90

Target Cost
Target Profit
Target Price
Ceiling Price (125%)
Share Ratio
$10,000,000
1,500,000
$ 11,500,000
12,500,000
75% / 25%
These elements are stated in the
Contract
• Point of Total Cost Assumption (PTA)
$ 12,500,000 - $ 11,500,000
.75
+ 10,000,000 = $11,333,333
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 91

(Illustrative Examples)
 Total Cost @ PTA
 Overrun @PTA
 Gov’t Share (75%)
 Contractor Share (25%)
333,333
$11,333,333
$ 1,333,333
$1,000,000
$
 Contractor Target Profit


Less Contractor Share
Delta = Profit Remaining
$1,500,000
$ 333,333
$1,166,667
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 92

(Illustrative Examples)
 Ceiling Price
 Total Cost @ PTA
$11,333,333
 Delta to Ceiling
$12,500,000
$ 1,166,667
 Contractor Profit Remaining @ PTA $ 1,166,667
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 93

(Illustrative Examples)
Ceiling
PTA
Delta
$12,500,000
$11,333,333
$ 1,166,667
Target Profit
K’or Share (25%)
Delta (Profit Left)
$1,500,000
$ 333,333
$ 1,166,667
If Cost Goes to …. $11,333,334 ….Then Profit Drops to …$1,166,666
$1 additional cost… equals… $1 less in Contractor Profit
If Cost Goes to ….$11,450,000
To….$1,050,000
….Then Profit Drops
Cost Increase of $116,667… means …Further Profit Erosion of $116,667
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 94

 “Award fee plan describes the organization, criteria, standards and procedures for evaluating contractor performance for determining and awarding an award fee, if any ...”
“IF ANY ”
 “Provides an incentive for contractor to produce timely, high quality outputs that meet or exceed the requirements of the contract while stimulating efficient contractor performance”.
 Involves subjective determination(s) of Award Review Board (ARB) and Fee Determining Official (FDO).
 Determination made on their impression of your performance and what you tell them (informally and formal self-evaluation)
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 95

Estimated Cost
Base Fee (2%)
Maximum Fee (12%)
Award Periods
Evaluation Criteria
Award Procedure
10,000,000
200,000
1,200,000
(See Plan)
(See Plan)
(See Plan)
Award fee pool is $1,000,000
 Under-runs to estimated cost simply means Government pays less
– Hopefully, under-run is through good performance and thus high award fee captures
 Over-runs to estimated cost means Government must pay more and may reflect in AF capture.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 96

Program Specific Award Fee Data
Evaluation Periods and Fee Allocations:
I
Period
II
III
IV
V
Evaluation Period
Contract Award to PDR
PDR to CDR
CDR to TRR
TRR to TRR plus 6 months
TRR plus 6 months to end
Available Fee
13%
15%
22%
18%
32%


Evaluation period ends at Milestone completion
Government may UNILATERALLY change criteria PRIOR to start of period, and only by mutual agreement during a period.
Our responsibility - No, Objective - To Manage to the Criteria
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 97

Performance Evaluation Areas, Emphasis and Weightings
Area
Management
Technical
Cost
Schedule
Total
Available Award Fee
Period I Period II Period III Period IV Period V
40%
25%
20%
30%
35%
20%
30%
35%
20%
20%
40%
20%
20%
40%
20%
15%
100%
13%
15%
100%
15%
15%
100%
22%
20%
100%
18%
20%
100%
32%
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 98

Total Effectiveness Rating
Rating Description
Excellent
Very Good
Good
Marginal
Sub-Marginal
Effective Rating
91 - 100
81 - 90
61 - 80
41 - 60
0 - 40
Our Objective Must Be “Excellent”
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 99

Critical Standards to Meet for Performance Ratings
Management Standards
 Provides Government visibility into critical tasks. Responds to request for information accurately.
 Implements directed changes within a reasonable time. Changes are complete.
 Provides timely responses to most critical action items.
 Adheres to all security practices and procedures, with only minor deviations.
Maintains routine level of security awareness.
 Tracks progress and maintains close control of all subcontracted efforts. Keeps program office informed of status of major subcontract issues.
 Provides effective communication with program office, associate contractors, and other Government agencies by “keeping lines open”. The contractor has maintained a satisfactory working relationship with Government representatives and has been responsive.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 100

Critical Standards to Meet for Performance Ratings (Cont’d)
Select Comments From Other Standards
1.
Technical: “Provides good expertise in most technical tasks”.
“Considers several factors and approaches to solving the problem.”
2.
Cost::
3.
Schedule:
“Cost variances (including subcontractor) are identified early and plans for recovery are revised, reported and implemented”.
“Changes are suggested in a timely manner to achieve maximum cost savings when implemented”.
“All cost reports are clear and reconcile to a common data base. Funds requirements data are projected accurately and clearly and are received in a timely manner.”
“All schedule reports are clear. Schedule variances (including subcontractors are identified early and plans for recovery are revised, reported and implemented.
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010 Template 101

Critical Standards to Meet for Performance Ratings (Cont’d)
If you meet all the positive standards expressed on the previous two (2) slides
What you get is ........
J.C. Burke
NCMA March Workshop
Bentley College
10 March 2010
A MARGINAL RATING AND NO AWARD FEE
Template 102