FPIF Math

The clause says:

(2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows... (ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less ______ (Contracting Officer insert percent) percent of the amount by which the total final negotiated cost exceeds the total target cost.

In your scenario, the contractor pays every dollar of overrun (0/100) up to $7,000,000. The contractor must complete the work, but will get no more than the $70,000,000 ceiling price.

So I think that if the actual cost is $68,000,000, $7,000,000 will come from the contractor's profit and the Government, which is liable up to $70,000,000, must pay $61,000,000. I think.

Is this a real arrangement?

Scenario:

Target Cost: $60M

Target Profit: $7M

Target Price: $67M

Ceiling: $70M

Share Ratio, Under and Over: 100/0; 0/100

if the cost exceeds the target, this is no different than a firm-fixed-price contract for $67 million. Plug in anything you want into the formula and you will get $67 million. The ceiling is meaningless.

Don, you can't leave it at that! You've got to do better than that! Your statement, "this is no different than a firm-fixed-price contract for $67 million" is conclusory, as is your statement, "the ceiling is meaningless." Give us your argument in support of those conclusions based on the incentive price revision clause.

The target cost is just that. It does not limit the Government's obligation to the contractor. The government's obligation is limited only by the ceiling price and the share ratio, which is applied to the target profit to determine the contractor's share of a cost overrun.

Under the scenario, If the contractor incurs cost of $68,000,000, then under the incentive price revision clause the share ratio is applied to the target profit of $7,000,000. Once that's gone there is no more sharing of the overrun, but the government is still on the hook up to the ceiling. That's what I would argue as the contractor. Is that wrong? If you think so, then please explain. What would you argue if you were the government?

The clause says:

In your scenario, the contractor pays every dollar of overrun (0/100) up to $7,000,000. The contractor must complete the work, but will get no more than the $70,000,000 ceiling price.

So I think that if the actual cost is $68,000,000, $7,000,000 will come from the contractor's profit and the Government, which is liable up to $70,000,000, must pay $61,000,000. I think.

Is this a real arrangement?

If the total final price is established by applying to the total final negotiated cost an adjustment for profit or loss, as follows... (ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less 100 percent of the amount by which the total final negotiated cost exceeds the total target cost.

Then:

$ 68M Total final negotiated cost

+ $ 7M Total target profit

- $ 8M Amount by which the total final negotiated cost

______ exceeds the total target cost

$ 67M

So Don is correct, but only so far as $67M will always be the result if there's an overrun. If there's an underrun, the total final price will be the total final negotiated cost plus $7M.

16.403-1 Fixed-price incentive (firm target) contracts.

(a) Description. A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs.

From what's provided in this thread, I would think that the contractor is paid $68M for negotiated Costs and $2M in profit.

Don - I have to disagree with you, the contractor should only absorb the difference as a loss when the ceiling is exceeded, not the target (from my experience with these contract types).

Vern - I'm not sure where your $61M number is coming from in post #2

(2) The total final price (X) shall be established by applying to the total final negotiated cost ($ 68M) an adjustment for profit or loss, as follows...

(ii) If the total final negotiated cost is greater than the total target cost ($ 60M), the adjustment is the total target profit ($ 7M), less 100 percent of the amount by which the total final negotiated cost exceeds the total target cost.

So we adjust the $ 68M by deducting $ 7M (total target profit) - $ 8M (the amount by with the total final negotiated cost exceeds the total target cost). Is that right?

The total final negotiated cost is $ 68M. The total target profit ($ 7M) less the amount by which the total final negotiated cost exceeds the total target cost ($ 8M) is how much?

$ 7M - $8 M = - $ 1M. So the total final price is: $ 68M - (- $ 1M).

How much is that?

(2) The total final price (X) shall be established by applying to the total final negotiated cost ($ 68M) an adjustment for profit or loss, as follows...

(ii) If the total final negotiated cost is greater than the total target cost ($ 60M), the adjustment is the total target profit ($ 7M), less 100

percent of the amount by which the total final negotiated cost exceeds the total target cost.

So we adjust the $ 68M by deducting $ 7M (total target profit) - $ 8M (the amount by with the total final negotiated cost exceeds the total target cost). Is that right?

The total final negotiated cost is $ 68M. The total target profit ($ 7M) less the amount by which the total final negotiated cost exceeds the total target cost ($ 8M) is how much?

$ 7M - $8 M = - $ 1M.

So the result it $ 68M - (- $ 1M).

How much is that?

I think the result is $67M, not $68M or "$ 68M - (- $ 1M)."

The total final price (X) shall be established by applying to the total final negotiated cost (A) an adjustment for profit or loss, as follows... (ii) If the total final negotiated cost is greater than the total target cost ($ 60M), the adjustment is the total target profit (B ), less 100 percent of the amount (C ) by which the total final negotiated cost exceeds the total target cost.

So -- X = A + B - C

Thus, for the given case, X = $68M + $7M - ($68M-$60M)

X = $67M.

You are starting with the number -- 68 + 7 -- that you are supposed to derive from the clause and then deducting the overrun. That's not what the says says to do. The clause does not say to add the total target profit to the total target cost and then deduct the overrun. The clause says, in my own paraphrasing:

Derive the total final price by deducting from the total final negotiated cost an amount that is equal to the total target profit minus 100 percent of the overrun. That latter amount is $ 7M - $ 8M = - $ 1M. That's the plain English of the clause. Have I read the clause wrongly? If so, what's my mistake. If not, then what is $ 68M - (- $ 1M)?

You are starting with the number -- 68 + 7 -- that you are supposed to derive from the clause and then deducting the overrun. That's not what the says says to do. The clause does not say to add the total target profit to the total target cost and then deduct the overrun. The clause says, in my own paraphrasing:

Derive the total final price by deducting from the total final negotiated cost an amount that is equal to the total target profit minus 100 percent of the overrun. That latter amount is $ 7M - $ 8M = - $ 1M. That's the plain English of the clause. Have I read the clause wrongly? If so, what's my mistake. If not, then what is $ 68M - (- $ 1M)?

You have read the clause wrongly. Nowhere does it say to "deduct" from the total final negotiated cost an amount that is equal to the total target profit minus 100 percent of the overrun. It says to apply an adjustment to the final negotiated cost. When you apply the -$1M adjustment to the final negotiated cost of $68M, you get $67M.

Vern - I believe Navy's process/calculation is correct. The clause states that you make an adjustment to (not a deduction from) the final negotiated cost. So if the final cost was $ 61M, the adjustment would be the target profit of $ 7M less the percentage (in this case 100%) of the amount by which the final cost exceeded the target cost ($ 1M) which leaves $ 6M. The adjustment in that case adds $ 6M to the $ 61M final cost for a total of $ 67M.

If the final cost exceeds the target cost by an amount that's more than the target profit (which is the OPs scenario) the adjustment becomes a deduction from the final cost.

But I want to re-ask the question you posed in post#2 -- is this a real arrangement? Who negotiates a deal that is, in effect a firm fixed price over the target cost and CPFF below the target cost?

navy and Craig:

Give me a break. What does "applying to" mean if it does not mean adding or subtracting? Please provide your definition. What would you tell a judge? It's no good telling me I'm wrong if you won't show me how. You start with a result and then work backwards. I can't accept that.

And Craig, can we solve one problem before we take up another?

ok going to give it a shot. (after reading the NASA incentive guide to freshen up on FPIF contracts)

Target cost $60M

Final negotiated cost $68M

difference ($8M)

target profit $7M

contractor would see a decrease in their profits of 100% of the difference of the target cost and the final negotiated cost. In this case since it is a 0/100 share on the over, the ceiling does not matter as the contractor assumes responsibility for for all costs over the the target cost. ( if there were a different ratio, then I could see where the ceiling would come into play)

so based upon the sharing ratio, my answer would be the final cost would be $67M, with the contractor absorbing a ($1M) loss.

just my two cents.

edited for spelling,

navy and Craig:

Give me a break. What does "applying to" mean if it does not mean adding or subtracting? Please provide your definition. What would you tell a judge?

And Craig, can we solve one problem before we take up another?

Of course, it means adding or subtracting. I think my example makes it perfectly clear how I interpret/define adjustment, and that's exactly what I would tell a judge. What do you think a judge would say to me in response?

Here's an example from a more representative type of FPI arrangement:

Target cost --- $60M

Target profit -- $ 7M

Share ratio over and under -- 50/50

Ceiling price -- $70M

So, in the case of an overrun, the final negotiated price (X) would be the final negotiated cost (W) adjusted by the total target profit (Y), less 50% of the of the amount by which the total final negotiated cost (Z) exceeds the total target cost.

Or, X = W + Y - 0.5(Z-W)

Now assume the final negotiated cost was $64M.

X = $64M + $7M - 0.5($64M-$60M)

In this example, X = $69M

Do you agree? If not, where did I go wrong?

If so, apply the formula to the OP's scenario, thusly -- X = $68M + $7M - 1.0($68M-$60M)

The result is X = $67M

...

so based upon the sharing ratio, my answer would be the final cost would be $67M, with the contractor absorbing a ($1M) loss.

[emphasis added]

...

I think you mean "final price."

yep price

ok going to give it a shot. (after reading the NASA incentive guide to freshen up on FPIF contracts)

Target cost $60M

Final negotiated cost $68M

difference ($8M)

target profit $7M

contractor would see a decrease in their profits of 100% of the difference of the target cost and the final negotiated cost. In this case since it is a 0/100 share on the over, the ceiling does not matter as the contractor assumes responsibility for for all costs over the the target cost. ( if there were a different ratio, then I could see where the ceiling would come into play)

so based upon the sharing ratio, my answer would be the final cost would be $67M, with the contractor absorbing a ($1M) loss.

just my two cents.

edited for spelling,

Can you provide a link to where from this statement is derived?

FAR 16.403-1 states "when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. "

with the application of the formula (0/100) the contractor sees his profit decremented by his percentage, which in this case is 100%.

Tjhe statement you are questioning is based upon the information given to us and my interpretation of 16.403-1

So the statement that "the ceiling doesn't matter" only applies to this case, yes?

my original statement

In this case since it is a 0/100 share on the over, the ceiling does not matter as the contractor assumes responsibility for for all costs over the the target cost. ( if there were a different ratio, then I could see where the ceiling would come into play

so yes in this case .

Scenario:

Target Cost: $60M

Target Profit: $7M

Target Price: $67M

Ceiling: $70M

Share Ratio, Under and Over: 100/0; 0/100

The issue surrounds interpretation of FAR 52.216-16(d)(2) and the adjustment for loss if the contractor's share of the over target costs exceeds the target profit.

If the actual cost were $68 million, is the final price $67 million or $68 million? In this case, the contractor's share in the adjustment in profit would be $8M, but the target profit is only $7M. Would the calculation of the final price be equal to the actual cost plus a negative $1M of profit or actual cost plus no fee?

Wouldn't the final price be the actual cost of 68 million with an absorption of 100 percent of the fee ($7 million) for the overrun plus absorption of the additional loss of ($7 million - $8 million)? This is because the contractor agrees to absorb 100% of costs in excess of the target price and the government agreed to absorb none of the excess costs. The excess is covered by the fee plus $1 million in cost overrun in excess of the fee.

Thus the final price will be $68 million, minus $1 million, equals $ 67 million.

Contractor is paid all costs less $1 million plus no fee.

The contractor will absorb a $1 million loss and earn no fee.

I don't think either navy or I started with a result and worked backwards. And calling it adding is OK with me.

If the difference between final negotiated cost and target cost is less than the target profit you're adding a positive number (7 minus some number less than 7) to the final negotiated cost. If the difference is greater than the target profit you're adding a negative number (7 minus some number greater than 7) to the final negotiated cost.

From 52.216-16(d)(2) --

(2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

(i) If the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit.

[

60 + 7 = 67]

(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less

100

percent of the amount by which the total final negotiated cost exceeds the total target cost.

[From the original posted scenario ... 68 + (7 - 8) = 67; If the final negotiated cost was 65 the adjustment would show as 65 + (7- 5) = 67]

(iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus

0

percent of the amount by which the total final negotiated cost is less than the total target cost.

[because of the 100/0 share, this results in adding 7 to whatever the final negotiated cost is]

Because of the pretty unusual share ratio over the target cost (0/100), the adjustment is a 1 for 1 movement, which makes the result static at the target price, or essentially FFP.

.... and yes, I can wait until we're done with this before moving to another question.

my original statement

In this case since it is a 0/100 share on the over, the ceiling does not matter as the contractor assumes responsibility for for all costs over the the target cost. ( if there were a different ratio, then I could see where the ceiling would come into play

so yes in this case .

i agree in this case. The ceiling must have been established before the fee and share ratios were established. The overrun share ratios make the ceiling cost irrelevant here.

This is the most wonderful problem we've had at Wifcon for a long, long time. Don Mansfield and I just spent an hour talking about it.

Here's where I am coming from:

These days I'm fascinated by the challenge of explaining things to people and making persuasive arguments. It's not enough to just assert that something or other is so, you have to be able to explain to others why it is so and persuade them to believe it.

I like the $67 million answer, but the question is how to persuade a contractor and/or a judge to accept it. The boards and courts say they will rely on the plain language of the contract, unless the contract is clearly ambiguous.

Looking at the incentive price revision clause, paragraph (d)(2)(ii), the issue is which of the following two formulas is correct in the event of a cost overrun on an FPI(F) contract:

(1) x = a - (b - c) or

(2) x = a + (b - c), where:

x is the total final price,

a is the total final negotiated cost,

b is the target profit, and

c is the contractor's share of the cost overrun.

Using the numbers we have been provided, formula (1) gives you $ 69M (the contractor makes $1M in profit) and formula (2) gives you $ 67M (the contractor loses $1M).

x = 68 - (7 - 8)

= 68 - (-1)

= 69, or

x = 68 + (7 - 8)

= 68 + (-1)

= 67.

What interests me is how to determine which of those is formulas is correct and how to prove it to a judge based on the language of FAR 52.216-16(d)(2)?

Since I last read the responses here (it's been a few moments) it seems that most of you think that $ 67M is the right number and you've used all kinds of calculations to show me how you got to your numbers, but you have not justified your choice of calculation based on the language of the clause. E.g., Craigmccaa. You've just plugged your choice of numbers into the right places to produce your result.

I know you think you're right, but if I'm the contractor or a judge, then why should I believe that your method of calculation is the right one? How does th language of the clause justify your choice of calculation? My own thinking is that you cannot establish which of the above formulas is correct based on the language of the clause, and neither can I. So we're going to have to resort to extrinsic arguments.

But speaking of extrinsic arguments, think of this:

Your honor, the government would have you believe that we should take a $1M loss even though we have not exceeded the ceiling price. I have perused all of the government's publications about fixed-price incentive contracts with firm targets, and all indicate that the contractor does not take a loss until its costs exceed the ceiling price. See e.g. FAR 16.403-1, "Fixed-price incentive (firm target) contracts," paragraph (a), sixth sentence, which states, "If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss." Well, your honor, we have not exceeded the price ceiling. At $68 million we are $2 million below it. We have lost the profit in the incentive pool, and that's fair, but we are still entitled to be compensated for our allowable costs incurred up to the ceiling price. We are not obligated to take a loss.

By the way, it's no good saying that the ceiling doesn't matter. It matters if for no other reason than the fact that it's in the contract. You cannot just read it out of the contract.

Vern -

I vote for your formula 2.

Take a look at post #22. I think FAR 52.216-16(d)(2)(i) sets the stage for "applying to the total final negotiated cost an adjustment for profit or loss". The only way "applying" the "adjustment" can be interpreted from (2)(i) is by adding the adjustment to the final negotiated cost. In the examples I included in the clause text, that all works out to $67M. If the "adjustment" is a positive number (target profit greater than the overrun amount) the contractor has a profit which is reduced in this case (because of the 0/100 share ratio) dollar for dollar by the amount of the overrun. If the target profit is less than the overrun the adjustment is a negative number which when added to the final negotiated cost results in a loss.

And I agree that we shouldn't say the ceiling doesn't matter. We should, however, be questioning why the CO would establish a ceiling that mathematically exceeds the amount the contractor could be paid under the formula. While the stated ceiling is $70M, the effective ceiling is $67M. If I were Government counsel during the appeal my best argument might be that the CO was incompetent ... but that doesn't mean the contractor receives more than $67M

I understand where you're coming from. But what would you say to a judge who asked:

Why, Mr. Craigmccaa, is adding "the only way" of applying the adjustment? What do you see in the language of (2)(i) that leads you to that conclusion? (2)(i) tells us how to calculate the amount of the adjustment, but it does not tell us how to "apply" the adjustment. In fact, I don't see anything in the clause that tells us how to apply the adjustment. It just says that you must apply it in some way. Your worthy opponent says that subtracting is the only way of applying the adjustment. Why should I believe you instead of him? (I'm going to ask him the same question after you answer.) I don't see anything in the contract or in the description of FPI(F) in FAR Subpart 16.4 that talks about an "effective" ceiling different from the stipulated ceiling. I don't care why the CO did what he did, I only care about what the parties are entitled to believe about the contract based on the language therein.

Just help me with the logic.

I understand where you're coming from. But what would you say to a judge who asked:

Why, Mr. Craigmccaa, is adding "the only way" of applying the adjustment? What do you see in the language of (2)(i) that leads you to that conclusion? (2)(i) tells us how to calculate the amount of the adjustment, but it does not tell us how to "apply" the adjustment. In fact, I don't see anything in the clause that tells us how to apply the adjustment. It just says that you must apply it in some way. Your worthy opponent says that subtracting is the only way of applying the adjustment. Why should I believe you instead of him? (I'm going to ask him the same question after you answer.) I don't see anything in the contract or in the description of FPI(F) in FAR Subpart 16.4 that talks about an "effective" ceiling different from the stipulated ceiling.

Just help me with the logic.

I would suggest that he apply the same logic to the situation where the actual final negotiated cost equals the target cost and see how he applied the adjustment.

Suggest away. Why should he do that? Please elaborate.

(I'm going to lunch now, so we'll recess for two hours.)

Vern,

If the correct formula were "x = a - (b - c)", wouldn't you have a CPPC arrangement for costs in excess of the target price? Think about it. Once c gets bigger than b, an extra dollar of cost results in an extra dollar of profit (i.e., profit would be earned at 100% of contract cost).

Vern,

If the correct formula were "x = a - (b - c)", wouldn't you have a CPPC arrangement for costs in excess of the target price? Think about it. Once c gets bigger than b, an extra dollar of cost results in an extra dollar of profit (i.e., profit would be earned at 100% of contract cost).

Stand down counselor, we're in recess [gavel sound]

Thank you, FAR Fetched. You're a first rate bailiff. Court is now back in session.

Don, the contractor's profit would increase up to the ceiling, but I'm not sure that would make the arrangement CPPC. It might. Let's suppose it does. What is your argument?

Judge, the final price is derived from 52.216-16(d)(2) --

"...(2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

(i) if the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit."

Thus, Total Price = Total Cost + Target Profit

However, in this case, the final negotiated cost exceeded the target cost by $ 8 million dollars..

"(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less [100] percent of the amount by which the total final negotiated cost exceeds the total target cost."

Thus, Total Price = Total Cost + (Target Profit - (100% x (Total Cost - Target Cost))).

TP = 68 + ( 7 - (68 - 60)) = 75 - 8 = 67 ($ million)

Joel:

Suppose we get the contractor to agree to that calculation. What if anything is the significance of the $ 70 million ceiling price and the fact that the contractor's actual cost was $68 million? What if he argues that he should get his entire incurred cost since it's less than the ceiling price? What would you say to that?

Vern, the 70 million ceiling price is unachievable, with the share ratios given here. The most that the final contract price can be is $ 67 million with no overrun or under run.

The government keeps all underruns and the contractor must absorb all overruns. This is a bum deal for the contractor.

I'm guessing that the government specified at least the ceiling price, then the winning proposer probably proposed the target price and the share ratios. Either the firm desperately needed the work or is not too smart?

As for what to tell the contractor, I'd probably say, "Please read the clause, which is used to establish the final contract price."

Some incentive contract this turned out to be!

Judge, the final price is derived from 52.216-16(d)(2) --

"...(2) The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

(i) if the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit."

Thus, Total Price = Total Cost + Target Profit

However, in this case, the final negotiated cost exceeded the target cost by $ 8 million dollars..

"(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less [100] percent of the amount by which the total final negotiated cost exceeds the total target cost."

Thus, Total Price = Total Cost + (Target Profit - (100% x (Total Cost - Target Cost))).

TP = 68 + ( 7 - (68 - 60)) = 75 - 8 = 67 ($ million)

Let's test Don's original assertion that this specific arrangement will yield a final price of $67 million, regardless of actual total cost.

If the final cost is $ 78 million, then we are looking at:

TP = 78 + (7 - (78 - 60)). = 85 - 18 = 67

But if there is an under run, the govt keeps it all and i think the contractor is paid the total cost plus target profit or fee. So, with a total cost of 59 million plus 7 million fee, the TP = $66 million. I have a low battery, so will verify that later.

But if there is an underrun, the govt keeps it all and I believe that the contractor is paid the total cost plus target profit or fee.

52.216-16 -- Incentive Price Revision -- Firm Target.

" ...(d) (2) (iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus [___0__] percent of the amount by which the total final negotiated cost is less than the total target cost."

So, with a total cost of $ 59 million plus $ 7 million target profit, the TP = $66 million.

The math is unassailable, but I always try to come up with a counterargument or two. It's good practice, and you never know. I have seen some pretty goofy court decisions. And you never know how a judge might react when he or she thinks that the government has taken advantage of a contractor. Tell me, Ms CO, what's up with that ceiling price? Whose idea was that?

The math is unassailable, but I always try to come up with a counterargument or two. It's good practice, and you never know. I have seen some pretty goofy court decisions. And you never know how a judge might react when he or she thinks that the government has taken advantage of a contractor. Tell me, Ms CO, what's up with that ceiling price? Whose idea was that?

I agree.

Your honor

The Government is arguing the ceiling does not matter "now", with their way of applying the formula for this contract. This is the same entity that established the ceiling higher than the Target Price knowing, apparently, that it could never be reached with their way of applying the formula. Clearly, the ceiling was meant as a cap on cost overruns during performance. The cost was higher than the target yet $2M lower than the ceiling established by the same entity whose position is now that the ceiling doesn’t matter.

Can the Government come up with a reason or a 100/0:0/100 scenario applying the formula "their way" where the ceiling is higher than the target price for a reason?

Ultimately, the contractor's best argument for getting more than $ 67M is the ceiling price. Few judges know much about FPI(F) contracts, and if the issue at hand were to be litigated the contractor would certainly argue that the contract must be read as a whole and the ceiling price is meaningful in that regard. The government would have to acknowledge the weirdness of the arrangement and explain the concept of formula incentives and the structure of FPI(F).

No one mentioned it during the discussion (unless I missed it), but the Contract Pricing Reference Guides explain how to calculate the adjustment in the event of an overrun. See Vol. 4, Section 1.3.1, under the heading "FPIF Contract Final Pricing." It specifically refers to the clause and describes the use of formula (2) from my Post #24, although it uses different symbols. https://acc.dau.mil/...id=379603#1.3.1 Don Mansfield discovered that during our telephone conversation yesterday morning.

If I were the government and trying to deal with the contractor's argument I would admit that the ceiling price doesn't make sense, but point out that it was a patent ambiguity at the time of contract formation and that the contractor should have brought it to the contracting officer's attention before signing. I would argue for using formula (2) to calculate the price revision by showing that formula (1) is inconsistent with the objectives of FPI(F) as described in 16.402-1((2) and as have been well and widely known and described for decades, including my own monograph published by Thomson Reuters in November 2009, 09-12 Briefing Papers. I would not use Don's CPPC argument, because I think it's too complicated, but others might.

I think it's possible that a board of contract appeals or the Court of Federal Claims might give the contractor $ 68M on the ground that the contractor should not take a loss at a dollar amount less than the ceiling price. I very much doubt that the contractor could get $ 69M.

I enjoyed the discussion.

I understand where you're coming from. But what would you say to a judge who asked:

Why, Mr. Craigmccaa, is adding "the only way" of applying the adjustment? What do you see in the language of (2)(i) that leads you to that conclusion? (2)(i) tells us how to calculate the amount of the adjustment, but it does not tell us how to "apply" the adjustment. In fact, I don't see anything in the clause that tells us how to apply the adjustment. It just says that you must apply it in some way. Your worthy opponent says that subtracting is the only way of applying the adjustment. Why should I believe you instead of him? (I'm going to ask him the same question after you answer.) I don't see anything in the contract or in the description of FPI(F) in FAR Subpart 16.4 that talks about an "effective" ceiling different from the stipulated ceiling. I don't care why the CO did what he did, I only care about what the parties are entitled to believe about the contract based on the language therein.

Just help me with the logic.

I agree that the clause doesn't expressly indicate whether "applying" means to add or subtract.

I used (2)(i) as the basis from which to extrapolate the meaning of "applying" to the other cases because (2)(i) involves numbers that are original elements of the agreement (target cost and target profit) and don't require intermediate calculations. The only reasonable way to apply the adjustment in that situation is by adding it to the final negotiated cost , because subtracting the adjustment would mean in the case of the initally posed scenario the contractor is reimbursed $53M on a contract where it incurred the target cost of $60M. The contractor loses the amount of the target profit as a reward for performing right at the target cost, a result that makes my concern about the "effective ceiling" and "who would agree to this arrangement?" seem trivial by comparison.

And just to review the math operation, in post #35 Joel laid out the calculation for an overrun scenario with an incurred cost of $78M as: TP = 78 + (7 - (78 - 60)). = 85 - 18 = 67. In fact, the calculation is TP=78+(7-(78-60))=78+(7-18)=78+(-11)=78-11=67.

I agree that the clause doesn't expressly indicate whether "applying" means to add or subtract.

I used (2)(i) as the basis from which to extrapolate the meaning of "applying" to the other cases because (2)(i) involves numbers that are original elements of the agreement (target cost and target profit) and don't require intermediate calculations. The only reasonable way to apply the adjustment in that situation is by adding it to the final negotiated cost , because subtracting the adjustment would mean in the case of the initally posed scenario the contractor is reimbursed $53M on a contract where it incurred the target cost of $60M. The contractor loses the amount of the target profit as a reward for performing right at the target cost, a result that makes my concern about the "effective ceiling" and "who would agree to this arrangement?" seem trivial by comparison.

And just to review the math operation, in post #35 Joel laid out the calculation for an overrun scenario with an incurred cost of $78M as: TP = 78 + (7 - (78 - 60)). = 85 - 18 = 67. In fact, the calculation is TP=78+(7-(78-60))=78+(7-18)=78+(-11)=78-11=67.

Your calculation, TP = 78 + (7 - (78 - 60)) simply cannot be gotten from the language of (2)(ii) of the clause. Period. The proper method of calculation, based on the language of FAR 52.216-16(d)(2)(ii) is:

TPF = TCFN + (TP - CS(TCFN – TC))

TPF = 68 + (7 - 1.00(68 – 60))

TPF = 68 + (7 - 8)

TPF = 68 + (-1)

TPF = 67

where:

TPF is the Total Final Price,

TCFN is the Total Final Negotiated Cost,

TP is the Target Profit

CS is the Contractor’s Share of an overrun

TC is the Target Cost

It is important that the CO get this right in his or her final decision, because the explanation should be bulletproof and invulnerable to distracting challenges (Your honor, that's not what the clause says!).

Also, rather than talk about extrapolating I would just point out to the judge that TPF = 68 + (-1) is consistent with the method of "applying" used in (d)(2)(i) and (d)(2)(iii) and consistent with the way the incentive is supposed to work, rather than say that I was extrapolating (d)(2)(i) to (d)(2)(ii). Someone might argue that consistency proves nothing, but I think it's intuitively persuasive.

"And just to review the math operation, in post #35 Joel laid out the calculation for an overrun scenario with an incurred cost of $78M as: TP = 78 + (7 - (78 - 60)). = 85 - 18 = 67. In fact, the calculation is TP=78+(7-(78-60))=78+(7-18)=78+(-11)=78-11=67. "

Craig: I won't argue that. In hating this iPad I took a shortcut in my typing.

Vern, Craig was responding to my test last night of Don's statement that the result is $ 67 million, regardless of the amount of overrun.

Your calculation, based upon a TC of $68, is correct, of course.

As to whether a contractor should not accept any loss below a cost ceiling, did you mean net loss or any loss of profit?

On the outside, guaranteed maximum price contracts are quite common in the construction and desigN-build industry. They normally include a shared savings formula and may or may not include a separate, non-variable fixed fee.

As to whether a contractor should not accept any loss below a cost ceiling, did you mean net loss or any loss of profit?

I meant net loss, but in the case we've been dealing with it's fun to argue for the $1 M in profit the contractor would get using formula (1). I mean, when the government enters into an arrangement as apparently screwy as the one at hand, anything goes short of lying and fraud. Why not argue for it? Who knows... ?

Kind of late to the party here - maybe this will teach me not to ignore WIFCON for a day or two.

We still don't know if the situation is real or some diabolical plot, with the original poster LHAO. The question reminds me of my rabbi, who when asked how many angels could dance on the head of a pin wanted to know what kind of pin.

FWIW, my vote (absent my "judicial" assessment below) is $68 because (1) incentive contracts do not permit adjusting profit to less than zero, and (2) the permitting the profit adjustment to be less than zero renders the price ceiling meaningless, and we are required to interpret a clause in a way that gives meaning to all its terms.

If I were the judge, my ruling would probably depend on who drafted the pricing arrangement. Applying the rule concerning ambiguities, I would find the clause is subject to two or more reasonable interpretations (I am sure no one here would want to call Vern unreasonable) and therefore ambiguous. The ambiguity would be latent. If, as is normal, the Govenment drafted the pricing arrangement, I would hold for the contractor and rule that there is a price ceiling of $70M and applying the share ratio to the overrun merely establishes $67M as the point of total assumption. If the pricing arrangement was drafted by the contractor I would probably hold that it created the ambiguity and rule in favor of the Government. If, as may be the case, the pricing arrangement was a give and take, I would rule that neither side drafted the ambiguous term, and would therefore interpret the contract in a way that gives meaning to all its provisions, and rule that decreasing the final price to $67M would not give meaning to the price ceiling included in the contract.

To bring another quirk into the equation, what would the price be if the final cost was $72M? For me it is easy, the price would be the price ceiling of $70. But if you think the price ceiling does not really apply because of how the share ratios work, would the final price be $67M ( $72M - ($12M - $7M)) or would it be $65M by deducting from the $70M price ceiling rather than the $72M final costs?

Thought provoking.

Why do you say the ambiguity would be latent?

As for being unreasonable, I do it here all the time just for the fun of it.

Kind of late to the party here - maybe this will teach me not to ignore WIFCON for a day or two.

We still don't know if the situation is real or some diabolical plot, with the original poster LHAO. The question reminds me of my rabbi, who when asked how many angels could dance on the head of a pin wanted to know what kind of pin.

FWIW, my vote (absent my "judicial" assessment below) is $68 because (1) incentive contracts do not permit adjusting profit to less than zero, and (2) the permitting the profit adjustment to be less than zero renders the price ceiling meaningless, and we are required to interpret a clause in a way that gives meaning to all its terms.

If I were the judge, my ruling would probably depend on who drafted the pricing arrangement. Applying the rule concerning ambiguities, I would find the clause is subject to two or more reasonable interpretations (I am sure no one here would want to call Vern unreasonable) and therefore ambiguous. The ambiguity would be latent. If, as is normal, the Govenment drafted the pricing arrangement, I would hold for the contractor and rule that there is a price ceiling of $70M and applying the share ratio to the overrun merely establishes $67M as the point of total assumption. If the pricing arrangement was drafted by the contractor I would probably hold that it created the ambiguity and rule in favor of the Government. If, as may be the case, the pricing arrangement was a give and take, I would rule that neither side drafted the ambiguous term, and would therefore interpret the contract in a way that gives meaning to all its provisions, and rule that decreasing the final price to $67M would not give meaning to the price ceiling included in the contract.

To bring another quirk into the equation, what would the price be if the final cost was $72M? For me it is easy, the price would be the price ceiling of $70. But if you think the price ceiling does not really apply because of how the share ratios work, would the final price be $67M ( $72M - ($12M - $7M)) or would it be $65M by deducting from the $70M price ceiling rather than the $72M final costs?

What source can you cite for the statement that "incentive contracts do not permit adjusting profit to less than zero"? The clause doesn't even discuss "adjusting profit." It talks about applying an adjustment to the total final negotiated cost. Profit isn't being adjusted; profit ("or loss") is what constitutes the adjustment.

What source can you cite for the statement that "incentive contracts do not permit adjusting profit to less than zero"? The clause doesn't even discuss "adjusting profit."

The heck it doesn't! The total final price is the total final negotiated cost plus the adjusted profit . The wording of the clause seems to suggest that the total final negotiated cost is adjusted, but it's not. You adjust profit based on the difference between the total final negotiated cost and the target cost. You either add to or deduct from the target profit based on the contractor's share, Then you add the adjusted profit to the total final negotiated cost in order to get the total final price. You don't change the total final negotiated cost.

That doesn't mean that wvanpup's statement about not adjusting profit to less than zero is true.

FWIW, my vote (absent my "judicial" assessment below) is $68 because (1) incentive contracts do not permit adjusting profit to less than zero, and (2) the permitting the profit adjustment to be less than zero renders the price ceiling meaningless, and we are required to interpret a clause in a way that gives meaning to all its terms.

how do you reconcile your statement with FAR 16.403-1(a) which states ...."When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss."

Where the heck is contract price analyst?

The heck it doesn't! The total final price is the total final negotiated cost plus the adjusted profit . The wording of the clause seems to suggest that the total final negotiated cost is adjusted, but it's not. You adjust profit based on the difference between the total final negotiated cost and the target cost, then you add the adjusted profit to the total final negotiated cost in order to get the total final price. You don't change the total final negotiated cost.

That doesn't mean that wvanpup's statement about not adjusting profit to less than zero is true.

Well, the clause does say to subtract an amount from the total target profit, but without using the word "adjust." If you want to characterize that as adjusting, that's OK. No argument.

But, who said anything about "changing the total final negotiated cost"? Not I. The clause requires that an adjustment be applied to the total final negotiated cost, and that's what I stated.

"The wording of the clause seems to suggest that the total final negotiated cost is adjusted"? [emphasis added.] It clearly says "The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss..." [emphasis added.] I think it does more than seem to suggest.

I thought court adjourned at the end of page two but it looks like this moved to the court of appeals quickly.

Well, the clause does say to subtract an amount from the total target profit, but without using the word "adjust." If you want to characterize that as adjusting, that's OK. No argument.

Good.

Now, wvapup said "[i}ncentive contracts do not permit adjusting profit to less than zero." I see no express prohibition, so I don't agree. But does the FPI(F) arrangement as described in FAR contemplate or provide for adjusting profit to less than zero? Only after the contractor exceeds the ceiling price. I know of no reference to FPI(F) going back to 1962 that provides for a profit of less than zero at or below the ceiling price. In that regard, FAR 16.102( says:

Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4

The question is: Is that significant to the case at hand?

I think that the FAR does allow for a profit of less than zero.

if you read 16.403-1 it discusses the application of the formula and states " or even a net loss" when using the formula to determine profit when final cost is more than target cost.

I have enjoyed reading all of the posts. I am glad that I gave everyone something to think about. The share ratios are real.

The share ratios were recommended by an individual at USD AT&L about a year ago. Rather than an incentive, the arrangement was structured to remove the contractor's incentive to limit expenses in order to pocket additional profit which was a concern at the time when the RFP was issued. The CLIN with the applicable arrangement is an interim development (i.e. completion of PDR, CDR, etc.).

Regarding the CPIF math, my personal interpretation had previously matched that of wvanpup because I had believed that the adjustment to the target profit could not be less than zero. Additionally, an FPIF graphing tool from the former chief of our pricing office generated a graph which showed a final cost between target price and ceiling that resulted in the final price equalling the final cost.

Based on the conversations here and recent discussions with my current management, I am inclined to believe that I along with the grahing tool were wrong.

I think that the FAR does allow for a profit of less than zero.

if you read 16.403-1 it discusses the application of the formula and states " or even a net loss" when using the formula to determine profit when final cost is more than target cost.

Yeah, paragraph (a). But the next sentence says that the loss happens when the final negotiated cost exceeds the price ceiling.

The share ratios are real.

Is the ceiling real?

I have no specific authority for my statement that the clause does not allow adjusting profit to less than zero, just as there is no specific statement that profit can be adjusted to less than zero. The literal language, as Vern has demonstrated, results in subtracting -1, which mathematically means adding 1. I suppose you can take your pick -- apply the literal language or find something else that is not addressed specifically.

As for the comment about how to reconcile my statement with FAR 16.403-1(a) which states that when final cost is more than target cost the formula may result in a net loss, I read that as applying to the ceiling price. After the point of total assumption there is no profit, after the ceiling price there is a net loss. It does not mean reducing the final cost to create a loss when costs are below the price ceiling.

...The literal language, as Vern has demonstrated, results in subtracting -1, which mathematically means adding 1. I suppose you can take your pick -- apply the literal language or find something else that is not addressed specifically.

Vern has said no such thing. As a matter of fact, here's a quote from his post #48 - "you add the adjusted profit to the total final negotiated cost in order to get the total final price." [emphasis added.]

Right on!

And it's not true that after the point of total assumption "there is no profit." The PTA is just the point at which the cost incurred plus the remaining profit equal the ceiling price, so that the share ratio becomes 0/100. In the example we've been discussing, however, the PTA is the target cost, but that cost plus the target profit do not equal the ceiling price, which is $ 70M. They equal $ 67M, which is $ 3M below the ceiling price. So the contractor starts taking a loss before it reaches the ceiling price.

I disagree, the preceding sentence is discussing the application of the formula, if you read both sentences in context it discusses the application of the formula, and in this instance the formula would lead to a net loss prior prior to reaching the ceiling.

"When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss.

the next step is to determine if the final cost is greater than the ceiling price then the contractor absorbs the difference as a loss.

in this situation, with the contractor absorbing 100% of the overrun over $60M, then the likelihood of reaching the ceiling is extremely unlikely.

seems clear to me.

(will this make it page 4?)

With what or whom are you disagreeing?

"[T]he likelihood of reaching the ceiling is extremely unlikely." Huh? Hook up, airborne!

right now disagreeing with the coffee maker,

my thoughts are with this share ratio, the contractor is on the hook for everything over 67M. that is why i dont think we will make the ceiling price.

right now disagreeing with the coffee maker,

my thoughts are with this share ratio, the contractor is on the hook for everything over 67M. that is why i dont think we will make the ceiling price.

That sounds like a ceiling.

Thank you, FAR Fetched. You're a first rate bailiff. Court is now back in session.

Don, the contractor's profit would increase up to the ceiling, but I'm not sure that would make the arrangement CPPC. It might. Let's suppose it does. What is your argument?

Vern,

My argument would be that 1) the contracting officer did not have the authority to agree to a CPPC arrangement, so the Government cannot be bound, and 2) the court can't enforce an illegal contract term.

Back to the contract clause, I don't think that you need to look outside the contract to conclude that "applying" at FAR 52.216-16( d )(2) means adding. This is because the contract specifies a target price, which is the sum of the target cost and the target profit. The subparagraph states:

The total final price shall be established by applying to the total final negotiated cost an adjustment for profit or loss, as follows:

(i) If the total final negotiated cost is equal to the total target cost, the adjustment is the total target profit.

(ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less ______ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost exceeds the total target cost.

(iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus _____ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost is less than the total target cost.

By showing target price as the sum of target cost and target profit, it is clear that "the adjustment" referred to in ( d )(2)(i) is additive. Since ( d )(2)(ii) and (iii) use the same terminology (i.e., "the adjustment"), and there is no reason to believe that the meaning of "the adjustment" is different when used in ( d )(2)(ii) and (d)(2)(iii), then the only logical conclusion is that it means the same thing. As such, the formula:

Total Price = Total Cost + (Target Profit - (100% x (Total Cost - Target Cost)))

can be logically deduced from the contract.

I thought court adjourned at the end of page two but it looks like this moved to the court of appeals quickly.

I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.

Don,

Where the heck have you been? We're all in agreement about the formula.

My argument would be that 1) the contracting officer did not have the authority to agree to a CPPC arrangement, so the Government cannot be bound, and 2) the court can't enforce an illegal contract term.

So is the contract void ab initio? If not, in what way is it enforceable?

Don,

Where the heck have you been? We're all in agreement about the formula.

I know. My point was that you can get to the formula without resorting to extrinsic evidence.

So is the contract void ab initio? If not, in what way is it enforceable?

Ask an attorney.

I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.q

It is a "fixed price, non-incentive,firm-target with a fictional cost ceiling". Whoever developed the formulas didn't work it through or didn't understand it and whatever contractor rep who agreed to it appears to not understand what they were agreeing to. The fact that the government is asking questions in this forum indicates confusion. I wonder what the actual intent of the parties was.

Making a contractor assume all risk for cost overruns with no corresponding incentive to reduce costs seems onerous to me. But both parties agreed to it. Maybe not knowing what they were seemingly agreeing to.

I think its going all the way to the Supreme Court.

I don't want to interfere but, when all of you have time, can you figure out a name for this contract "type?"

PS: I'm enjoying this.

Although identified as FPIF in the original post, in application it's CPFF below the target cost and FFP above the target cost.

Ask an attorney.

I'm asking you, Professor. You don't have to be an attorney to have a professional opinion. Anyway, very few attorneys know anything about that. Your opinion will be as good as most attorneys'. But I understand if you're not comfortable giving an answer.

Although identified as FPIF in the original post, in application it's CPFF below the target cost and FFP above the target cost.

Exactly, except that I would say it's FFP at the target cost.

I'm asking you, Professor. You don't have to be an attorney to have a professional opinion. Anyway, very few attorneys know anything about that. Your opinion will be as good as most attorneys'. But I understand if you're not comfortable giving an answer.

I don't think it would necessarily void ab initio. I think that it would have to be proven that the illegal term went to the heart of the deal. Otherwise, I think a court could read an illegal term out of the contract and keep the rest intact.

Vern

You asked why I thought the ambiguity is latent, not patent. I do not have the time to research this, so I am answering from what I think is a pretty good memory of the distinction. For the discussion I am going to assume that the Government created the ambiguous term.

A contract term is ambiguous if it is subject to two or more reasonable interpretations. The rule contra proferentum (sp?) says, in effect, that ambiguities are construed against the party that drafted the ambiguous term if the ambiguity is latent, but will be construed in favor of the Government if the ambiguity is patent. A patent ambiguity is one where the parties should realize, from examinging the terms of the contract, that there is an ambiguity. A contractor in such a situation has a duty to inquire as to the meaning of the term. A latent ambiguity is one where the parties reasonably do not recognize the other potential interpretations. In my judgment, it is reasonable for the contractor to believe that the FPIF formula says that profit may be reduced to zero, but not less than zero until the price ceiling is reached, and it is also reasonable to not realize that others might interpret the clause differently because a different interpretation could (in cases, like this, of very high contractor share ratios) render the price ceiling meaningless.

This is my judgment. I suppose reasonable minds can differ on what others may consider reasonable.

And it's not true that after the point of total assumption "there is no profit."

You are, of course, correct. It is what happens when I try to respond in less than five minutes while heading out the door to a doctor appointment. Sloppy thinking, and even sloppier writing. What I should have written is: "As for the comment about how to reconcile my statement with FAR 16.403-1(a) which states that when final cost is more than target cost the formula may result in a net loss, I read that as applying to the ceiling price. After the point of total assumption the contractor's profit is reduced dollar for dollar by the cost overrun until the price ceiling, after which there is a net loss. It does not mean reducing the final cost to create a loss when costs are below the price ceiling."

Thanks, wvanpup. Don't worry about the mistake. I have done the same thing in haste more than once. In fact, navy caught me at it early in this thread.

If I were the government in our case I would argue that the ambiguity was patent on the grounds that the targets, the 0/100 overrun formula, and the ceiling price are clearly inconsistent with FPI(F) contracting as described in FAR and in other readily available government contracting publications. I don't know if I could win that argument, but if I were the government I'd sure give it a try.

In post #7, Vern wrote:

(from earlier post) (2) The total final price (X) shall be established by applying to the total final negotiated cost ($ 68M) an adjustment for profit or loss, as follows...

(ii) If the total final negotiated cost is greater than the total target cost ($ 60M), the adjustment is the total target profit ($ 7M), less 100

percent of the amount by which the total final negotiated cost exceeds the total target cost.

(applying the formula exactly as written) So we adjust the $ 68M by

deducting

$ 7M (total target profit) - $ 8M (the amount by with the total final negotiated cost exceeds the total target cost). Is that right?

The total final negotiated cost is $ 68M. The total target profit ($ 7M) less the amount by which the total final negotiated cost exceeds the total target cost ($ 8M) is how much?

$ 7M - $8 M = - $ 1M.

So the total final price is: $ 68M - (- $ 1M).

How much is that?

In post # 59, Navy wrote:

(quoting me)...The literal language, as Vern has demonstrated, results in subtracting -1, which mathematically means adding 1. I suppose you can take your pick -- apply the literal language or find something else that is not addressed specifically.

(navy's comment) Vern has said no such thing. As a matter of fact, here's a quote from his post #48 - "you

add

the adjusted profit to the total final negotiated cost in order to get the total final price." [emphasis added.]

My response to Navy: Maybe Vern was having fun with numbers and got me. He wrote: "So we adjust the $ 68M by deducting $ 7M (total target profit) - $ 8M (the amount by with the total final negotiated cost exceeds the total target cost). Is that right?" That sounded good at the time, but is "deducting" the right word there? The adjustment actually is adding. If we apply Vern's formula in the case of a final cost of $64M, we get "So we adjust the $ 64M by deducting $ 7M (total target profit) - $ 4M (the amount by with the total final negotiated cost exceeds the total target cost). Is that right?" This results in $64M - $3M, or a price of $61M rather than $67M, which cannot be right.

Regardless of whether I was got or not, I stand behind my conclusion as to how I would apply the clause. I am not going to establish a de facto price ceiling of $67M and ignore the contract price ceiling of $70M.

I have enjoyed reading all of the posts. I am glad that I gave everyone something to think about. The share ratios are real.

The share ratios were recommended by an individual at USD AT&L about a year ago. Rather than an incentive, the arrangement was structured to remove the contractor's incentive to limit expenses in order to pocket additional profit which was a concern at the time when the RFP was issued. The CLIN with the applicable arrangement is an interim development (i.e. completion of PDR, CDR, etc.).

Regarding the CPIF math, my personal interpretation had previously matched that of wvanpup because I had believed that the adjustment to the target profit could not be less than zero. Additionally, an FPIF graphing tool from the former chief of our pricing office generated a graph which showed a final cost between target price and ceiling that resulted in the final price equalling the final cost.

Based on the conversations here and recent discussions with my current management, I am inclined to believe that I along with the grahing tool were wrong.

Given these new facts, I add to my previous analysis the probability of giving some form of relief based on mutual mistake. The Government has now admitted that it intended the clause to permit a reduction in profit to zero, but not below. Assuming that was also the contractor's intention, the contract should be reformed to correct the mistake (the clause was not written to reflect the intent of the parties) that frustrates the intention of each party.

It also strikes me that a cost incentive is not appropriate in this situation. "Rather than an incentive, the arrangement was structured to remove the contractor's incentive to limit expenses in order to pocket additional profit which was a concern at the time when the RFP was issued." Isn't the whole purpose of a cost incentive to limit the contractor's expenses while still giving us what we want? Why are we writing an incentive contract if we do not want the contractor to reduce expenses, or if by reducing expenses we will not receive what we want?

wvanpup:

In re your post #77, i stated what I think the proper formula would be several posts back, and that it's:

68 + (7 - 8)

= 68 + (-1)

= 68.

You add, not deduct, the -1.

I was having fun earlier, but I was also serious. The question that interested me was: How do we know when we are right, and how do we explain our thinking so as to persuade others that we are right? Why can't the answer be 68 - (7 - 8) = 68 - (-1) = 69? Why isn't the ceiling significant to the outcome? In every disagreement, both parties think they are right. The problem is how best to end the disagreement short of litigation? If you do have to litigate, how do you persuade a board or court so that you win? Several solutions have been proposed by various persons, and all have some merit. At this point in my life I am far more interested in those kinds of questions and problems than the actual answer to the questions most frequently posted here, which are usually elementary and very often just silly. Half the questions asked here can be answered with 15 minutes work at Google or Bing. It gets a little wearisome doing other peoples' work for them, but I'm lazy and it saves me from doing what I ought to be doing, which is real work.

I am sympathetic to the contractor in this case. I think the deal was so weird and one-sided that it never should have been offered or approved. I know that contractors have to be held responsible for what they agree to, but the Government usually is far more powerful than contractors during competitive contract formation, and is often unwilling to bargain or listen to reason.

The formula mathematically comes out to $67M, no way around it. However, I think the 0%/100% renders it meaningless. Just as putting in a percentage equal to the square root of -1. Nothing says you can’t but it doesn’t work - you will get two very different answers every time, with both being equally correct.

In order for a cost to be allowable, it must be reasonable. You would think that incurring a poorly controlled cost (a cost above target cost on a contract that you have 100% responsibility) would not be reasonable and therefore unallowable. It certainly does not seem to pass the requirement at FAR 31.201-3(a). However, if the Government also has some responsibility for cost above target cost then it would seem that these costs are more reasonable and therefore allowable.

If we consider that there is no other distinction to a given cost element than whether it is either under or over the target cost, then an over-run cost is as reasonable as an under-run cost. For example, what caused the contract over-run, the first hours worked or the last hours worked or some hours worked in between? You cannot tell. So we end up with a single cost element that could be arbitrarily sometimes reasonable and sometimes unreasonable. It would make a certain amount of sense that all allowable costs are billable (up to the contract ceiling) and it is the profit (which is not a cost) that becomes not payable. In this thread this would result in a final price of $68M.

The incentive contract places an incentive for a company to increase profit and profit percentage at the expense of revenue. If you look at today’s stock market, and how investor’s react to earnings, you will find that many investors put more value on revenue (total price) and growth then on profit and profit percentage – up to a point of course. You would like to think that the lower cost is the result of increased efficiencies and that these now available (and unused) resources are available to do additional work. It would be a shame if these past incentivized resources sit idle and unproductive in the future – driving up overhead cost, putting the increased profit that was earned at risk of being quickly lost. It seems a better incentive would be one that also includes the award of additional work (more revenue) to the vendor.

We dont know all the facts regarding the establishment of this task order or contract but it would have to have been bilateral. Whether the contractor knew what the terms were is also unknown.

Service contractors might be adverse to a Guaranteed Maximum Price (GMP) contract type with assumption of total risk for overruns on a completion type contract. Many construction and design-build firms apparently aren't.

The contract format is quite common in the construction industry, where firms will guarantee their top price to complete a project, either with or without a separate fee.

However, these type contracts also often have share ratios to incentivize and reward cost savings. There is usually a limited range. Say, for example, "70/30 owner/contractor savings up to $5 million in total cost savings". Construction firms seem to like such arrangements, regardless of the apparent drawbacks cited in the previous post.

I've also read that, because it is a pain for both parties to administer contracts on an actual cost basis, many such contracts contain provisions to definitize the contract price o a FFP as soon as possible during performance.

The formula mathematically comes out to $67M, no way around it. However, I think the 0%/100% renders it meaningless. Just as putting in a percentage equal to the square root of -1. Nothing says you can’t but it doesn’t work - you will get two very different answers every time, with both being equally correct.

In order for a cost to be allowable, it must be reasonable. You would think that incurring a poorly controlled cost (a cost above target cost on a contract that you have 100% responsibility) would not be reasonable and therefore unallowable. It certainly does not seem to pass the requirement at FAR 31.201-3(a). However, if the Government also has some responsibility for cost above target cost then it would seem that these costs are more reasonable and therefore allowable.

If we consider that there is no other distinction to a given cost element than whether it is either under or over the target cost, then an over-run cost is as reasonable as an under-run cost. For example, what caused the contract over-run, the first hours worked or the last hours worked or some hours worked in between? You cannot tell. So we end up with a single cost element that could be arbitrarily sometimes reasonable and sometimes unreasonable. It would make a certain amount of sense that all allowable costs are billable (up to the contract ceiling) and it is the profit (which is not a cost) that becomes not payable. In this thread this would result in a final price of $68M.

The incentive contract places an incentive for a company to increase profit and profit percentage at the expense of revenue. If you look at today’s stock market, and how investor’s react to earnings, you will find that many investors put more value on revenue (total price) and growth then on profit and profit percentage – up to a point of course. You would like to think that the lower cost is the result of increased efficiencies and that these now available (and unused) resources are available to do additional work. It would be a shame if these past incentivized resources sit idle and unproductive in the future – driving up overhead cost, putting the increased profit that was earned at risk of being quickly lost. It seems a better incentive would be one that also includes the award of additional work (more revenue) to the vendor.

Gobbledegook.

We dont know all the facts regarding the establishment of this task order or contract but it would have to have been bilateral. Whether the contractor knew what the terms were is also unknown.

Why wouldn't the contractor know the terms of the contract?

Vern, I will let Joel speak for himself, but from personal experience I can give you two reasons why the contractor would not reasonsably know what the terms of a contract are. First, when the contract was awarded, it had different terms and conditions from what were included in the RFP. Second, the government provided the contractor with one version of the contract and retained a different version.

Thanks, Retread.

That's scary. In your experience, did the contractor ever discover the disconnect and, if so, was it able to sort things out? Did it cause serious problems?

Why wouldn't the contractor know the terms of the contract?

Let me rephrase. We dont know all the facts regarding the establishment of this FPIF task order or contract. It must have have been bilaterally agreed to. We don't know if the contractor understood the terms either. Whoever established the formulas and the cost ceiling does not seem to have understood that the cost ceiling is unacheivable using the stated cost share ratios.

Thanks.

Vern, in regard to your post #85, there were major problems in each instance with the government withholding payment from the contractor in each instance because of disagreements over what the contract required. I do not know if the contractor ever got things worked out in regard to the terms of the RFP being changed when the contract was issued as I was no longer associated with that company. In regard to the situation where there were two different versions of the contract, the contractor made a business decision not to fight the government's contention that its version of the contract was the "official" version that the contractor was required to follow. This required a lot of rework and lost revenue which the contractor was willing to accept to put everything behind it and get paid for work it had done.