Cost Plus Percentage of Cost Contracts

Q. Is the contract discussed below a cost plus percentage of cost contract, even if the modifications show a target cost, base fee and maximum available award fee? Cost plus award fee contract. 8 percent base. 7 percent award fee. Contract ceiling $508 million. Contract grows due to scope changes over a six-month period to almost $1 billion. Agency continues to pay the award and base fees on the increased cost at the original percentage rates. First 20 of original contract modifications do not restrict or provide either a target amount for the base or award fee. Contract modifications three after contained an identified scope of work and target cost, base fee, and maximum available award fee. These fees, of course, were calculated using the predetermined rates. A. It is not uncommon to negotiate a profit or fee rate on changes or added scope using the negotiated percentages in the original contract. This is not the recommended approach but it is not prohibited. The additional fee should be based on such matters as the degree of risk in the added work, the amount of investment, the percentage of work subcontracted, etc. But it is important to distinguish between using ("negotiating") projected/ estimated costs vs. actual costs in arriving at the profit or fee dollars. If the agency is using the Contractor's projected/estimated (proposed) costs as the basis to negotiate fee, then this is not a CPPC situation. If, however, the agency uses actual costs (i.e., after the costs are incurred) as the basis to establish fee, then we would have a "de facto" illegal CPPC situation (this principle has been established by the GAO on Federal contracts). We would also note that it would not be legal to establish terms in a contract that promised to pay the Contractor for actual costs incurred plus a predetermined rate of profit on those costs. This too would be a CPPC contract. The fee payable must always be expressed and fixed in the contract in $ terms, not % terms, so that if the Contractor overruns the estimated costs in completing the statement of work, there must be no additional fee paid on those cost overrun $. The fee to be paid for completing the scope of work must be fixed and payable regardless of how much it actually costs the Contractor to finish the work. If the agency is treating all cost growth as fee bearing $, they should document the file to explain that the Contractor in fact completed the scope of work originally established, so that it is clear that the additional estimated costs, and fee negotiated, are associated with "new" or "changed" work as defined in the contract modifications.

Q. Paragraph 10.e of FTA Circular 4220.1E states that the cost plus a percentage of cost and percentage of construction cost methods of contracting shall not be used. Question 1. Is this only for construction projects, since my project concerns rolling stock purchase with possible changes to the car? Question 2. If Grantee directed a change to a contract where cost cannot be ascertained at the time of Grantee's directed change, wouldn't it make sense to reimburse the contractor for their cost plus overhead and profit to make them whole? Is that permitted? We are buying rolling stock and have a contract clause for NCTD directed changes that provides that NCTD will reimburse for the actual cost plus overhead and profit. It is intended for regulatory design changes (e.g. ADA, FRA) in the car that is being manufactured since it is very difficult to forecast what costs are involved in a redesign. In the contract provision, overhead and profit has a % cap. Overhead is subject to audit to ensure that they are not charging more overhead then they actually incur (but they cannot charge more than the stipulated cap), and profit is negotiated (but not to exceed the stipulated cap). We want to ensure that this contract provision is not violating FTA regulations. A. The statutory prohibition concerning cost-plus-percent-of-cost (CPPC) contracting applies to all contracts, not just construction. Your contract clause would not violate the CPPC prohibition if it merely places a cap on the overhead and profit rates that will be negotiated on future change orders. The important point is that the overhead and profit rates not be fixed in advance, so that the Agency is bound to pay actual costs plus a pre-determined rate for overhead and profit. These rates must be negotiable and the overhead rate that is negotiated should be "provisional," and subject to later audit where it will be adjusted to actuals. You are, however, allowed to put a cap on the overhead rate so that the final rate payable will not exceed the cap even if the audited rate should be higher than the cap.