Cost Plus Fixed Fee Contracts

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Q. We would like to incentivize our CPFF contractors to perform their contracts in a timely manner. Can we structure our CPFF contracts to pay the fixed fee upon submission of contract deliverables instead of as a percent of cost incurred on a monthly basis?

A. We believe this would be an excellent approach to motivating the contractor to complete the contract on time. In fact the fixed fee is only fully earned when the contract is completely performed. It is not earned simply for incurring costs. Your approach recognizes the contractor’s responsibility under the contract to successfully perform as consideration for the payment of fee. Payment of costs, however, is made on the basis of “best efforts” as the costs are incurred. (Posted: February, 2013)

Q.
Can we place caps or limits on direct costs on a cost plus fixed fee contract? For example, can we reject a proposed increase to a direct labor rate that we find to be excessive? Or are we required to accept the rate as their true cost so long as it can be supported by an audit?#

A. You are required to ensure that all costs billed to your contract are allowable costs as defined in FAR Part 31 cost principles, and in fact grantees are required to include FAR Part 31 cost principles in their cost reimbursement contracts for the purpose of determining allowable costs under the contract. This means that contractors are not entitled to be reimbursed for unallowable costs as defined in FAR Part 31. The issue you raise is one of reasonableness of compensation, and this is dealt with in FAR Part 31.205-6. FAR Part 31.205-6 – “Compensation for Personal Services” deals with the issue of compensation and reasonableness thereof. This subpart has the following guidance for compensating individuals not covered by labor – management agreements:

(2) Compensation not covered by labor-management agreements. Compensation for each employee or job class of employees must be reasonable for the work performed. Compensation is reasonable if the aggregate of each measurable and allowable element sums to a reasonable total. In determining the reasonableness of total compensation, consider only allowable individual elements of compensation. In addition to the provisions of 31.201-3, in testing the reasonableness of compensation for particular employees or job classes of employees, consider factors determined to be relevant by the contracting officer. Factors that may be relevant include, but are not limited to, conformity with compensation practices of other firms—

(i) Of the same size;

(ii) In the same industry;

(iii) In the same geographic area; and

(iv) Engaged in similar non-Government work under comparable circumstances

The FAR may be accessed: https://acquisition.gov/far/current/html/Subpart%2031_2.html#wp1095552 (Posted: August, 2013)

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