Compliance and Best Practices Blog for USAID Grantees and Contractors.
The topics presented here are for informational (and sometimes entertainment) purposes only and should not be relied upon as legal advice. Any comments or reactions to the posts posted by members should likewise not be considered legal advice. If you have a specific question about any legal matter, you should consult with a licensed legal professional.
Tuesday, May 29, 2018
Creating Value in CPFF contracts
The topic is CPFF contracts: incorrect use of incentives and death by a thousand papercuts….
If you went through the early days of USAID Iraq programming, you would remember that after a decade of T&M contracting, USAID discovered CPFF. The premise was innocent enough: they wanted a flexible instrument to allow for ramp up and ramp down at will, with scopes of work you could drive a proverbial truck through, minimal profits (CPFF is the lowest risk contract type for contractor) and the promise of some monster incurred costs audits to keep the contractor from spending too much money on things it did not really need.
After deciding that they wanted to have the same thing as T&M, but with the ability to see and audit all the costs, as opposed to some highly suspect fixed daily rates, USAID settled on CPFF “term” type contracts (FAR 16.306 (d)(2)). The Contracting Officers, who were handed these CPFF term contacts, received very little training on what a CPFF was, and, received no training on what a CPFF “term” form meant.
The “term” form refers to the type of contract where the allowable and allocable costs are reimbursed, and the fixed fee is paid based on the amount of the delivered level of effort against the term of the contract. Historically, CPFF term contracts were used to order specific labor effort in loosy goosy labor categories to allow for flexible costing of, what was normally, an R&D type expertise. CPFF contracts were decided to be, ostensibly, less risky and expensive than T&M, because the salaries were subject to the applicable cost principles and the total time accounting assured that the Government only got charged for for the actual time employees spent on the contract and were paid for by the contractor. The fee was then attached to the specific number of days or hours of labor that the Government wanted, or, the contractor estimated to accomplish the scope of work. If the contractor run out of days, it stopped working, unless the Government added more days (and fee). The Government only paid the full fee if all Level of effort had been delivered, and, if not, it pro-rated the fee against the days that had been delivered. So far so good.
Back to USAID contracting workforce, which decided that CPFF was really just a cost reimbursable contract with a fee paid as percentage of incurred costs (i.e. the exact contract type prohibited by FAR 16.102(c)). Because USAID contracting force were (and are), in fact, trained on protecting US tax payer funding, this type of contract sounded super risky (and it was!!!). So, the decision was made to micromanage the ever living daylight out of what the contractor was allowed to charge and how much the contractor was allowed to pay its employees, to combat the risk of overspending. This led to two things: 1) the contractor was often forced to hire inferior employees, who would accept inferior pay and 2) the work was not getting done quite to the standard the Government was expecting. Then, the third thing happened: the work was not being done, but the contractors were demanding FULL FEE at the end of the contract’s term of performance. This was happening because the contractors claimed they had expended all the ordered labor level of effort, that USAID put in the contract. The nerve! After the dust settled and all the highly paid lawyers were done with it, USAID was in fact required to pay full fees, because the CPFF term contract did not mean that if you spent half the costs, the fee would only be paid as a percentage of that half; the fee was due for all the labor days, incurred by the cheap labor accomplishing little.
Fast forward 15 years later and USAID learned its lesson. CPFF term was no way to accomplish deliverables and was just a glorified T&M, plus a 100% administrative nightmare under incurred costs audits, expensive to boot.
Instead, USAID decided that CPFF “completion” form contracts (FAR 16.306 (d)(1)) are a much better fit. Because the word “completion” undoubtedly communicates the requirement to complete something. And that is a true fact.
The CPFF “completion” contracts started appearing everywhere, with USAID still paying the fee as a percentage of cost, but determining that the work was complete or not complete based on how much had been spent……. Obviously, the contractors did not agree. “Look”- the contractors said – “you are penalizing us for keeping the costs low and still accomplishing the scope as broad as the Shenandoah valley! We demand the full fee if all the work you described in the contract or the subsequent work plans have been completed!” (that word again).
Smarter contractors started asking for Fee Schedules, which outlined specific deliverables/products (as required by FAR 16.306 (d)(1)) to be attached to fixed fee amounts.
The cost control was still paramount, but the objective and the mission became important again. The contractor was committing to delivering all the products for full fee or receiving no fee for non-delivery. The fee, incidentally and contrary to popular belief, is not simply lining the pockets of fat cat contractors; the fee is actually meant to cover the business risk that the contractors bear, including disallowances and unallowable costs, necessary for performance. The fee is also meant to incentivize the contractor to perform better and attract better talent.
With incurred costs’ audits still looming, no fee meant that the contractor would likely be out of pocket for 2-3% of its incurred costs - because that is a going rate for disallowed costs on a cost reimbursable contracts in USAID countries. That was incentive enough to control and scrutinize costs and to strive to deliver in exchange for fee. Plus, “cost control” being a CPAR element was a strong motivator to do just that – control costs.
Things were looking up.
Everyone was getting something out of this CPFF “completion” thing. Then, one day, USAID decided they would go one step further and start issuing the fixed fee schedules as part of the CPFF completion RFPs. Not a bad idea – unfortunately failed in execution. Instead of making those deliverables attainable and tangible, the fee schedules did not contain deliverables at all, but instead contained…..goals. The goals of world peace and eradication of poverty now were bearing fixed fees attached to them and the contractors had no choice but to accept those or not bid any of the USAID work at all. To add to the problem, such lofty goals were then attached to a 5-year contract, which USAID called “non-severable” and which required 80-100% delivery or no fee was going to be paid.
So, 3 things happened again: 1) USAID, unlike the rest of the Federal Government, decided that even though the contracts were “non-severable” and required to be funded in full (or at least in yearly increments) at the time of award, to fund those contracts incrementally at random periods. To slow down performance to match the incremental funding, the workplans were re-worked to allow only so much labor/costs to be incurred and only so much work to be accomplished. The fee schedules were never revised, and the contractors were told that if they don’t control the cost, their CPARs would suffer. The cost approval requests started costing more in administrative time than the time of the professionals whose costs USAID was approving. The goals of world peace and total poverty eradication stopped being even a glimmer of completion. Too bad, USAID said, we won’t pay you any fee, since you are not accomplishing the goals we established, and you signed on for.
One- Nil, the Government?
Well, not so fast. Just like in the case of CPFF term, without incentives and with unbearable scrutiny during and after the contract performance, the work is not really being accomplished as designed. The micromanaging of costs contributes to the contractors’ facing too high of a risk on what was deemed to be “a low risk type of contract”. The fees that may never come and the disallowances that surely would make the bidding for this type of work a disincentive for any company with real expertise and know-how. All the risk and no pay make a good contractor look elsewhere…. It creates a different kind of contracting community, focused on exactly the opposite of what USAID wants it to focus. It is a loss for international development and the tax payer.
The fix, as most brilliant things in life, is simple. USAID needs to invest in its contracting workforce, educate them on the best types of contracts to serve the new type of programs and design that USAID is already investing in. USAID needs to invest in designing the right type of contract, selecting the best possible contractor, funding the Government’s end of the bargain and then allowing the contractor to do their job. The dialogue and spirit of partnership should be introduced. We are on the same side.
Not worrying about when and if the funding comes, whether or not we can hire the right people to deliver the right results and allowing us to deliver in accordance with our proposed and ACCEPTED solutions would absolutely lead to lower costs and tangible results. The contractors will then have no excuse but to compete on cost control, compliance and schedule, as opposed to finding every excuse in the book to show why they could not accomplish the work on time, on budget and in compliance.