Contract Management 101: A FFP contract is not T&M

One thing that I have seen a lot of is the misapplication of performance-based contracting tenets, especially when it comes to requirements. Basically, some requirement offices slap “Performance Work Statement” as the title, delete “Statement of Work,” and maybe add some metrics and measures. Voila, a “performance-based contract” is born.

However, the contract line item numbers (CLINs) is really where I see performance-based acquisition (PBA) fall off the tracks. This text is straight out of a recent solicitation for a services contract on Federal Business Opportunities, commonly referred to as “fedbizopps” or FBO:

The Offeror shall provide their proposed firm-fixed price for this project by completing the CLIN Listing, in its entirety, as provided in the RFP. Additionally, the Offeror shall also provide a basis for the price, identifying all prospective labor categories, showing labor rates for all labor categories and discounts offered. (The Offerors shall also show profit, and any overhead costs if not included in the labor rate). Lack of detail may result in a rating of a higher risk by the Selection Authority in the selection process.

Significant discounts are considered highly desirable. Discounts offered must be explicit. (There is no page limit for this factor, however Offerors are encouraged to only provide that cost and pricing data mandatory to a comprehensive review and that data which would allow the evaluation team to determine price reasonableness.)

Certainly great material to include in my classes when I teach PBA, Contracting Officer Representative (COR), or FAC P/PM courses on how not to structure CLINS under a PBA, or for a Firm Fixed Price (FFP) contract.

For starters, why do you care about this information? You shouldn’t. As a project manager (PM) or COR, you care about performance. Period. The other contract management efforts that will be expended on managing labor rates, labor categories, expenditures, etc. is inappropriate for this contract type, it adds extra administration and complexity into the contract management function, and takes the focus away on what you really care about; performance.

Further, the main objective of a FFP contract is to transfer risk to industry, with the assumption on a FFP contract type that the requirements are clearly defined and baselined. This model wants to eliminate that risk premium, and further drive prices down by threatening to add risk if these factors, which you shouldn’t care about, are not deemed “reasonable?” Protest anyone?

This model is creating a culture of “buying in,” deemed an improper business practice per FAR Subpart 3.5, but now a necessity as a result of budget cuts and the pressure to cut contracts.

PBA is about performance, and incentivizing industry to exceed requirements through a strategic partnership of trust and communication for both parties to excel. Let’s focus on that, and leave the administrative burdens where they belong.

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Pattie Buel

Can you get folks to stop referring to a Labor Hour (or Fixed Price Labor Hour as some like to say) contract as FFP while you’re at it?

Robert Saab

I see that language on every task order that comes out uneder the IDIQ I manage, You are spot on about “buying in” – in my world its compounded by the fact that we went from 4 primes to 9 when the IDIQ I support was recompeted last year and every one of the new players wants a foot in the door. Outcome- serious low-balling. A recurring project that generated $2.8M in revenue (with very modest profit) in 2009 has changed hands between 3 different primes now and the current value is $1.6M. What the government isn’t seeing (or is ignoring) are the second and third order impacts of this culture. The very same technicians supporting this project were making $50K and were full benefitted in 2009. Today, they are making $38K and are part time with no benefits. So, there’s loss of tax base, loss of local economic impact on and on; not to mention the loss of talent as human capital flees the area. Simply amazing.

Peter G. Tuttle

Yep, Jaime, you hit the nail on the head with one of your statements. It’s a transfer of risk to industry. In many cases the risk is correctly placed on industry; other times, however, we see that the risk is inappropriately levied. With the continuing focus on reducing costs, the continuing issues within the acquisition workforce, the ever-increasing mission needs and the necessity for managing change more and more rapidly, I fully expect that industry will see more FFP deals, whether or not FFP is the best choice. What can one do? One potential avenue that any vendor can take (although it is pretty late in the process) is to ask questions and make reasonable recommendations as part of the RFI and draft solicitation process. Perhaps the government will see your logic and change course where needed. It’s worth a shot. Besides, winning a contract that is poorly constructed from the start – and depending on upsells and change orders to make you whole – may not be a good strategy in this time of curtailed budgets and greatly increased oversight. Cheers. Pete

Jaime Gracia

@Robert – In regards to the issues you see on your current IDIQ, would you say that the performance and quality of the work has also been an issue? It seems safe to say based on your comments.

The feedback you provided is the same for many PMs and CORs, in which they are stuck with low-price, and quality is an issue. Many incumbents are hard-pressed to accept a 35-50% pay reduction, including loss of benefits. The biggest issue I have seen and experienced first hand is low-performing consultants. Very smart and hard working no doubt, but nowhere as experienced and qualified as someone who should be in that roll, at a fair and reasonable price.

Robert Saab

@Jaime – performance and quality have most definitely been compromised in my sphere – not mention efficiency. Examples of the former: a project where the IGE must have been over $300K (competed full and open versus SBI) and corporate experience validating cost to do the work; awarded to one of the ‘new’ primes for $120K. Six weeks later, the TOR was released again because the original vendor could not perform. Question: How could any competent KO not disqualify a bid so low? When challenged, the KO response was – basically – I don’t have to tell you anything. Another – a ‘new’ player unseats the incumbent on a larger effort with a bid 30% less than market value – based on 7 years of costing data. The project is perpetual and the KO’s apparent theory was the new prime will hire all the former primes tech’s, the former primes manager will go home on Friday and the new primes manager will show up the following Monday and the mission will continue. Preposterous! Long story short, less than 2/3’s of the incumbent employees accepted the new primes offer – come Monday there was insufficient staff to continue the effort. Operations were suspended for about 3 weeks at tremendous cost, as there were people who travelled from all over the world and were then sent home. In regard to efficiency – I have an active project competed and awarded as a FFP. This is 5 FTE embedded at the customer location in GA. The task lead shares a cubicle with the government’s technical lead. The COR and KO are in Missouri. Can you see the inherent issues in this? It gets better. The payment plan we submitted with the bid split the award into 12ths, tied to each monthly report. The government balked and required us to submit a payment plan equitably distributed across all possible deliverables. There were 89 possible deliverables listed in the PWS. We complied. Now, we’re 4 months into the performance period and the government has only required 3 deliverables tied to payment. So, I obviously have a revenue flow problem cause exclusively by the government forcing a square peg into a round hole. Anymore I feel like I stick with this industry out of sheer curiosity of what happens next LOL. CHEERS!

Jaime Gracia

Thanks for sharing @Rob. How do you protect yourself from concussions, as you obviously are pounding your head against the wall on a regular basis?

Same story I have seen across the board. According to the KOs I talked with, it is not in their power, nor is it appropriate, to claim an offered price is unreasonably low. This would be the case if accountability existed, but as we know it does not. Nor does a price reasonableness analysis.

In regards to incumbent employees, I just read a GAO protest decision where the losing offeror (incumbent) stated that the new contractor could not possibly perform, since they would not be able to hire the incumbent staff or performance at the incredibly low price. The incumbent lowered its proposed price from actuals 40%, and was just barely above the low-ball offer.

You can’t make this stuff up…

Robert Saab

@Jaime, I wear a hockey helmet and mouth guard =) What do you make of a Task Order Request for a deliverables based FFP that includes language, as it pertains to the efforts relating to arriving at the deliverables: ” the government anticipates it will take no more than (x number) hours to accomplish ( y deliverable).” And then requires the cost volume to include labor categories tied to hours tied to hourly rates? In my opinion this is so blatant as to be almost criminal….

Jaime Gracia

It is ridiculous, and a prime example of how difficult some procurement officials have at letting contractors do what they are supposed to, but more importantly, allowing themselves the freedom to focus on what they need to. There is no need to micro-manage costs given the contract type, but some feel that if they don’t, they are going to get ripped off I guess.

Risk aversion is endemic in federal procurement. It stems from the F.U.D. factor, as Dr. Kelman states; the climate of fear, uncertainty and doubt

Tova Churgin Stein

I have made an award to a non-incmbent with substantially lower pricfes and had my program customers concerned and stating that they would lose all the incumbent employees only to have most of the incumbent employees stay and the program office happy with the result. Just because you believe the prices are too low that does not mean that they are.

Jaime Gracia

@Tova – I am glad that the low-priced award turned out for your customer, but there are many moving parts with these type of scenarios. Also, the low-priced bid needs to have a price reasonableness analysis done, or at least a risk assessment if there is a substantial difference between the IGCE and the proposed price.

Your are of course correct, in that low price does not automatically mean program failure. I have seen geographical labor markets force incumbents to take a 40%+ pay and benefit decrease as a result of an incumbent contract loss with the new contractor, due to poor employment prospects. Continuity and program performance were continued.

However, this is the exception, not the rule. I have mostly seen high-turover, low morale, poor performance, and amendment after amendment will low priced models, as a result of sanctioned “buying in.” Like many things in government contracting and federal procurement, it depends on may factors. Nonetheless, driving down prices to unrealistic levels will only cost the government more in the long-term.

Robert Saab

@Tova- thanks for engaging. The impetus behind my issue is when the Government estimate and vendor estimates are in concert. A low ball bid indicates a lack of comprehension of the scope of the effort – or is an intentional buy in. There are only so many ways to innovate on certain things, especially in long standing programs, that can lead to price reductions. This current tendency is artificially lowering the market value of talent – there’s no way that can argued with logic and reason with one exception. It can be argued that contract labor has been too expensive all along and the bubble, like the housing market bubble, finally popped. Here’s the problem with that argument – contract labor rates in a services situation are generally based off the general schedule, as is the Government’s independent estimate. Hence, you can’t accuse vendors of over inflation without accusing the Government of being the cause of it. The question is, will this right itself? I’m not too sure, as I’m now seeing recompetes low-ball the previous low-ball awards. Again, this is artificial – not based on market trends or market estimates – and has potentially devastating second and third order affects. Housing market, local economy, tax base, local business usage, commercial space utilization, etc are all indirectly affected. Not to mention the human perspective: suppose you arrived at your workplace on a Monday morning and there were strangers there. They say – “hi, I’m with HR from xyz company and we now own this work. We’re happy to offer you your job for a 40% pay reduction – take it or leave it.” I will tell you that I have unseated incumbents – but, it has always been in conjunction with a best value competition. The right way to do what the Government is trying to accomplish, IMHO. Cheers!

Jaime Gracia

This really gets to the heart of an issue that does not really seem to get much attention, in that incumbents low-ball bids to continue working, again working from a low-ball bid previously won under “best value.”

As @Robert mentions, what are the repercussions of incumbents who bid 30-50% lower on the same work, as innovation potential is limited on purely labor-based work? Is it simply a matter of market dynamics, insufficient negotiations, or both?

Robert Saab

@Jaime. A large part of the problem is the competition type and poorly written SOW (which as you point out, becomes the PWS). The task orders under the IDIQ I manage have all turned into low price / technically acceptable. Acceptable reeks of mediocrity and “just good enough.” This also takes away the ability of the actual client to truly evaluate technical approaches for merit and added value. I have seen cases where clients have gotten so frustrated with this that they move there money to a different contract vehcicle where low bids aren’t forced down there throat. In low price / technically acceptable situations, the echnical evaluation becomes a check the box compliance matrix. Talk about stifling innovation and inhibiting long term cost savings potential. Add this dynamic to the magic PWS that last week was a SOW and you get a recipe for disaster. Then comes the start of work meeting that inevitably generates a mod right out of the gate, as the client’s intent and need comes into better focus. I just closed out a project $150K overspent becuase the client didn’t really know what he wanted until he started to see the words of the PWS transformed into tangible deliverables. 4 mods in a 12 month PoP. Oh by the way – the very first metric in the PWS for measuring performance – The contractor shall perform services required in order to deliver products listed without the need for modification of the PWS 98% of the time. LOL!!!! Frankly, if these were multi-million dollar task orders I wouldn’t touch them with latex gloves and 100′ pole. At some point industry needs to say – enough is enough, I’m not paying the government to work for them.