UCA Contract Type and Pricing

FrankJon said:

Why does DoDIG assume that all UCAs are cost-reimbursement contracts? Where does the FAR or DFARS support this assertion? I see clause 52.216-26, but that is only required when a cost-reimbursement definitive contract is contemplated.

From the IG report:

Quote

UCAs are agreements that allow a contractor to begin work and incur costs before the Government and the contractor have reached a final agreement on contract terms, specifications, or price. Once a UCA is awarded, the contractor immediately begins working and the Government must reimburse the contractor’s allowable costs during the undefinitized period. As a result, a UCA is essentially a cost-reimbursable contract during the undefinitized period. When the contractor and Government agree on contract terms, specifications, price, and profit, the UCA is then definitized.

Emphasis added. What don't you understand about that?

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

For more info, see this: https://apps.dtic.mil/sti/tr/pdf/ADA432582.pdf

and this: https://www.gao.gov/products/gao-07-559

Vern Edwards said:

From the IG report:

Emphasis added. What don't you understand about that?

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement. 

For more info, see this: https://apps.dtic.mil/sti/tr/pdf/ADA432582.pdf

and this: https://www.gao.gov/products/gao-07-559

Well if 52.216-26 is properly excluded from the UCA because the CO anticipates a FFP definitized contract, how is the contractor apprised that the Government will reimburse allowable costs? Where does the Government explain how it will calculate allowable costs? How does the contractor know to submit cost data? Which contract term defines "qualifying proposal," and what if the contractor doesn't agree to submit cost data?

I'm no expert in CR contracting, but it's not clear to me why the parties must necessarily assume the UCA is a CR contract type. Take my situation. I had a requirement for severable, commercial services. I loaded the UCA with commercial clauses as well as UCA- and letter contract-specific clauses I felt applied.* The contractor indicated it would view this as a labor-hour arrangement until definitization, and I saw no issue with this since the work provided an hourly benefit to the Government. In 252.217-7027 paragraph (b), I requested a FFP proposal. The contractor submitted a timely FFP proposal with two CLINs, one covering the UCA period, the other covering post-definitization work. The UCA period included LCATs, fully-burdened rates, and actual hours worked. The post-definitization period included the same LCATs and fully-burdened rates, but with estimated hours. Using FAR subpart 13.5 procedures, I determined the rates to be fair and reasonable and proceeded immediately to award the definitized contract.

What is wrong with that?

(*One thing that I learned may have been wrong after the fact was including 252.217-7027 at all, as this is not listed as a commercial clause in DFARS part 212. It was actually DFARS Case 2021-D0003 that tipped me off to this. This Case states of DFARS 252.217-7027: "The clause will continue to not apply to acquisitions at or below the SAT and to acquisitions of commercial services and commercial products.")

The IG did not say a UCA is a cost-reimbursable contract during the undefinitized period; rather, the IG said a UCA is essentially a cost-reimbursable contract during the undefinitized period (emphasis added).  There is a difference, driven by the word "essentially."  I am okay with the IG's formulation.

Yes, FrankJon, you can have an undefinitized FFP contract with appropriate fixed-price clauses, and you can definitize it as a FFP contract.

FrankJon said:

I had a requirement for severable, commercial services. I loaded the UCA with commercial clauses as well as UCA- and letter contract-specific clauses I felt applied.* The contractor indicated it would view this as a labor-hour arrangement until definitization, and I saw no issue with this since the work provided an hourly benefit to the Government. In 252.217-7027 paragraph (b), I requested a FFP proposal. The contractor submitted a timely FFP proposal with two CLINs, one covering the UCA period, the other covering post-definitization work. The UCA period included LCATs, fully-burdened rates, and actual hours worked. The post-definitization period included the same LCATs and fully-burdened rates, but with estimated hours. Using FAR subpart 13.5 procedures, I determined the rates to be fair and reasonable and proceeded immediately to award the definitized contract.

🤔😂 I'm going to let the regulars help you.

ji20874 said:

The IG did not say a UCA is a cost-reimbursable contract during the undefinitized period; rather, the IG said a UCA is essentially a cost-reimbursable contract during the undefinitized period (emphasis added).  There is a difference, driven by the word "essentially."

@FrankJonThis also is similar language used by GAO on page 17 of the report linked above by Vern.  We can split hairs on contract terminology all day but a contractor performing under a UCA is essentially reimbursed.  That’s why it’s critical to definitiize a fixed price contract as soon as possible.

Vern Edwards said:

The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement.

Vern, I'm confused by this statement.  Can you clarify it for me.  Are you saying that as work progresses on the UCA, that the contractor can bill the government for its incurred allowable costs?  I see that if FAR 52.216-26 is in the UCA, however, if the definitized contract is anticipated to be FFP, 52.216-26 should not be in the UCA.

Geez everyone is not the language of the FAR and its supplements specific?   A UCA is not essentially anything it has specific definition in the DFARS.  My thought DoDIG and GAO erred in their language.  A UCA is an arrangement that provides for payment of allowable incurred costs and profit/fee to the extent negotiated and agreed to by the parties in the definitized action.  The definitized action is either a type of contract allowed by the FAR or a modification to a contract.

That's it!

Thank you for the substantive discussion, @ji20874, @formerfed, @Retreadfed. I really don't want to get bogged down with nomenclature here, as that was the least important part of my question. I'm more interested in the ability to adjust a contractor's profit under the circumstances I've described.

If I've erred, I'll own it. But Vern's silly response aside, I've seen nothing definitive that would indicate this.

C Culham said:

A UCA is an arrangement that provides for payment of allowable incurred costs and profit/fee to the extent negotiated and agreed to by the parties in the definitized action.

Can you provide a citation to this definition? This doesn't match any definition I've found.

From DFARS 217.74

Quote

Undefinitized contract action” means any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the action.  Examples are letter contracts, orders under basic ordering agreements, and provisioned item orders, for which the price has not been agreed upon before performance has begun. For policy relating to definitization of change orders, see 243.204-70.

I think the boards of contract appeal also have repeatedly used wording that a change order and a T4C on FFP contracts are "essentially" cost-reimbursement until agreement on equitable adjustment or settlement occurs.  I am okay with that wording, while still thinking of the contracts as fixed-price.

Vern Edwards said:

🤔😂 I'm going to let the regulars help you.

If you'd like to point me to an authoritative discussion or rule on UCAs and letter contracts, I'd gladly read it. Apart from the regulations and DoDIG language I cited (which you then cited back to me), I've reviewed Formation of Government Contracts (5th Ed.) and The Government Contracts Reference Book seeking information the topic of UCA pricing. I've also discussed UCAs and LCs with multiple colleagues with experience awarding them, and each colleague has had unique ideas about the "right" way to do them. Likewise, it seems some your "regulars" don't quite agree on this topic either.

formerfed said:

From DFARS 217.74

Was this to me or @C Culham? I'm aware of that definition. It doesn't align to what Carl appears to think is very clearly stated by the regs.

FrankJon said:

Was this to me or @C Culham? I'm aware of that definition. It doesn't align to what Carl appears to think is very clearly stated by the regs.

16.603-1 Description.

A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.    

It’s a contract and not an “arrangement” whatever that is

formerfed said:

16.603-1 Description.

A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.    

It’s a contract and not an “arrangement” whatever that is

Still seems like you’re talking to me. I didn’t say that.

Retreadfed said:

Vern, I'm confused by this statement.  Can you clarify it for me.  Are you saying that as work progresses on the UCA, that the contractor can bill the government for its incurred allowable costs?  I see that if FAR 52.216-26 is in the UCA, however, if the definitized contract is anticipated to be FFP, 52.216-26 should not be in the UCA.

@Retreadfed

No. That's not what I said. I said:

Quote

UCA is "essentially" a cost-reimbursement contract because it is undefinitized as to price. The contractor works pending price agreement and will be entitled to compensation for allowable costs incurrred until the parties reach final price agreement.

Just like under a change order.

Assume an FFP letter contract. The contract must contains 52.216-24 and 52.216-25.  The -24 clause limits the government's liability if the contract is terminated. The -25 clause prescribes a procedure for definitization, requires the contractor to submit a proposal, and, if the contract was awarded based on price competition (which in my experience would be unusual), a maximum negotiated price, assuming that the contract is not modified prior to definitization. 

Presumably, the contractor will want some kind of revenue flow during performance unless its is willing to provide its own financing. So it seeks progress payments based on costs, which will be anchored to the Government's maximum liability. See 52.232-16.

At the time of award, the contractor is not obligated to complete the work for any specific amount, because the contract is undefinitized.

So the contractor starts working, starts incurring costs, and eventually submits a proposal, which has been delayed due to government changes. The government initiates an audit and starts price analysis. The contractor submits a revised proposal, while still incurring costs, and the government has had to increase its maximum liability because it has changed the contract a few times. Oh, and all the while indirect cost rates are being adjusted.

All of this is why Congress enacted legislation to try to limit and control the use of UCAs. See 10 USC 3371, which is  why DFAR 214.74 exists. And don't forget the PGI 217.74. And all of that is why the DOD IG said what it did.

Honest to God, I thought all this was common knowledge.

BTW, here's the GAO in 2007:

Quote

All UCAs are essentially cost-reimbursement contracts until definitized, as contractors are reimbursed for all incurred costs that are reasonable, allocable, and allowable during the undefinitized period. This contract type places the greatest cost risk on the government.

Here's from the Congressional Research Service in 2020:

Quote

[U]ndefinitized contract actions, such as letter contracts, can be useful when an agency must move quickly to award a contract. Generally, it may take less time to draft a letter contract (or other types of undefinitized contracts) because these types of contractual agreements do not include all of the terms and conditions usually found in a procurement contract. As GAO has noted, the downside to using undefinitized contract actions is that they “can pose risks to the government, such as when contractors lack incentives to control costs before all contract terms and conditions are defined.”

@FrankJon

FrankJon said:

If you'd like to point me to an authoritative discussion or rule on UCAs and letter contracts, I'd gladly read it.

You're no newbie. You've been a member of this forum since 2016.

Do your own research. (Heard of Google or Google Scholar?)

FrankJon said:

Still seems like you’re talking to me. I didn’t say that.

Sorry, I meant my comment was directed to Carl and others interested here

edit:  @Vern Edwards Thanks again for the informative and comprehensive response

FrankJon said:

Can you provide a citation to this definition? This doesn't match any definition I've found.

I crafted that response myself, aka my thought.  

formerfed said:

It’s a contract and not an “arrangement” whatever that is

Ok not good.   I would argue not a "essentially" even.  I could, could I not in negotiating the UCA come to agreement that something is reasonable, allowable and allowable reach agreement with the contractor that the something will not be in the definitized contract or modification.

Following Vern's references I will use agreement I guess.

@FrankJon, does this shed any light for you? https://www.federalregister.gov/documents/2023/05/25/2023-11139/defense-federal-acquisition-regulation-supplement-undefinitized-contract-actions-dfars-case

C Culham said:

I crafted that response myself, aka my thought.  

Ok not good.   I would argue not a "essentially" even.  I could, could I not in negotiating the UCA come to agreement that something is reasonable, allowable and allowable reach agreement with the contractor that the something will not be in the definitized contract or modification.

Following Vern's references I will use agreement I guess.

Where does Vern’s reference support use of agreement?

@FrankJon, also see United States Code (USC), 10 USC 2326 entitled, Undefinitized Contractual Action; restrictions at https://www.govinfo.gov/content/pkg/USCODE-2010-title10/html/USCODE-2010-title10-subtitleA-partIV-chap137-sec2326.htm (this was the law as of 2010. It was repealed in 2021 and relocated to different USC section and may have been amended in some way thereafter. Still working on it. It is somewhat complex to run it down in its final language of today, if it was subsequently changed. Still working on it but I hope you get the picture about the top level requirement related to undefinitized contractual actions is federal law approved by Congress and the President, which then is "interpreted" and approved for FAR as a regulation.)

Vern Edwards said:

contractual agreements

From the Congressional Research document he referenced.

Vern Edwards said:

Do your own research.

Vern Edwards said:

Assume an FFP letter contract. The contract must contains 52.216-24 and 52.216-25.  The -24 clause limits the government's liability if the contract is terminated. The -25 clause prescribes a procedure for definitization, requires the contractor to submit a proposal, and, if the contract was awarded based on price competition (which in my experience would be unusual), a maximum negotiated price, assuming that the contract is not modified prior to definitization. 

Presumably, the contractor will want some kind of revenue flow during performance unless its is willing to provide its own financing. So it seeks progress payments based on costs, which will be anchored to the Government's maximum liability. See 52.232-16.

OK, well for starters neither 52.216-24 nor 52.232-16 are commercial clauses, so neither belongs in the scenario I described. Clause 52.216-25 is a commercial clause, but unfortunately DFARS 216.603-4(b)(3) tells us to replace that clause with 252.217-7027, which is not a commercial clause. 

Vern Edwards said:

The government initiates an audit and starts price analysis.

In the scenario I described, what gives me the authority to audit the contractor’s costs and adjust its profit? What gives me the authority to demand cost data at all? Certainly no terms I included in my letter contract appear to convey this.   

Vern Edwards said:

All of this is why Congress enacted legislation to try to limit and contract the use of UCAs.

Vern Edwards said:

Honest to God, I thought all this was common knowledge.

Why would any of this be common knowledge among today’s practitioners if the use of UCAs is so limited? It’s amusing to me that the regulations so poorly describe this process we must look to audits and some level of experiential learning to piece together the true nature of UCAs, yet the confused practitioner asking reasonable questions (in this case me) is the a-hole. Thanks for your help, Vern.

Neil Roberts said:

@FrankJon, also see United States Code (USC), 10 USC 2326 entitled, Undefinitized Contractual Action; restrictions at https://www.govinfo.gov/content/pkg/USCODE-2010-title10/html/USCODE-2010-title10-subtitleA-partIV-chap137-sec2326.htm (this was the law as of 2010. It was repealed in 2021 and relocated to different USC section and may have been amended in some way thereafter. Still working on it. It is somewhat complex to run it down in its final language of today, if it was subsequently changed. Still working on it but I hope you get the picture about the top level requirement related to undefinitized contractual actions is federal law approved by Congress and the President, which then is "interpreted" and approved for FAR as a regulation.)

Thanks Neil. Profit is discussed at 10 USC 3374. This would override my commerciality argument, although the term “substantial portion” still seems to present a great deal of ambiguity.

FrankJon said:

Why would any of this be common knowledge among today’s practitioners if the use of UCAs is so limited?

I assumed it is common knowledge because I often falsely assume that contracting "professionals" understand self-interrogation.

(Question: Why a UCA for a commercial item?)

This thread is off the rails, as often happens at Wifcon Forum. Let's not forget the questions that started it.

On 4/3/2024 at 12:51 PM, FrankJon said:

Questions:

1. Why does DoDIG assume that all UCAs are cost-reimbursement contracts? Where does the FAR or DFARS support this assertion? I see clause 52.216-26, but that is only required when a cost-reimbursement definitive contract is contemplated.   
2. Assuming the contract is definitized on time in accordance with paragraph (d) of clause 252.217-7027 and the CO does not include any other terms authorizing the adjustment of profit, what gives the Government de facto authority to adjust a contractor's profit in accordance with DFARS 217.7404-6?   
3. Since unilaterally adjusting profit is not compatible with commercial procedures and utilizing weighted guidelines is not compatible with simplified acquisition procedures, would the inclusion of commercial terms in the UCA and the application of FAR subpart 13.5 procedures to the definitized contract action negate the requirement to follow DFARS 217.7404-6?  
4. Since "substantial portion" is not defined by the DFARS, it seems to me that the CO has total discretion to determine when the 217.7404-6 analysis applies, depending on her definition of "substantial" under the circumstances. Am I missing something?

I presume that the first question has been answered. What about the second and third question?

As to the second question, it is not a matter of "de facto authority". (Authority is the last refuge of the helpless.) It is a matter of business smarts.

DFARS 217.7404-6 states:

Quote

When the final price of a UCA is negotiated after a substantial portion of the required performance has been completed, the head of the contracting activity shall ensure the profit allowed reflects—

(a) Any reduced cost risk to the contractor for costs incurred during contract performance before negotiation of the final price. However, if a contractor submits a qualifying proposal to definitize a UCA, and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk of the contractor as such risk existed on the date the contractor submitted the qualifying proposal;

(b) Any reduced cost risk to the contractor for costs expected to be incurred during performance of the remainder of the contract after negotiation of the final price; and

(c) The requirements at 215.404-71 -3(d)(2). The risk assessment shall be documented in the price negotiation memorandum.

That is an instruction about how to negotiate. Why the instruction? It's there for the clueless.

Smart, competent COs negotiating the definitization of an FFP letter contract would do that as a matter of course, as a matter of profit policy and commonsense business practice, because they know that before definitization an FFP letter contract "effectively" works like cost-reimbursement contracts, and they can explain why and how that is the case. And because some savvy contractors will take advantage of government ignorance and incompetence, while others are simply resigned to government slow motion.

Smart people negotiating a UCA for the first time engage in self-interrogation, determine what they do and do not know, and then research and study like heck. But those persons seem to be rare. It seems that some people have never heard of Google Books and Google Scholar. Some people don't search DTIC. They spend their spare time watching "Ted Lasso" and "Monarch: Legacy of Monsters". (I liked "Lasso", but "Monarch" is for idiots. "Godzilla Minus One", on the other hand, is sheer genius, but it's not streaming yet.)

So if you are negotiating an FFP contract price the guidance to the clueless is, first, to reward the contractor's assumption of risk with higher profit than you would agree to under a cost-reimbursement contract, but, second, if the contractor has incurred "a substantial portion" of the total cost by the time the letter contract is definitized, while the UCA functioned like a CPFF contract, then the contractor has not faced as much risk as it would have under an FFP contract and should not be rewarded with FFP-level profits. It's not about "de facto authority", it's just commonsense business practice.

Wonder why we have so much regulation? Look around you.

Okay, I hope that takes care of questions 2 and 3.

Question 4 does not deserve an answer. This isn't high school.

BTW, if you really want to understand the DODIG's concern about UCAs, go to Google Books and search for: "Acquisition Reform-1986." It's a transcript of a HASC hearing. Download it and then read pages 1-47, which are devoted to UCAs. Plenty of good background.

(Question for the self-interrogators who cultivate curiosity: Why does the DFARS say that change orders are not UCAs?)

The FAR is not a textbook. Most of the textbooks devoted to the practical sides of government contracting are legal hornbooks, like Formation of Government Contracting. They don't address and explain practical matters in any depth. You have to be able to gather info, put ideas together, think things through, follow the logic, and determine logical consequences. Competence is not handed to you on a platter.

We old-timers have failed the younger folk to the extent that we have not taught them how to think things through, and to the extent that we have engaged in too much hand-holding. Knowledge and competence are the products of career-long struggle.

Forgive any typos. I can barely see my screen.

On 4/3/2024 at 2:51 PM, FrankJon said:

Assuming the contract is definitized on time in accordance with paragraph (d) of clause 252.217-7027 and the CO does not include any other terms authorizing the adjustment of profit, what gives the Government de facto authority to adjust a contractor's profit in accordance with DFARS 217.7404-6?

My response is Holy Sh…!

…Because you are NEGOTIATING the definitized price  of a contract. You aren’t “adjusting the contractor’s profit”, as though it is an entitlement.

Vern Edwards said:

We old-timers have failed the younger folk to the extent that we have not taught them how to think things through, and to the extent that we have engaged in too much hand-holding. Knowledge and competence are the products of career-long struggle.

Forgive any typos. I can barely see my screen.

Thank you for your responses here, Vern!.🌹❤️

My phone broke earlier this week - just got it back plus we had company all week. Just catching up now on WICON Forum…

Thanks, Joel.

Vern Edwards said:

Presumably, the contractor will want some kind of revenue flow during performance unless its is willing to provide its own financing. So it seeks progress payments based on costs, which will be anchored to the Government's maximum liability. See 52.232-16.

Thanks for the response.  This is what I was thinking would be the situation.  It was the use of the word "allowable" that had me spun up since to me, allowable denotes application of the cost principles in FAR Part 31 while 52.232-16 does not incorporate the cost principles.

Retreadfed said:

It was the use of the word "allowable" that had me spun up since to me, allowable denotes application of the cost principles in FAR Part 31 while 52.232-16 does not incorporate the cost principles.

No, the clause doesn't mention the cost principles, and I don't think I cited Part 31. (I see a quote box for me in your post, but no quote.)

But see DCAA 17500 Audit Program for Progress Payment, Cost AP, Item 8:

Quote

The objective of progress payments is to provide the contractor with interim financing for a percentage (stated in contract) of allowable costs incurred for undelivered and uninvoiced items.

Emphasis added.

https://www.dcaa.mil/Portals/88/17500 Audit Program for Progress Payment Cost AP.pdf?ver=1DtDHZB6nPAH_hdDTBOkgA%3D%3D 

See also DCAA CAM 14-200 Section 2 Audit of Progress Payments, 14-201 a.;

Quote

Interim contract financing is available on certain fixed price contracts during the predelivery period as a percentage of allowable costs adjusted as discussed in this section. Financing is interest-free, but the amount is subject to limitations specified in the contract.

Emphasis added. And see 14-202.1 d.:

Quote

The contractor can request progress payments as work progresses, but not more frequently than monthly. The amount of each progress payment is computed by (i) applying the rate stipulated in the progress payment clause of the contract (DFARS 252.232-7004) to the cumulative total allowable costs under the contract as shown in the contractor's books and records (see 14-202.4); (ii) plus financing payments to subcontractors or other divisions of the contractor's corporate office (see 14-205h); (iii) less the sum of all previous progress payments. The contracting officer is responsible for approving progress payment requests.

Emphasis added. The contractor will ultimately be paid the full contract price for acceptable performance, but, apparently, progress payments include only allowable costs pending liquidation. At least, that seems to be DCAA's position and has been my understanding. Maybe DCAA has a different definition of "allowable".

https://www.dcaa.mil/Portals/88/Documents/Guidance/CAM/Chapter 14 Other Contract Audit Assignments.pdf?ver=CF-j6io9SKfawNSSXQpCwQ%3d%3d

Vern has done a great job of supporting a dumb statement by DoDIG.  And in my view a DFARS definition that seems inconsistent with a full read of the FAR  and DFARS as well.

Example per DFARS 217.7401 a UCA can not be a change order.  Yet a UCA can be a letter contract?  The definition of UCA should be be changed to Undefinitized Action.

Vern Edwards said:

Maybe DCAA has a different definition of "allowable".

Having worked for DCAA for 15 years I can tell you that it is a very inward looking agency.  Unless things have changed drastically, it refuses to allow its auditors to receive procurement training from anyone outside DCAA.  Thus, DCAA perpetuates its own views of procurement policy, including interpretations of the FAR.  In this regard, 52.232-16 never uses the term allowable, neither does the SF 1442 nor the instructions for that form.  Instead, the 1442 and its instructions use the term "eligible."

@Retreadfed 

Allowable, eligible... Whatever. 😀 

It doesn't change my explanation of the DODIG's and the GAO's simile that a UCA is "effectively" like a cost-reimbursement contract until definitization, which explains why Congresss placed statutory limits on them.

We use a lot of similes to explain things to people in our business. Remember when some people insisted that a T&M contract was a kind of cost-reimbursement contract. That was not even close to being true.

Vern, is leaving the building. Going to France on Monday to spend a month on the Seine and the Loire in Spring.

Y'all carry on.

Vern Edwards said:

Remember when some people insisted that a T&M contract was a kind of cost-reimbursement contract.

You mean like Eleanor Spector in her guidance on prompt payment?

Sorry for the edit while you were posting, Retread.

Au revoir.

Vern Edwards said:

Vern, is leaving the building. Going to France on Monday to spend a month on the Seine and the Loire in Spring.

Enjoy your time there. My Pastor has a River barge house boat in Auxerre on the River Yonne. Least it will be in May, it’s in a shed at the moment. They have invited us to visit before the Olympics.