CPFF Direct Labor Rates

Yes. It seems like the Navy is attempting to impose a contract term you did not agree to.

I've never encountered this myself, but have had this discussion on one other occasion. The net effect of the prior encounter was that the Customer required cost of increased rates to come out of the fixed fee portion of the contract and they apparently stood firm on this. I'll be interested in following this topic.

The last time I saw such customer micromanagement of direct labor rates in a CPFF contract environment, a COTR ended-up going to jail. Seriously.

H2H

I think they are within their rights to request the information prior to issuing an order. Moreover, since the contract is an IDIQ and they are not obligated to issue orders beyond the minimum, they are within their rights to try to negotiate ceilings on rates as a condition precedent to issuing orders once the minimum has been reached. My guess is that the minimum is pretty low, so if the rates go up significantly, they might pay you off rather than order the minimum.

Vern,

My point is that the customer is attempting to create what is essentially a T&M type contract under the rubrik of CPFF. If the labor rates were going to be micro-managed then the solicitation should have indicated that T&M type task orders would be awarded, in my view.

There's a reason that T&M contracts are the least preferred contract type, as you know. Such risk-shifting after award is hardly the mark of fair dealing, regardless of the perceived utility.

On the other hand, the contractor need not submit task order proposals if it feels the administrative costs and financial risks make any award a bad deal, so there's that.

H2H

Help:

I don't agree with you.

I saw nothing in the first post to suggest that the customer is trying to convert a CPFF contract into a T&M contract. What I see is an attempt at some kind of advance agreement to cap unloaded direct labor rates, which is very different from T&M. And I don't think that's micromanagement. I think it's an attempt at cost control.

The CO is an idiot If he wants to convert a CPFF to a T&M.

Vern, a couple of things:

1. The Contracting Officer may well be trying to negotiate ceiling rates, but the three items mentioned in the original post don't seem to lead to that.

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order."

The first item seems more like a limitation of cost type provision (provide notice if the rates will be higher), but does not prohibit higher rates.

The second item requires notice and justificatoin when using personnel who are paid at higher rates, but does not prohibit use of such personnel.

Unless the RFP establishes a "labor cost ceiling" (which to me does not really fit within the construct of a CPFF contract), the third item is ambiguous.

2. The contracting officer may be requesting labor rates as part of the proposal, but the three items seem to apply during performance, not as part of the information requested before award. I have no problem with the Contracting Officer doing this, but it is not at all clear what the Contracting Officer is going to do with the information. For example, if actual cost rates are higher than those proposed, and the contractor provides the notice/explanation required, then what?

By telling the contractor not to incur higher rates before notifying him, the CO is setting a condition for cost allowability. The practical effect is to allow the CO to effectively cap the rates if he so desires.

As for what the CO is going to do with the info, what do you think he's going to do with it? He's going to use it to decide whether to let the work go forward at the higher rates.

Look, it's a CPFF contract and it's the government's job and money. The CO has every right to control the contractor's costs by requiring approval before incurrence. The only risk is that it might delay the work and increase costs if the CO does not make prompt approval/disapproval decisions.

This is no big deal. The CO's direction is entirely reasonable and legally unobjectionable. In my opinion, this is not worthy of further discussion. JAG51 asked if there were any issues. My response is that there are none of any significance. A wise contractor would do as the CO asks.

But some of you have worried and suspicious minds, so chat on.

Thank you, Vern!

Actually, the first question that rose in my mind actually related to whether the proposed task order costs reflect reality or just whatever it will take to win tasks. In my opinion, the KO has the right to require a cost contractor to justify the reasonableness of certain costs that don't reflect what the contractor tells the government to expect during task order competitions/negotiations.

There is no presumption that incurred costs are reasonable (FAR 31.201-3 ( a )). And:

"If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officers representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable."

And - I may be wrong - the last point the KO is making is that he/she expects the contractor to manage the task order within the proposed labor budget. Is that a "change"? I doubt it. The implied message could be "Don't smoke me to win a task order."

Yes. It seems like the Navy is attempting to impose a contract term you did not agree to.

Don, where is the change to the contract terms? Please elaborate. Thanks.

Don, where is the change to the contract terms? Please elaborate. Thanks.

joel,

JAG51 wrote that the CO wants him to abide by the following terms:

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order.

JAG51 also wrote that these terms were not included in the basic IDIQ contract--he never agreed to them. That's why I wrote what I did.

Actually, JAG51 did not say that the CO "wants him to abide" by those terms. He said that the CO showed a slide that displayed those terms. Did JAG51 ask the CO any questions about the slide? If so, he did not mention it and did not report a CO response.

And so the CO, who presumably has included 52.232-7 and 52.232-22 in the ID/IQ and presumably has an ability to issue a CPARS rating, feels the need to add an additional cost allowability condition into the post-award administration. It may be permissible but that doesn't make it right.

And to Joel's point about 31.201-3, he's wrong. (Sorry Joel, but you are.) A specific allowability rule trumps a general allowability rule. I can't find the legal cite right now for that axiom, but it's precedential. Since there is already a very complex cost principle governing the allowability of contractor compensation (31.205-6)--which requires labor cost to be reasonable as a condition of allowability--then labor that is already allowable pursuant to that set of detailed prescriptions cannot be challenged on the more general reasonability grounds. Which is to say, sure, you CAN challenge it. But it won't be sustained in litigation, I predict.

Litigation is where this relationship is headed, based on the adversarial relationship evidenced by the slide. There's a lack of trust, and Vern's and Joel's posts display it as well.

Is the contractor trust-worthy? Who knows? But the CO has already decided the answer before issuing the first task order. That does not bode well.

Last point: when the CO attempts to control the direct labor rates and use the proposed DL rates as a cap on allowable DL rates that is, in essence, attempting to convert the CPFF T.O. into a T&M T.O. It is an attempt to shift the risk of cost growth from the government customer, where it belongs by virtue of the contract type chosen for award, to the contractor, who by the nature of the contract type should not be expected to bear it. I don't consider that attempt evidence of fair dealing and good faith, but since I'm a contractor I'm biased. Your mileage may vary.

H2H

Don, I don't see where those terms for task orders, as stated, are necessarily outside the bounds of a CPFF contract. The KO is telling the contractors that he/she expects that they will propose realistic labor rates for yaks orders that are similar to what the government expects to pay and that the contractor is expected to manage task orders. The contractor is expected to notify the government before paying higher labor rates and should justify why that is reasonable and necessary and what is the value provided for paying more than the government's expected cost. It is also expected to advise the KO how it plans to mitigate the added expense. The KO is being proactive as opposed to being reactive.

That's my perspective as a steward of the taxpayer. I'm not surprised that a contractor or someone who serves the interests of his employers wouldn't have the same perspective. I feel that many government employees have little understanding of being proactive in such contracting situations. I'm at my camp today so don't have the resources handy to cite the law* that added the language to 31.201-3 regarding no presumption of reasonableness of incurred costs and that the contractor should explain and justify the reasonableness if they appear to be unreasonable or out of line with what the contractor proposed and what the government expected. It is easier to resolve the question of reasonableness before costs are incurred than afterwards. The contractors know the KO's expectations before proposing or quoting for each task order.

Edit: *the language that I quoted is based upon statute enacted after I went to work for the government. I believe it was added in the mid to late 80s or early 90s and I do know that many of those "seasoned" government employees had no concept of this but felt only that it "will cost what it costs", regardless of reasonableness under the circumstances. And this law is not meant to conflict with the specific rules in 31.2. The question is whether incurring those costs under the specific circumstances is reasonable. I don't have time to research the law on my cellphone at the moment. EDIT: SEE LATER POST FOR CITATION.

H2H, I didn't see where the KO imposed a cap on labor rates. Being "in line with" doesn't necessarily impose any "cap".

H2H, Joel is correct in applying 31.201-3 in determining reasonableness of compensation costs. Note that 31.204 specifically requires application of 31.201, including 31.201-3, when determining allowability of costs even if there are criteria for allowability including reasonableness, in the enumerated cost principles in 31.205. Thus, the reasonableness criteria in 31.205-6 are supplementary to those in 31.201-3.

"It may be permissible but that doesn't make it right."

I want to re-write the CO slide to help in my understanding -- let's re-write it so clearly show that the contractor does not have to do what was on the slide...

"Proposed Direct Labor Rates

Task Order direct labor rate quotes must need not be in line with the rates proposed at the basic contract level. All offerors (and their respective subs) shall need not submit their current actual unloaded direct labor rates for all proposed key personnel. Contractors shall need not :

- Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ;

- Provide a detailed rationale for the need to utilize personnel with direct labor rates exceeding those proposed in response to the RFQ, including a description of the benefit to the Government; and_or_

- Provide a detailed breakdown of how the costs associated by the increased direct labor rates will be absorbed within the direct labor cost ceiling on the task order."

Hmmm, somehow I don't really like the re-write.

Retreadfed,

I see what you wrote but I don't think it aligns with judicial interpretation. I might be wrong and I don't have time to research it. So let's agree to disagree.

ji20874,

The customer had the option of issuing an FFP contract or a formal T&M contract, which would have pushed the risk of cost growth onto the contractor in an explicit, transparent, manner. It did not choose to avail itself of any of those options. Thus, your rewritten slide is absolutely correct from a regulatory perspective.

H2H

Does the contractor invoice its actual direct and indirect costs during the Task Order period of performance, or does it invoice according to the direct labor rate and indirect rate "caps" that the proposal funding was established upon?

Contractors shall: Notify the Contracting Officer before incurring direct labor rates in excess of those proposed in response to the task order RFQ...

I see nothing unreasonable in a contracting officer telling a contractor working under a cost-reimbursement contract not to use labor on a job that earns more than a certain rate without first getting the contracting officer's approval. There is no conflict with FAR 31.205-6. Help -- your approach to that cost principle is absurd.

And I cannot believe that any contractor with its head screwed on properly would object to such an instruction or do anything other than put the customer on notice of any potential performance implications.

And having given such an instruction and having ensured that it was received and understood, and having received no strenuous objection from the contractor, I see nothing unreasonable in the contracting officer refusing to compensate the contractor for the difference between the base rate and the higher rate on grounds of unreasonableness if the contractor were to fail to comply. And I do not believe that any board or court would overrule the contracting officers determination in that regard. What could be more unreasonable than to ignore such a straightforward instruction from the contracting officer?

I can think of no grounds for the contractor to strenuously object. It's a cost-reimbursement contract. It need only make its best effort. It's the customer's money. Why object? If it were to appear that higher priced labor were necessary, then all the contractor need do is tell the CO, provide rationale, and let him or her decide whether or not to spend the money.

The idea that such a stance by a contracting officer is a sign of distrust and will lead to litigation strikes me as ridiculous. Ridiculous. This is not a matter of trust. It is a matter of control over expenditure. It's as simple as that.

Does the contractor invoice its actual direct and indirect costs during the Task Order period of performance, or does it invoice according to the direct labor rate and indirect rate "caps" that the proposal funding was established upon?

JAG51,

This is the kind of question you need to ask the CO.

Don, I don't see where those terms for task orders, as stated, are necessarily outside the bounds of a CPFF contract. The KO is telling the contractors that he/she expects that they will propose realistic labor rates for yaks orders that are similar to what the government expects to pay and that the contractor is expected to manage task orders. The contractor is expected to notify the government before paying higher labor rates and should justify why that is reasonable and necessary and what is the value provided for paying more than the government's expected cost. It is also expected to advise the KO how it plans to mitigate the added expense. The KO is being proactive as opposed to being reactive.

joel,

If you're saying that, by entering into a CPFF contract, the contractor has implicitly agreed to the administrative burden that the CO wants to impose under this task order, I would have to disagree. I believe such specific terms should be contained in the basic IDIQ contract.

See Cost-Reimbursement Contracting 3d ed., by Cibinic and Nash, pp. 23 - 24:

The unique risk-allocation provisions of cost-reimbursement contracts permit the Government a great deal of flexibility by writing a broad work statement and directing the contractor to achieve the desired results during performance of the work. This flexibility is not present in fixed-price contracts.... The contracting officer has greater leeway in a cost-reimbursement situation, primarily because the contractor is generally reimbursed for costs that it incurs in following the Government's direction.... Thus, cost-reimbursement contractors do not usually raise strenuous objections when requested to comply with the wishes of Government officials.

In a very real sense, the instruction to not use labor that is paid more than a specific rate with CO approval is technical direction from the CO. The CO did not say that the contractor must use whatever labor is necessary, but that he won't pay more than the originally proposed rates. He said not to use more highly paid labor without first getting his approval. That's very different. It's very similar to requiring advance approval before incurring overtime costs. The CO must balance the government's demands, and he must be reasonable. He cannot require the contractor to do work that requires more highly skilled and paid workers and then refuse to approve their use and to pay the otherwise reasonable bill.

Does the contractor invoice its actual direct and indirect costs during the Task Order period of performance, or does it invoice according to the direct labor rate and indirect rate "caps" that the proposal funding was established upon?

If the contractor incurs costs that are based on labor rates greater than those in its proposal, and if it did not get the approval of the CO for such costs, then the question is whether the CO will consider the excess to be unallowable. If so, the contractor can (a) acquiesce, in which case it should invoice for only the allowable amount and treat the excess as unallowable in accordance with FAR 31.206-6, or ( b ) submit a claim challenging the CO's determination. The contractor should be careful about invoicing for amounts in excess of the proposal rates, since someone might consider invoicing for such costs to be false claims.

Look, JAG51, you need to take these matters up with the CO. You need to clear up any uncertainties and understand how the contract is going to work. None of us know.

Vern - would it be a fair statement to say that the KO's slide may have force and effect, possibly falling under technical direction?

JAG, look at this a little differently. Lets look at what the contract says. You have already said the contract does not contain any clauses that impose the requirements identified on the slide. Because it is a cost reimbursement contract, I presume it contains FAR 52.216-7. That clause says "The Government will make payments to the Contractor in amounts determined to be allowable in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract." We have already eliminated terms of the contract addressing payment of direct labor. Therefore, we look to what 31.2 says.

31.201-2 states: A cost is allowable only when the cost complies with all of the following requirements:

(1) Reasonableness.

(2) Allocability.

(3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

(4) Terms of the contract.

(5) Any limitations set forth in this subpart.

Further, 31.205-6 makes the cost of compensating employees and allowable cost if the contractor complies with the requirements of the cost principles.

With this in mind, if you paid employees at a higher rate than the rate you proposed for a task order, would those higher rates be allowable based upon the above? Keep in mind the application of the Limitation of Cost clause.

I don't think the slide has legal "force and effect."

I believe that a board of contract appeals or the Court of Federal Claims would hold that the CO's instructions, if given to you in writing and if you do not contest them, are binding as a type of advance agreement (see FAR 31.109), and that if you incur higher rates without first obtaining the CO's approval the costs would be unallowable on grounds of reasonableness. If you contest them your future under that IDIQ contract may be bleak and unrewarding. Why pick a fight with someone who is trying to exercise some control over how his agency's money is spent?

There are no rates in the contract. The CO appears to have said that when you submit a task order proposal he expects you to adhere to the rates in your proposal. If you cannot do that, then you should propose rates that are higher, but that you consider to be reasonable. If the CO accepts them, then you are good to go. If not, then you have to negotiate.

If you propose rates that do not exceed what were in your proposal, and decide that you have to use more highly paid people after receipt of the task order, then you should notify the CO and seek approval to use the more highly paid people, making it clear to the CO what the impact would be if he were not to approve. If the CO does not approve, then you should make your best effort to perform with the lower paid employees.

If you propose rates that do not exceed what were in your proposal, but then raise salaries during the course of performance, you will have to work it out with the CO. If a raise is pending, it would be wise to notify the CO in the task order proposal.

Despite what others have said here, don't try to argue with the CO about cost allowability. Since the contract does not include labor rates, I doubt that the CO can force you to accept a task order based on the rates in your proposal. I saw nothing in your posts that show that you are required to use more highly paid people during performance. All the CO has said is that if you want to do that you have to talk to him first. In my opinion, picking a fight over that instruction, which I consider to be reasonable, would be a needlessly provocative act that would not endear you to the customer and that would have an uncertain outcome in court.

I can tell you this: If I were the CO, and if, despite my instruction, you used people at higher rates without notifying me and getting my approval and then sought reimbursement, I would disallow the excess in a heartbeat. If you disputed my decision, and if I had an alternative, I would not issue another order to your firm, and I would issue a final decision denying your claim.

I think there's enough on this thread to mull over. Thank you all for your inputs. As always, it was informative and has made me think in different directions which is appreciated. Thank you all again.

From my Post #10, yesterday: I said "[t]here is no presumption that incurred costs are reasonable (FAR 31.201-3 ( a ))". I added that "If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officers representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable." Here is the reference

From Nash and Cibinic's Administration of Government Contracts, 4th Ed., Chapter 8, Pricing of Adjustments,, II Proof of Adjustment,, A. Burden of Proof, 2. Reasonableness of Amount, page 689:

Prior to 1987, the courts and boards had held that when a contractor sought compensation for incurred (historical) costs, the government had the burden of proving that the costs were unreasonable. Congress changed that by enactment of Public Law 99-145 Section 933, which said:

In proceedings before the Armed Services Board of Contract Appeals, the United States Claims Court, or any other Federal court in which the reasonableness of indirect costs for which a contractor seeks reimbursement from the Department of Defense is in issue, the burden of proof shall be upon the contractor to establish that such costs are reasonable.

This is now codified at 10 USC 2324(j). When the statute was implemented in FAR by FAC 84-26, 52 FR 19804, effective July 30, 1987, the rule was applied to all costs, see FAR 31.201-3(a), and is incorporated into cost-reimbursement contracts through the Allowable Cost and Payment clause, FAR 52.216-7.

Nash and Cibinic discuss how this rule has been applied to determine reasonableness of incurred costs, which depend upon several factors and the circumstances.

I think there's enough on this thread to mull over. Thank you all for your inputs. As always, it was informative and has made me think in different directions which is appreciated. Thank you all again.

Was it Yogi Berra, who said "It's Deja Vu all over again"?

See a a similar discussion/debate involving some of the usual suspects concerning "CPFF and Rate Caps" at: /threads/4815-cpff-and-rate-caps

Joel

at the risk of beating this to death, as we seem to do at WIFCON on every other discussion thread, I understand that you have correctly posted the rules on reasonableness and you have correctly posted who has the burden of proof if challenged.

Yet you -- and in my experience many Contracting Officers -- elide the requirement that the CO must first establish good grounds for challenging the costs in the CO's Final Decision. You skip the part about the standards associated with a COFD -- see Vern's excellent blog post on the topic, citing Penner Installation. A CO cannot simply challenge all labor costs in excess of those proposed on the sole basis that they were higher than proposed, when the real (unstated) basis would be that funds are tight. I'd like to think a Board of Appeal would find that COFD to be arbitrary and capricious, and not in line with the "quasi-judicial" independence standards expected of a COFD.

In such circumstances (see for example the recent KBR decision issued by Judge O'Sullivan at ASBCA No. 59557), Judges have required the government to state the basis of disallowance first -- i.e., to file the first appeal -- under the theory that the government is best positioned to understand the basis of a disallowance. In my personal experience, that forces the government lawyers to realistically assess their case, and leads to very quick settlements if they think they have a loser, as I suspect they would in the (vague) circumstances we are discussing here.

H2H

H2H, I don't disagree. Nash and Cibinic discuss establishing the standards before the incurrence of costs rather than afterwards.

This is an unpriced contract. It includes no labor rates. There is no agreement in that regard. Presumably, estimated costs and fees are to be negotiated and agreed upon for each task order.

All that the CO appears to have done is said: When you submit a task order proposal, propose the rates that you included in the proposal you submitted in order to win the underlying contract. If you plan to propose higher rates you must justify them. If, after award of a task order, you want to incur higher rates than the ones in your task order proposal, then notify me, justify them, and get my approval.

The only time there would be any issue about disallowance in connection with the CO's instruction would be if the contractor incurred higher rates without first notifying the CO and getting the CO's approval.

I say:

1. that such an instruction is prudent and entirely unobjectionable on legal and business grounds, and

2. that if the contractor were to seek reimbursement for higher rates that were incurred intentionally without having first obtained the CO's prior approval of them, then if the CO makes a sound disallowance there will be absolutely no chance whatsoever that a board of contract appeals or the COFC would rule against the CO. No chance. Whatsoever.

The CO cannot be arbitrary. If he's going to disallow the cost after incurrence because the contractor did not comply with his instruction, he should be prepared to show that he would not have approved the higher rates if the contractor had sought his prior approval and explain why. The reason need not be that the rates were inherently unreasonable under FAR Subpart 31.2, but could be that the government did not have or want to spend the money and that he would have modified or terminated the order in order to avoid the higher cost.

I presume that the CO will do it properly by putting his instruction about the incurrence of task order labor costs into writing, provide it to the contractor, and document the contractor's receipt. If the contractor were to object, then the solution would be for the contractor to accept no orders and for the government to give it no orders. No contractor in its right mind would object or disregard the CO's instruction. If a CO were to disapprove use of higher rates and if the contractor thought such disapproval were not in the customer's best interests, I would expect the contractor to discuss its thinking with the CO.

Vern, I agree with you here.

Vern,

In my view we have a MATOC and presumably there is going to be competition for task orders. Somebody is going to determine whether the proposed task order price is fair and reasonable, and perhaps somebody might perform a cost realism analysis. Then a CPFF task order is going to be awarded. After that, FAR 42.8 will govern.

Your advice to the contractor to accept no orders if it is not willing to comply with the CO's labor rate ceilings is not precisely in line with FAR 42.8 especially 42.801.

Whether a court may or may not enforce the CO's desire to control labor rates would be governed by the contract terms, right? Would you say that imposition of labor rate ceilings before incurrence requires a written agreement, or a contract clause, or something other than a single slide in a PowerPoint deck? Because if you are, then I agree with you that the contractor has to abide by the written contract. But if we are arguing over a single slide in a PowerPoint deck, then I don't agree with your position. I don't think the slide can be fairly read into the contract as an enforceable term.

H2H

Help:

In Post #29 I said: "I don't think the slide has legal 'force and effect.'"

In the very next sentence in that post I said: "I believe that a board of contract appeals or the Court of Federal Claims would hold that the CO's instructions, if given to you in writing and if you do not contest them, are binding as a type of advance agreement (see FAR 31.109)...." Emphasis added.

And in Post #35 I said: "I presume that the CO will do it properly by putting his instruction about the incurrence of task order labor costs into writing, provide it to the contractor, and document the contractor's receipt."

I have no idea where you get the idea that FAR 42.801, "Notice of intent to disallow costs," has any bearing on the advice I gave about not accepting any orders. That advice is based on the fact that, notwithstanding the FAR ordering and IDIQ clauses, unpriced MATOCs are little more than unenforceable agreements to agree on prospective essential terms until a contractor actually accepts an order. Once a contractor accepts an order, it is bound by the terms in both the underlying contract and the order. As for what is in the contract and the order, it entails more than just what is included in the original documents. It also includes terms that can be inferred from the communications and conduct of the parties after contract award and order issuance.

What JAG51's contracting officer appears to want to do is both prudent and entirely within the government's rights, and the contractor would be stupid to object or refuse to comply. It might mean the loss of valuable business and could mean serious legal difficulty.

Vern,

Yes and no. The instructions, if given in writing but not incorporated into the contract, are not going to be enforceable. There's no such thing as "a type" of Advance Agreement. Either it is or it is not. And if it is, where is Legal to review and approve it? And if it is, it needs to be executed by both parties and not simply be an uncontested unilateral action.

Honestly, you have been all over the map on this one, from prudent management to technical direction to advance agreement. It's been hard to discuss this with you for that reason. I look forward to discussing with you in person in Seattle. I'll buy the first round.

H2H

Help:

MY SUPPOSED INCONSISTENCY

Well, I know why you think that I've been inconsistent. It's because you haven't been paying attention, as is evidenced you your Post # 37 and my response to it. I have not been inconsistent. I have been consistent since my first post, but I have developed my argument in response to opposition. Nothing I have said is inconsistent with my point, which is that the CO is within his rights to impose a requirement for notification and approval of expenditures after contract award, but prior to order issuance and cost incurrence.

There is no inconsistency between prudent management, technical direction, and advance agreement. Prudent management can prompt technical direction, which can be construed as advance agreement based on communications and conduct. But I have not written an essay and presented it for consideration. I have been engaging in a conversation spread over four days, in which my argument has developed through point and counterpoint. In order to follow a conversation, you must pay attention, which you obviously have not done. Your assertion of inconsistency is groundless and unfair. The course of your argument has changed considerably over the last four days. You began:

The last time I saw such customer micromanagement of direct labor rates in a CPFF contract environment, a COTR ended-up going to jail. Seriously.

Then proceeded to:

My point is that the customer is attempting to create what is essentially a T&M type contract under the rubrik of CPFF. If the labor rates were going to be micro-managed then the solicitation should have indicated that T&M type task orders would be awarded, in my view.

(Which was nonsense.) And then:

And so the CO, who presumably has included 52.232-7 and 52.232-22 in the ID/IQ and presumably has an ability to issue a CPARS rating, feels the need to add an additional cost allowability condition into the post-award administration. It may be permissible but that doesn't make it right.

Emphasis added. And then:

Would you say that imposition of labor rate ceilings before incurrence requires a written agreement, or a contract clause, or something other than a single slide in a PowerPoint deck? Because if you are, then I agree with you that the contractor has to abide by the written contract.

Emphasis added. While in your last post you wrote:

The instructions, if given in writing but not incorporated into the contract, are not going to be enforceable.

I could go on, but enough.

ENFORCEABILITY OF THE CO's POST-AWARD INSTRUCTION

Now -- please prove your last point in the context of an instruction issued in writing (a) prior to the issuance of a task order under a cost-reimbursement IDIQ contract and ( b ) prior to cost incurrence.

If you cling to your last position, then your mistake is in thinking that post-award communications between the parties cannot bind them. You want to read a task order contract literally to exclude anything that you cannot find in therein. That's not consistent with more than a century of contract case law. You do not seem to think that the CO's instruction would be wrong if in the contract. You think the CO's instruction would be unenforceable because it was imposed after award, although prior to the issuance of an order under the contract.

You are ignoring the fact that JAG51's contract is an IDIQ under which orders must be negotiated prior to issuance. Do you really believe that the CO cannot impose a condition on an order prior to issuance that requires notification and approval prior to incurrence of a cost? The CO would not be imposing a condition after incurrence, but prior to it. Are you arguing that the condition cannot be enforced after issuance because it does not appear in the underlying contract?

APPLICATION OF THE FAR 31.201-3 REASONABLENESS STANDARD

Your earlier arguments based on the reasonableness standard in FAR 31.201-3 ignore the standard and the case law about it. The key element of the standard is what "a prudent person in the conduct of a competitive business" would do. Would a prudent person blatantly disregard a customer's clear instruction, even if he didn't agree with it? Even if he accepted the order with prior knowledge of the instruction?

The instruction would be "ask and seek approval before spending." What's unreasonable imposition would that impose on the contractor, especially since the contractor would be reimbursed for the cost incurred to comply with the instruction? Moreover, according to Cibinic and Nash in Cost Reimbursement Contracting, 3d ed., page 718:

To determine whether a cost is reasonable, the boards and courts will give consideration to all the facts and circumstances which existed at the time the cost was incurred.

See, too, FAR 31.201-3( b )(2) and (3). And see General Dynamics/Astronautics Corp., ASBCA 7650, 1963 BCA ¶ 3685, 1963 WL 721, recons. denied, 1963 BCA ¶ 3750, 1963 WL 740, aff'd, 410 F.2d 404 (Ct. Cl. 1969):

[O]ne of the basic concepts of a [cost-plus-fixed-fee] contract is that it is a cooperative endeavor between the contractor and the Government. (IX Williston, Contracts, War Contract Claims, 1945 Revision Section 45), and the CPFF contract also follows the concept that "he who pays the piper can call the tune." While the CPFF contractor has the right and the duty to use his own best judgment on how to accomplish the job, this does not give him the unqualified right to spend the Government's money as he sees fit, regardless of the Government's wishes and instructions, and in the face of Government disapproval.

More recently, see Planning Research Corp. Systems Service Company, NASA BCA No. 680-11, 81-2 BCA ¶ 15,179:

The issue of the authority of a Contracting Officer under a cost-type contract has been considered and treated before by contract appeals boards. The following often quoted excerpt sums up well the instant appeal:

[O]ne of the basic concepts of a CPFF contract is that it is a co-operative endeavor between the contractor and the Government. (IX Williston, Contracts, War Contract Claims, 1945 Revision Section 45), and the CPFF contract also follows the concept that ‘he who pays the piper can call the tune.' While the CPFF contractor has the right and the duty to use his own best judgment on how to accomplish the job, this does not give him the unqualified right to spend the Government's money as he sees fit, regardless of the Government's wishes and instructions, and in the face of Government disapproval.

Keep in mind that the CO is not saying that rates higher than those proposed are per se unreasonable. He's saying, Check with me before you spend that kind of money. What might make them unreasonable would be the contractor intentionally spending that kind of money with checking first with the CO.

If you really think that the contracting officer in this case cannot impose a requirement for notification and approval after contract award, but prior to order issuance and cost incurrence, then I think you are wrong. Pure and simple. He who pays the piper can say, "Check with me first."

Vern,

We seem to disagree about a single PowerPoint slide nether of us has seen and for which neither of us has context. You have gone to great lengths to support the CO's declaration, which as far as you and I know is simply one slide out of a score of slides, that says, essentially, regardless of what time has passed since you originally proposed your costs to win the MATOC, your proposals for prospective task orders cannot include direct labor rates in excess of those originally proposed. Sure, you may have proposed those costs a year ago or longer but that's what you proposed and that's what I expect to see.

The last time I saw such micromanagement from a customer was with respect to an SCA contract. Now neither you nor I know whether this particular contract is subject to SCA. But what if it were subject to SCA? Would that change your position?

You asked me to prove my point in the context of a written CO instruction. I don't have to because that's you moving the goalposts again. Instead, I'll ask you to prove your point in the context of a PowerPoint slide which is not incorporated into the contact at any point and which is not otherwise reduced to writing and is never the subject of a bilateral agreement.

With respect to the discussion on reasonableness, again you are reframing the question to support your position. The issue is not one of a CO who has expressed disapproval about certain costs. The issue is one of a CO who has said, in essence, "I expect your labor rates to be frozen and to be 'in line' with the rates you originally proposed to win the MATOC." That's not expressing disapproval, that's nonsense -- because a contractor's workforce is not static and neither are its labor rates.

Further, your notion that a contractor's costs would be unreasonable because a prudent businessperson would have checked with the CO first is a bit tortured, don't you think? Let me offer the idea that at a larger contractor the PM may not know how much an individual employee is being paid or whether Joe Engineer got a raise last month. Heck, at one large contractor the actual labor rates were based on labor categories, not individual employees, and they were recalculated every pay period. My counter-argument would be that I am following my disclosed cost accounting practices, I have an approved accounting system, and my labor rates are in line with industry averages. What more does the CO need? If my labor rates are higher then I'll burn through my funding faster, and maybe I'll lose money. Or maybe I can find cost efficiencies elsewhere, in which case what does the CO have to care about except my bottom-line costs that I bill? What's unreasonable is a monomaniacal focus on one single cost element when the only thing that really matters is the total cost. Not to mention the notion of getting approval to propose actual labor costs as part of the proposal process (or as part of the invoicing process) is disruptive to the smooth operation of the contractor's efforts.

The whole reasonableness discussion came up earlier because it was asserted that the labor costs could be questioned as being unreasonable, simply because they were higher since the date of initial proposal -- and wouldn't that be such a convenient approach here? To which I responded, "I hope not" and noted why I felt that way. I still feel that way. Your mileage may vary but you're going to have to do better than citing court cases which, for all you or I know, may be easily distinguishable from this situation -- which I remind you is about a single PowerPoint slide that is not incorporated into the contract and which is not the subject of a bilateral agreement.

I get that you don't like me calling the CO's approach imposition of a T&M contract approach. I said that because of the desire to control labor rates. The CO isn't trying to control hours or indirect costs or travel costs (as far as we know). There is a concern specifically with direct labor rates, which is one element of cost out of many that make up total contract cost. I could see where that might make sense in a context of competitions for task order awards, where the low bidder wins; but that does not seem to be the case here, since the CO is trying to tell the contractor that the direct labor rates in its task order proposals must be "in line" with the direct labor rates originally proposed to win the MATOC. That's crazy, if for no other reason than it ignores the impact of the passage of time.

I see we have beaten this poor PowerPoint slide to death arguing about maybes and what-ifs. I'm done. You can have the last word if you'd like.

H2H

Help:

It's a cost-reimbursement contract. Labor cost = labor rate x time. If you're worried about cost, why focus on one and not the other? A company wins a contract based in part on its "proposed" rates. Why not hold the company to them unless they can justify higher ones? Keep in mind that the CO (or his infamous slide) did not say that the government wouldn't pay higher rates, it said only that the contractor would have justify them. If I'm administering the taxpayer's contract and it's taxpayer money you're spending, you won't offend me by calling me a micromanager when it comes to costs. He who pays the piper....

Look, I'm sorry I can't convince you. I've reviewed this thread from the beginning, and I'm satisfied that I have clearly stated my position and my reasons for it and been consistent throughout. I haven't been all over the place, my argument is pretty straightforward, not tortured, and I do not doubt that I'm on solid ground.

I do regret your distortion of my argument and my conclusion, but that's the heat of battle at work. No biggie. I'll let the thread speak for itself and let the other readers reach their own conclusions. But, oddly enough, of all the things you've said I am most distressed by your statement that the CO has tried to treat a CPFF contract as a T&M contract. It may seem a minor point to you and to some others, but as the person who has published more about T&M contracts and the difference between them and cost-reimbursement contracts than anyone else, your comments say to me that you don't understand the nature of the two pricing arrangements and of their differences. I really thought that you knew, and I'm sorry to learn that you don't. It's either that or you're too stubborn to acknowledge that you got carried away in your excitement and misspoke. It's a disappointment.

Thanks for letting me have the last word.

Vern,

We seem to disagree about a single PowerPoint slide nether of us has seen and for which neither of us has context. You have gone to great lengths to support the CO's declaration, which as far as you and I know is simply one slide out of a score of slides, that says, essentially, regardless of what time has passed since you originally proposed your costs to win the MATOC, your proposals for prospective task orders cannot include direct labor rates in excess of those originally proposed. Sure, you may have proposed those costs a year ago or longer but that's what you proposed and that's what I expect to see.

The last time I saw such micromanagement from a customer was with respect to an SCA contract. Now neither you nor I know whether this particular contract is subject to SCA. But what if it were subject to SCA? Would that change your position?

You asked me to prove my point in the context of a written CO instruction. I don't have to because that's you moving the goalposts again. Instead, I'll ask you to prove your point in the context of a PowerPoint slide which is not incorporated into the contact at any point and which is not otherwise reduced to writing and is never the subject of a bilateral agreement.

With respect to the discussion on reasonableness, again you are reframing the question to support your position. The issue is not one of a CO who has expressed disapproval about certain costs. The issue is one of a CO who has said, in essence, "I expect your labor rates to be frozen and to be 'in line' with the rates you originally proposed to win the MATOC." That's not expressing disapproval, that's nonsense -- because a contractor's workforce is not static and neither are its labor rates.

Further, your notion that a contractor's costs would be unreasonable because a prudent businessperson would have checked with the CO first is a bit tortured, don't you think? Let me offer the idea that at a larger contractor the PM may not know how much an individual employee is being paid or whether Joe Engineer got a raise last month. Heck, at one large contractor the actual labor rates were based on labor categories, not individual employees, and they were recalculated every pay period. My counter-argument would be that I am following my disclosed cost accounting practices, I have an approved accounting system, and my labor rates are in line with industry averages. What more does the CO need? If my labor rates are higher then I'll burn through my funding faster, and maybe I'll lose money. Or maybe I can find cost efficiencies elsewhere, in which case what does the CO have to care about except my bottom-line costs that I bill? What's unreasonable is a monomaniacal focus on one single cost element when the only thing that really matters is the total cost. Not to mention the notion of getting approval to propose actual labor costs as part of the proposal process (or as part of the invoicing process) is disruptive to the smooth operation of the contractor's efforts.

The whole reasonableness discussion came up earlier because it was asserted that the labor costs could be questioned as being unreasonable, simply because they were higher since the date of initial proposal -- and wouldn't that be such a convenient approach here? To which I responded, "I hope not" and noted why I felt that way. I still feel that way. Your mileage may vary but you're going to have to do better than citing court cases which, for all you or I know, may be easily distinguishable from this situation -- which I remind you is about a single PowerPoint slide that is not incorporated into the contract and which is not the subject of a bilateral agreement.

I get that you don't like me calling the CO's approach imposition of a T&M contract approach. I said that because of the desire to control labor rates. The CO isn't trying to control hours or indirect costs or travel costs (as far as we know). There is a concern specifically with direct labor rates, which is one element of cost out of many that make up total contract cost. I could see where that might make sense in a context of competitions for task order awards, where the low bidder wins; but that does not seem to be the case here, since the CO is trying to tell the contractor that the direct labor rates in its task order proposals must be "in line" with the direct labor rates originally proposed to win the MATOC. That's crazy, if for no other reason than it ignores the impact of the passage of time.

I see we have beaten this poor PowerPoint slide to death arguing about maybes and what-ifs. I'm done. You can have the last word if you'd like.

H2H

The Slide did not say that labor rates in task orders can't exceed those in the original proposal for the contract . I read "in line with" to mean "similar to" for one thing. As Vern has repeatedly advised, the KO doesn't say that proposed rates (original or task orders) represent a cap - only that he/she expects that the contractor will have to explain and justify why higher rates are necessary.

And - based upon some of my experience and observation with cost contracts - I've seen instances* where "optimism" is prevalent during the contract competition, only to be replaced by "reality" (truth) during performance...

* "instances". - I'm trying to be kind here...

From reading the slide, it appears to have specific requirements for pre-TO award and post-award actions. Pre-award, contractors are required to use direct labor rates that are in line (whatever that means) with the rates they proposed to obtain the contract. Post-award, contractors are required to give the contracting officer a notice with specified contents, if the contractor will pay higher direct labor rates than those used when proposing for the task order. I see no requirement in the language attributed to the slide that requires contracting officer approval before paying higher direct labor rates. In these circumstances, I see no reason why the normal rules for determining the allowability of direct labor costs as set forth in FAR 31.201-2 and subject to the Limitation of Cost clause, would not be applicable. While I would not like having to provide the notice if I were a small business, I do not think it results in the government micromanaging my business or converting a CPFF contract into a T&M contract.

Why wouldn't you like the notice if you were a small business? If the notice and justification had to be prepared in connection with a task order, you would be reimbursed for the cost of that work.

Vern, many small businesses do not have the administrative structure to easily provide this type of notice. For them, any administrative requirement can be a distraction from performance of the actual work called for by a contract. Next, I am not so sure that the cost of preparing the notice could be recovered from the Navy. Recent experience with the Navy indicates that many Navy offices are resorting to unique ways of squeezing contractors in regard to what they are paid. (I should add that I have some sympathy for the Navy because it seems to be suffering the most of any of the services under budget cuts.) This is particularly true of small businesses that do not have the resources to fight back effectively against this overreach. Next, even if I do recover the cost of preparing the notice, this could be an unplanned cost which could cause me to exceed the estimated cost of the contract. Unless I could convince the Navy that the requirement to submit the notice was a change under the contract entitling me to an equitable adjustment, I would be left with getting additional funding as an overrun. If I were to receive overrun funding, I would get no fee on this, resulting in a further reduction in the margin I realize from the contract.

Thanks for your views, Retread.