Monday, May 21, 2012

GRANTS UNDER CONTRACT- are you ready to assume the risks?

As more often and larger “Grants under Contract (GUC)” components appear in USAID CPFF prime contract solicitations, there arise multiple issues for contractors bidding on such work, especially in the cases where USAID Contracting Officers direct contractors not to assess any “fee” on the GUCs component of the contract.

I would like to examine the regulatory basis for GUCs and the risks being undertaken by contractors (and USAID) when assessment of risk factors on GUCs is prohibited and the fee is therefore reduced dramatically overall by 1-3%.

Grants under Contract are a result of deviation, granted to USAID by OFPP, to allow them to outsource direct grant making authority to contractors, when certain circumstances prevent USAID from doing it themselves (feasibility, multiple small grants, restricted monitoring environment etc.).

In fact, ADS 302.3.4.8, which allows the GUC’s process, specifically requires that USAID be involved and must ensure that the requirements that apply to USAID-executed grants will also apply to grants that a USAID contractor executes through Grants under Contract.

These requirements include contractors following ADS 303 (USAID direct grant making rules) in all material aspects, making pre-award surveys and determinations and affecting monitoring and evaluation of the activities.   The requirements are heavily loaded with financial responsibility in determining fair pricing and costs for grantees, obtaining necessary certifications (terrorism, trafficking etc.) and monitoring compliance.

There is one big difference.  USAID, under its regulations (ADS 303 and ADS 625), has the right and access to a very elaborate debt collection process to recover misused grant funds, fraudulent payments, unjustified costs etc.  The process is multi-tier and includes transfer of debt to US Treasury and Department of Justice for collection or ability to “write-off” such debt as uncollectible.

USAID contractors, who are acting on USAID’s behalf and issue GUCs, do not enjoy the same protections or access to the debt collection process.  In fact, most prime contracts, which include GUCs, are silent on the allowed (and allowable) remedial processes of recovering debt from the grantees by the contractor; nor do they address contractor’s ultimate responsibility for uncollectible debt and collection costs.  In absence of any contractual language in Section H. or advance agreement with USAID, the contractor is “on the hook” for such funds in accordance with its applicable cost principles and is responsible as the debtor to the US Government, subject to the full wrath of the collection process described in ADS 625.  The cost principles do not look kindly on any debt collection costs or misused funds by subs, so the risk is extremely high for contractors and the monetary risk is proportionately higher, the larger the "GUCs" component is and the more unstable, dangerous and remote the performance location is.
So what happens when USAID directs the contractor not to budget a fee for GUCs under CPFF contracts?

First of all, the fee is not a percentage of any one component of a CPFF contract and it is not and could not be billed this way, since Fee as a Percentage of Cost is not an allowable concept in Government FAR contracting.  A normal risk assessment for a CPFF contract involves valuing risk factors for various parts of the contract (as handily described by USAID itself in its CIB 84-14…. Yes, 1984).

So, your typical assessment runs something like this:
Direct Labor    Fee Range 5-15%
Subcontractors Fee Range  1-5%
ODCs – Fee Range 1-5%

Then you calculate special factors and come up with the risk % for the entire contract.  Since CPFF, normally, is the lowest risk for the contractor, the fee would unlikely be more than 5-8% of the total cost, unless there are special risks that can be justified. The FAR only puts a limit on the total fee (10% of total contract costs).

That fee gets fixed as a dollar $$ amount and is proposed to be paid either as $$ per each day of LOE (CPFF term) or $$ per accepted deliverable (CPFF completion).    

This means that regardless of the cost itself, the fee is fixed for specific milestones or proportionate to the delivered level of effort.  As you can also see, subcontractors are included in the risk factors.  So why wouldn’t grantees be?  Why would USAID want to interfere in a business process and direct contractors on how to assess the risk for their activities without also indemnifying the contractors from the potential risks?   This seems contrary to the FAR procurement principles and fundamentally unfair.

Also, by making contractors lower their fee for the risks that they are undertaking, USAID is getting an essentially slowed down performance.  The contractor is more likely to be overly cautious and completely risk averse in implementing GUCs.  On the other hand, the GUCs are usually supposed to be used for fast paced activities and therefore could be ineffective if slowed down.  DCAA on average recommends disallowance of 1-3% of costs on CPFF contracts.  Since the contractors are losing their ability to have about the same percentage amount in fee to account for risks under GUCs, they are unlikely to assume any risks during implementation to avoid such disallowances at all cost.  This is bad for the contractors and USAID.

I can see three solutions. 1) If a USAID CO insists that no risk should be assessed on GUCs, then the contractor should assess additional Special Risks under the CIB 84-14 formula.  2) Otherwise, the contractor may ask for an additional Section H clause, which describes the protections USAID is willing to offer to the contractor (after certain predetermined collection process that USAID is willing to pay for) in the form of allowable “write off of bad debt”, in case where grantees misuse funds, or incur unallowable costs which cannot be collected.  It is my understanding that such "Limitation of Contractor Liability" clause was, indeed, considered during the original GUC approval process within USAID and it read something like this: 

"The Contractor shall have no liability to USAID with respect to its awarding and administration of grants on behalf of USAID hereunder, or with respect to the acts or omissions of its grantees hereunder, except to the extent that losses to the USAID foreign assistance program arise from the Contractor's negligence or bad faith in performing its responsibilities hereunder"

However, the easiest thing for USAID to do is 3)… allow contractors price their own risk on GUCs as they do with subcontracts.  Shifting the burden of risk to contractors for a fair price is the ultimate win-win for USAID.


  1. Dear Tzarina - fantastic and easy to understand post on this VERY IMPORTANT subject! I hope that our counterparts within the Government understand the burden this places on the Contractor and that we can work towards meeting in the middle to reduce risk overall and still accomplish the mission! - Melissa

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