Revisions to Cost-Type

Contracts: Controlling Scope,

Schedule, and Cost

Breakout Session #405

Jo Cunningham

July 20, 2010

11:15 am – 12:30 pm

1
1
Contract Types

• Two Basic Pricing Arrangements:

– Fixed Price:
• FFP, FFP/EPA, FP+AF, FP+I, FF Rate, Cost-
Share

– Cost Reimbursement:
• CNF, CPFF, CPIF, CPAW, Cost-Share
• T&M, LH

2
 Cost -Type Contracts
Cost Risk: High >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Low

Requirement
Definition Vague >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Well Defined

Production Concept Exploratory Test/ Full scale Full

Stage Studies, & Development Demo Development Production
Basic Research

Contract Varied CPFF CPIF, CPIF, FPIF, FFP, FPIF,

Type FPIF or FFP or FPEPA

3
 CPFF / T&M Overview

CPFF Completion CPFF Term (LOE) T&M

SOW SOW SOW
POP POP POP
Estimated Cost Estimated Cost Ceiling Price
Estimated Cost Estimated Cost Allowable
Fixed Fee Fixed Fee Charges
Total Cost and Fee Total Cost and Fee

LOE Language tying

fee to range of hours

4
Cost-Reimbursement
Contract Administration

• Where the rubber

meets the road

5
T&M Contracts

• Contractor’s rates for Labor include

Costs, Overhead, and Profit/Fee
• Materials and Other Direct Costs
are provided at Contractor’s cost
• Contractor may add OH to ODCs IF
he has not already recovered these
costs in his Labor rates, and it is his
standard accounting practice.
6
 Revisions to T&M Contracts
Issues you must address:
Option years and Rate Change Requests:
 Direct Labor Rate changes
 Indirect Rate changes
 Audit contractor’s proposed revised rates? Consider
cost of audits
 Use GII/DOL factors?
Adding Funding:
 Will additional funding & work scope lower indirect
rates?
 Assuming no GII/DOL provisions, has contractor
experienced any changes in his indirect rates?
7
Cost-Reimbursable With or
Without Fee Contract Revisions

• THESE ARE NOT

TIME AND
MATERIALS OR
LABOR HOUR
CONTRACTS
• You cannot just
“Add Money”

8
Revisions to Cost-No Fee Contracts
Issues you must address:

• Costs incurred to date (existing scope)

• Estimated Costs to Complete (existing scope)
• Estimated Costs for New Scope
• Is this revision for an overrun?
• Identify the reason for an overrun.

9
Revisions to Cost-No Fee Contracts
Issues you must address, continued:

• Address Contractor’s Quote(s), Buyer’s Position,

Negotiated Settlement, and Net Impact

• Monitor invoices.

Key Words to Remember: Scope Creep, Scope

Growth, Cost Overrun

10
Revisions to Cost-Plus Type
Contracts
Issues you must address:

• Estimated Costs for New Scope plus Fee for New

Scope
• Is this revision for an Overrun on a Cost-Plus-
Fixed-Fee contract?
• Identify the reason for an overrun.
• If the overrun does not represent added work,
additional fee shall not be added.

11
Revisions to Cost-Plus Type
Contracts
Issues you must address, continued:

• Address Contractor’s Quote(s), Buyer’s Position,

Negotiated Settlement, and Net Impact
(An example of an analysis is in the attached
spread sheets)
• Define how Fee will be paid in contract; monitor
invoices to insure Contractor is not invoicing
inappropriately for fee.

Key Words to Remember:

Fee-bearing, Non-fee-bearing, Scope Creep, Scope
Growth, Cost Overrun
12
Cost-Reimbursement Contracts
Completion vs. Term

• The scope of work can be written two

ways for a cost reimbursable contract:

– Completion

– Term Form

13
Cost-Reimbursement Scope
Approach: Completion vs. Term
Completion
• States a definite goal or target and specifying an
end product.
• Contractor must complete and deliver specified
end product (e.g., a final report of research
accomplishing the goal or target) within the
estimated cost, as a condition for payment of the
entire fixed fee.
• If work cannot be completed within estimated cost,
Government may require more effort without
increase in fee, provided Government increases
the estimated cost.
• FAR 16.306(d)
14
Cost-Reimbursement Scope
Approach: Completion vs. Term
Term Form
• Obligates contractor to devote a specified level of effort
for a stated time period.
• If performance is considered satisfactory by
Government, fixed fee is payable at expiration of
agreed-upon period, upon contractor statement that
level of effort specified in contract has been expended
in performing the contract work.
• Renewal for further periods of performance is a new
acquisition that involves new cost and fee
arrangements.
• FAR 16.306(d) 15
Quarterly Cost Status Reports

• Quarterly Cost Status Report Enable

Better Contract Management:
– Technical progress for period ended
– Cost to date for period ended
– Estimated costs for next quarter
– Technical activities/milestone completion
planned for next quarter
– Estimated Cost to complete Contract
16
 Ask the Right Questions:
Line Customers
• What is the technical status of the
contract?
• What is driving the increase?
– Cost Growth?
– Scope Growth?
– Constructive Changes?
– Effect on Schedule?

• Project Manager & Budget Analyst Input

17
Ask the Right Questions:
Contractors
• What is the technical status of
contract performance?
• What is driving the increased
schedule and/or costs?
– Scope changes ? Source?
– Constructive Changes?
– Suppliers?
– Subcontractors?
18
The Trinity:
Scope, Schedule, and Cost

SCOPE

SCHEDULE COST

19
Adding Scope, Schedule, Cost
Step One – Existing Scope:
• Get cost-to-date and estimate to complete
existing, current work
• Get technical status to date
• Obtain hours to date and estimated hours-
to-complete for CPFF LOE Contracts.
• If there is a projected overrun, make sure
that Contractor does not mix up cost for
new work with overrun in order to get fee
on the overrun.
20
Adding Scope, Schedule, Cost

Step Two – Scope Change

• Evaluate labor, material, travel, indirect
costs, profit for new work. Negotiate
Schedule and Cost Plus Fee for New Work.

Step Three
• Summarize Changes. Map out how much
must be added to the contract to account
for (1) cost status of existing contract and
(2) proposed new work.
21
CPFF Completion Changes:
Fee-bearing Costs &
Non-fee-bearing Costs
• If SOW Scope is increased, the increased cost is
fee-bearing.
•

• If your action has the effect of requiring the

Contractor to perform more work, (constructive
change), that cost increase could be fee-bearing
– Defective Specifications
– Contractor gets order to “speed up” work in face of
excusable delays.
– Non Cooperation or Interference, e.g. your
organization impedes performance

22
CPFF Changes: Fee-bearing
Costs & Non-fee-bearing Costs

• If increased cost is the result of Cost

Growth, the increased cost is non-fee
bearing.
– More hours needed than originally estimated
– Material Cost Increases
– Proposed subs not available requiring
Contractor to use more expensive subs.

23
CPFF Changes: Overruns

• If there is an overrun or revised estimate to

complete (anticipated overrun)
– Contractor needs to provide detail on the
overrun:
• Cost and technical status of work to date
• What cost elements make up the overrun
• What technical work will be performed with
the overrun.
• What conditions drove the overrun.
24
CPFF Changes: Descopes

De-scope:
Preferable to a Partial Termination

Step One
• Get cost-to-date and estimate to complete
for current work.
• Get technical status to date

25
CPFF Changes: Descopes

Step Two
• Evaluate labor, material, travel, indirect costs,
profit for new work. Negotiate Cost Plus Fee
for Deleted Work:
• Look for the following when evaluating the
proposal:
– Underestimating labor, material
– Omitting types of labor or material
– Omitting Indirect Costs
– Omitting Profit
26
CPFF Changes: Descopes

Step Two, Continued

• Closely review original proposal to see if there was
anything originally proposed that is missing from
deduct proposal

Step Three
• Summarize Changes. Map out how much must be
added to and/or deleted from the contract to
account for (1) cost status of existing contract, and
(2) proposed deleted work.

27
Example 1: Scope Increase to
CPFF Completion-type Contract
Increased Scope Change on CPFF Completion,
Without Getting Cost-to-Complete Status
Quotation Instructions:
• Propose Estimated Cost and Fixed Fee for adding one
support package:

Original Negotiated New Contract

Contract Increase Value

Cost $1,218,354 $118,868 $1,337,222

Fee $ 92,778 $ 7,132 $ 99,910
CPFF $1,311,132 $126,000 $1,437,132

28
Example 1(a): Scope Increase to
CPFF Completion-type Contract
Increased Scope Change on CPFF Completion,
Buyer Obtained Cost to Complete Status, and
“Balanced the Books”:
Quotation Instructions –
• Provide Cost to Date through the Most Current Accounting
Period.
• Provide Technical Status To Date through most current
Accounting Period.
• Provide Estimated Cost to Complete for the Current Work.
• Propose Estimated Cost and Fixed Fee for adding one
support package.
Let’s look at the difference in the results
29
Example 2: Adding New Term to
CPFF-Level Of Effort Contract
Adding new Term Without Getting Cost and Hours-
to-Complete Status, e.g. “Balancing the Books”
Quotation Instructions:
• Propose Estimated Cost and Fixed Fee for adding 4 months.

Contract Cost
And Fee
Thru 8/31/07 New Contract
Term Neg. 9/1/07 – 12-31-07 Value

Cost $74,425,817 $3,826,414 $78,252,231

Fixed Fee $ 5,694,078 $ 305,108 $ 5,999,186
Total $80,119,895 $4,131,522 $84,251,417

30
Example 2(a): Adding New Term to
CPFF-Level Of Effort Contract
Increased Scope Change on CPFF LOE, Buyer
Obtained Cost to Complete Status, and “Balanced
the Books”:
Quotation Instructions –
• Provide Cost to Date through the Most Current Accounting
Period.
• Provide Hours through Most Current Accounting Period.
• Provide Estimate to Complete thru Balance of Contract Term.
• Propose Estimated Hours to Complete thru Balance of
Contract Term
• Provide CPFF and Hours for new Term
Let’s look at the difference in the results
31
Example 3: De-Scope
Delete Task #4:
Quotation Instructions:
• Provide Cost to Date thru Most Current Accounting Period
• Provide Estimated Cost to Complete for the Current Work
• Get Technical Status on current work.
• Propose Detailed Deducted Estimated Cost and Fixed Fee for
deleting Task #4. Use current costs to price the proposal.

Let’s See How the Savvy Buyer Accomplished This.

32
Group Exercise:
Fixing the Mismanaged CPFF

You have inherited a CPFF contract that was treated like a

T&M for the last 2 amendments, over a two-year period.

Funding was added without obtaining any cost information of

any kind – twice!

• Need amendment to extend the contract for a fourth year, and

add funding to cover the estimated costs.

• Contractor provided detailed cost proposal $695,000.00.

33
Group Exercise:
Fixing the Mismanaged CPFF
• Contractor quoted indirect rate of 387%; it was 186% when
contract was placed 3 years ago.

• Requester thinks 4th year’s level of effort will be about

$800,000.00.

• The current contract value is $750,000.00.

What are the issues you must address?

How will you resolve each one?

34
Summary
• Consider getting Quarterly Cost Status Reports
• Avoid adding and deleting funding off CPF’s as
if they are T&M’s. Go through the proper
processes.
• Ask the right questions of Line and Contractors.
• Evaluate Cost Status vs. Technical Completion
for Cost Type Contracts.
• Understand what is fee bearing and what is not.

35
Questions?

36