Contract Terms

Third Party Procurement

Frequently Asked Questions

Q = Question; A = Answer

Q. Our City contracts for its transit services under a 5-year contract. I have a six-month carry-over term but not an Extension clause. I would like to amend the contract to include the Extension clause for an extension of up to 5-years. We see this as advantageous to our system, for it provides the continuity that sometimes is missing from private contracting. Background info: we are not a direct grantee of Federal Transit Administration funds. We operate with State of California Transit Development Act funds, but the fleet we operate is funded with FTA capital funds.

Are there any FTA regulations that would prevent us from amending the contract to allow for negotiations for an extension of services provided by our current contractor?

A. From the data you provided we are not sure that this transit services contract is subject to FTA Circular 4220.1F. Leaving that question aside, however, we can provide some guidance on FTA requirements regarding contract extensions.

There was a time when FTA had a five-year term limit on service contracts such as this, but that term limit no longer exists, except for contracts for rolling stock and replacement parts.

The present services contract was obviously not competed for the five-year (future) period you describe. This means that any extensions to the original contract will be a sole source procurement, requiring justification and approval through the established management officials of your agency. The inclusion of a contract extension clause in the contract does not alter the requirement for a sole source justification. The only way to avoid this would have been to include this five-year period in the original solicitation as an option that was priced by the competitors and evaluated as part of the original contact award decision.

The FTA Best Practices Procurement Manual (BPPM) discusses the topic of contract periods of performance in section 2.2.1. (Revised: July, 2010)

Q. I have a construction site that is experiencing a form of vandalism. Graffiti is being sprayed on the bridge for the facility project. Is this the contractor's responsibility or the owners?

A. Responsibility for security at the construction site depends on the terms of your contract. We would suggest you have your counsel review the contract and advise you. If you find the contract does not give the contractor responsibility, you are of course free to change the contract terms and make the contractor responsible for security, but this will entitle the contractor to an equitable adjustment in the contract price. You may want to get a cost proposal and negotiate it before you issue the change. (Reviewed: July 2010)

Q. We have a cost-reimbursement, fixed fee contract that contains projections of billable hours. The contractor has submitted a claim asking that we reimburse him at a higher reimbursable rate because our projections were off by more than 10% (i.e. contract reflects 114,000 billable hours; actual hours were 97,577 billable hours). Contractor feels we owe him a higher rate for the entire previous year. What, if anything, would we actually consider reimbursing this contractor?

A. It would seem from the fact there was an audit of actual fringe benefit costs that the parties understood that a cost-plus-fixed-fee contract was intended, and not a T&M contract with fixed hourly billing rates. We, however, do not understand the intent of the hourly billing rate in the contract. Is that rate intended to be merely a provisional billing rate until final costs can be audited? If so, it would seem prudent to perform annual cost audits and annually adjust the billings to date so that the agency is protected from serious over-billings by the contractor and the contractor is not faced with having to refund large amounts of money to the agency at the end of the contract term. This annual audit could also form the basis for adjusting the provisional billing rate to more accurately reflect actual costs being incurred. Related to these issues is the question of whether the contractor is accounting properly for its costs and keeping a real-time picture of costs incurred so that the billings are accurate. Many contractors with cost-reimbursement contracts find themselves in serious trouble because their accounting systems are not adequate to properly account for costs.

As to the basis of the claim, the first question you need to answer is the question of entitlement under the specific clauses of your contract. In other words, there must be a contract provision that entitles the contractor to an adjustment in the estimated cost and fixed fee of the contract for the fact that the actual hours ordered and worked were less than the projected amount. We would think under these circumstances of less work that your agency would normally expect a credit (reduction) in the estimated cost and, without question, a credit in the fixed fee for ordering fewer hours.

In regard to the fixed fee issue, section 2.4.3.2 - Cost Reimbursement Contracts in the FTA Best Practices Procurement Manual (BPPM) has an excellent discussion of fixed fee and the contractor's responsibility to complete performance of the contract in order to earn the full fixed fee. In this case the contractor has furnished about 86% of the hours, so he is entitled to 86% of the fixed fee for the first year, unless the contract specifically says otherwise. This means a substantial credit to you for fee as compared to the amount called for in the contract for the first year. The contractor should have been billing fee as a percent of completion of the work; i.e., based on hours worked and not based on time elapsed or dollars spent.

In regard to costs, if the contractor is claiming a cost increase for having to work less hours, it is the contractor’s responsibility to furnish detailed cost data to substantiate the claim. We would ask for a breakdown of the various cost elements that formed the basis of the cost proposal for the original contract award (e.g., direct labor hours and dollars, fringe benefit costs, home office overhead, materials, equipment, subcontract costs by subcontract (together with a copy of those subcontracts), etc. Alongside these originally projected costs for the period in question we would ask the contractor to submit the actual costs incurred for that cost element, together with an explanation of how the reduced hours affected that cost element. It is essential that the contractor explain why your agency caused its costs to increase. It may be the contractor has fixed costs for things like management and vehicle leases that must be recovered over fewer hours but the contractor needs to present this data and support its request. The same type of explanation and support must be furnished with respect to the subcontractors who form a major part of its cost base. The contractor needs to support why the terms of its subcontracts entitle them to more money, which would then be an allowable cost incurred to the contractor and thus billable to you. I would take care to be sure the contractor has not guaranteed a certain amount of hours and revenue to its subcontractors in contradiction to the terms of the prime contract which merely estimated the hours to be needed and did not in any way guarantee those hours. Presumably all the parties understood there were no guarantees and accepted this as a risk. Whatever cost increases the subcontractors are claiming, they also need to support with cost data, and we would strongly urge that the subcontractors' costs be audited along with the prime's costs (as suggested below) before payment is made on the claims.

Once the contractor has submitted the cost data described above, you should have your auditors examine the contractor's records and the subcontractors' records for the first year's costs incurred and the explanations of why these costs increased, and submit an advisory audit report to you so that you can prepare a pre-negotiation memorandum setting forth the agency's negotiation position (with the help of your legal staff and your audit staff). We would caution you to be diligent in documenting whatever additional money is agreed to so that you do not run the risk of a later review by FTA which would disallow the payment of this claim and cause your agency to have to absorb the full amount of any payment. We would also advise you to review the FTA Master Agreement, Section 43d, which states that FTA reserves the right to concur in any compromise or settlement of any claim, and FTA Circular 5010.1D, which requires FTA concurrence when the proposed claim settlement exceeds $100,000. (Revised: July 2010)

Q. Would you please clarify no term limits on rolling stock and replacement parts; is that referring to actual purchase of the bus and parts? In other words, can an advertising contract for on-bus advertising be longer than 5 years?

A. Yes, the five-year term limits apply only to the purchase of the bus and parts. Contract terms for revenue contracts (advertising on buses) can be longer than five years. FTA's only requirement for revenue contracts is that they be competed in order to give all taxpayers an equal opportunity to benefit from a federally funded asset (bus). FTA policy regarding revenue contracts is discussed in the FTA Procurement Circular 4220.1F, Chapter II, page II-6. (Posted: January, 2012)

Q. Does the lease of bus tires come under the FTA 5-year contract limit for rolling stock and spare bus parts?

A. Leasing of tires does not fall under the five - year contract term limit for procuring rolling stock and replacement parts. Leasing of tires is seen as a service contract since the agency is not buying the tires, per se, but rather entering into a contract to supply tires to the agency during the life of the contract. The lease arrangement is thus a services contract to keep the tires maintained even if that means replacing them on occasion. (Posted: August, 2013)