Subcontract for Commercial Items - changes

Is there a clause in the subcontract that authorized the sub to submit the initial modification request?  Similarly, was there a clause in the subcontract requiring or authorizing the sub to submit the final list of incurred cost and for the prime to pay the sub in accordance with that list?

No, neither SOW, clause set or any other clause in the subcontract gives direction to submit a proposal, or for the prime to pay the sub per the incurred cost list.

So just thinking out loud…..

You have not specified if the original contract had one CLIN in a lump sum or multiple CLINS for the different elements of the service.    Just noting but I am not sure it matters with regard to how I see this.

Also not sure if you are asking as the prime, the sub or the Government, again for me it probably does not matter but for others it might.

You ask –

CO1559 said:

Is it correct to question the value of the aforementioned price increases?

Questioning after the fact if you are the prime does not make any sense if the work was already agreed to and added.  If you are the Government sure it is okay to question the costs your prime and its sub incurred as to allowable and allocable.

You also ask –

CO1559 said:

Is it correct to characterize this situation as converting a fixed price contract to a cost reimbursement type?

Not for me.  It was simply a renegotiation of the fixed price.

 It seems your question revolves around the fact of a prime allowing a sub to change its contract pricing during contract performance and the need to have a specific clause to do so.  Contract terms and conditions are in a contract to help address unanticipated issues that might occur (need to direct a change in contract, differing site condition, increase in DOL wage rates, etc.) and/or to give direction to a contractor on how to deal with a particular matter (EEO, cooperation with other contractors, using GFP, etc.).  However  it is my view, that I believe is supported by courts, with regard to any contract arrangement whether between private entities or in the Government that the contract can be changed without the need of a specific term or condition to allow if both parties agree the change is necessary.  In Government contracting there are issues of scope etc. that may come into play but not sure scope matters in private industry.

CO1559 said:

A cost reimbursement prime contractor issues a fixed price services subcontract on the basis of commercial items. The price proposal was a list of estimated costs by type of service. The following changes clause is included in the subcontract: “Changes in the terms and conditions of this contract may be made only by written agreement of the parties.” (FAR 52.212-4 is not included)

Mid way through performance, subcontractor submits a revised price proposal. In response, the prime issued a modification increasing the fixed price IAW the revised proposal. There is no cost analysis and no mention of invoking the changes clause. However, the bilateral modification stated: “authorizes additional $X,XXX to cover costs of additional lodging, per diem and taxes for XX additional participants.”

At end of performance, subcontractor submits a final list of incurred cost. The prime issues a modification increasing the price to align with the final incurred cost. The subcontractor does not have an approved accounting system.

Is it correct to question the value of the aforementioned price increases?

Is it correct to characterize this situation as converting a fixed price contract to a cost reimbursement type?

Thank you!

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Is it correct to question the value of the aforementioned price increases?

Yes, it may be appropriate to question the value of the price increase.  See  FAR 31.201-3 (a) -- Determining Reasonableness.

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...No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable..

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Is it correct to characterize this situation as converting a fixed price contract to a cost reimbursement type?

How do you know it was a "fixed price contract" ?  What kind of "fixed price (sub)contract is it?  In addition to FFP, a fixed price incentive arrangement is a form of fixed price contract.   You said, "The price proposal was a list of estimated costs by type of service." That doesn't appear to be a proposal for a FFP (sub)contract.

C Culham said:

You have not specified if the original contract had one CLIN in a lump sum or multiple CLINS for the different elements of the service.    Just noting but I am not sure it matters with regard to how I see this.

Also not sure if you are asking as the prime, the sub or the Government, again for me it probably does not matter but for others it might.

Thank you C. There are no CLINs; I am working on behalf of the Government. The subcontract contains a changes clause. It was not invoked, nor was it documented.

joel hoffman said:

Yes, it may be appropriate to question the value of the price increase.  See  FAR 31.201-3 (a) -- Determining Reasonableness.

Thank you Joel, I agree.

joel hoffman said:

How do you know it was a "fixed price contract" ?  What kind of "fixed price (sub)contract is it?  In addition to FFP, a fixed price incentive arrangement is a form of fixed price contract.   You said, "The price proposal was a list of estimated costs by type of service." That doesn't appear to be a proposal for a FFP (sub)contract

Thank you Joel. The contractor's acquisition policies and procedures define contract types. This one is a firm fixed price contract for commercial items. There is no quantity variation clause, there is no documentation of a change order, nor was the clause invoked. I have no problem with the contractor providing a list of services and respective costs, or a single dollar amount; this FFP subcontract was competed.

I recommend, based upon your concerns,  that you place the burden of proof on the Contractor to justify the additional cost to the government - before allowing it and preferably before paying it.

Thanks for the advice Joel, and thanks for reminding me to test and or support my findings against FAR 31.201-3 (a)!

CO1559, the reasonableness cost principle would apply at the prime contract level because it is a cost reimbursement contract.  Therefore, all costs incurred by the prime must be reasonable.  On the other hand, if the subcontract is a fixed price subcontract as you have indicated, the cost principles do not apply to what the sub is entitled to be paid by the prime.  Moreover, the government does not have the right to audit the costs incurred under such a subcontract.  See FAR 52.215-2.

Retreadfed said:

Therefore, all costs incurred by the prime must be reasonable.

Not really. All costs for which the prime wants to be reimbursed must be reasonable, but if the prime is willing to absorb the difference between a reasonable amount and the cost actually incurred, it is free to do so.

Let me see if I've got this right.

1. Prime issues aFFP SubK for commercial services that includes an amount for travel.

2. SubK says more people travelling than bid. Prime agrees to a price increase associated with additional travellers.

3. After travel, SubK says travel costs were higher than anticipated. SubK wants to be paid for actual travel costs, which may include unallowable costs because SubK doesn't have an adequate accounting system.

The question is which, if any, price increases should be permitted and whether the second Mod request converted the FFP SubK into a cost reimbursable SubK.

If I've parsed the situation correctly I think the first Mod is legit but not the second, because the second request was based on actual costs incurred.

Retreadfed said:

Moreover, the government does not have the right to audit the costs incurred under such a subcontract.  See FAR 52.215-2.

Thank you Retreadfed. The audit is of the prime contractor's contract administration, not the subcontractor's cost. For Wifcon I just provided a simple summary of what I found in the subcontract file; looks bad to me, and now I know that it doesn't look good to the prime contractor. As Joel mentioned above, put the onus on the prime. 

here_2_help said:

I think the first Mod is legit but not the second, because the second request was based on actual costs incurred.

Thanks for the feedback here-to-help; and all others.

CO, what do you mean when you say "the audit is of the prime contractor's contract administration"?

Retreadfed said:

CO, what do you mean when you say "the audit is of the prime contractor's contract administration"?

Just guessing but how about an audit pursuant to FAR Clause 52.216-7, Allowable Cost and Payment?

...(g) Audit. At any time or times before final payment, the Contracting Officer may have the Contractor’s invoices or vouchers and statements of cost audited. Any payment may be --

(1) Reduced by amounts found by the Contracting Officer not to constitute allowable costs; or

(2) Adjusted for prior overpayments or underpayments.

On 7/22/2017 at 11:12 AM, CO1559 said:

A cost reimbursement prime contractor issues a fixed price services subcontract on the basis of commercial items. The price proposal was a list of estimated costs by type of service. The following changes clause is included in the subcontract: “Changes in the terms and conditions of this contract may be made only by written agreement of the parties.” (FAR 52.212-4 is not included)

Mid way through performance, subcontractor submits a revised price proposal. In response, the prime issued a modification increasing the fixed price IAW the revised proposal. There is no cost analysis and no mention of invoking the changes clause. However, the bilateral modification stated: “authorizes additional $X,XXX to cover costs of additional lodging, per diem and taxes for XX additional participants.”

At end of performance, subcontractor submits a final list of incurred cost. The prime issues a modification increasing the price to align with the final incurred cost. The subcontractor does not have an approved accounting system.

Is it correct to question the value of the aforementioned price increases?

Is it correct to characterize this situation as converting a fixed price contract to a cost reimbursement type?

Thank you!

That all strikes me as typical business conduct. It does not accord with the formalities and proprieties so often expected by Government employees, so it mystifies and confuses them. They reach for their FAR and get further mystified and confused.

An experienced hand would have answered CO1559's questions simply and directly:

Is it correct to question the price increases? Sure, if you want to, and if it's a lot of money, why not? Ask them about it. See what they say. If their story makes sense and if the money seems okay, then reimburse them and move on. Otherwise, refuse to pay and see what they do.

Does the situation convert a fixed-price contract to a cost-reimbursement contract? Of course not.

Case closed. But this is a Wifcon thread, and so it goes on and on and...

What are we teaching the kids?

"What are we teaching the kids?"

A basic principle concerning the presumption of reasonableness, thus possibly affecting the allowabilty of incurred costs, backed up by a reference. You have chided many here before for not providing backup for "simple and direct answers" that are stated as opinions😜

Vern I don't agree with you.

A prime contractor awarded a subcontract. In order to avoid scrutiny and the need to perform cost analysis, it declared the subcontract to be a FFP commercial item. Subsequently the subcontractor wanted to be treated differently and be reimbursed for actual costs incurred. I dont believe that behavior should be condoned.

H2H, is it your position that the description of an FFP in FAR Part 16 governs how a prime contractor labels or characterizes a subcontract?

Thank you Vern, Joel and H2H for weighing in. This has been helpful, and my questions have been answered.

Thanks Wifcon.

Retreadfed said:

H2H, is it your position that the description of an FFP in FAR Part 16 governs how a prime contractor labels or characterizes a subcontract?

That's not the basis of my position. My position is that if the prime wants the benefits associated with a commercial item award then it must consistently treat that award as a commercial item. Last time I checked the FAR didn't permit cost type commercial item awards. If I'm wrong on that point then I will agree with Vern.

here_2_help said:

A prime contractor awarded a subcontract. In order to avoid scrutiny and the need to perform cost analysis, it declared the subcontract to be a FFP commercial item. Subsequently the subcontractor wanted to be treated differently and be reimbursed for actual costs incurred. I dont believe that behavior should be condoned.

help: You don't know any of that to be the case! A prime and a sub conducted some loosey goosey transactions, rather typical in my experience as a businessman (I wish I could tell you about some of the transactions government and industry have asked me to undertake for the sake of their convenience). A knowledgeable CO would call the contractor and say, "What the hell was all that about?" listen to the explanation and perhaps ask that it be put in writing. The cost is not necessarily unallowable because it was not incurred in a manner consistent with ordinary practice.

CO1559 appears to know about the tests or allowability in FAR Part 31. Therefore, the answer to his question is: Question the cost if you doubt its allowability on any of the five grounds, listen to the prime's explanation, then make a decision.

here_2_help said:

Last time I checked the FAR didn't permit cost type commercial item awards. If I'm wrong on that point then I will agree with Vern.

help: As for the FAR permitting cost-type commercial awards, the last time I checked, the rules in FAR Part 12 about the terms of government prime contracts for commercial items did not apply to contractor subcontracts. Has anything changed? What prohibits a prime contractor from awarding a contract for a commercial item on a cost-reimbursement basis? What in FAR 12.207 says anything about subcontracts?

I will concede that the FAR is not applicable to contractors unless incorporated into a clause. That said, contractors may still have to pass a CPSR and or submit a subcontract for advance consent. I have never seen nor heard of a cost type commercial item services subcontract that passes government o eyesight scrutiny. But I am forced to concede that the regulatory basis for disapproving such a subcontract would be weak. Assuming there was a prime contractor willing to litigate that point.

There are no grounds for disapproving a subcontract for commercial items merely because it is cost-type. Cost-type contracts are used in the commercial world.

Vern Edwards said:

help: You don't know any of that to be the case! A prime and a sub conducted some loosey goosey transactions, rather typical in my experience as a businessman (I wish I could tell you about some of the transactions government and industry have asked me to undertake for the sake of their convenience). A knowledgeable CO would call the contractor and say, "What the hell was all that about?" listen to the explanation and perhaps ask that it be put in writing. The cost is not necessarily unallowable because it was not incurred in a manner consistent with ordinary practice.

CO1559 appears to know about the tests or allowability in FAR Part 31. Therefore, the answer to his question is: Question the cost if you doubt its allowability on any of the five grounds, listen to the prime's explanation, then make a decision.

help: As for the FAR permitting cost-type commercial awards, the last time I checked, the rules in FAR Part 12 about the terms of government prime contracts for commercial items did not apply to contractor subcontracts. Has anything changed? What prohibits a prime contractor from awarding a contract for a commercial item on a cost-reimbursement basis? What in FAR 12.207 says anything about subcontracts?

So, is the government acquiring commercial items?  If so, FAR 12.207 would seemingly apply.  

Can the prime/sub pick and choose which terms of commercial item contracting would apply to the acquisition?  No need for cost or pricing data or  many other inapplicable requirements but - oh, lets switch from FFP to Cost Reimbursement, as we wish?  That doesn't make sense to me.

The Prime Contract includes a clause that states: "The Contractor shall maintain file documentation which is appropriate to the value of the purchase and is adequate to establish the propriety of the transaction and the price paid."

Sorry that I did not bring that up before; thanks all for the input.

I discussed this issue briefly with prime contract management; their initial reaction was disappointment, and to not fight it. This questioned cost will eventually wind its way to the cognizant ACO for adjudication.

I'd change my moniker but I don't think that is allowed. I retired from the Fed about two years ago.

You can change your alias.  All of your posts should be given the new alais you choose.  Just send me a PM and the alias you want and I can change it.

joel hoffman said:

So, is the government acquiring commercial items?  If so, FAR 12.207 would seemingly apply.  

Can the prime/sub pick and choose which terms of commercial item contracting would apply to the acquisition?  No need for cost or pricing data or  many other inapplicable requirements but - oh, lets switch from FFP to Cost Reimbursement, as we wish?  That doesn't make sense to me.

CO1559 said that the prime contract was cost-reimbursement. Presumably, the contract is not for commercial items.

Can the prime/sub pick and choose? Yes, unless you can show something in FAR that says subcontracts for commercial items have to be FFP.

The requirement for and exceptions to cost or pricing data have nothing to do with contract type.

CO1559 said:

I retired from the Fed about two years ago.

If you're retired, why bother with an alias?

I'm in a situation where I'd rather remain anonymous.  Thank you Vern

Prime contractor acquisition procedures require commercial item subcontracts to be FFP or FFP w/econ price adjustment. In addition, IQ subcontracts can be used if prices are established as FFP or FFP w/econ price adjustment.

CO, do the prime contractor's acquisition procedures describe what they consider to be an FFP or FP(EPA) contract?  I have seen contractor's define contract types differently than they are described in the FAR.

Retreadfed said:

CO, do the prime contractor's acquisition procedures describe what they consider to be an FFP or FP(EPA) contract?  I have seen contractor's define contract types differently than they are described in the FAR.

Contractor procedures define FFP same as 16.202-1; and FP-EPA sane as 16.203-1

On ‎7‎/‎25‎/‎2017 at 6:23 PM, Vern Edwards said:

CO1559 said that the prime contract was cost-reimbursement. Presumably, the contract is not for commercial items.

Can the prime/sub pick and choose? Yes, unless you can show something in FAR that says subcontracts for commercial items have to be FFP.

The requirement for and exceptions to cost or pricing data have nothing to do with contract type.

Vern, the government is acquiring commercial items (services).  It is acquiring those commercial services by means of a subcontract.  If so, FAR 12.207 would seemingly apply to the subcontracting action. Cost or pricing data doesn't apply to a commercial item (service) purchase.

Of course, we don't know whether the subcontract was awarded competitively or the amount of the initial award, either. If so, then C&P data would not have been required, regardless of the subcontract type for the acquisition.

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15.403-1 -- Prohibition on Obtaining Certified Cost or Pricing Data (10 U.S.C. 2306a and 41 U.S.C. Chapter 35).

(b) Exceptions to certified cost or pricing data requirements. The contracting officer shall not require certified cost or pricing data to support any action (contracts, subcontracts, or modifications) (but may require data other than certified cost or pricing data as defined in FAR 2.101 to support a determination of a fair and reasonable price or cost realism)—

(1) When the contracting officer determines that prices agreed upon are based on adequate price competition (see standards in paragraph (c)(1) of this subsection);

(2) When the contracting officer determines that prices agreed upon are based on prices set by law or regulation (see standards in paragraph (c)(2) of this subsection);

(3) When a commercial item is being acquired (see standards in paragraph (c)(3) of this subsection);

(4) When a waiver has been granted (see standards in paragraph (c)(4) of this subsection); or

(5) When modifying a contract or subcontract for commercial items (see standards in paragraph (c)(3) of this subsection).

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.(c) Standards for exceptions from certified cost or pricing data requirements—

..(3) Commercial items.

(i) Any acquisition of an item that the contracting officer determines meets the commercial item definition in 2.101, or any modification, as defined in paragraph (3)(i) of that definition, that does not change the item from a commercial item to a noncommercial item, is exempt from the requirement for certified cost or pricing data. If the contracting officer determines that an item claimed to be commercial is, in fact, not commercial and that no other exception or waiver applies, (e.g. the acquisition is not based on adequate price competition; the acquisition is not based on prices set by law or regulation; and the acquisition exceeds the threshold for the submission of certified cost or pricing data at 15.403-4(a)(1)) the contracting officer shall require submission of certified cost or pricing data...

If the prime contractor can use any type of subcontract acquisition method and pick and choose how to administer or modify the subcontract, e.g., FFP commercial item, then allowing actual incurred cost, this would seem to allow the government and or its primes to essentially cowboy any subcontract, without regard to acquisition rules. 

If the modifications were for actual travel requirements. then I would think that the original subcontract probably should have had a separate line item for estimated travel but that may not be mandatory...

joel hoffman said:

Vern, the government is acquiring commercial items (services).  It is acquiring those commercial services by means of a subcontract.

Joel:

Oh, please. The Government is acquiring something from the prime. The prime is buying something from the sub. There is no privity between the Government and the sub, and the rules in FAR 12.207 don't apply to the subcontract. To call your argument strained would be generous. And cost or pricing data is not the issue; it was part of one of your earlier premises. The issue is the reasonableness of the prime's costs.

Vern, I agree that the basic issue is the reasonableness of the prime contractor's costs. 

In evaluating the reasonableness of those costs, I would question the contractor paying more for what  was supposedly a firm fixed price subcontract,  which should not be subject to adjustment for an open verrun of its actual incurred costs. The prime should justify why it paid more than the awarded subcontract amount -  justify why  the subcontractor is entitled to a price adjustment that the prime expects the government to pay.

Cost or pricing  was simply an example of the differences between commercial item and noncommercial subcontract type. The argument presented in this thread appears to be that, since the government has no privity of contract with the prime's subs, the prime can define its subcontract's any way it chooses to and can define "FFP" its own way, regardless of the government's acquisition rules.

On ‎7‎/‎25‎/‎2017 at 10:36 AM, here_2_help said:

That's not the basis of my position. My position is that if the prime wants the benefits associated with a commercial item award then it must consistently treat that award as a commercial item. Last time I checked the FAR didn't permit cost type commercial item awards. If I'm wrong on that point then I will agree with Vern.

I agree with H2H. I just used cost or price data as an example of a "benefit" associated with a acquiring commercial items under that acquisition method. It was you who said that 12.207 doesn't apply to subcontracts.  If this were a FFP prime contract, I would agree to an extent.  In that case, unless there was some government liability for the increased cost, the cost increase would be between the prime its sub.

joel hoffman said:

Vern, I agree that the basic issue is the reasonableness of the prime contractor's costs. 

In evaluating the reasonableness of those costs, I would question the contractor paying more for what  was supposedly a firm fixed price subcontract,  which should not be subject to adjustment for an open verrun of its actual incurred costs. The prime should justify why it paid more than the awarded subcontract amount -  justify why  the subcontractor is entitled to a price adjustment that the prime expects the government to pay.

You want to declare the cost to be unreasonable because the prime did not adhere to rules that apply to the Government in its dealings with primes? Where is the clause that implements your policy? Who says that a private sector FFP subcontract is not subject to adjustment based on actual costs? That's a matter of negotiation between the prime and its sub.

An FFP sub incurred additional costs and asked the prime to reimburse it, and the prime did, and you think that procedure--a procedure which would be anomalous between the Government and a prime under the FAR--makes the prime's cost unallowable as a matter of general principle? Based on what clause? Rule? Case law? That strikes me as something that a prudent business person might do under certain circumstances in the conduct of a competitive business.

Look--we've already agreed that the CO can question the cost pursuant to the rules for allowability. What the CO ultimately decides is up to the CO. I don't think there's anything more to say.

It appears to be "questionable" - I said from the beginning that if the KO questions the reasonableness, then require the contractor to justify it. I didn't "declare the cost to be unreasonable". We don't know the full context or the details.    

When I review claims, disputes, REA's, etc. I don't "declare" anything to have merit or no merit until I become familiar with all the facts and the full context of the issues. That has been a successful approach for 46 years or so.