Must a Fixed Price Incentive Contract include Separate Target and Ceiling (Prices)

Is my question too difficult or did I provide too much explanation?  

The question is simply,  as the title of the Thread says:  "Must a Fixed Price Incentive Contract include Separate Target and Ceiling (Prices)?"   -  - not whether or not using FPI is allowed for design-build under the right circumstances.

That would closely resemble the design-build industry's "Cost-Plus with GMP" pricing method

I provided the background because many of us complain about the "Original Poster" not enough development of the circumstances , which OFTEN leads to  people speculating and following rabbit trails.

Thanks.

joel,

Thanks for the second post. I was having trouble figuring out what your question was.

So, there would be a target profit and a target cost stated in the contract. When added together, they would equal the ceiling price. There would be sharing under the target cost, but not over. In other words, the target cost is the PTA.

I don't see an obvious problem with that. I'm going to ask someone who knows more than me about FPI(F) contracts.

Thanks, Don

joel,

The person I asked didn't see an inherent problem with target price = ceiling price, either.

Thanks again,  Don.

Why call it an FPI contract? Why not just craft a custom incentive. Call it just a cost incentive contract (CIC). Write a clause that describes how it works. That would free you from the terms of the incentive price revision clause.

Vern, are you saying, in effect, that the FPIF format doesn't allow the target to equal the ceiling and therefore, we have to "just craft" a custom cost incentive contract type, called a "CIC"?  Would this need to be adopted in FAR?  If not, would any agency or office that intends to use the federal design-build with GMP method have to justify using the custom cost incentive contract type and use the custom, non-standard contract clause? 

Would your answer be any different if this design-build with GMP guidance is planned to be published (not by me) for government-wide use for those agencies subject to FAR?  Of course, 'Guidance' is simply that - guidance.  

There should not be a  need to "just' craft a new type of cost incentive contract for federal agencies, if the GMP with target = ceiling is allowable under the FPIF contract type, with proper justification, .  

The DFARS, for example establishes the ceiling at 120% and 50/50 share ratio as "the point of departure " for establishing an FPIF incentive arrangement.  However, that isn't mandatory.  I did not see any special approval authority there or in the PGI, other than the official who has to approve the acquisition plan.  Of course, other agency policy requirements might apply.

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DFARS

216.403-1  Fixed-price incentive (firm target) contracts.

  ... (b)  Application. 

             (1)  The contracting officer shall give particular consideration to the use of fixed-price incentive (firm target) contracts, especially for acquisitions moving from development to production.

              (2)  The contracting officer shall pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement.

              (3)  See PGI 216.403-1 (DFARS/PGI view) for guidance on the use of fixed-price incentive (firm target) contracts.

Here is an excerpt from the PGI coverage:

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PGI 216.403-1  Fixed-price incentive (firm target) contracts.

      (1)  Use of FPIF contract.  (i) Not mandatory. DFARS 216.403-1(b)(1) directs the contracting officer to give particular consideration to the use of fixed-price incentive (firm target) (FPIF) contracts, especially for acquisitions moving from development to production. DFARS does not mandate the use of FPIF for initial production and each acquisition situation must be evaluated in terms of the degree and nature of the risk presented in order to select the proper contract type.

               (ii)  Considerations. Volume 4, chapter 1, of the Contract Pricing Reference Guide provides a detailed discussion of the considerations involved in selecting the proper contract type. For example:

                     (A)  It is not in the Government’s best interest to use FPIF when the cost risk is so great that establishing a ceiling price is unrealistic.

                     (B)  It is also not in the Government’s best interest to use firm-fixed-price (FFP) contracts on production programs until costs have become stable. Therefore, FPIF contracts should be considered in production programs where actual costs on prior FFP contracts have varied by more than four percent from the costs considered negotiated. Contracting officers are reminded that actual costs on prior contracts for the same item, regardless of contract type or data reporting requirements of the prior contract, are cost and pricing data on the pending contract, and should be obtained from the contractor on production programs when cost or pricing data are required.

       (2)  Incentive arrangement.  DFARS 216.403-1(b)(2) directs the contracting officer to pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement. While DFARS does not mandate the use of these share ratios or ceiling percentage, it is not unreasonable to expect that upon entering into production, risks have been mitigated to the point that the DFARS recommended point of departure for an FPIF incentive arrangement would be normal.

Following the (proposed - to be published) Guidance for Federal Agency Use of Design-Build with Guaranteed Maximum Price , DoD solicitations using the GMP methodology could "depart  from the 120% "point of departure" and establish 100% of target as the ceiling/GMP, with appropriate justification and approval.

Here is the standard FPIF clause language with applicable fill-ins:

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52.216-16   Incentive Price Revision—Firm Target.

 ...(d) Price revision. Upon the Contracting Officer's receipt of the data required by paragraph (c) above, the Contracting Officer and the Contractor shall promptly establish the total final price of the items specified in (a) above by applying to final negotiated cost an adjustment for profit or loss, as follows:

  (1) On the basis of the information required by paragraph (c) above, together with any other pertinent information, the parties shall negotiate the total final cost incurred or to be incurred for supplies delivered (or services performed) and accepted by the Government and which are subject to price revision under this clause.

  (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.

  (ii) If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less _ *[0]  percent of the amount by which the total final negotiated cost exceeds the total target cost. _*[ADDED CLARIFICATION:** "The Target Cost is the Ceiling 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.

*The solicitation will state that the target and ceiling are one and the same.   Paragraph (d) (2) (ii)  in the clause 52.216-16 provides for a "fill in", which would simply be filled in as "0%" with the clarification language substantially as shown above.

** I presume that (subject to any agency policy) the cost savings share ratio in (d) (2) (iii) may be established through competitive negotiations (accepted final proposed share ratio)  or the government may specify it in the solicitation. If established through the source selection process, the clause will be filled in at award to reflect the accepted final proposal.  For DoD, the government could establish "50/50" in the solicitation, could "depart" and establish a different ratio in the solicitation or could allow the proposers to propose and justify a different ratio

joel hoffman said:

Vern, are you saying, in effect, that the FPIF format doesn't allow the target to equal the ceiling and therefore, we have to "just craft" a custom cost incentive contract type, called a "CIC"?  Would this need to be adopted in FAR?  If not, would any agency or office that intends to use the federal design-build with GMP method have to justify using the custom cost incentive contract type and use the custom, non-standard contract clause? 

Would your answer be any different if this design-build with GMP guidance is planned to be published (not by me) for government-wide use for those agencies subject to FAR?  Of course, 'Guidance' is simply that - guidance.  

There should not be a  need to "just' craft a new type of cost incentive contract for federal agencies, if the GMP with target = ceiling is allowable under the FPIF contract type, with proper justification, .  

The DFARS, for example establishes the ceiling at 120% and 50/50 share ratio as "the point of departure " for establishing an FPIF incentive arrangement.  However, that isn't mandatory.  I did not see any special approval authority there or in the PGI, other than the official who has to approve the acquisition plan.  Of course, other agency policy requirements might apply.

I didn't say you have to do anything, and I didn't say you couldn't have a combined target/ceiling price (although I think it's ridiculous). My thought is simply that the FPI contract is the most complicated in use today. If all you want to do is reward the contractor for coming in below some maximum price, why not just write a simple clause that gives it so many cents for every dollar it underruns. Why mess around confusing everybody with that ridiculous FPI contract. (Have you read the incentive price revision clause?) You can use any contract type or combination that is not prohibited, and FAR does not limit you to the FPI cost incentive. KISS is the essence of brilliance.

Joel, you're talking a design-build construction contract, not a contract to develop or produce a new spacecraft, aircraft, or warship. Keep it simple.

Vern Edwards said:

I didn't say you have to do anything and I didn't say you couldn't have a combined target/ceiling price (although I think it's ridiculous). My thought is simply that the FPI contract is the most complicated in use today. If all you want to do is reward the contractor for coming in below some maximum price, why not just write a simple clause that gives it so many cents for every dollar it underruns. Why mess around confusing everybody with that ridiculous FPI contract. You can use any contract type or combination that is not prohibited, and FAR does not limit you  to the FPI cost incentive. KISS is the essence of brilliance.

Joel, you're talking a design-build construction contract, not a contract to develop or produce a new spacecraft, aircraft, or warship. Keep it simple.

Vern, As I explained above, a "Cost-Plus GMP" is a standard industry type of design-build contract that is widely used. Apparently, industry doesn't think that it is ridiculous.  I wasn't the one who proposed that we need to find a way to implement the GMP method for federal design-build and to provide guidance for federal government design-build usage. That was a group of industry and federal design-build practitioners.  I was asked to find a way to use it,  to see what laws and/or FAR coverage would have to be revised and to develop guidance for Federal Agencies to use it. 

I am proposing that the FAR allows that type of pricing method without the need to seek FAR revisions. The industry term "Cost-Plus"  doesn't equate to the FAR "Cost-Plus" / "Cost Reimbursement" contract types.  It most closely resembles the industry Cost-Plus/GMP approach, as long as the target and ceiling are the same. 

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...why not just write a simple clause that gives it so many cents for every dollar it underruns.

What is the contract type that "the simple clause" applies to?  It isn't a FFP if actual cost of performance must be considered or used to determine or adjust the contract price . 

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16.202-1   Description.

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor's cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

I looked for something other than a fixed Price Incentive to use with cost incentives but didn't find language that would seem to allow it.  

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16.102   Policies.

(a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

(b) Contracts negotiated under part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 3901). Contract types not described in this regulation shall not be used, except as a deviation under subpart 1.4.

As I initially said -  (other than FFP) type of contract is used when the it is too early in the project's design development "to be able to establish a firm fixed-price (FFP) without having to include considerable contingencies or risk in the FFP". 

In your simple clause, what is the contractor underrunning from?  What is that amount, contractually?  A target cost?  An estimated cost?  A Fixed cost Incentive?

In order to do that, the contractor and government would have to have a contractual mechanism for determining and agreeing upon "every dollar it underruns".  This implies that there has to be a method to determine and agree on what actual costs we are measuring.  There will have to be a way to determine and make progress payments to the contractor during design and construction. 

The parties could work to definitize the contract price from a (??)  to a FFP at any point, but that also brings in FAR Subpart 15.4 and Part 31 rules and requirements.  The FPI pricing method can also allow for definition of parts or all of the price to FFP.

joel hoffman said:

What is the contract type that "the simple clause" applies to?  It isn't a FFP if actual cost of performance must be considered or used to determine or adjust the contract price .

If you have to give it a name, which you don't, call it GMP with Cost Incentive, GMP-CI. The contractor shares in the savings. That's the idea, right?

joel hoffman said:

In your simple clause, what is the contractor underrunning from?  What is that amount, contractually?  A target cost?  An estimated cost?  A Fixed cost Incentive?

From the GMP. The lower the final price from the GMP, the higher the contractor's fee (profit).

"The contract will provide for shared savings on the project if the actual costs are less than the ceiling price/GMP, through contract provisions for sharing of savings."

The parties agree on a cost savings share ratio.

If the final contract price is less than the GMP, then the contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows:

[(GMP - Contractor's Fee) - Actual Cost] x .25

Is that what you have in mind? If so, then that's the only incentive clause you need.

On 8/25/2017 at 0:06 PM, Vern Edwards said:

If you have to give it a name, which you don't, call it GMP with Cost Incentive, GMP-CI. The contractor shares in the savings. That's the idea, right?

From the GMP. The lower the final price from the GMP, the higher the contractor's fee (profit).

Vern, that appears to be a type of cost incentive contract.  Name or not, it has to be SOME contract type and has to be described in the solicitation:

"16.105   Solicitation provision.

The contracting officer shall complete and insert the provision at 52.216-1, Type of Contract, in a solicitation unless it is for—

(a) A fixed-price acquisition made under simplified acquisition procedures; or

(b) Information or planning purposes."

 Is it a cost incentive contract type described somewhere in subpart 16.4 -  Incentive Contracts? 

If not, that is the problem:

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16.102   Policies.

(a) Contracts resulting from sealed bidding shall be firm-fixed-price contracts or fixed-price contracts with economic price adjustment.

(b) Contracts negotiated under part 15 may be of any type or combination of types that will promote the Government's interest, except as restricted in this part (see 10 U.S.C. 2306(a) and 41 U.S.C. 3901). Contract types not described in this regulation shall not be used, except as a deviation under subpart 1.4.

How do you define "cost" in a "GMP with Cost Incentive, GMP-CI", which doesn't seem to be a contract type described in Part 16?

How do you determine the "actual cost" in a "GMP with Cost Incentive, GMP-CI"?

In order to do that, the contractor and government would have to have a contractual mechanism for determining and agreeing upon "every dollar it underruns".  This implies that there has to be a method to determine and agree on what actual costs we are measuring.

How is a "GMP with Cost Incentive, GMP-CI" simpler, in actual practice than the FPIF with GMP?

On 8/25/2017 at 0:52 PM, Vern Edwards said:

If the final contract price is less than the GMP, then the contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows:

[(GMP - Contractor's Fee) - Actual Cost] x .25

Is that what you have in mind? If so, then that's the only incentive clause you need.

Bingo! 

See the highlighted FPIF applicable "cost incentive" paragraph (d)(2)(iii). 

I doubt that paragraph (d)(2)(i) is achievable, within $1 .  

Paragraph (d)(2)(ii) is not applicable. because the target cost plus target fee = GMP = ceiling price.   The final negotiated cost cannot exceed the target cost and the final price cannot exceed the ceiling price (GMP). There is no profit adjustment if "actual cost" exceeds the target cost.

So the only applicable "incentive clause"  language is :

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52.216-16   Incentive Price Revision—Firm Target.

(d) Price revision...

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

"(iii) If the final negotiated cost is less than the total target cost, the adjustment is the total target profit plus  25% percent of the amount by which the total final negotiated cost is less than the total target cost.

I think that the result is the same as in the "GMP with Cost Incentive, GMP-CI. 

"The contractor shall share in the savings at the rate of $.25 of every dollar saved, calculated as follows"

(The contract states that the target cost plus target profit = GMP)   

=>   Target cost = ( GMP - target profit)

[(GMP - target profit) - (actual cost)] x .25 or:

(target cost - actual cost) x .25

Whatever, Joel. I have been in contracting a long time and this is the kind of thing I would do with a very short homemade contract incentive clause and without the least trouble. I think the FAR is blurring your vision.

The incentive price revision clause is very long and very complicated and is not necessary for what you want to do, but if you want to use it, then use it. I wouldn't, but that's me. I tend to look for simple ways to do things. You tell people to use an FPI with a target price and ceiling price that are the same and you're going to get more questions than you're going to want to answer.

But be my guest. I don't have a stake in your project.

Vern,   THis guidance is intended to be for broad application across federal government. You should be able to understand the challenge of trying to convince lawyers  and contracting officers  in many agencies to do anything outside of the ordinary,  let alone devise a new type of contracting outside of the boundaries of FAR Part 16. 

 Beyond that, I am unable to determine what contract type you are talking about using. It would have to be some type of incentive contract that is either fixed price or cost reimbursement.  Cost reimbursement type of contract is inappropriate for design build because the contractor would only have to make the best effort to complete the project within the so-called guaranteed maximum price. I could not find where a different type of fixed price cost incentive contract is allowable under the wording in the FAR. 

 I have asked you several times what type of contract format you are going to use and how you are going to define costs and cost reimbursement for actual costs expended.

I would appreciate it if you could please specifically tell me how it can be done under the current FAR, so that the contracting officers and their lawyers will agree that it is FAR compliant.  Also, how would you provide for reimbursement and determination of allowable costs under your ?? type contract.

This is not a one time experiment. This guidance would have to be "within the FAR box" for the generally timid and risk adverse gov't legal and contracting community to use it. 

A GMP design-build contract would likely only be used by the more sophisticated construction contracting agencies for complex projects where it is too early in the acquisition cycle to be able to establish a reasonable  FFP amount.  In fact, there are only a couple of USACE Districts that I feel might be presently qualified to try it either.  The Pentagon Renovation Office used something similar after 9-11-2001 to rebuild Phase 1 of PENREN,  after it was destroyed by the Terrorists and was used to design and construct the other 3 phases, thereafter. 

The FPI clause isn't THAT complicated if the final price adjustment is only subject to one adjustment scenario . The rest of the clause primarily explains how allowable costs are determined , and how the billing process and some facets of earned value project management are necessary, which design-builders and most construction contractors do any way.  

You still haven't told us anything about your contracting process other than a one sentence explanation of how to pay the cost incentive. You often chide others here for not providing references or sources for their positions.

I sent the draft guidance document to Don.  If you would like, Don can share it with you.

I think that it very closely resembles the industry version of cost – plus/GMP design – build, which is explained in the Design Build Institute of America's Manual of Practice.  The major differences are in semantics.  What the industry refers to as cost – plus is not the same as what a government cost – plus contract type is.

 In addition, the industry can use (QBS) qualifications based selection of the  design–build contractor, in any point of the acquisition cycle,  then use the same design- build team from project conception through completion. They call it  "Progressive Design – Build". The federal government must use some type of best value determination to select the contractor, which would consider price.  In addition, the federal government is subject to the Brooks Act and other restrictions (e.g., FAR 36.209) which prohibit the government from selecting an A – E contractor, construction contractor or design-build contractor to develop "the program", and/or to develop the design criteria, and then design and construct the project,  with construction as an option at some later point.

P.S., The GSA is already using a similar type of a fixed price incentive contract with GMP for their version of  "construction management at risk."  See next post.

,My "next post" was somehow deleted .  I described the GSA's "Construction Manager as Constructor (CMc) Project Delivery Method", which is GSA's version of Construction Manager@Risk. where:

"The PBS Offices of Design and Construction and Acquisition Management are issuing the attached Policies and Procedure for using the CMc delivery method. The policy prescribes the steps for successfully completing a project under this delivery method. The policy is posted on the PBS Acquisition website at http://insite.pbs.gsa.gov/pbsacqpolicy".

That method uses a form of the FPIS contract type with a "GMP" rather than the separate "target" and "Ceiling".

I described the Pentagon Renovation Office's successful use of D-B, using an FPI contract format to rebuild the just completed first of four phased "pies" in the Pentagon after the Terrorists hit it on 9/11/2001.  It was also successfully used to complete the remaining phases of the PENREN.  It was highly acclaimed by the Design-Build industry.  The Government's Program Manager, Lee Ivey later became the President and CEO of the DBIA.  

I explained how CM@risk fits between D-B-B and D-B in the spectrum of design and construction delivery systems.  

I explained how there are few government agencies that are sophisticated enough to successfully use the more complex delivery systems, anyway.  

Thanks, Bob... 

Joel:

I am adding this edit because your link does not work.  It may be to an internal page.  I wanted to remind myself to tell you.

joel hoffman said:

Beyond that, I am unable to determine what contract type you are talking about using.

Does that mean you are unable to determine how it works or unable to determine what to call it?

And Joel, how about short and to-the-point posts. That one from an hour ago was 659 words. Your first one was 2,556. It's too much!

Vern, No - but thanks.

CPFF is generally prohibited by law for Military construction and the cost reimbursement contract type only requires that the contractor make a best effort to complete the project within the contract cost.  

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216.301-3   Limitations.

For contracts in connection with a military construction project or a military family housing project, contracting officers shall not use cost-plus-fixed-fee, cost-plus-award-fee, or cost-plus-incentive-fee contract types (10 U.S.C. 2306(c)). This applies notwithstanding a declaration of war or the declaration by the President of a national emergency under section 201 of the National Emergencies Act (50 U.S.C. 1621) that includes the use of the Armed Forces.

[81 FR 65564, Sept. 23, 2016]

216.306   Cost-plus-fixed-fee contracts.

(c) Limitations. For contracts in connection with a military construction project or military family housing project, see the prohibition at 216.301-3.

(i) Except as provided in paragraph (c)(ii) of this section, annual military construction appropriations acts prohibit the use of cost-plus-fixed-fee contracts that—

(A) Are funded by a military construction appropriations act;

(B) Are estimated to exceed $25,000; and

(C) Will be performed within the United States, except Alaska.

(ii) The prohibition in paragraph (c)(i) of this section does not apply to contracts specifically approved in writing, setting forth the reasons therefor, in accordance with the following:

(A) The Secretaries of the military departments are authorized to approve such contracts that are for environmental work only, provided the environmental work is not classified as construction, as defined by 10 U.S.C. 2801.

(B) The Secretary of Defense or designee must approve such contracts that are not for environmental work only or are for environmental work classified as construction.

[62 FR 1058, Jan. 8, 1997; 62 FR 1817, Jan. 13, 1997; 62 FR 49305, Sept. 19, 1997; 71 FR 39007, July 11, 2006; 81 FR 65564, Sept. 23, 2016]

Adding a little incentive doesn't fix that. In addition I don't see that "managing" a cost reimbursement contract is any easier than an FPI -  I'm talking about true management, not just passively administering it and paying the bills.  In addition to management of design and construction, a robust project controls (cost, schedule and production)  team is necessary.  True earned value management skills - not reading EVMS report deliverables that reflect past events - is necessary. That's what they teach in Construction Management college curricula.  That's what contractors do and that's what government project management and contract administration teams must be able to do.

FPI has been successfully used for D-B in the Pentagon Renovation  after 9/11/2001 and is being used by GSA for its version of CM @ risk.  The D-B industry highly praised the PENREN program.  P.S., they had true program and project management.

Vern Edwards said:

Does that mean you are unable to determine how it works or unable to determine what to call it?

And Joel, how about short and to-the-point posts. That one from an hour ago was 659 words. Your first one was 2,556. It's too much!

Vern, If you took as much time to read it as to count the words, you would have known what I was asking and you would have known that DoD can't use cost plus contracts for construction or design-build without approval by the Sec Defense or designee, except for environmental - which require Sec of Mil. Dept.  approval .  That leaves - - - - Fixed price.

At any rate - three lines into the long post:  

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Beyond that, I am unable to determine what contract type you are talking about using. It would have to be some type of incentive contract that is either fixed price or cost reimbursement.  Cost reimbursement type of contract is inappropriate for design build because the contractor would only have to make the best effort to complete the project within the so-called guaranteed maximum price. I could not find where a different type of fixed price cost incentive contract is allowable under the wording in the FAR. 

 I have asked you several times what type of contract format you are going to use and how you are going to define costs and cost reimbursement for actual costs expended.

I would appreciate it if you could please specifically tell me how it can be done under the current FAR, so that the contracting officers and their lawyers will agree that it is FAR compliant.  Also, how would you provide for reimbursement and determination of allowable costs under your ?? type contract.

I can understand if you forgot what I was asking after my excruciatingly long post.

Sorry. I last did construction for DOE and we did use CPFF contracts. The last two contracts I ever signed as a CO were CPFF construction contracts.

Okay, call it fixed-ceiling-price with cost incentive.

You know, Joel, if you understand how it works you should be able to come up with a name for it yourself. You could have done it easily in the time it took to post your tomes.

Vern Edwards said:

Sorry. I last did construction for DOE and we did use CFPP contracts. The last two contracts I ever signed as a CO were CPFF construction contracts.

Okay, call it fixed-ceiling-price with cost incentive.

You know, Joel, if you understand how it works you should be able to come up with a name for it yourself.

DOE has an abysmal track record on their recent cost type construction and remediation contracts -  However, that doesn't matter.  DoD cant use them.  My last full time assignment was on the DoD Chemical Demilitarization Program on two CPFF Systems contracts that are STILL not finished and the cost has doubled or tripled over the original estimates - all for various reasons.. I left that program over ten years ago. 

I did come up with a name for it: It's "Fixed Price Incentive with GMP". The contract explains that it is an FPIF where the target and ceiling are one and the same.

Well, since you're determined to call it an FPI contract, I'm glad your happy. I hope I'm still writing for The Nash & Cibinic Report when someone solicits proposals for the first one of your creations. 

Joel:

Your post wasn't deleted.

Vern Edwards said:

Okay, call it fixed-ceiling-price with cost incentive.

The lawyers and KO''s will say "Show me where that is described in FAR Part 16."

On 8/26/2017 at 3:18 PM, Vern Edwards said:

Well, since you're determined to call it an FPI contract, I'm glad your happy. I hope I'm still writing for The Nash & Cibinic Report when someone solicits proposals for the first one of your creations. 

Already been done with design-build.  Pentagon Renovation after 9/11/2001.

Although CM@risk, rather than D-B,  GSA is doing it, in accordance with the PBS policy that I referred to earlier today.  

Joel:

That link does not work.  This edit is a reminder to me to tell you that.

bob7947 said:

Joel:

Your post wasn't deleted.

Bob, I think you deleted one of those duplicate posts of mine while I was composing my post as an edit to the one that said "duplicate".  When I hit "save", the post had already been deleted. Not your fault.

Someone called me on my cell phone while I was walking my dog and I apparently push the wrong button twice, thus a duplicate and triplicate.

joel hoffman said:

I did come up with a name for it: It's "Fixed Price Incentive with GMP".

Where is that described in FAR Part 16? Where does "GMP" appear anywhere in FAR? Where does "Guaranteed Maximum Price" appear in FAR? Let me tell you: nowhere, nowhere in the entire FAR System. So why does fixed-ceiling-price with cost incentive bother you? 

In the construction industry and in agencies other than DOD a GMP contract is a CPFF contract with a cap at which the contract becomes FFP. (Do you need me to provide references to prove that assertion? I can provide plenty: legal websites, construction industry websites, government regs, board of contract appeals decisions, and Court of Federal Claims decisions. But I'm trying to avoid the Joel Hoffman Pit of Tediously Endless Posts.) The contractor is reimbursed for its costs and is paid the lesser of its costs and a fee or the GMP. It's a device that limits the owner's risk under a CPFF contract. All  you want to do is add an incentive and call it FPI.

So what are your lawyers and KOs going to say about that? They'd be idiots not to see what you'd be trying to do.

Geez, Vern.  The "contract type" is either an FPIF or (hopefully rarely) an FPIS.  

Quote

52.216-1 Type of Contract.

As prescribed in 16.105, complete and insert the following provision:

Type of Contract (Apr 1984)

The Government contemplates award of a _________ [Contracting Officer insert specific type of contract] contract resulting from this solicitation.

joel hoffman said:

Geez, the "contract type" is either an FPIF or (hopefully rarely) an FPIS.

Bull, and by calling it FPI anything you're leading your people into a contract admin disaster.

So you are finally alluding to the actual question that I asked three days ago.  Thanks for your opinion.

FPIF, the solicitation explains that the target cost plus target profit equal the ceiling cost.  

Thus the target is within the confines of the ceiling cost per FAR** as  I stated in the first post.  

**8/31/2017 EDIT FOR CLARITY: 

Quote

FAR 16.201(a): 

(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances...

**8/31/2017 EDIT FOR CLARITY: 

Quote

16.204 Fixed-price incentive contracts.

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by a formula based on the relationship of final negotiated total cost to total target cost...

**8/31/2017 EDIT FOR CLARITY: 

Quote

16.402-1 Cost incentives.

(a) Most incentive contracts include only cost incentives, which take the form of a profit or fee adjustment formula and are intended to motivate the contractor to effectively manage costs. No incentive contract may provide for other incentives without also providing a cost incentive (or constraint).

(b) Except for award-fee contracts (see 16.404 and 16.401(e)), incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula that (within the constraints of a price ceiling or minimum and maximum fee) provides that—

(1) Actual cost that meets the target will result in the target profit or fee;

(2) Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and

(3) Actual cost that is below the target will result in upward adjustment of target profit or fee.

**8/31/2017 EDIT FOR CLARITY: 

The following is inapplicable when Target cost plus profit = ceiling price:

Quote

16.401 (b)...

2. Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and

**8/31/2017 EDIT FOR CLARITY: 

See the notes for Clause 52.216-16 which allow changing the language in paragraph (d)(2)(ii) of  Clause 52.216-16:

Quote

Notes:

(1) The degree of completion may be based on a percentage of contract performance or any other reasonable basis.

(2) The language may be changed to describe a negotiated adjustment pattern under which the extent of adjustment is not the same for all levels of cost variation

**8/31/2017 EDIT FOR CLARITY: 

This language can be changed to reflect that the total final negotiated cost will not exceed the ceiling price less target profit (GMP less profit). Or it can simply be deleted:

Quote

52.216-16 (d) (2) ((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.

On 8/23/2017 at 4:43 PM, joel hoffman said:

Is there enough flexibility under the FAR in Parts 16.2 and 16.4, to use a fixed price incentive with Firm Target (FPIF) or similar contract type for a federal design-build construction project but with the "target price" plus  the "target profit" in an FPI with "Firm Target" (FPIF) equal to the ceiling price?   In other words, does the FAR specifically require separate "target" (cost plus profit) and "ceiling" (where ceiling price = cost plus profit)?

That's the question you asked three days ago. What you meant of course was not "specifically" but expressly. Don answered your question some time ago. FAR does not say that the target price and the ceiling price must be different numbers. The inventors of FPI and the authors of the incentive price revision clause presumed that the numbers would be different, but nothing says that they must be in so many words.

I was not "alluding" to that question at all.

On ‎8‎/‎26‎/‎2017 at 4:15 PM, Vern Edwards said:

That's the question you asked three days ago. What you meant of course was not "specifically" but expressly. Don answered your question some time ago. FAR does not say that the target price and the ceiling price must be different numbers. The inventors of FPI and the authors of the incentive price revision clause presumed that the numbers would be different, but nothing says that they must be in so many words.

I was not "alluding" to that question at all.

Ok thanks.  'Specifically' and 'expressly' are synonyms.  However, you answered my question in the initial post.

What some readers of this thread might not understand is that a Guaranteed Maximum Price (GMP) contract is a CPFF contract. But unlike a Government CPFF contract, the contractor is obligated to finish the work. It is not a "best effort" contract. The owner agrees to reimburse the contractor's costs, but only up to the guaranteed maximum price. At the GMP the contractor is fully responsible for all additional costs to complete.

For the sake of those who are not familiar with GMP, here is the text of a model GMP clause for a commercial GMP contract:

Quote

ARTICLE IV – AMOUNT OF CONTRACT – GUARANTEED MAXIMUM PRICE

(a) Guaranteed Maximum Price. The Contractor shall furnish all items required by the Contract Documents for proper completion of the Work. In full consideration for the performance of the Work and all other obligations of Contractor hereunder, Princeton University agrees to pay the Contractor’s actual costs incurred to perform the Work (“Cost of the Work”) plus the Contractor’s Fee established in accordance with this Contract the sum of which is guaranteed not to exceed the total amount of $XXX,XXX,XXX.XX (text description). This GMP amount consists of the following ‐‐

(1) The total estimated amount for Cost of the Work of $X,XXX,XXX.XX as more fully detailed in the Guaranteed Maximum Price Breakdown set forth in Part IV; and,

(2) The Contractor’s Fee amount of $X,XXX,XXX.XX.

(b) The Cost of the Work and the Guaranteed Maximum Price may be increased or decreased resulting from changes to the Work made by the issuance of approved Change Orders as provided for in this Article and in accordance with General Terms & Conditions Clause L5 – Changes Under GMP Contracts.

(c) General Conditions.

(1) The Contractor guarantees that the actual costs incurred for its General Conditions shall not exceed the amount of $X,XXX,XXX.XX as more fully detailed in the Guaranteed Maximum Price Breakdown set forth in Part IV and that all costs or expenses in excess of this amount shall be borne by the Contractor unless adjusted by Change Order. Should a change or adjustment to the General Conditions amount be required, the Contractor shall submit a separate Change Order exclusively addressing General Conditions and include supporting rationale for the change. Change Orders addressing changes to the Work shall not intermingle costs or expenses for General Conditions. The Contractor is not entitled to fee assessed on General Conditions costs and expenses and such costs shall not be included in any calculations to establish or adjust the Contractor’s Fee.

(2) Hourly Billing Rates. The Parties have agreed to fixed hourly billing rates for the Contractor’s salaried project administration and field supervision staff and other direct‐hire labor included as a part of the General Conditions for this project. These rates include salaries, wages, bonuses, payroll taxes, benefits, and insurances and are fully‐burdened with overhead and fee. Hourly rates shall remain fixed and in effect for the duration of this Contract: Individual/Labor Category Hourly Rate

(d) Adjustment to Contractor’s Fee. The Contractor’s Fee amount established in this Contract is a fixed amount that shall be adjusted only as provided for in this paragraph. The Contractor is not entitled to fee on individual Change Orders nor shall individual Change Orders cause any modification to the Contractor’s Fee. However, upon completion of the Work, if the cumulative total of all Change Orders has resulted in a net increase to the Guaranteed Maximum Price of $X,XXX,XXX.XX or more, then the Contractor’s Fee shall be correspondingly increased by an amount equal to NN% (TBD percent) of the cost of the Change Order Work in excess of $X,XXX,XXX.XX. Alternately, if the cumulative total of all Change Orders has resulted in a net decrease to the Guaranteed Maximum Price of $X,XXX,XXX.XX or more, then the Contractor’s Fee shall be correspondingly decreased by an amount equal to NN% (TBD percent) of the cost the Change Order Work in excess of $X,XXX,XXX.XX. When calculating the cumulative total of all Change Orders, amounts related to the following shall be excluded from any and all fee calculations or adjustments:

(1) Any change order issued to adjust the amount established for General Conditions without regard to the reason for the adjustment.

(2) Change orders issued to make adjustments to the amount established for Construction Contingency or Buy‐Out Savings or to incorporate changes for which costs are to be paid from Contingency as defined in Article II(b).

(3) Change orders issued to incorporate priced Alternates that have been specifically identified in the Contractor’s GMP or as part of Subcontractor bids.

(4) Change orders issued solely for the purpose of adjusting the GMP amount to add costs related to Work that is within the existing scope of the contract or related to scope previously added by an approved change order. This includes, but is not limited to (i) adjustments to estimated amounts for Allowances identified in the GMP; (ii) costs for Work performed under time & materials (T&M) type field tickets that are related to within‐scope Work; or, (iii) adjustments to authorized T&M Work when costs exceed previously established not‐to‐exceed limits.

(5) Change orders issued to make administrative adjustments to the GMP such as those to correct errors or omissions, resolve audit findings, or the final change order issued for the purpose of finalizing the GMP, returning any savings to Princeton University, and/or otherwise adjusting the contract value based on the final GMP amount.

(6) Any change orders not authorized or expressly approved by Princeton University in accordance with Clause L5 ‐ Changes Under GMP Contracts.

(e) Savings. Upon completion of the Work, the Contractor shall provide to Princeton University a detailed and complete accounting of the Cost of the Work for the Project. Should the actual final Cost plus the Contractor’s Fee be less than the GMP amount as adjusted pursuant to this Contract; the savings shall accrue one hundred percent (100%) to Princeton University and zero percent (0%) to the Contractor. Should, however, the actual final Cost plus the Contractor’s Fee exceed the GMP amount as adjusted pursuant to this Contract; then, the excess amount shall be borne solely by the Contractor.

(f) Payment Schedule. Prior to the submission of the first Application for Payment, Contractor shall prepare and submit for Princeton University’s review and written approval a proposed schedule of values (trade breakdowns) and fee payment schedule. This shall be the basis for the Contractor’s monthly Applications for Payment.

(g) Limitation of Markup. Contractor shall include in each subcontract a limitation on the markup that Subcontractors can include in their Change Orders. The cumulative total markup (subcontractor markup plus all lower‐tier subcontractor markups) shall not exceed fifteen percent (15%) of the direct cost of the change.

It should be clear from that text that the clause describes a hybrid of CPFF and FFP. The contractor is paid the lesser of its actual costs or the GMP. The clause does not give the contractor a share of the savings, but paragraph (e) could easily be rewritten to do so.

I'm pointing these things out to you because I hate FPI contracts. The administration of such contracts is difficult. They greatly complicate the process of contract modification. I don't think you would be doing a good thing by trying to implement the use of GMP through the use of FPI.

I think FAR Part 16 allows you to mix features of contract types. Others may disagree, but there is a long-established tradition of doing so. In a May 2000 article, Selecting The Type Of Contract: Limits On Discretion?, Ralph Nash interpreted FAR 16.102(b) to permit the use of GMP for design-build and discussed how the FAR appears to limit agency discretion in use of contract types. Among many things, he said:

Quote

[W]ith regard to the use of guaranteed maximum prices in design-build contracts, we believe agencies should accept our interpretation of FAR Part 16 and rule that they are permissible. Contracts for construction should use the terminology of the construction industry and not impose new terminology for the sake of playing the FAR game. Thus, we do not believe agencies should get around the literal requirements of the FAR by calling such contracts “incentive contracts” or “redeterminable fixed-price contracts.”

I'd be happy to provide you with the full text of his article if you have no other access to it.

If the people you must work with on your project will not accept an interpretation of FAR that permits the use of GMP for design-build, then I urge that you seek a class deviation of FAR amendment permitting the use of GMP for design-build rather than using FPI contracts with identical target and ceiling prices. I truly believe that the use of FPI contracts would make construction KOs and contractors very unhappy in the long run. I've adwarded and administered several of them, and I cannot think of a worse contract type for construction contracting than FPI.

Vern

On 8/26/2017 at 11:27 AM, Vern Edwards said:

Does that mean you are unable to determine how it works or unable to determine what to call it?

And Joel, how about short and to-the-point posts. That one from an hour ago was 659 words. Your first one was 2,556. It's too much!

Vern, your last post was 1484 words - sometimes it takes more than a few one liners to explain your points, right?  

DBIA's STANDARD FORM OF AGREEMENT BETWEEN OWNER AND DESIGN-BUILDER - COST PLUS FEE WITH AN OPTION FOR A GUARANTEED MAXIMUM PRICE, Document No. 530, includes 9 pages of language about the Contract price, Procedure for payment and Termination for Convenience.  It's part of a 34 page contract fill-in agreement. I can't copy it, as it is copyrighted and I only have rights to use it for my research.

The similar topics in clause 52.216-16. require 4 pages.  It's also lengthy but covers roughly the same topics. 

Thanks for your explanation.

Okay, Joel. But 52.216-17 does not cover all of that. And your first post was 2,556 words just to ask one question, not to make a point, and to which you got only two responses.

I'm just trying to persuade you to do something simpler than what you seem determined to do. I didn't realize you weren't open to suggestions. Now I am, and I'll quit offering unwelcome ideas.

Vern, I was thanking you for your explanation.  The information would have been particularly useful earlier.  I would be interested in reading Prof. Nash's full article.  Thanks. 

If there is a simpler way - that is expressly allowed by FAR - without having to create a class deviation or seek FAR revisions, then I'm open to it under the circumstances of my current assignment. 

Sorry for the detail to follow:

Having access to both an industry  published Manual of Practice and the FAR clause, it appears to me that both the industry cost-plus GMP and federal FPIF operate essentially the same  - for the D-B application that is possible for government to use, as explained below. 

 The existing FAR clause 52.216-16 could be revised to add an Alternate 2, deleting paragraph (d) (2)(ii), which provides a fill-in for a price adjustment when the actual negotiated final cost exceeds the target. That situation isn't applicable to GMP. A simple statement that the target cost plus target price equals the ceiling cost equals the GMP could also be included in the new Alternate 2.  I don't think that is really necessary though. The solicitation/contract language would define and explain it. 

Contractors read the solicitation narratives before reading the operative contract clauses anyway. 

For now, the fill-in paragraph can be simply filled in as N/A. The contract narrative language defines what constitutes the GMP (target cost plus target profit equals ceiling price equals GMP).

In Industry, an owner can use a QBS selected D-B team to develop the owners program and develop the performance-based design criteria.

Then at an early point in the design development, before the  parties are able to negotiate a lump sum (FFP) contract, they negotiate a GMP for the construction or both design and construction.  The parties might choose to convert to lump sum at a later point, when the cost certainty would allow.  

The owner has the option of continuing the relationship or ending it after each preliminary phase.  That is called "progressive design-build". 

The federal government can't use "progressive design-build" under current law and regulations to select a D-B team using QBS (without meaningful consideration of price) to develop its program, develop the requirement and design criteria for the government, then use the same firm to design and construct it.

However, both government and industry can use D-B with a GMP after having established the "program" (which means defining the scope, cost and budget) and after having established enough level of preliminary design development to be able to select a D-B team.  

The GMP pricing method is used in industry or government when it is too early in the acquisition cycle to be able to establish a lump sum price (FFP) - for reasons of urgency and/or the level of complexity of the project. This then is the application that the government could use for D-B with GMP - urgency and/or complexity of the project don't allow the additional time needed to develop the design criteria to be able to price and award a FFP design-build contract. 

It won't use QBS - it must use  best value, considering quality and price.

You probably don't believe it but the industry " Standard Form of Agreement for Cost Plus GMP" and the FPIF clause are actually very similar when used with the  best value approach ( not the Progressive D-B approach). 

Both the industry approach, the government GMP approach can allow for the parties to be able to definitize prices for the project or  portions of the project to FFP if the parties agree. This is done to simplify contract administration effort, cost, etc. under industry or government approaches. Contractors don't like private or government owners having full access to their books and other management and business information. 

The  government D-B method with GMP is not intended for broad use. It would only be used under special circumstances. 

Therefore, there isn't currently much if any political support to allow QBS selection of a design-build firm without meaningful consideration of price) or to allow federal-wide use of "Progressive Design-Build". 

Based upon my personal experience and that of some other leading D-B practitioners, the government often can't afford  many of the most highly qualified design-build teams - that would dominate a QBS selection process.  After selection they would  negotiate with the firm in the absence of competition to establish a fair and reasonable cost for the project. Been there - done that, in single award, design-build ID-IQ follow on task orders. 

There isn't a government agency that is currently interested in acting as the proponent to sponsor amended law or FAR revisions to allow QBS or progressive D-B. 

It would probably require a monumental effort and the sponsorship of several agencies to effect legislative and regulatory (major) revisions to use it.

D-B with GMP would not be widely used in government anyway,  Yes it is more complex and requires expertise that most government agencies don't have.

I don't think that the agencies are interested in revising FAR to "expressly" define  a special GMP contract type and write a clause that would likely largely mirror the current FPI clause, anyway.

GSA has Developed policy and procedures to use GMP with FPI for their version of owner furnished design with construction manager hired early in the design development phase. It uses the existing FAR FPI Incentive clause(s).

So it can be done within the context of the current FAR for the intended limited application. 

That's why I originally asked the question.

joel hoffman said:

If there is a simpler way - that is expressly allowed by FAR - without having to create a class deviation or seek FAR revisions, then I'm open to it under the circumstances of my current assignment.

Joel:

A simpler way need not be expressly allowed by the FAR. It only need not be "specifically" prohibited by the FAR. See FAR 1.102(d) and 1.102-4(e).

In his article, Prof. Nash argues that the sentence in FAR 16.102(b), "Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4," should not be read so as not to permit use of any contract type that is not named in Part 16. Several types are in use that were or are not named in FAR. Firm-fixed-price with award fee contracts were used for several years before being specifically mentioned, and were reported as FFP. Award term contracts have been in use now for a decade and are not specifically mentioned. Share-in-savings contracts are used without specific mention in FAR.

I think a GMP contract is ultimately FFP,  but is hybridized with CPFF-type terms below the maximum price. I think the contract should be reported to FPDS as FFP. The actual cost provision is not truly CPFF, because unlike the CPFF described in FAR, the contractor would be required to complete the work in order to be entitled to payment, and you don't need a limitation of cost clause, because you've got the guaranteed maximum price. So it should not run afoul of the prohibition against use of CPFF construction contracts by DOD.

Trying to teach people who don't ordinarily use FPIs about an FPI that is not really an FPI as described in FAR and the Contract Pricing Reference Guides, which has a separate ceiling price and a "point of total assumption", is going to be more trouble than it's worth, especially if, as you indicated, most can't administer DB GMP contracts. What happens if, as part of an REA, the contractor seeks a ceiling price that is higher than the target price? You're going to have to write a provision that prohibits such an REA. Would that require a FAR class deviation? If it did, and you didn't get one, would it be enforceable? Why bother with all that?

Who would reasonably complain about a contract type that provides for payment of either a firm-fixed-price (the maximum) or actual costs and a fee, whichever is less? After all, the maximum is considered fair and reasonable, right? As for a name for the contract type, you could call it "FFP (or Less)". 

I have attached the Nash article to this post. The article is copyrighted, attached with permission, and must not be further disseminated.

Best of luck to you.

Vern

SELECTING THE TYPE OF CONTRACT LIMITS ON DISCRETION.pdf

Thanks, Vern. 

I will study the article and discuss with my client to see if they want to pursue developing guidance under that approach. 

Trying to implement guidance for something out of the ordinary that could be used government wide is a challenge. Inventing a "new" contract type will be especially daunting, inasmuch as we are interacting with some organizations that are staffed by risk averse legal, contracting and program managers.

They want to see a contract type that neatly fits into a FAR 16 box.  One Agency's HQ Counsel are stating that FPI is a "cost reimbursement" contract therefore prohibited for any construction, even though the wording in the law and the regulations expressly/specifically name the prohibited FAR types of cost reimbursement construction contracts.

Geewiz, Prof. Nash wrote that article 17 years ago and still no takers. 

thanks again.

joel hoffman said:

One Agency's HQ Counsel are stating that FPI is a "cost reimbursement" contract therefore prohibited for any construction, even though the wording in the law and the regulations expressly/specifically name the prohibited FAR types of cost reimbursement construction contracts.

Good grief! Well, remember the fight over whether the FAR Part 12 prohibition against "cost type" contracts prohibited use of T&M? If only the reg writers would be clear and would adjust their wording to clarify their intent as soon as these kinds of disagreements emerge. Never going to happen, and they are impervious to argument and criticism.

joel hoffman said:

Trying to implement guidance for something out of the ordinary that could be used government wide is a challenge. Inventing a "new" contract type will be especially daunting, inasmuch as we are interacting with some organizations that are staffed by risk adverse legal, contracting and program managers.

You got that right. But I would simply argue that GMP is really FFP or less and that FAR clearly permits it. You could always ask DPAP for an "official" interpretation, if there is such a thing. I'll see in Nash would be willing to write an update to his piece. Small caliber ammunition, but it might be of some help.

Legislation is unlikely. Congress is dysfunctional.

Haven't had a chance to read it yet - not at home. 

Id like to discuss some more off line.  We are going GMP to allow the contractor to include quantifiable risk that is included as a contingency. We want to positively incentify the contractor through a share of the savings to manage, mitigate or avoid as much of those risks and associated contingency costs as possible. There is often other not fully fleshed out design definition at the point that the contract has to be awarded, so there is some risk there. The cost avoidance sharing can also positively motivate the contractor to finish early, avoid quality control related rework, etc.

I don't understand how that fits the "FFP" concept that the contract price is not subject to revision based upon the actual costs incurred. 

In true FFP, the contractor assumes those risks but may well include them in the contract price. The contractor keeps all savings and the owner pays the costs included for the risks even if not  actually encountered or that cost less than priced. 

Let me catch up with Ralph's article.  I probably read it back then. We had a subscription at the Office.

Ok, I read the 2000, Nash & Cibinic Reports article. I don't agree that there is not an existing, appropriate contract type under the FAR that operates essentially the same as the "Cost-Plus/GMP" type, as described and defined in the DBIA Design-Build Manual of Practice - when both are used under the scenario described herein.

I will limit my scenario to the circumstances where the commercial owner or federal government has a defined "program" for a construction project. The owner/government has an authorized project, the scope is defined, the funding budget limit is defined and the owner/government has defined the functional and technical performance requirements. Both the design-build team and the government can develop a parametric cost estimate.  However, the project is very complex and there may be numerous risks that might affect price but can't be totally mitigated or avoided with certainty at the point that it is necessary to award a contract. Prices for various construction materials are fluctuating due to market conditions, so it would be risky to lock in one design solution at this point and alternative material and systems can be used to meet the owners performance requirements.

Thus, this is not an application of the "progressive design-build" approach, which is generally not allowed for FAR acquisitions.

Lets assume that there is a commercial design-build project with similar characteristics and circumstances. 

Under this scenario, assume, it would be very risky and/or speculative for a design-builder to agree to a "lump sum" (translated for federal contracting: FFP).  The contractor will only agree to an FFP if it can include a contingency for the POSSIBLE,  quantifiable risks, that may or may not occur or may or may not be controllable, manageable or able to be  mitigated, given time and possible alternatives.  The owner and contractor agree that it isn't practical to use a FFP, with the owner absorbing all the cost risk for the contingency. 

 The contractor will agree to a ceiling price but wants protection for the risks.  

The owner will agree but wants a way to positively motivate (incentivize) the contractor to try to avoid, find ways to mitigate and to manage the risks,  in order to reduce costs and/or time to complete the project. The owner wants to avoid delays due to unmanaged risk that would prevent the project from being available for its business use (let's not discuss other time incentives for the sake of this discussion).

The parties agree to a designbuild method, as described and defined DBIA's Manual of Practice in Document Numbers 510, "Cost-Plus/Guaranteed Maximum Price" and 530, "Standard Form of Agreement Between Owner and Design-Builder - Cost Plus Fee With an Option for a Guaranteed Maximum Price". Under this scenario, the parties are able to negotiate a GMP at the outset, so there is no option used (or the parties could include the option to incentivize the contractor's initial performance). 

The parties agree to  an incentive shared cost savings formula of 50/50% for each dollar of contractor cost savings under the GMP and they agree to a fixed fee for profit.  They agree that the contractor will open its books so that the owner can verify or audit actual costs expended. 

Note: in actuality,  the DBIA model includes the contractor's Home and Branch Office overheads and other indirect costs in the "fee". The contractor usually doesn't want to completely share its indirect and other overhead details with another business organization for proprietary business purposes. 

The parties establish a distinct line item within the GMP for the contingency risks that have been quantified. They agree that the line item is exclusively for the contractor's use to draw on but that it must justify the need to draw on the line item. 

Note: As Vern and I previously stated, the commercial "Cost Plus" model does not equate to the FAR "cost plus" (cost reimbursement) types. 

Now, assume that the federal agency's project falls under a similar scenario. The federal agency has decided to use design-build for similar cost and urgency reasons.  Assume that the agency can't justify sole source or limited competition. It must use the two-phase design-build process in FAR 36.3. The government doesn't want to assume the entire cost risk for possible contingencies but due to urgencies or other reasons, doesn't have the time or solutions to all the concerns at hand. 

Through market research, the government discovers that industry is unwilling to agree to a firm fixed price contract without allowing for the risk contingencies. 

The government determines that a design-build contract with a cost ceiling (GMP) like the DBIA model, which will include a fixed profit and a POSITIVE incentive for the design-build contractor to manage, avoid or mitigate risks is appropriate and desirable, thus hopefully the contractor will not expend the entire ceiling cost. The government will reimburse the contractor for its allowable costs, including overhead and other indirects under the Part 31 cost principles, within the ceiling price (less the fixed profit). 

Voila - the Fixed Price Incentive Firm Target with the ceiling price = the target price plus profit = GMP is within the bounds of FAR Part 16.  The contract clause 52.216-1 Type of Contract will state that the contract type is a Fixed Price Incentive -  Firm Target and that the target cost plus target profit will equal the ceiling cost, which is a Guaranteed Maximum Price.

The cost savings incentive sharing formula may be specified or it may be competitively negotiated. 

 The GMP must be within the Contract Cost Limit (CCL), which the government will identify in a solicitation provision. The solicitation provision will also state that "Offerors are under no obligation to approach the CCL."  In this example, the solicitation will state that full scope and design and material quality are the most important of the non-cost factors.  It will state that all evaluation factors other than cost or price, when combined, are significantly more important than cost or price. Thus, competition will hopefully control the reasonableness of proposed cost and provide high quality. 

A distinct line item for contingency within the GMP could be used and could be evaluated during the source selection to determine what kind of risks the proposers are considering. This often reveals industry concerns,  ambiguities or errors in the solicitation or industry misunderstandings of requirements. This facilitates the possibility for effective discussions that lead to solutions or otherwise alleviate some concerns, hopefully leading to better final pricing. I have successfully used similar approaches during discussions when initial proposed prices exceeded the CCL or were otherwise worthy of discussion. 

The final price is established by contract modification, based upon the final cost, fixed profit plus any share of cost savings realized below the target cost.

 Having studied both the DBIA's contract conditions and the FAR contract clause at 52.216-16,  I believe that the FPIF with GMP, in operation, is essentially the same as the DBIA's Cost-Plus/GMP model used for the commercial D-B project above- of course, tailored for the federal government acquisition regulations, cost principles, etc.

The FPIF contract is greatly simplified when there is not separate ceiling with its separate cost sharing disincentive of costs between the target and price ceiling.

On ‎8‎/‎29‎/‎2017 at 10:07 AM, Vern Edwards said:

What happens if, as part of an REA, the contractor seeks a ceiling price that is higher than the target price? You're going to have to write a provision that prohibits such an REA. Would that require a FAR class deviation? If it did, and you didn't get one, would it be enforceable? Why bother with all that?

Just noticed this. The Ceiling price or GMP is subject to adjustment under an applicable clause in the contract.  See paragraph (k) of the clause --- I've been quoting the wrong clause. The FPIF Incentive price revision clause is 52.216-16, not -17.  

Its covered exactly the same way  in the DBIA's cost-plus/GMP contract language. 

8/31/2017 EDIT: Your question is also answered in FAR  16.201 (a):

Quote

FAR 16.201(a): 

(a) Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances...

8/31/2017 EDIT:

Here is the paragraph (k)

Quote

FAR clause 52.216-16:

(k) Equitable adjustment under other clauses. If an equitable adjustment in the contract price is made under any other clause of this contract before the total final price is established, the adjustment shall be made in the total target cost and may be made in the maximum dollar limit on the total final price, the total target profit, or both. If the adjustment is made after the total final price is established, only the total final price shall be adjusted.

8/31/2017 EDIT:

I'm thinking that the author of the DBIA's:   STANDARD FORM OF AGREENENT BETWEEN OWNER AND DESIGN-BUILDER -- COST PLUS FEE WITH AN OPTION FOR A GUARANTEED MAXIMUM PRICE adapted the FAR clause for non-government D-B industry use.  He/she got rid of the legal gobblygook, FAR language using PlainSpeak but covered much of the meat of the clause - converting it to a GMP clause..

Michael C. Loulakis, ESQ., a well known attorney in design, construction and design-build law, who is also an engineer, is the probable author.  I'll ask him the next time we talk.

Joel:

Okay, let me play devil's advocate. Pretend that I'm one of the staffers you described earlier, and you have presented your design-build proposal (above) for use of an FPI(F) contract--with (a) identical target price/ceiling price, (b) a 50/50 share ratio, and (c) a separate contingency line item--to me for review and comment.

Among other things, you said:

joel hoffman said:

Under this scenario, assume, it would be very risky and/or speculative for a design-builder to agree to a "lump sum" (translated for federal contracting: FFP).  The contractor will only agree to an FFP if it can include a contingency for the POSSIBLE,  quantifiable risks, that may or may not occur or may or may not be controllable, manageable or able to be  mitigated, given time and possible alternatives.  The owner and contractor agree that it isn't practical to use a FFP, with the owner absorbing all the cost risk for the contingency.

joel hoffman said:

The contractor will agree to a ceiling price but wants protection for the risks.

joel hoffman said:

The owner will agree but wants a way to positively motivate (incentivize) the contractor to try to avoid, find ways to mitigate and to manage the risks,  in order to reduce costs and/or time to complete the project.

joel hoffman said:

The parties establish a distinct line item within the GMP for the contingency risks that have been quantified. They agree that the line item is exclusively for the contractor's use to draw on but that it must justify the need to draw on the line item.

joel hoffman said:

The government doesn't want to assume the entire cost risk for possible contingencies but due to urgencies or other reasons, doesn't have the time or solutions to all the concerns at hand.

I have no objection to the use of an FPI(F) pricing arrangement for design-build contracts. I wouldn't use one, but that's a CO call. But what you propose is a departure from standard FPI(F) practice, and I object to (1) the identical target price/ceiling price and (2) the distinct line item for contingencies on the grounds that you have not provided a good rationale for either feature of your proposal

Identical Target and Ceiling Prices

The identical target price/ceiling price, while not expressly prohibited by FAR, is radically inconsistent with the long-standing guidance on structuring an FPI(F), going back to the 1960s and presently reflected in the Contract Pricing Reference Guides, Vol. 4, Section 1.3.1. You give no rationale for that extraordinary feature of your proposal. Why should/must they be the same? How is that consistent with orthodox incentive theory? Why couldn't the target price be the ceiling price minus the quantified contingencies? That would give the contractor a motive to control costs arising from the contingencies, which your scheme does not provide. See the next section.

Distinct Line Item For Contingencies

While I think it's a good idea to identify and discuss contingencies during discussions leading up to contract award, I don't understand your notion of establishing a distinct line item for them.  Do you intend to fund it? What would be the deliverable(s) stipulated in such a line item? See FAR 4.1003. Would "contingencies" be the deliverables and the obligation? How so?

Establishing a distinct line item for contingencies that is not subject to the cost sharing incentive would give the contractor no contractual motivation to control those costs. The contractor would have an incentive to underrun the GMP, but since the GMP would exclude the contingencies the incentive would not apply to them. What your scheme appears to do is relieve the contractor from any responsibility for managing contingencies and their costs, which is inconsistent with your statement that the Government's doesn't want to assume the entire cost risk for possible contingencies. Moreover, the contractor would have a basis for submitting a claim if the Government refused to approve a "draw".

Moreover, some current guidance on the use of guaranteed maximum price indicates that the contingency is typically a 3 to 5 percent add-on within the maximum price, which is not what you're  proposing. See Carney, Contracting Methodologies and Project Delivery Systems, Maryland Construction Law Deskbook, Ch. 2 (2017):

Quote

Other issues that should be addressed in a GMP contract are the contingencies available to the contractor for items such as bid errors, missed scope between trade contractors, defects in the work, defaults by subcontractors or suppliers, and other expenses that constitute a cost of the work but do not result in an adjustment to the guaranteed maximum price. Typically, a contingency of 3-5% is included on top of the projected costs of the work and is carried as part of the guaranteed maximum price. Thus, the guaranteed maximum price will be comprised of the anticipated costs of the work, the contingency, and the fee to be paid to the contractor.

Emphasis added. If that is, in fact, "typically" the case, why do you want to establish a distinct line item from which the contractor can "draw", whatever that means? It seems to me that you have proposed a feature that requires more explanation.

Summary

The objective that I discern in your scheme is to develop a Government contract type that is consistent with guidance published by the DBIA. You have not made a case for adoption of DBIA guidance other than that you like it. Your proposal strikes me as a scheme to get around the limitation that some see in the second sentence of FAR 16.102(b) by calling your GMP cost-plus/fixed-price hybrid an FPI contract.

I see no insurmountable legal or policy issues with the use of an FPI(F) contract for design-build. But if you use it, use it in accordance with standard practice, and apply the cost sharing incentive to contingency costs. Set a target price that excludes specified contingencies, and include contingencies within the ceiling price. In that way the Government and the contractor will share the risks arising from the contingencies. I see no value added by your proposed departures from long-standing standard practice.

Let me know if I have misunderstood anything that you've said.

Not meaning to derail this very interesting thread, but I wanted to mention that when negotiating contracts with the UK MoD, the parties are supposed to discuss contingencies and, through a relatively complex probability analysis using Monte Carlo simulations, develop a probable contract cost for the contingency. That probable cost is added to the contract price as an allowable cost and, thereafter, it's the contractor's risk. In a FFP-like contract, the contractor has been compensated for that contingency whether or not it occurs, or regardless of to what extent it materializes. Obviously things are a bit different in a CP-like contract environment because funding is involved, but my understanding is that the contract profit/fee would not be adjusted for that particular contingency, regardless of actual cost incurred related to it.

"Risk that can be estimated and modelled may be an Allowable Cost within the contract price if agreed by the [MoD]. Costs associated with compensating the contractor for such risk should be evidenced, be appropriately modelled, and only be recovered once." (Emphasis in original.)

Vern, thanks.

Vern Edwards said:

I have no objection to the use of an FPI(F) pricing arrangement for design-build contracts. I wouldn't use one, but that's a CO call. But what you propose is a departure from standard FPI(F) practice, and I object to the identical target price/ceiling price and the distinct line item for contingencies on the grounds that you have not provided a good rationale for them..

Regarding contingencies:

Vern, I did not go into detail regarding a separate line item for the risk/contingencies. That is discussed as optional approach in both the DBIA Publication 510 and in my proposed Guidance for Federal D-B with GMP.  It is an amount that is included in the target cost, thus is within the GMP and included within the incentive . 

I mistakenly said in an earlier post that the contractor would have to justify using it. 

In my post yesterday, I explained why a separate line item might be useful during the source selection evaluation:

joel hoffman said:

A distinct line item for contingency within the GMP could be used and could be evaluated during the source selection to determine what kind of risks the proposers are considering. This often reveals industry concerns,  ambiguities or errors in the solicitation or industry misunderstandings of requirements. This facilitates the possibility for effective discussions that lead to solutions or otherwise alleviate some concerns, hopefully leading to better final pricing. I have successfully used similar approaches during discussions when initial proposed prices exceeded the CCL or were otherwise worthy of discussion.

Vern, I tend to agree with you that separate line item isn't necessary. 

Actually, the DBIA model states "Subject to the issue of which costs are reasonable,  the design-builder has the entire GMP available to perform the work, and in the event a line item within the GMP is exceeded,  the design-builder has the right to use underruns in other items to offset the overages, as long as the overall GMP remains intact." 

The separate line item is only useful to identify what the proposers are considering to be such contingencies. A separate line item that can be used on other line items would add unnecessary complexity. 

Quote

The identical target price/ceiling price, while not expressly prohibited by FAR, is inconsistent with the long-standing guidance on structuring an FPI(F), going back to the 1960s and presently reflected in the Contract Pricing Reference Guides, Vol. 4, Section 1.3.1. You give no rationale for that feature of your proposal. Why must they be the same? Why could the target price be the ceiling price minus the quantified contingencies? That would give the contractor a motive to control costs arising from the contingencies

The basic rationale for the identical target price/ceiling price is that, as a result of recommendations from an industry sponsored Forum for Federal Owners, I was asked to research and develop guidance for federal agencies to utilize GMP (and recommend required revisions to laws or FAR that restrict or prohibit its use).  I was told later that the scope of the recommendations isn't restricted to D-B but also includes the Construction Management at Risk project delivery method. 

Mike Loulakis referred me to GSA's policy for their version of CM@Risk, using FPIS with GMP (also uses target = Ceiling) .  I considered their method during my development of design-build guidance. However, In design-build, the contractor has more control over the design than a construction manager at risk does.  Thus the FPIF, which is simpler than the FPIS would generally be the contract type used for design-build with GMP.

I informed my client that there is already a policy for CM@Risk that could be used and adapted for other agencies. 

Quote

You give no rationale for that feature of your proposal. Why must they be the same?

I believe that I discussed the rationale in my introductory posts.  However, 

1. It is consistent with an established industry method - which GSA also adopted and which the Federal Owners Forum discussed. The industry and commercial owners are comfortable with it and it is understandable.

2. It is MUCH less complex than the separate target and ceiling and the PTA  -   if you recall a recent thread, the concept of PTA wasn't clear and in the example used, ALL of the profit was eliminated at a point below the actual ceiling cost. 

3. It is simpler and provides a POSITIVE incentive.  The separate target versus ceiling with cost overrun sharing formula can be essentially a punishment for the contractor encountering a situation during or after design, which the contractor might have little no control over - e.g., delays in obtaining third party permits, the risk of trade buyout differentials, which aren't known until after the associated tradework is designed and bid, etc.,

4.  The government's version of FPI is more suited for complex developmental programs with first articles or prototypes, systems designs, complex software development, etc.   It is vastly more complex than the type of work involved with the GMP method. Look at the Boeing Tanker program as but one example.  The government leads the public (as reported by the press, who knows nothing about FPI) to believe that the second competition was a fixed price LPTA.  Shortly after contract award for the FIRST FOUR PLANES, the contractor announces a multi-hundred million dollar cost overrun, which the government (taxpayers) will have to share in.  Was it a buy in?  

5.  In design-build, the scope is generally boxed within the defined program for one project.

Back to discussion of contingency:

The GSA policy definition of the contingency allowance, which is set at 3% of the estimated cost of the work,  is:

Quote

CMc Contingency Allowance (CCA) is an allowance for the exclusive use of the CMc to cover reimbursable costs during construction that are not the basis of a change order as defined in the contract template. These costs could include estimating and planning errors in the final ECW or other CMc errors. This allowance is the beginning pool for the shared savings incentive. The CCA is a set 3 percent of the ECW. This contingency allowance is not the budget contingency that is appropriated for the project. NOTE: This is a change in the former policy for CMc which included a shared contingency pool.

The contingency allowance is included within the GMP, thus provides the construction manager at risk a positive incentive not to have use all of it.

I did not go into that kind of detail about contingency in this thread but did say that it is within the GMP.

here_2_help said:

Not meaning to derail this very interesting thread, but I wanted to mention that when negotiating contracts with the UK MoD, the parties are supposed to discuss contingencies and, through a relatively complex probability analysis using Monte Carlo simulations, develop a probable contract cost for the contingency. That probable cost is added to the contract price as an allowable cost and, thereafter, it's the contractor's risk. In a FFP-like contract, the contractor has been compensated for that contingency whether or not it occurs, or regardless of to what extent it materializes. Obviously things are a bit different in a CP-like contract environment because funding is involved, but my understanding is that the contract profit/fee would not be adjusted for that particular contingency, regardless of actual cost incurred related to it.

"Risk that can be estimated and modelled may be an Allowable Cost within the contract price if agreed by the [MoD]. Costs associated with compensating the contractor for such risk should be evidenced, be appropriately modelled, and only be recovered once." (Emphasis in original.)

Yes - I agree with you, H2H.   In the negotiations of the Cost plus Award Fee construction task orders on two single award task order, systems contracts for the last two Chemical Weapons Demilitarization Projects,  the government and the systems contractor used Alpha Contracting methods to identify and quantify various risk contingencies. In those cases, the amount of the contingency affected the cost ceiling and the fixed portion of the fee. The funding was available for those or any other cost of the work.  The systems contractor is also the designer and the design development was in the early stages at that point.  I don't know how the DoD got authorization to perform the construction task order under cost plus award fee, considering the statutory and regulatory restrictions on that method. I'm guessing that they ignored it - but it was a DoD Level I, Major Acquisition Program.

The award fee did provide an incentive for cost underruns - cost incentives are mandatory, if performance incentives are also to be included..  

EDIT: I forgot to say that we also used the Monte Carlo simulations...

Thanks, Joel. I'll read your last post carefully later today.

A couple of things:

You have referred to a DBIA publication 510 a couple of times. I can't find a DBIA publication 510. I called DBIA just now and spoke with someone in their publications office who told me there is no DBIA 510. She said she checked their archives, too. Please check that reference and provide a complete citation. Thanks.

I'm curious--Why not just go for a FAR amendment to expressly authorize the use of GMP and to provide appropriate clauses?  Alternatively, if the FAR councils won't act, why not propose a class deviation for adoption in agency supplements ? It seems to me that the FPI approach is a halfway measure.

Vern

Vern Edwards said:

Thanks, Joel. I'll read your last post carefully later today.

A couple of things:

You have referred to a DBIA publication 510 a couple of times. I can't find a DBIA publication 510. I called DBIA just now and spoke with someone in their publications office who told me there is no DBIA 510. She said she checked their archives, too. Please check that reference and provide a complete citation. Thanks.

I'm curious--Why not just go for a FAR amendment to expressly authorize the use of GMP and to provide appropriate clauses?  Alternatively, if the FAR councils won't act, why not propose a class deviation for adoption in agency supplements ? It seems to me that the FPI approach is a halfway measure.

Vern

Vern, it is part of the "DBIA Manual of Practice".  My Manual is a Binder with each Document separately bound with covers. I'm referencing Manual of Practice Document Number 510: "Design-Build Contracting Guide."  I will call DBIA and ask and check the website.

I also remembered this morning, when I was responding to H2H about negotiating risk on the construction task orders for two Systems Contracts under a DoD Level I Major Acquisition Program, that a Cost Reimbursement construction contract doesn't contain the same clauses as a FP construction contract. 

The FPI contract type for construction contains most of the FFP clauses, including differing site conditions and other clauses that provide for equitable adjustments.

The Cost Plus Systems contractor had argued to include many of those possible risks during the Alpha Contracting definition phase. The overall risk contingency allowance affects the amount of the fixed fee or base fee.  I  just don't remember how we finally addressed it in pricing the task order.

Vern - The publication 510 has been restructured into numerous other documents. Only members can download the documents.  The Standard Form of Agreement for the Cost-Plus/GMP method, Document 530 , is still there.  I am searching for the discussion on how and when to use it in the current publication list.  Have asked the staff to assist. 

EDIT:  AHA!  The Pub 510 chapter 5.0 on Lump Sum vs. Cost-Plus/GMP has been absorbed into the general instructions for the Standard Form of Agreement.  It is  available only for members as a download. Unfortunately, I cannot transfer, copy or reprint it under the license agreement. It is only available for members as a download. 

The new citation for that which I cited earlier as Publication 510, "Lump Sum vs. Cost-Plus/Guaranteed Price" is "(Specific Instructions For) Document No. 530, Standard Form of Agreement Between Owner and Design-Builder - Cost Plus Fee With An Option For A Guaranteed Maximum Price (2010 Edition)"

Darned. Sorry.

Vern Edwards said:

I'm curious--Why not just go for a FAR amendment to expressly authorize the use of GMP and to provide appropriate clauses?  Alternatively, if the FAR councils won't act, why not propose a class deviation for adoption in agency supplements ? It seems to me that the FPI approach is a halfway measure.

Vern

Gosh,   I think we adequately discussed this.  The short of it is - 1) There is no government sponsor,  2) the FPIF method with target= ceiling (then defining that in the solicitation as the GMP) is similar to the industry's "Cost-Plus/GMP", with the understanding that their vernacular simply means that the owner will reimburse certain defined allowable costs for completing the project - not to exceed the ceiling/GMP.   That's the same as the federal "FPI" version.   The  "I" incentive operates essentially the same in both forms. 

My question is WHY does it seem to you that the FPI approach is a halfway measure?  Why isn't the existing FPIF contract type and incentive revisions clause 52.216-16 suitable for the specific application of D-B described herein ,  when the clause is slightly edited (as I showed in a previous post is specifically allowed)? 

It appears to me to operate essentially the same as the commercial GMP contract, subject to standard FAR operatives for such as determining allowable costs.  Unfortunately, you apparently don't have access to the DBIA Standard Agreement and DBIA specifically prohibits me from sharing it "for educational purposes" or any other purpose other than to a D-B client that I may be working for.

The FPI should exclude the indirect/overheads that DBIA includes in the fee ( fee = profit only).  In my opinion, the DBIA treatment of those costs is too ambiguous to put into the "fixed fee".  They are included in the fee in the DBIA contract for commercial privacy reasons. Construction companies vary widely in how they are organized and how they treat costs as direct or indirect costs. The FAR is very strict on mixing fixed costs and reimbursable costs for construction contracts (e.g., 36.208 Concurrent performance of firm-fixed-price and other types of construction contracts). To me, it would be very challenging for the government to determine if direct and indirect costs have been totally separated or classified within the fixed fee or within the reimbursable costs.  The possibility of paying twice or of inconsistent treatment of direct and indirect costs is difficult to avoid where there is no visibility of what costs are included in the fixed fee. 

The only FAR change that might be recommended is to clarify that the target price can be set to equal the ceiling price and when that could be appropriate.   I think that the DFARS at  216.403-1 and the PGI at 216.403-1 already cover how an organization can vary from the  'one size fits all' " 120 % ceiling and 50/50 share ratio "point of departure".  Its ridiculous to assume that a Design-Build contract - when used under the circumstances in the "Guidance" - would have to have a ceiling price that is 20% more than the target - as though it were an ACAT 1 Acquisition Program for a nuclear submarine or aircraft carrier or the dad-gummed Air Force Tanker. The PGI describes the requirements for D&F approval for any Incentive type contract and how to analyze risk, etc.in establishing a ceiling price. The Budgets for federal construction projects don't include other than a low percentage for contingencies.

The various FAR References that provide flexibility (including the instructions for the FPIF Incentive Clause) have already been quoted herein. 

At least two people from DAU,  Vern Edwards and an attorney from my client organization have indicated that it doesn't appear that the target and ceiling can't be the same in an FPIF.

For the most complex straight construction projects, using various forms of Construction Manager at Risk project delivery method,  the successive targets form has been used with success.

By the way, 

Quote

PGI 216.401 General.

(c) Incentive contracts. DoD has established the Award and Incentive Fees Community of Practice (CoP) under the leadership of the Defense Acquisition University (DAU). The CoP serves as the repository for all related materials including policy information, related training courses, examples of good award fee arrangements, and other supporting resources. The CoP is available on the DAU Acquisition Community Connection at https://acc.dau.mil/awardandincentivefees. Additional information can be found on the MAX website maintained by the Office of Management and Budget at: https://max.omb.gov.

 I must read the info at the above site that I just noticed...

joel hoffman said:

My question is WHY does it seem to you that the FPI approach is a halfway measure?  Why isn't the existing FPIF contract type and incentive revisions clause 52.216-16 suitable for the specific application of D-B described herein ,  when the clause is slightly edited (as I showed in a previous post is specifically allowed)?

Because you're not really thinking of an FPI(F) when you propose a target and a ceiling that are the same. That's not a concept that I know to have been used in the entire history of FPI(F) (which goes back to WWII). There is nothing that "specifically" (expressly) provides for such a thing, including the instructions for completing the incentive price revision clause. The FAR is silent about what you want to do, so, legally, it can be done, but why do it? See FAR 1.102-4(e):

Quote

The FAR outlines procurement policies and procedures that are used by members of the Acquisition Team. If a policy or procedure, or a particular strategy or practice, is in the best interest of the Government and is not specifically addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, Government members of the Team should not assume it is prohibited. Rather, absence of direction should be interpreted as permitting the Team to innovate and use sound business judgment that is otherwise consistent with law and within the limits of their authority.

Why is identical target and ceiling, something that as far as I can determine is inconsistent with 57 years of written guidance in FPI(F) structuring, in the best interest of the Government and sound business judgment? Here's what you said in your opening post:

Quote

The classic FPIF with a lower target doesn't align with the industry model.  It encourages a lower quality target design and construction level and may penalize the contractor for encountering unknowns or other non-controllable contingencies, rather than providing positive incentives to the contractor for mitigating, managing or avoiding risks and NOT consuming the contingency allowance.  It is also much more cumbersome to manage and administer than a simple GMP ceiling.  The industry has already demonstrated a willingness to accept the risk for exceeding the GMP/ceiling, using its existing GMP contract type.

The first sentence is the real rationale. As for the second, why would FPI(F) do those awful things for a DB construction project when it didn't do them for the first GPS satellite development project in 1977, which used an FPI(F) with a 75/25 share ratio and a 120 percent ceiling? The launch and spacecraft performance were a great success. Come on. 

The only rationale you have provided since (that I can remember) was this:

Quote

The basic rationale for the identical target price/ceiling price is that, as a result of recommendations from an industry sponsored Forum for Federal Owners, I was asked to research and develop guidance for federal agencies to utilize GMP (and recommend required revisions to laws or FAR that restrict or prohibit its use).  I was told later that the scope of the recommendations isn't restricted to D-B but also includes the Construction Management at Risk project delivery method. 

Mike Loulakis referred me to GSA's policy for their version of CM@Risk, using FPIS with GMP (also uses target = Ceiling) .  I considered their method during my development of design-build guidance. However, In design-build, the contractor has more control over the design than a construction manager at risk does.  Thus the FPIF, which is simpler than the FPIS would generally be the contract type used for design-build with GMP.

Now, Joel, be fair. Read what that says. That's not a rationale (argument) for identical target and ceiling, which is a radical departure from long-standing FPI(F) guidance and practice. The fact that you were asked to research and develop guidance is not a rationale for the guidance you are developing. True, FPI(F) is simpler than FPI(S), but how is that a rationale for identical target and ceiling? What comes after that "thus" in the last sentence of your second paragraph does not logically follow from the three sentences that go before it. The fact that CM@Risk isn't suitable isn't a rationale for identical target and ceiling, either.

joel hoffman said:

The only FAR change that might be recommended is to clarify that the target price can be set to equal the ceiling price and when that could be appropriate.

Talk about bureaucratic resistance. I can tell you now that if you recommend that without a better rationale than you've given here you are likely to face a long, uphill struggle to get anybody to write that into any regulation or guidance. Why would they? If I were at a meeting with you in which you made that recommendation I would ask you to tell us when such a thing would be appropriate and why? And you'd be done for if your only explanation was that it would be appropriate because it would match what's in the DBIA Manual of DB Practice. I would ask, if you're trying to match DBIA's guidance, why not simply recommend that we adopt the GMP contract type that they use? Why corrupt the FPI(F), which we think has worked well. (Actually, there is no evidence that it has.)

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs? Do that and you don't have to recommend or justify anything to anybody. If you want to use FPI(F), why not just use a standard-practice FPI(F)?

Joel, I'm not trying to be difficult. I'm trying to help you prepare for questions you might get from the conservative, cautious staffers you mentioned earlier. After all, you were concerned enough about the identical target and ceiling yourself to post a long thread asking if it would be okay. If I were a staffer and you brought this to me for review I would hone right in on that identical target and ceiling and not let go until you hollered, relented, or provided a reasoned argument in support.

You don't have to agree with me about FPI(F), just gin up a decent argument for what you want to do. Don't wreck your cause by constructing a rickety framework for it.

If I were in your place I would recommend Government adoption of GMP. I'd find a Government sponsor.

Vern

According to the DFARS, the public can make recommendations for FAR and DFARS changes directly to the DAR Council. From DFARS 201.201-1(d)(ii):

Quote

The public may offer proposed revisions of FAR or DFARS by submission of a memorandum, in the format (including all of the information) prescribed in paragraph (d)(i) of this subsection, to the Director of the DAR Council.

GSA is using FPI with GMP similar to this proposed use. They are using FPIS and developing a single target-ceiling GMP.  So, it is being done already, whether or not you knew about it. 

There is less uncertainty for design-build application than for CM@risk project delivery system.  The CM is hired early in the design stage and the government has hired a separate designer. I see a high probability that the target/ceiling  may change during the owner's design development. The construction manager has no control over the design development. But they are able to  refine the GMP.

In design-build,  the same firm is responsible for providing the integrated design and construction services.  Much more collaboration with much less uncertainty. Thus FPIF should be possible and appropriate for most projects - again with a single target/ceiling.

On 9/1/2017 at 11:42 AM, Vern Edwards said:

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs? Do that and you don't have to recommend or justify anything to anybody. If you want to use FPI(F), why not just use a standard-practice FPI(F)?

No justification to anybody is not true for DoD. . Use of  FPI for any application requires approval. 

Use of any ceiling price that "departs" from 20% delta will require appropriate justification, whether 3-5% or 0%.

 Of course, expecting a target price for  a construction project to be established at least 20% below the programmed amount for 100% scope would be asinine.  

 Whether it is 3-5% or 20% , requiring a construction contractor to pay 30-50% of the risk of contingencies/uncertainties by putting it on the right side of the target is unrealistic expectation.  This isn't the same application of FPI, as "you know" it has been used for.  Since at least  95% of design and construction in the US market is performed by other than the US Government,  it generally doesn't involve something as complicated as inventing or developing new classes of  ships, airplanes, complex weapons systems, etc. 

Construction contractors base the estimates for their FFP prices on historical construction costs that include normal events and less than perfect execution, then add for some escalation. They also consider risks for contingencies that might or might not occur. The owner's estimate of "fair and reasonable costs" also consider historical costs and some allowance for level of escalation plus risk.  

There are risks that the contractor can't always control, such as skilled labor availability, material cost escalation, subcontractor availability and market conditions that would affect buyout prices, etc. 

What would you expect the contractor to eat 30-50% of the cost of?  Reimbursement is already limited to those costs which are reasonable and allocable, etc.

What's the point of continuing this discussion if you won't provide a straightforward answer to the question: Why target = ceiling?

On 9/1/2017 at 8:42 AM, Vern Edwards said:

Joel, how hard would it be to identify a target cost and profit, add the contingencies to set a ceiling price, and set a share ratio that you think would motivate the contractor to manage the contingencies and control their costs?

You should be able to answer that in just a few simple sentences, without the irrelevancies. Why is target = ceiling an essential feature of your use of FPI? How is it in the government's best interests?

joel hoffman said:

GSA is using FPI with GMP similar to this proposed use.

Give me the contract number(s) or name the project.

Let's take a break until Tuesday. It's a holiday weekend.

We can continue later, Vern. 

But while I am thinking about it and before I lose my train of thought (one of my problems these days) , the types of contingency costs that you would suggest the government make the design-build contractor share between a target and separate ceiling would be otherwise reimbursable in a cost reimbursement construction contract and would probably be included in a FFP contract price, if you could even get a design-builder to agree to one.

The GMP method would only be appropriate for the limited instances where it is too early or otherwise too risky to be able to achieve a reasonable FFP when the owner needs to award a contract to meet its schedule for occupancy.  The cost plus methods would result in the government paying for all risks and inefficiencies that are allowable.  The FFP, if even possible,  would have the government pay for the risks included plus a markup on those costs, regardless of whether they are actually encountered.  Some otherwise unallowable costs might be included in a competitively negotiated price, too. 

The GMP includes contingencies - but only costs that are otherwise allowable would be reimbursed.  

The cost savings share incentive  encourages the contractor to manage and avoid or mitigate expending those costs. It allows both parties more time to address and mitigate risks. 

The government benefits from the time gai8ned to award and start project execution. The government also gains extra time after award to collaborate with the design-builder in addressing , avoiding and mitigating risks.  It  saves paying some costs it otherwise would have paid in a firm fixed price at the outset.  

I think that  someone would have to justify to me why the construction contractor must be required to share those costs between separate target and ceiling that iotherwise would have been allowable under a different pricing method . 

I think that H2H also mentioned the difference between paying for risk in an FPP contract whether or not the costs are avoided later.  Yes, something like the Monte Carlo simulation should be used in pricing risk. 

 I am making some contacts to find out where GSA has used their GMP method.

I've been a bit remiss by not emphasizing that the federal design-build with GMP project delivery method - just like the industry model - provides the flexibility for the parties to definitize Firm Fixed-prices for all or part of the project after award, during project execution.  

This greatly simplifies contract administration, especially for the owner but also the design-builder, who can then focus on internal design and construction management. 

The design-builder will track their actual costs, anyway as part of their own traditional project controls, construction and earned value management. 

The cost savings Incentive would still apply if the FFP comes in under the GMP. 

It is apparent to me that the lack of input here by other forum members indicates that they don't really care about the topic and/or likely don't have much, if any, clue about design-build, the business side of construction or when such a pricing method would be useful for the government.

The industry is pushing for a way to do this but isn't going to go to the effort and expense to sponsor FAR revisions if nobody in the government would understand when or how to use it.

The D-B Industry's current primary interest focus is on promoting the use of "Quality Based Selection" of design-build teams in government and commercial D-B , then using what they term "Progressive Design-Build",  in lieu of selecting the design-builder using Best Value (FFP).

In Progressive Design-Build, the owner may select a D-B team to define or help define its "program" (scope, budget and program schedule), then develop the performance criteria for functional and technical design, then design and build the project.  The method would use an evolutionary contracting process, through a series of options that would be negotiated as the project progresses. 

The industry also advocates using  sole source negotiated GMP for Progressive design-build pricing purposes. 

All that is beyond the scope of the GMP method being discussed here.

joel hoffman said:

It is apparent to me that the lack of input here by other forum members indicates that they don't really care about the topic and/or likely don't have much, if any, clue about design-build, the business side of construction or when such a pricing method would be useful for the government.

Joel,

You may err in your conclusion -- this is not a design-build discussion; rather, this is a FPI discussion focusing on whether the target and ceiling prices may be different.

joel hoffman said:

The industry is pushing for a way to do this but isn't going to go to the effort and expense to sponsor FAR revisions if nobody in the government would understand when or how to use it.

Speaking for myself here, industry has learned through many years of futile effort that the FAR Councils, and especially the DAR Council, don't really give a darn about what industry thinks. Members are primarily focused on following the policy agenda established by their supervisors, and then doing what Congress tells them to do via implementing public laws in the regulations. (The latter is a distant second.)

I would strongly suspect that any innovations that made sense to the people in the trenches, actually trying to accomplish projects, would be either (a) ignored or (b) killed in an ad hoc committee. I support my assertion by reference to the regulatory history of DOD's attempts to kill Performance-Based Payments or DOD's attempts to kill commercial pricing or the DAR Council's embarrassing response to recommendations contained in http://www.acq.osd.mil/fo/docs/Eliminating-Requirements-Imposed-on-Industry-Study-Report-2015.pdf

ji20874 said:

Joel,

You may err in your conclusion -- this is not a design-build discussion; rather, this is a FPI discussion focusing on whether the target and ceiling prices may be different.

ji, If that's all you think the discussion is about, then you have confirmed my conclusions. The FAR says very plainly that fixed price contracts that provide for an adjustable price may include a ceiling price, a target price (including target cost), or both. For application of a pre-determined formula-type cost incentive, the contract includes a target cost, target profit or fee and a profit or fee adjustment that is within the constraints of a price ceiling. 

The basic question is why and when you would set the target price equal to the ceiling price for a construction or design-build contract, rather than setting it lower than the ceiling price.

Other than telling me "that's the way we've always done it", I want to know  why the ceiling price must be higher than the target price for a construction or design-build contract that is awarded, due to time constraints, before various questions or concerns or before a reasonable FFP can be determined. I explained why the type of costs that you'd be asking the contractor to eat a share of in a design-build contract would be payable in either a cost or FFP contract type. The object is to incentivize the contractor to manage the unknowns after award and control and reduce the overall cost to the government. A GMP icost incentive does that and allows the parties time to collaberate together to address and mitigate contingencies.

And it "hasn't always been done that way".  

I'm busy preparing for a hurricane but will try to find a POC in DAU or GSA to answer Vern's question of which projects have used a GMP using FPI.

Joel,

I didn't say anything about the way we've always done it.  Perhaps your comment to me was mis-addressed?

ji, sorry- that wasn't necessarily directed at you.

What is your opinion about whether or not an FPI contract necessarily must have separate target and ceiling for the application addressed above?  If yes, why?  What costs must be absorbed by the D-B contractor within the ceiling price?

Joel:

Can you make a FPAF work?  Best guess = FP.  Contingency and slop included in AF.

bob7947 said:

Joel:

Can you make a FPAF work?  Best guess = FP.  Contingency and slop included in AF.

Nope