RFP without NTE on proposal prep - cost plus percentage of cost?

10 U.S.C. 254( states (as does FAR 16.102©):

"( Barred contracts; fee limitation; determination of use; advance notification

The cost-plus-a-percentage-of-cost system of contracting shall not be used,"

My question is this: if a RFP goes out that does not specify a not-to-exceed amount for proposal prep, does that constitute 'cost plus percentage of cost'? Sure, the usual practice at contract award is to use the FFP contract type for proposal prep since it is almost entirely actuals by that point. However, the fact is that the higher the contractor's proposal prep costs are, the higher their fee will be - which is the very essence of cost plus percentage of cost, no matter what fee the government agrees to.

I'm sure having a NTE for proposal prep is a good idea in most situations. I am asking if having an NTE for proposal prep is a requirement given the U.S. Code and FAR citations above. Is calling proposal prep FFP just skirting the law?

Here are the GAO's criteria for determining whether a payment arrangement is a prohibited CPPC arrangement:

Our Office uses the following criteria to determine whether a method of payment represents a prohibited cost-plus-a-percentage-of-cost arrangement:

(1) Payment is at a pre-determined rate,

(2) the pre-determined rate is applied to actual performance costs,

(3) the contractor's entitlement is uncertain at the time of contracting, and

(4) the contractor's entitlement increases commensurately with increased performance costs.

See the Comptroller General's letter to Mr. James K. White, Assistant General Counsel for Finance and Litigation, Office of the General Counsel, Department of Commerce, B-252378, September 21, 1993.

Apply those criteria to your facts and make your own determination.

What about in a time and material contract where material handling (indirect cost only no fee) is recovered by apply a percentage rate to the actual direct material cost?

I would argue it meets the four criteria, but seems to be common practice within the Government, notwithstanding the changes made to the T&M payment clause (52.323-7) around 2007.

RIPIDIQ, without hijacking your thread, I'd love to understand what authority you're using to treat proposal prep as a direct charge. How is the proposal required under the terms of an existing contract? If so, how did that contract price it?

What about in a time and material contract where material handling (indirect cost only no fee) is recovered by apply a percentage rate to the actual direct material cost?

I would argue it meets the four criteria, but seems to be common practice within the Government, notwithstanding the changes made to the T&M payment clause (52.323-7) around 2007.

Payment for materials under T&M contracts, including allocable indirect costs, are subject to FAR 52.216-7, Allowable Cost and Payment. Under that clause the parties establish billing rates for allocable indirect costs, but those rates are subject to final adjustment pursuant to paragraphs (d) and (e). The final indirect cost rate is not predetermined. It is determined after contract performance. The contractor receives only the allocable portion of its actual indirect costs, as under cost-reimbursement contracts. That being the case, Items 1, 2, and 4 of GAO's criteria, payment at a predetermined rate and commensurate increase in payment with an increase in actual costs, are not met.

Thanks. That is my reading also. If the rate is treated as a billing rate - as the T&M payment clause was revised to do in 2007 - it does not violate the prohibition. If the rate is treated as a final payment ? as it historically was prior to the change ? I think it would.

RIPIDIQ,

Jacques has made me fill guilty now that I have ?hijacked your thread?.

As I understand your question it only involves pricing after the costs have been incurred. It does not appear that the scenario outlined would meet the third criteria set out by the GAO and adopted by the courts (Urban Data Sys. Inc. v. United States (Fed Cir 1983)) that Vern provided.

Cibinic and Nash?s ?Cost Reimbursement Contracting? on page 52 provide that the courts and board have generally agreed that after-the-fact pricing is not a violation of the CPPC prohibition. However, profit policies usually call for a lower profit rate where substantial costs have been incurred prior to pricing, as the contractors risk have been reduced.

Okay, here's another question. An RFP directs a contractor (by the way, here and above I am talking about a sole source environment) to begin incurring costs for proposal prep. However, since the amount the contractor will incur is not known, and not even estimated (with a NTE), it is like spending money without knowing how much you need, potentially violating the Anti-Deficiency Act.

Is this also not the case? I am getting the impression that while these things may be de facto true or appear to be so, they are overlooked in practice and have possibly been ruled acceptible or not a violation.

In any case, this looks to me like allowing the contractor to run up charges for proposal prep as high as they like, with no verification of the funding needed since an amount hasn't been determined or estimated, and then making it look valid by calling them 'actual costs' and putting them on as FFP. Even if this is common practice and has been deemed allowable, it still seems wrong to me.

If the government's direction to incur costs does not include a limitation on the government's liability, then there is a potential for violation of the Anti-deficiency Act.

Thanks. That is my reading also. If the rate is treated as a billing rate - as the T&M payment clause was revised to do in 2007 - it does not violate the prohibition. If the rate is treated as a final payment ? as it historically was prior to the change ? I think it would.

Garth:

You say that COs historically agreed to a predetermined rate. I'm sure that some may have done that, but your wording suggests that you believe that was more or less standard practice. The older version of the T&M payment clause did not provide for the establishment of a predetermined rate for materials handling. Here is what it said:

((2) The Contractor may include reasonable and allocable material handling costs in the charge for material to the extent they are clearly excluded from the hourly rate. Material handling costs are comprised of indirect costs, including, when appropriate, general and administrative expense allocated to direct materials in accordance with the Contractor?s usual accounting practices consistent with Subpart 31.2 of the FAR.

Nothing in that subparagraph suggests that the CO could or should agree to a fixed materials handling rate at the time of award. Any such predetermined rate would have violated the CPPC prohibition. Any CO who agreed to a predetermined material handling rate that was not subject to post-performance adjustment based on actual indirect cost experience was simply incompetent. COs are expected to know things like that. They shouldn't have to be told.

Nothing in that subparagraph suggests that the CO could or should agree to a fixed materials handling rate at the time of award. Any such predetermined rate would have violated the CPPC prohibition.

Vern:

Fair enough. But as best I can determine there was also no language in the clause requiring post performance adjustments, as there is in the current version.

I think it was not atypically to read ?indirect cost? as implying the acceptability of a percentage rate and absent any explicit direction to adjust to the actual rate at contract closeout, it was often not accomplished. This combined with the common misinterpretation that CPPC prohibition only applies to fee or profit, I would submit made this practice not uncommon.

I am trying to be careful, that's all. If it was "not atypical," then was it typical? I simply don't know. That strikes me as speculation. It may be true, but then again it may not be. And what it is typical -- characteristic of a type? What type? "It was often not accomplished." Again, possible, but I don't know one way or the other. Common misinterpretation? Maybe, but what is common and how do we know that it was?

I'm trying to be careful, that's all. I have no problem with speculation, as long as we admit that we're speculating.

Don't fret. I have often said such things myself, and I probably will again. Now I like to ask myself how I know that what I say is true. I'm increasingly into evidence. I think we should challenge each other. I want to be challenged.

Garth, I didn't mean to suggest you had hijacked the thread. I was acknowledging that my question could potentially. I do think that RIPIDIQ's question really only comes up in the context where a proposal is not an express requirement of an existing contract.

Treating proposal preparation as a direct charge in the absence of a requirement of an existing contract can be problematic. See Interpretation 1 to CAS 402 [48 CFR 9904.402-61?]; Boeing Co. v. U.S., 862 F.2d 290 (Fed. Cir. 1988), 30 GC ? 416; Nash & Cibinic, Direct Charging Proposal Costs: Now You See It, Now You Don't, 4 N&CR ? 40 (June 1990); Molina & Stein, Allocating B&P: Direct or Indirect? The Confusion Continues [link]; Karen Manos, FAR 31.205-18, Independent Research & Development & Bid & Proposal Costs, 03-12 Briefing Papers 1, 11 (Nov. 2003). Sorry if this is terribly off-topic, I just had to say my peace.

Vern, you are correct - as usual. I am generalizing from limited experience.

Jacques, Thanks, those are useful references. I?m not sure of the proper etiquette, but personally I benefit from the tangential information provided in these discussions.