1. 1 Elements for Program Success NCMA Cape Canaveral Chapter Winter Education Conference February 24, 2006 Steve Cusick DRS Technologies Phil Couey Harris Corporation

2. 2 Agenda for this Segment Topic: Appropriate Contract Type – Steve Cooperation – Government & Contractor Team – Steve Clarity of Specifications – Phil Change Management – Phil Question and Answer Session

3. 3 Contract Type – Back to Basics I.Categorized by Price A.Fixed - Price B.Cost - Reimbursement C.Time and Materials & Labor Hours D.Level of Effort

4. 4 Firm – Fixed Price Contracts (FAR §16.2) 1.Contractor promises to perform at a fixed price 2.Contractor bears risk of increased costs 3.Inappropriate for R&D work – use Cost plus oFAR § 35.006(c) oDoD Appropriations Act – 1987 obut see, AT&T v. U.S. 48 Fed CL. 156 (2000) upholding Fixed Price contract for developmental work

5. 5 FFP Contract is appropriate when: 1.Adequate price competition. 2.Reasonable price comparisons or price supported by valid cost or pricing data. 3.Available C & P data permits realistic estimates of probable costs. 4.Performance uncertainties can be identified and reasonable cost impact can be made.

6. 6 Fixed-Price with Economic Price Adjustment (FAR §16.203) 1.Provides for up or down revision upon specified contingencies (eg. known labor or material index). 2.There is serious Govt. doubt regarding the stability of labor or market conditions. 3.Market based EPA clauses are permitted under the FAR. Tesero Hawaii Corp. v. U.S. (CAFC, April 2005). 4.Price adjustments are limited to contingencies beyond the contractor’s control.

7. 7 Fixed-Price Incentive Contracts (FAR §16.204) 1.Fixed contract price adjusted based on relationship of final negotiated total cost to the total target cost. 2.Advance agreement on firm target cost, target profit, and profit adjustment formula. 3.May use FPI (firm target) or FPI (successive targets) (FAR § 16.403(a)). 4.N.B. - Point of Total Assumption – Converts FPI to FFP 5.Use FPI when FFP is not suitable and contractor can assume cost responsibility and gain a positive profit incentive.

8. 8 Fixed-Price Award Fee (FAR §16.404) 1.Contractor receives negotiated fixed price (includes profit). 2.Award fee will be paid in addition to fixed price. 3.Requires an Award Fee Board, approval above the level of the C.O. 4.Rare – used when the Govt. wants to motivate a contractor and other incentives cannot be used because the contractor’s performance cannot be measured objectively.

9. 9 Cost Reimbursement Contracts (General) (FAR §16.3) 1.Rules pertaining to all cost contracts apply: oPayment of allowable costs only oTo be allowable, a cost must be reasonable, allocable, properly accounted for, and not specifically disallowed (FAR § 31.201-2). oContractor must have an adequate Cost Accounting System (FAR § 16.301-3). 2.Cost ceilings are imposed by Limitation of Cost clause or Limitation of Funds clause if incrementally funded. 3.Contractor is entitled to “stop work” when the funding or cost limit is reached.

10. 10 Cost Plus Fixed Fee Contracts (FAR §16.306) 1.Contract price is allowable cost plus a fixed fee (not profit) that is negotiated before award. 2.Max fee is based on estimated cost at time of award, not on actual costs incurred. oCost plus percentage of cost is prohibited (FAR 16.102(c)) 3.For regular contracts, max fee is 10% (R&D 15%) (FAR § 15.404-4(c)4.)

11. 11 Cost Plus Incentive Fee Contracts (FAR §16.304) 1.Appropriate for services or development and test programs (FAR § 16.405-1). 2.Govt. may combine technical incentives with cost incentives (FAR § 16.405-1(b)(2)). 3.CPIF contract specifies a target cost, a target fee, a minimum & maximum fee plus a “share ratio” (Govt./Contractor share percentage of overrun or underrun).

12. 12 Cost Plus Award Fee Contracts (FAR §16.405-2) 1.Appropriate when acquisition objectives will be enhanced by CPAF that motivates exceptional performance and provides Govt. with evaluation flexibility (FAR § 16.405-2(b)(1)). 2.Contractor receives a base fee (0 – 3%) plus an award fee based upon award fee board evaluation. 3.Award fee is a unilateral decision – solely at discretion of the Govt. 4.A contractor is entitled to unpaid award fee when Govt. terminates a CPAF for convenience. (Northrop Grumman v. Goldin, 136 F.3d 1479 (Fed. Cir. 1998).

13. 13 Cost Reimbursement (no fee) and Cost Sharing Contracts (FAR §16.302 & 16.303) 1.Appropriate for R&D work, especially with non-profit organizations. 2.Cost sharing contracts – contractor is reimbursed only for an “agree upon” portion of its allowable costs. 3.Normally used where the contractor will receive “substantial benefit” from the effort; a follow on contract for example.

14. 14 Time & Materials and Labor-Hour Contracts (FAR §16.6) 1.Appropriate when not possible at contract award to estimate the extent or duration of the work (FAR § 16.601, 16.602). 2.C.O. must execute of a “Determination & Finding” that no other contract type is suitable. 3.T&M contracts – services or supplies on the basis of: oDirect Labor hours oMaterials at cost, but may include a handling fee.

15. 15 Level of Effort Contracts 1.Fixed price, level of effort term (FAR §16.207) oAppropriate for investigation or study contract in a specific R&D area (generally less than $100K). 2.Cost plus fixed fee – term (FAR §16.306(d)(2)) oContract price equals the cost incurred plus a fee oSpecific Level of Effort over a specific period of time

16. 16 Indefinite Delivery Contracts (FAR §16.5) 1.Three types A.Definite Quantity (FAR §16.502) B.Requirements Contract (FAR §16.503) oGovt. must order all its requirement from Contractor C.Indefinite Quantity (FAR §16.504) Must be either: oRequirements or oID/IQ (See Satellite Servs, B-280945, Dec 4, 1998). 2.Placing orders under delivery on task order contracts (FAR §16.505) oGenerally not protestable (GAO rules – 4 C.F.R. §21.5a).

17. 17 Letter Contracts (FAR §16.603) 1.Appropriate when Govt.’s interests demand a binding commitment so work can start immediately. 2.The Head of the Contracting Activity (HCA) must determine in writing that no other contract is suitable (FAR § 16.603-3). 3.Must include a not-to-exceed price, generally with 180 day definitization (DFARS §217.7404-3 ). 4.Letter contracts shall not: oViolate the Anti-Deficiency Act oViolate the Competition in Contracting Act (FAR Part 6)

18. 18 Option Contracts (FAR §17.2) 1.A unilateral right by which the Gov’t may elect to purchase additional supplies or extend the term of a contract. May not exceed five years. 2.The C.O. shall not employ options if: oContractor will incur undue risks; e.g., the price or availability of materials or labor is not reasonably foreseeable. 3.Exercising options oGovt. must exercise an option strictly according to its terms. oImproper exercise or partial exercise may be a constructive change to the contract. Lockheed Martin IR Imaging Sys v. West, 108 F.3d 319 (1997)

19. 19 Summary of factors in selecting a contract type (FAR §16.104) 1.Numerous factor that the C.O. should consider in selecting a contract type: a.Availability of price competition f.Contractor’s technical capability and financial responsibility b.Accuracy of price or cost analysis g.Adequacy of the contractor’s accounting system cType and complexity of the requirement h.Concurrent contracts d.Urgency of the requirement i.Extent and nature of proposed subcontracting e.Period of performance or length of production run j.Acquisition history 2. Selection of a contract type is ultimately left to the reasonable discretion of the contracting officer. Diversified Tech. & Servs. of Virginia, Inc., B-282497, July 19, 1999.

20. 20 Appropriate Contract type based upon risk (FAR §16.103) 1.Requires sound judgment; objective is reasonable contractor risk with greatest incentive for efficient performance. 2.Chart depicting risk allocation: FFP to CPFF Low Risk Contractor bears; High Risk Govt. Bears Allocation of Cost Risk Contractor Risk Government Risk CPFF – LOE T&M CPFF CPIF COST NO FEE COST SHARING FPAF FPI FFP W/EPA FFP

21. 21 TEAM EFFORT: Duty to Cooperate by Government and Contractor Team

22. 22 Cooperation: A Basic Duty of Both Parties 1.In every Government contract, both parties have an implied duty of “good faith” and “fair dealing” with each other. 2.The most common result of a breach of this duty is the performance of extra “out of scope” work; i.e., a “constructive change”. 3.Generally present when parties fail to communicate openly.

23. 23 Government Duty to Cooperate 1.“Good faith and fair dealing” requires the Govt.: oTo cooperate by taking whatever action is necessary to enable the contractor to perform efficiently. oNot to act in any way that will hinder performance. 2.Lots of legal authority in this area: oGovernment Contract Changes, Chapter 12 (Ralph Nash, 2002) oRestatement (Second) of Contracts, Section 205 oLewis-Nicholson v. U.S. 550 F.2d 26 (Ct. CL. 1977)

24. 24 Failure to Cooperate & Interference 1.The Govt. must cooperate with the Contractor. Failure to provide assistance for efficient contractor performance is a “constructive change”. oChris Berg v. U.S. 197 Ct. Cl. 503 (1972) oIngalls Shipbuilding 76-1 BCA para. 11,851 2.Govt. has been held liable for interference claims in the following circumstances: oOverzealous inspection of work oIncompetence of Govt. personnel oDisruptive criminal investigation conducted in Govt.’s contractual capacity.

25. 25 Actions and Inactions may also be Constructive Changes 1.Failure to provide assistance. More examples: oFailure to prevent interference by another contractor. oFailure to provide access to the work site. 2.Abuse of discretion in the approval process. oSubstitution of Subcontractors oDisapproval of CDRLs oTimely approval of waivers & deviations is required. 3. Inaction or silence can also compel extra work. 4.Failure to disclose vital information. oSuperior technical knowledge held by Govt. of which contractor is ignorant.

26. 26 Conclusion – Cooperation is a “two-way” street 1.Mutual success in the federal contracting area requires judgment, patience, maturity and cooperation. 2.Complex technical specifications abound in this area, and are subject to interpretation. oDesign specs oPerformance specs winning formula Change management is a “winning formula” for program success