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Thursday, July 17, 2014

Using Alternative Subcontract Types under Prime CPFF "Term" Contracts with USAID

Okay this one is a bit of a mind bender and is for....  geeks like me... mostly....

The basic idea of CPFF term contracts is that the Government is ordering types of labor at cost plus a fixed fee for each day of Level of Effort.  It is somewhat similar to T&M contract with less risk for the Government, because the labor rates are at cost, must be approved in advance, cannot exceed USAID CST and indirects are charged based on actual rates as negotiated under NICRA agreements.  The fixed fee however remains fixed and recoverable for each delivered day of labor based on the initially negotiated amount.

So, when budgeting for CPFF term contract, you have to be cognizant that the fee will remain fixed and will only be recovered in full if you deliver the total Level of Effort as stated in your contract.

Let’s use this example throughout:
So if the contract’s Fixed Fee is $10,000
Total Level of Effort is 100 days
Then the Fixed Fee recoverable per day is ($10,000/100) $100
If you deliver 50 days of LOE by the end of the contract, then you will only collect $5,000 and so on.

The fee is presumed fixed for all level of effort labor being delivered, including any of such level of effort types of labor being delivered by the subcontractors.

So if you are proposing one Fixed Fee for the total proposed Level of Effort (including subcontractor level of effort) under the Prime Contract, your award will reflect one Fixed Fee for the Total Level of Effort, which can be recovered on proportionate basis as explained above.

If your intent is to issue other than CPFF term subcontracts to your subcontractors under such prime CPFF term contract, you must not include the subcontractor labor in your Level of Effort Labor Part of the budget; you must, instead, budget the subcontractor’s total price under Subcontractor Pass Through Cost Line item and explain to the Government that those subcontracts would perform on other than CPFF term basis.  You would further need to explain how you arrived at the price for such subcontracts and that your proposed fixed fee for the prime contract only covers Level of Effort which would be performed directly by you, as a prime, and the subcontractor price is inclusive of their profits/fee and would simply be a pass through to the Government.  This should be explained in detail in your budget notes or your consent to subcontract request submitted with the proposal (you would need to convince the CO that you are selecting an appropriate type of subcontract for the work you plan to subcontract).  That subcontract cost including their profit/fee will then become pass through to the Government and you would not be recovering any fee on top of that subcontractor’s invoice.  (You may be able to recover Subcontractor Handling Charges if your NICRA allows for that.)

As mentioned above, if you are proposing one Fixed Fee for total proposed Level of Effort (including subcontractor level of effort) under the Prime Contract, your award will reflect one Fixed Fee for the Total Level of Effort, which can be recovered on proportionate basis as explained above.
 If you award a CPFF term subcontract under such prime contract, you are technically free to negotiate any fixed fee you chose with the subcontractor, which would be recoverable for delivery of total level of effort under that subcontract.    If you negotiated well, the subcontractor fee per day may be lower than the fixed fee per day you get to recover from the Government for their Level of Effort, subcontractor Level of Effort will count towards total Level of Effort delivered under the prime contract…  So instead of $100 per day you get from the Government, you would pay the subcontractor, let’s say $75 per day and keep the difference.

The real fun starts when you introduce a new subcontractor after the award of the prime contract and decide you want to subcontract on other than CPFF term basis.

If you decide to award a CPFF completion, T&M or a fixed price subcontract to your subcontractor for the types of labor that were originally budgeted in your prime contract under Level of Effort Cost Reimbursable Labor Categories, the subcontractor fee would still be coming out of your overall negotiated fixed fee.  So....  how would you segregate that fee and recover it from USAID?

In my opinion, the only way to do this equitably for the prime and the Government is to negotiate these new subcontracts as pass through (the same way you would do under the proposal) and then reduce the total fixed fee payable to the prime contractor by whatever the fee/profit part that is going to be payable to the subcontractor.  The total Level of Effort under the prime contract would also be reduced.

In order to do that you would need to estimate the Level of Effort Amount that you would have performed directly and which you are now “giving up” to the subcontractor.  When requesting consent to subcontract from USAID for such subcontract, you would need to elaborate that you are assigning some of your prime contract’s fixed fee to this subcontract, proportionate to the estimated level of effort you are subcontracting.  So, let’s say instead of 100 days, which you said you would perform directly; you are assigning the subcontractor 50 days, which means that the total fee you could have recovered from the Government for 50 days would have been $5,000, so your subcontractor total fee could not exceed that amount.  That same amount would need to be deducted from your Total Fixed Fee listed in the prime contract and the total estimated Level of Effort Amount needs to be reduced by 50 days.

Once that is done and the consent is approved, you will be paying the subcontractor that fee based on completing deliverables (under CPFF completion subcontract), as part of Fixed Daily Rates (under T&M) or upon final delivery (under Fixed Price) and passing it through to the Government at cost.  This approach does not give you any opportunity to negotiate a lower fee with the sub than that recoverable from USAID.  
If you subsequently need to increase such subcontracts price and add more work, the same exercise would need to be done for the new fee unless the increase does not take away from your prime contract remaining Level of Effort and, instead, the increase covers additional, not previously contemplated work, which, if performed directly by you/prime, would require additional Level of Effort anyway; in this case you could pass through additional fees without reducing the total Fixed Fee or Level of Effort in your prime contract if the Government agrees that additional fee is merited.  I suggest negotiating these things in writing with the CO in advance to avoid different interpretations.

Under Prime CPFF Completion Contracts, the issues would be similar, and the subcontracts which are other than CPFF Completion form (where subcontractor is responsible for total or partial delivery of a fee bearing item in the prime contract) would need to be negotiated as a pass through and the appropriate fee/per deliverable in the prime contract will be reduced by the negotiated subcontractor fee.  

1 comment:

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