FPI(S) - does it operate as reimbursable until FFP set?
Started by Supra · Mar 12, 2013 · 3 replies
- SOriginal post
Supra
Mar 12, 2013 · 13y ago
Background:
We have fixed price incentive (successive target) contract;
Firm Target Price was negotiated and agreed to;
Ceiling price set;
No Firm Fixed Price set (negotiations broke down);
Adjustment formula set;
There have been disputed changes that parties can’t agree on;
Project costs are projected to exceed ceiling.
Questions:
Does this contract operate as a cost reimbursable contract until a FFP is set, shifting cost risk to contractor only at that point (FAR 16 seems to suggest that)?
Is contractor obligated to continue incurring costs beyond ceiling if no FFP set?
If so, are those costs incurred beyond ceiling recoverable (recognizing that profit above ceiling may not be)?
By the way, I’ve reviewed the previous discussion that went ‘to the supreme court’ as to how the profit adjustment was applied. Thanks for that, very helpful.
- G
Guest Vern Edwards
Mar 12, 2013 · 13y ago
The Government will have to reimburse the contractor's costs and pay profit up to the ceiling price.
The contractor is obligated to incur costs in excess of the ceiling price until the work is completed and delivered and accepted by the government.
The contractor cannot recover costs incurred beyond the ceiling, unless it is entitled to an equitable adjustment for some reason.
- S
Supra
Mar 12, 2013 · 13y ago
Expected that answer. I presume you rely on FAR 16.403-2(a)(v) as authority. While I understand the ceiling must mean something, it does describe the maximum amounts that “may be paid”, not “shall” be paid.
The other camp argues FAR 16.403-2( B ) and FAR 16.403-2(d)(4) are more appropriate for our situation. In the situation where there is a failure to establish a FFP or it is “inappropriate,” the final price is established by the specified, prescribed formula. The formula specifically contemplates that the final negotiated cost receives: “an adjustment for profit or loss, determined as follows….(ii) if the total final negotiated cost is greater than the total firm target cost, the adjustment is the total firm target profit, less (assume 25%) percent of the amount by which the total final negotiated cost exceeds the total firm target cost.”
Their read on this is that if the total negotiated final costs are above the ceiling (which is clearly contemplated here where there is no FFP established), the contractor may lose some if not all of his profit, but there is nothing in the FAR that says he should be penalized to eat the costs above the ceiling too. That would make it akin to a FFP contract, which is exactly what the parties were unable to achieve. And if the purpose of this contract is to shift the risk to the govt on costs due to the illdefined nature of the work, then why should the contractor bear costs above the ceiling if there is no FFP negotiated?
I referenced the previous post from you guys a few years back in my original post above, I didn’t follow whether the consensus is that if the profit calc produces a negative number that the costs should be ‘adjusted’ down.
By the way, I’ve read your Nov. ’09 Briefing Paper on these contracts and the NASA/DOD guide from ‘69. Both very helpful.
- G
Guest Vern Edwards
Mar 12, 2013 · 13y ago
You presume wrongly. I rely on the contract clause, FAR 52.216-17, "Incentive Price Revision -- Successive Targets (OCT 1997)," as should you. It is that contract clause that sets the terms of the FPI(S) contract. It says, in pertinent part in paragraph (a):
(a) General. The supplies or services identified in the Schedule as Items [XXXX] are subject to price revision in accordance with this clause; provided, that in no event shall the the total final price of these items exceed the ceiling price of [$XXXXX].
When in doubt, read your contract. The other camp's argument is idiotic.
By the way, there is no such place in FAR as 16.403-2(a)(v). However, there is a paragraph 16.403-2(a)(1)(v).