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Monday, December 1, 2008

CONTINUED GOVERNMENT EMPHASIS ON SERVICE-DISABLED, VETERAN-OWNED BUSINESSES

Since 2004 after a presidential mandate to contract 3% of all federal contracting dollars to service-disabled veteran-owned businesses, federal agencies have struggled to meet that goal.

Now renewed emphasis has been placed on the matter by the GSA and the Veteran's Entrepreneurship Task force (VET-Force) with the signing of an agreement under which VET-Force will use its network of veterans to expand training and information on federal opportunities for these firms.

VET-Force is composed of more than 200 organizations and affiliates -- many small businesses -- representing thousands of veterans. It was organized in 1999 to lobby for the Veterans' Entrepreneurship and Small Business Development Act, which became law, and provide assistance to veterans who are starting businesses.

"GSA welcomes the opportunity to work with the VET-Force and other organizations committed to helping veterans and service-disabled veterans who are entrepreneurs," said GSA acting Administrator David Bibb. "This is a point of honor, but it is also a point of common sense. When we expand economic opportunities for veterans, we're drawing on men and women who know teamwork, discipline, cooperation and mission accomplishment."

In fiscal 2007, GSA spent 2.2 percent of its procurement dollars on businesses owned by service-disabled veterans. In announcing the agreement, officials said preliminary data for the third quarter of fiscal 2008 shows GSA has increased that figure to 3.2 percent, surpassing the statutory goal.The agreement was part of GSA's 21 Gun Salute initiative, led by the agency's chief of staff, John Phelps. GSA works with other agencies, veterans and industry to meet the 3 percent spending target.GSA also drew up the first government-wide acquisition contract set-aside exclusively for small businesses owned by service-disabled veterans.

The Veterans Technology Services GWAC, through which agencies can procure systems operations and maintenance and engineering services, was the first contract vehicle reserved for service-disabled veterans. The contract was awarded in 2006 to 44 businesses and has a $5 billion ceiling.

Veteran's can obtain assistance in the details of entering federal government contracting at:

http://smalltofeds.blogspot.com/2006/12/registering-your-small-business-for.html

For additional information on the disabled veteran's contracting initiatives please see the following link:

http://www.nextgov.com/nextgov/ng_20080820_3219.php?

Saturday, November 1, 2008

IMPORT/EXPORT MANAGEMENT AND SMALL BUSINESS FEDERAL GOVERNMENT CONTRACTING

Because the world has become tightly wired technologically and the current economic situation ties us inexorably to foreign economies, it is likely small business will encounter the import/export process either on the selling or the buying end of federal government contracts involving foreign countries. This is particularly true with Foreign Military Sales (FMS) contracts through DOD and services contracts with civilian agencies such as USAID.

Key to your success will be the development of links to buyers or sources in other nations. You may have gotten the idea that it is a simple and perhaps easy enterprise to get into and successfully perform. It is not in my experience any such thing. Companies who are successful evolve contacts and product relationships in foreign countries and in the US that take careful and businesslike approaches. You will find yourself importing to this country by exporting from other countries and vice versa. There are laws and processes that apply in both domains governing taxes, duties and the import/export process.

It is recommend that you research thoroughly the answers to the following questions:

(a) What are the specifics of the equipment and supplies you are becoming involved in? (Manufacturer's part number, performance specification, unique qualities and market potential) What are the distribution channels that currently exist; is there a product warranty and are their spare and repair parts involved?

(b) Who buys the equipment and supplies in the United States and in countries you intend to sell to. (commercial consumer, government agency, large business, hospitals, military etc.) Do you plan to do market research on the potential demand for a product before you buy it? My advice is that you should - before you buy. I further advise that you research practical marketing, sales and distribution channels for a product before you buy it or import it. What are the possibilities of locally retailing it yourself?

(c) What are the laws and regulations regarding the movement of equipment and supplies? How are they taxed in the US and how are they taxed in foreign countries? Are they regulated by US or foreign countries? Are licenses required to either import or export the items? The answers to all these questions vary with the product and the US State Department and US Customs and Border Protection will have those answers once you identify the equipment and supplies. The links to the associated web sites are in the section below entitled 'THE REGULATORS'

(d) What service can you perform in (a)-(c) above? What value can you add to the process? Do you have special channels to either a customer or a source for the supplies and equipment? Do you have special knowledge or do you know others with special knowledge of these equipment and supplies, customers and sources which you could involve in creating or designing a niche no one else is filling or offer these items at a price attractive enough to generate volume and profit for your business and beat the competition.

(e) Who is your competition and how are they performing (a)-(d) above? Your business involves offering the service of importing equipment and supplies to fill the need in the US from sources out of the country and the other way around. You must develop an available niche that other companies do not fill, either by having lower prices, more and better sources, or a low overhead cost for handling the business; faster delivery, better product warranty, parts service and replacement, all play in the equation. Your market plan must address the reliability of your sources in other countries and the US, the quality of their product and how well they support their product in countries other than their own.

SHIPPING AND FREIGHT FORWARDERS

Along the way be particularly careful in your planning to research Freight Forwarders (FF). Use the Better Business Bureau (BBB) or other such government agencies to research the experience the buying public has had with stateside companies you deal with. BBB company research capabilities on the web are free to the public. Carefully review FF terms and conditions and assess the liability arrangements in the event of product theft or loss for goods coming in from overseas.

A freight forwarder is your paid agent to safeguard your property. He is also registered to handle clearing US customs. Certain other FF specialize in dealing with foreign countries. He is normally the individual to which your overseas manufacturer ships you product or through whom you ship product to foreign countries. Relying on the manufacturer himself to ship, insure, handle export and import requirements is not a safe bet and shipping directly to a foreign country has no assurances of delivery.

The foreign factory producer has too much conflict of interest in simply getting you to pay his bill and move on and your expertise in clearing customs in a foreign country may be limited. Freight forwarder expenses must be added to those of the product you buy from the factory source. These expenses should be included in your business plan and in your product pricing prior to going to market.

BE CAREFUL

Be wary of networks and exchange sites on the web that offer to make you rich and handle all the arrangements. This is seldom the case. Check them out with the BBB closely. The BBB Web site search page is as follows:

http://search.bbb.org/

INSURANCE

On the subject of insurance, I assume you have looked into business insurance. A Limited Liability Company (LLC) is a form of Subchapter 'S' corporation that usually experiences the lowest rates for insurance. Have you looked into becoming an LLC? Insurance is a must in the line of business you are pursuing.

THE REGULATORS

For research regarding exporting and importing goods to and from foreign countries please see the web site for the Bureau of Industry and Security out of the Department Commerce. It is the keeper of export administrative regulations and classification numbers. It also has a commerce country chart that shows taxes and duties and license information by country. There are 5 generic product groups in the commerce control list categories:

http://www.bis.doc.gov/

The Office of Foreign Asset Controls out of the Treasury Department is also a site you will have to visit to see if there are any specially designated nationals or targeted countries that the US has regulations against selling to:

http://www.treas.gov/offices/enforcement/ofac/programs/index.shtml

The US State Department and the US Customs and Border Protection regulate and assist in import and export matters. I strongly suggest you visit their web sites. The State Department controls high technology items and weapons through the International Traffic in Arms Regulation (ITAR). Export licensing under the ITAR can be a lengthy process. Services and technical data as well as products of a weapons or high technology nature requiring licenses appear on a controlled items list in the ITAR. A company can unwittingly make an illegal export of technical data simply by conveying the wrong specifics regarding a controlled item to a foreigner over the phone. The serious nature of ITAR violations can be seen in case histories at the following web site:

http://rosecoveredglasses.blogspot.com/2008/11/as-recently-announced-by-project-on.html

For excellent articles on ITAR compliance, please see the following links:

http://mae.pennnet.com/display_article/367164/32/ARTCL/none/none/1/ITAR-compliance:-ignorance-is-no-excuse/

The web site for the US State Department and US Customs and Border Protection respectively are as follows:

http://www.state.gov/e/eb/cba/

http://www.customs.ustreas.gov/xp/cgov/import/commercial_enforcement/trade_rules.xml

You will need to research the above regulatory sites as appropriate once you identify the specific products in which you intend to deal. It will be necessary to determine licensing, declaration, tariffs, taxes and trade implications. All these factors should be fully documented in your business plan before you undertake operations in a product area.

FINANCE AND CREDIT:

Finally your business plan will be your best long -term asset in establishing your credibility with the banking community and with prospective investors. My advice is to start small and slow, with minimal personal investment and begin dealing in products only after you have a well developed business plan and market research indicates they will be profitable. As the business establishes itself, a demonstrated cash flow and projected earnings statement can be used as leverage with a good business plan to achieve a small business loan, perhaps working with the SBA for a guarantee. Small business credit cards are a possibility if you can work the interest rates into your planned expenses and recover them in your product pricing.

Your planned banking arrangements should involve setting up accounts that involve automatic currency conversion features in the countries you plan to do business in.

I recommend being careful not to make your inventory a burden. Carrying excessive financed inventory without associated sales to pay the bills is one of the biggest traps you can fall into. Also remember many products have a shelf life which must be considered in the storage environment.

Sunday, September 28, 2008

UPDATED ARTICLES ON MILITARY INDUSTRIAL COMPLEX AT "ROSECOVERED GLASSES"

Please see the blow link for a recent posting on the Military Industrail Complex at our companion blog by Minnesota Veterans:

http://rosecoveredglasses.blogspot.com/2008/09/two-collapsing-towers-wall-street-and.html

http://rosecoveredglasses.blogspot.com/2008/11/as-recently-announced-by-project-on.html

SMALL BUSINESS FEDERAL GOVERNMENT CONTRACTING MANUAL UPDATE

The May 2007 issue of this manual has now been updated to reflect reader interests expressed over the last year at this blog and regular SCORE counseling cases on government contracting.

The book is now 96 pages with two cost model appendices. The table of contents is below.

YOU CAN OBTAIN A FREE COPY  BY DOWNLOADING IT FROM THE FIRST, VERTICAL BOX NET CUBE IN THE LEFT MARGIN OF THIS SITE. 



PLEASE CLICK ON BELOW IMAGE OR DOWNLOAD TO ENLARGE



Tuesday, September 2, 2008

PROTECTING INTELLECTUAL PROPERTY AND PROPRIETARY DATA IN FEDERAL GOVERNMENT CONTRACTING


PLEASE CLICK ON ILLUSTRATION OR DOWNLOAD TO ENLARGE

Contractual relationships established directly with the US government or under subcontracts and purchase orders under government contracts with other companies must contain provisions for the protection of intellectual property and proprietary data. This article will address the major processes by which that protection is achieved.

RIGHTS IN TECHNICAL DATA AND SOFTWARE

The Defense Federal Acquisition Regulation (DFAR) contains the most widely used provisions by a federal agency that allow a contractor, subcontractor or supplier under government contracts to assert ownership or protective rights for specific technical data and software. Keep in mind that the more a company has invested in a technology, a product or a system the higher the level of protection available under the DFAR. If the government has or will invest in the technical data and software then the level of protection that can be asserted diminishes and the government begins to assume ownership and attendant control of the related intellectual property.

It is important during the solicitation and proposal stage to assert rights in technical data and software so the business relationship is clearly understood by all parties and appropriate protective markings, licensing and related measures can be covered in the contractual documentation. The following information in the DFAR should be studied to ascertain how to appropriately assert rights during proposals to the government and to prime contactors:

http://www.acq.osd.mil/dpap/dars/dfars/html/current/227_71.htm

http://www.acq.osd.mil/dpap/dars/dfars/html/current/227_72.htm

The government does not sign agreements to protect specific data, abiding instead by the DFAR-specified assertions regarding ownership and use of technical data and computer software as they are negotiated in contracts. The government will comply with specific marking and identification of proprietary data. Details on these markings are provided at the conclusion of this article.

NON-DISCLOSURE AGREEMENTS BETWEEN COMPANIES

When two companies begin an exchange of information that may lead to a mutually exclusive business arrangement under a government contract, a Non-Disclosure Agreement (NDA) is generally signed to protect proprietary data.

The first page of such an agreement is on the left in the illustration above. The entire document may be obtained free of charge by downloading it at the "Box Net" cubicle in the left margin of this site.

TEAMING AGREEMENTS BETWEEN COMPANIES

When two companies agree to form a mutually exclusive agreement to prepare a proposal as a team to a government agency a teaming agreement is generally executed. The first page of such an agreement is on the right in the illustration above. The entire document may be obtained free of charge by downloading it at the "Box Net" cubicle in the left margin of this site.

A teaming agreement remains in force until it is replaced by a subcontract from the lead company to the following company upon award of the prime contract. In the case of a joint venture, the prime contract award results in two contracts from the joint venture contract level to the respective participating company levels.

PROTECTING RATE INFORMATION BETWEEN COMPANIES

It is generally recognized by all industries participating in federal government contracting that internal overhead and G&A rates and the data that support them are proprietary data. The reason for the proprietary nature of rate data between companies is that in government work firms are teaming with each other exclusively on one project and competing against each other on additional contracts or projects at the same time.

Assuming everyone pays a generally similar labor rate on the market to retain employees and that fringe costs about the same for everyone, then overhead and G&A are what wins and loses jobs and specific, company internal overhead rates are very closely held.

Companies do not disclose the details of their rates to other companies and they do not expect to see another company's proprietary rate information. So companies view each other’s rate information on a fully loaded basis, meaning the total of the base cost, any proprietary indirect cost and an agreed upon profit percent.

If a prime contractor requests that subcontractor proprietary rate information be supplied with a proposal the detail should be double wrapped and the package stamped, 'Government Eyes Only'. The prime will then hand the package off to DCAA without opening it and receive only the fully loaded result of the burdened rate pricing.

DCAA or federal agency pricing analysts perform detail audits of subcontractor rate information but prime contractors are not provided the result. An audit statement by the government that the subcontractor detail rate support is acceptable or not acceptable is all that is provided to the prime contractor.

Government auditors do not make value judgments or negotiate; they review the logic and support for rates, check the math and provide a report to the government contracting officer who will conduct the negotiations, if any.

PROTECTIVE MARKINGS FOR PROPRIETARY DATA SUBMITTED TO THE GOVERNMENT AND TO A PRIME CONTRACTOR

Your proposal data may contain rate information, proprietary data or strategic technical solutions that you would not want to fall into the hands of a competitor. The government does not sign Proprietary Data Agreements (PDA's). Examples of the government's obligation to protect your information are covered under the DFAR rights in technical data and software assertions discussed above and in the following FAR clause that requires protective markings by you on the title page of your document and on each subsequent page.FAR 15.509 Limited use of data:

(a) A proposal may include data that the offeror does not want disclosed for any purpose other than evaluation. If the offeror wishes to restrict the proposal, the title page must be marked with the following legend:

"The data in this proposal shall not be disclosed outside the Government and shall not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate the proposal; provided, that if a contract is awarded to this offeror as a result of or in connection with the submission of these data, the Government shall have the right to duplicate, use, or disclose the data to the extent provided in the contract. This restriction does not limit the Government's right to use information contained in the data if it is obtainable from another source without restriction."

(b) The offeror shall also mark each restricted sheet with the following legend:

"Use or disclosure of proposal data is subject to the restriction on the title page of this Proposal."

(c) The coordinating office shall return to the offeror any unsolicited proposal marked with a legend different from that provided in 15.509(a). The return letter will state that the proposal cannot be considered because it is impracticable for the Government to comply with the legend and that the agency will consider the proposal if it is resubmitted with the proper legend.

Friday, August 1, 2008

PROVISIONAL INDIRECT RATES IN SMALL BUSINESS FEDERAL GOVERNMENT CONTRACTING

Recent articles at this site have overviewed FAR and CAS Compliant business systems for small enterprises undertaking federal government contracting:

http://smalltofeds.blogspot.com/2008/03/establishing-far-and-cas-compliant.html

http://smalltofeds.blogspot.com/2008/02/dcaa-audits-and-small-business-job-cost.html

Chapter 51 of my free book, “Small Business Federal Government Contracting” contains an explanation and examples of a forward pricing budget plan from which provisional rates are established and negotiated with the government. Under "Management Factors" the book goes on to explain that it is not always possible to execute the plan as anticipated.

Programs and projects will come and go, entering and leaving the business base sometimes earlier and sometimes later than planned. Expenses do not always materialize as anticipated. For these reasons actual experience in terms of indirect rates may differ (+or -) from provisional rates.

There are three important points to remember regarding provisional bidding and billing rates:

1. Provisional rates are utilized for both pricing and billing and billed rates must be reconciled to actual rates at contract closeout for cost-plus and time and material contracts.

2. Provisional rates are audited by DCAA and are the baseline frame of reference for auditors reviewing proposals and billings until the contractor asks for a change. Provisional rates are used for billing existing contracts and for pricing new work. Provisional rates are approved by DCAA for both purposes or they would not be "Provisional" by definition.

3. A change to provisional rates must be supported by data regarding actual running rate experience and may start a series of questions by DCAA or contracting activities regarding what sort of management corrective action is planned for differences between provisional and actual running rates (particularly if a provisional rate increase is proposed under time and material or cost type contracts or prices for outstanding proposals are increased due to rate changes prior to negotiation)

There are no industry average indirect rates in federal government contracting because there are wide swings due to many factors. Company indirect rates are managed based on the competition, the market and the funding availability of the customer. Site-unique indirect rates inside government facilities are always lower than company site operation rates because the government is paying a portion of the expenses on work occurring inside a government facility.

Assuming a small business pays roughly the same on the open market for labor, material and ODC as the competition, and has to offer the same fringe benefits to retain employees, the remaining overhead and G&A rate expenses are principal drivers in winning new business and have the most potential to lose a job, cause funding difficulties on an existing program or be responsible for a loss on projects negotiated at fixed rates.

Below are examples of a risk analysis thought process when evaluating whether or not to make a provisional rate change:

EXAMPLE 1

One could say that it may be a poor time to change a provisional rate when there are several FFP proposals outstanding and in negotiation or a major competition is coming up.

On the other hand if there is a wide unfavorable variance between the current actual running rate experience and the existing provisional rate and the future forecasted base and expenses do not show improvement, perhaps the rate should change to avoid signing up to prospective losses or ambitious funding profiles that may mislead a customer.

EXAMPLE 2

One could say that it is a good time to change a provisional rate if several cost plus and T&M contracts are pending closeout and there is a wide disparity between billed cost and actual cost due to rates. In fact, if the government is going to owe you money at closeout, the issue should be broached as soon as possible to the contract funding authorities to insure there are enough funds on the programs to cover the final bills.

Conversely, if you will owe the government money at closeout your forecasts should project the anticipated drop in final contract pricing that will be settled in the closeout actions with the government.

For most companies a provisional rate change comes about at the end of the calendar year and the beginning of the new calendar year. Accountable personnel perform a bottoms-up projection of the anticipated business base and associated expenses by cost center. The company then submits the results to DCAA to get them approved for the new year as revised provisional rates.

Nothing mandates a specific date for a provisional rate review. DCAA audits proposals and contract closeouts, fixed price progress billings and cost-plus and time and material billings. During those audits there may be questions regarding the comparison between bidding and billing and actual running rates.

The company takes the action for provisional rate changes by requesting them from the government as a function of an annual budgeting cycle or business developments. DCAA approves them.

Throughout, the data is very company private and closely held. No other company, to include prime contractors has the right to your rates and rate supporting data. When necessary they will see only fully loaded labor, material and ODC.

The term provisional implies subject to change and approved on an interim basis by DCAA. Provisional rate changes for billing and pricing can occur more often than annually if the business is changing on a volatile basis with work coming and going from the business base in an unplanned manner and expenses increasing or decreasing with economic changes.

I have seen some corporations that had several changes a year. It is a management call, but DCAA reserves the right to review and approve each one.

A provisional rate change is a delicate matter and should be approved by a management level of the company where authority to effect cost change resides (usually the CEO and CFO).

Management must make rate change decisions based on company-unique product and service lines, work location, forecasts, customer demands, competitive factors and contract status. It is a job that should be undertaken by executives who get paid for balancing such factors and for managing successful outcomes from decision results.

Tuesday, July 1, 2008

THE SMALL BUSINESS GOVERNMENT CONTRACTING “PAST PERFORMANCE” CHALLENGE

As a small business begins the proposal submission process to federal government agencies or to prime contractors the past performance challenge is a major challenge. By definition a start-up company in government contracting has no direct government agency past performance projects to site in meeting the requirement in requests for proposals (RFP’s) for historical references to similar projects in terms of size, duration and complexity.

Past performance data must be specific to the enterprise bidding a contract. It cannot site historical references to performance of individuals now in the company when they were with other firms, achievements by predecessor companies or successful projects that the current company did not perform as its current entity. The purpose for this rigid perspective by the government is to avoid "Fronting" a new enterprise with misleading information to obtain a high past performance rating.

So how can a new organization or one that is new to government contracting muster a response to the past performance challenge?

The answer lies in historical projects that may be similar in the commercial arena and a high quality proposal that clearly demonstrates an understanding of the requirement at hand, a unique and cost effective project plan and high performing personnel and/or products tailored to the statement of work to offset an interim, light past performance record.

A past performance reference sheet usually accompanies an agency RFP. It normally requires the bidder to fill it out with references to historical projects the company has performed and the contact points for confirmation. The government may request these forms in advance of the main body of the proposal to allow enough time to send them to the references. The past performance form is sent by the government to the references and you never see the result. The input goes directly from your past performance references back to the government.

Many small businesses work through prime contractors to "Grow" past performance history (subcontracts count). By teaming with a sizable firm a small entity can relate its participation to larger projects and ultimately graduate to a good library of references, carefully maintained and kept as a living, growing data base of good customer service records that can be sited again and again in proposals.

It is wise to keep customer perceptions of your professionalism and products or services alive by constant vigilance, visits, surveys and other feedback mechanisms so that you are not surprised at a proposal debriefing when you find that a client you thought rated you highly did not.

The major services maintain past performance records by contract that you can access. Inquire with them as to a membership at the appropriate web site and review them regularly. The GSA utilizes service companies to rate contractors. You can get your rating by inquiring with them, much like a credit rating, except pertinent to cost, schedule and technical performance. Monitor your D&B report. It is always out there for prime contractor and government assessment of your financial health, your vendor payment history, your organization profile and your rating.

The Central Contractor Registration (CCR) database has a narrative to profile your company. Check your registration and insure you have a current and complete description of your supplies and services available to all who use the CCR Dynamic Search Mechanism.

Insure your web site, your capability statement and your marketing plans are maintained current alive and dynamically reflective of your successes as you pursue new business and carefully develop your library of past performance record by project with accessible profiles to use in your government proposals.

Sunday, June 1, 2008

SMALL BUSINESS FEDERAL GOVERNMENT CONTRACT BILLING

SAMPLE GOVERNMENT CONTRACT BILLING ON STANDARD FORM 1034

PLEASE CLICK ON IMAGE OR DOWNLOAD TO ENLARGE



FEDERAL GOVERNMENT CONTRACT BILLING
A recent poll revealed that in excess of 40% of the visitors who voted on the topics listed at this site wished to see a feature on government contract billing. Billing under federal government contracts can cause difficulty for small businesses because they often do not recognize that setting up complete contract identification information on the government billing form is vital to smooth invoice processing.
Another major feature not recognized by businesses new to government contracting is the relationship between inspection and acceptance records and invoice approval.
The type of contract also drives invoice preparation and requirements for supporting information.
The below article is an extract from the Navy SBIR site and is one of the most informative discussions I have seen by a government agency on the topic of billing. Following that article below is a special notice from the Defense Finance Accounting Service regarding electronic billing and links to tools insuring that mode is achieved correctly.
HOW TO GET PAID ON TIME
1. Instructions for Invoicing and Vouchering are usually included in Section G of the contract. The instructions will include the location where vouchers shall be sent. If the contract requires the contractor to send vouchers to the sponsoring DoD organization for approval, the DoD organization would forward vouchers, after approval, to the appropriate DFAS for payment. The appropriate DFAS will usually appear at block 12 on page one of the contract. It is important for contractors to follow specific instructions contained in Section G of the contract. If there are any questions, they should call the contracting officer. This procedure should reduce the time required to process payments.
2.. Additional information on submission of vouchers is available from the Defense Contract Audit Agency. Contractors may request a copy of a guide entitled "Information for Contractors" (DCAAP 7641-90), August 1996, from Headquarters, Defense Contract Audit Agency, Operating Administrative Office, 8725 John J. Kingman Road, Suite 2135, Fort Belvoir, VA 22060-6219; Telephone No. (703) 767-1066; Telfax No. (703) 767-1061. This is an excellent source of information for contractors and its use is strongly recommended. A contractor may determine its local DCAA office by calling (703) 767-3274.
3. The type of contract will usually impact how, when, and under what circumstances the contractor will receive payments. The contract should be reviewed for payment schedules and procedures prior to signature. The contractor should understand how and under what circumstance each payment will be made. The following information is provided to help contractors better understand the payment process:
If the contract is Fixed-Price, the clause at FAR 52.232-2 will be included in the contract. This clause provides that contractors should be paid promptly as portions of work are completed. In order to provide for payment for a portion of the work, that portion of the work and price must be separately stated in the contract. If this is not done, the contractor will not be able to receive payment for portions of the work. The only other method of receiving interim payments on a fixed-price contract would be through progress payments, which can be authorized by the clause at FAR 52.232-16. Progress payment procedures are more complicated than partial payments and the contractor must have an approved accounting system if the progress payments clause is included in the contract.
If the contract is Cost-Plus-Fixed-Fee,a Cost-Reimbursement type of contract, the clause at FAR 216-7 will be included in the contract. This clause allows for submission of vouchers approximately twice each month for actual costs incurred. The clause also allows a small business to voucher for recorded costs for items or services purchased directly for the contract, even though they have not yet paid for those items or services.
If the contract is incrementally funded (not fully funded at time of award) the contract will require the contractor to notify the contracting officer when additional funds will be required to continue performance.
If a fixed-price contract is incrementally funded, the clause at DFARS 252.232-7007 Limitation of Government’s Obligation will be included in the contract. This clause requires the contractor to notify the contracting officer in writing at least ninety days prior to the date when, in the contractor’s best judgment, the work will reach the point at which the total amount payable by the Government, including any cost for termination for convenience, will approximate 85 percent of the total amount then allotted to the contract. The notification will state the estimated date when that point will be reached and an estimate of additional funding needed to continue performance. This clause also provides that if such additional funds are not to be allotted, the contracting officer will terminate any items for which additional funds have not been allotted. However, the contract may be modified, by mutual agreement of the parties, to change the funding schedule and, if necessary, the period of performance.
If a cost-reimbursement contract is incrementally funded, the clause at FAR 52.232-22 Limitation of Funds will be included in the contract. This clause requires the contractor to notify the contracting officer in writing when costs expected to be incurred within the next sixty (60) days (may be varied from 30 to 90 days) will exceed 75 percent (may be 75 to 85 percent) of the total amount allotted. This notice should state the estimated amount of the additional funds required to continue performance. This clause also provides that if additional funds are not to be allotted by the end of the period specified in the schedule or another agreed-upon date, upon the contractor’s written request, the contracting officer will terminate the contract.
4. The clause at FAR 32-232.25 Prompt Payment is included in most SBIR contracts. The following information applies to prompt payment procedures:
The clause at FAR 32-232.25, among other things, provides that the due date for making an invoice payment by the designated payment office shall be the 30th day after the designated billing office has received a proper invoice from the contractor and/or the 30th day after Government acceptance.
FAR 32.903(a) and (b) requires that the Government NOT make an invoice or contract financing payment earlier than 7 days prior to the due date specified in the contract.
The Defense Federal Acquisition Supplement (DFARS) states, at subparagraph 232.905(2), that "designated payment offices are encouraged to pay small disadvantaged business (SDB) concerns as quickly as possible after invoices are received and before normal payment due dates established in the contract. The restrictions of FAR 32.903 prohibiting early payment do not apply to invoice payments made to SDBs. Contractors shall not, however, be entitled to interest penalties if invoice payments are not made before the normal payment due dates established in the contract."
5. There are a number of things that contractors may do to help decrease the period of time between the submission of an invoice and receipt of payment:
Submit invoices directly to the designated billing office. Call the point of contact at that office to insure that acceptance has been accomplished and that the invoice has been sent to the designated payment office.
Contact the designated payment office to obtain status of invoices. (FAR 32.904(a)(4) states that contractors shall be informed of points of contact within their cognizant payment offices to enable them to obtain status of invoices.) Verify the due date for the invoice with the payment office – what do they consider the due date to be? If the payment office indicates a due date that is more than 30 days after the designated billing office accepted the supplies or services, point out that FAR 32.905(a)(ii) states "In the event that actual acceptance occurs within the constructive acceptance period, the determination of an interest penalty shall be based on the actual date of acceptance." (The "constructive" acceptance period is 7 days.) Therefore, the due date should be 30 days after Government acceptance - commonly at the billing office.
Offer discount for prompt payment. FAR 32.905(g) states: that "when a discount for prompt payment is to be taken, payment will be made as close as possible to, but not later than, the end of the discount period. Payment terms are specified in the clause at 52.232-8, Discounts for Prompt Payment." For example, a discount of "1/2% - 14 days" offered on a $10,000 invoice should result in a payment of $9,950 within 14 days after the date of the invoice. The discount for prompt payment procedure should help in at least two ways. (1) the due date would be computed from the date of the invoice rather than the date of acceptance (Note: acceptance must occur prior to payment and the invoice should be mailed on the date it is submitted), and (2) the "discount for Prompt Payment" offer would overcome the requirement at FAR 32.903(b) that the Government shall not make invoice payments earlier than 7 days prior to the due date specified in the contract. The offer for a discount for prompt payment should appear prominently on the invoice (perhaps underlined). It may be helpful to discuss this with the designated paying office in order to get their recommended format. It is not the intent of DoD to encourage or discourage use of the discount for prompt payment procedure. The purpose of this paragraph is to provide sufficient information for the contractor to make that choice.
IMPORTANT NOTICE FOR COMPANIES BILLING THE DEFENSE FINANCE ACCOUNTING SERVICE (DFAS)
Important Notice: Effective 12/31/07, the interfaces between WINS/EDI and MOCAS for commercial invoices and public vouchers will be disconnected. For further assistance, please contact the WAWF helpdesk:
You can obtain learning tools for WAWF at the following web sites:
DFAS EC End Users Tool Box - Go here to obtain user guides, interactive tutorials and reference links to assist you with WAWF.
WAWF Web-Based Training Site - Go here to learn how to use WAWF via self paced, online training. This training is an excellent place to begin learning about WAWF.
WAWF Training Practice Web Site - Go here to practice using the WAWF
application.
Wide Area Work Flow - Receipts and Acceptance (WAWF-RA) is a Paperless Contracting DoD-wide application designed to eliminate paper from the receipts and acceptance process of the DoD contracting lifecycle. The goal is to enable authorized Defense contractors and DoD personnel the ability to create invoices and receiving reports and access contract related documents.
In the traditional DoD business method, three documents are required to make a payment - the contract, the receiving report and the invoice. Each of these may arrive at the payment office separately - if they are paper. They are processed individually as they arrive. Information is then manually keyed in to the payment system. Using WAWF-RA, electronic documents are shared, eliminating paper and redundant data entry. Data accuracy is increased and the risk of losing a document is greatly reduced.
The contract is available through a seamless interface with an application called Electronic Document Access (EDA). Contractors have electronic options for submitting invoices and receiving documents. They can submit documents on the Web, through FTP, or through EDI.
Authorized DoD personnel receive notification electronically of pending actions and have a virtual folder of documents accessible. Digital signatures are used to authenticate the users and to digitally sign documents. In some cases, user id and password can be used in lieu of a digital signature.
WAWF-RA supports DoD's efforts to reduce unmatched disbursements in the DoD receipt, acceptance, entitlement and payment process through data sharing and electronic processing. The benefits to DoD are global accessibility of documents, reduced need for re-keying, improved data accuracy, real-time processing, and secure transactions with audit capability. For vendors, benefits include the capability to electronically submit invoices, reduction of lost or misplaced documents, and online access to contract payment records.
For security purposes, with WAWF-RA, user identity is assured through the use of digital signatures and certificates or user id and password over an SSL connection. The online data transmissions are protected with encryption.
For additional information, please see the WAWF-RA website at

Thursday, May 1, 2008

EARNED VALUE MANAGEMENT SYSTEMS



Recently a question regarding project management on "Linked -In" prompted me to recommend a simple application of an Earned Value Management System (EVMS) to deal with a project management problem.

The question and my answer are as follows:

Question:

How do you keep yourself on task and on budget during a start up?

What are some techniques that you use to keep you (and your team?) on task, and on budget, during a business start up?

Answer:

Plan to measure your "Bang for the Buck". Establish tangible tasks in the form of a plan. Set milestones for them in time at a budget value for each milestone tied out to the total budget. The milestones should be things you can look at and say, "That's done".

Status your plan regularly. When milestones are completed, credit the budget value as earned. Tasks may cost more than their budgets to complete. That is cost variance for completed tasks.

If milestones are not completed by their scheduled date do not credit their budget value as earned. Behind schedule tasks are thus contributing to a cumulative budgeted schedule variance in time.

If you are running an unfavorable schedule variance for incomplete tasks and an unfavorable cost variance for completed tasks you are in trouble.

Corrective action, additional resources or a work around plan will be necessary to recover from negative variances. You will investigate the tasks behind schedule and over cost to determine the problem, the cause, the resolution, the corrective action and the likelihood of overrunning your total budget or being late due to events at time now. You will have time to do something about it.

The above technique can be used for starting a company or running a project. This technique is commonly referred to as Earned Value Management. It should not be driven to a level of detail that is unmanageable.

Prudently used this approach gives insight into the dynamics of physical accomplishment driving status as opposed to plan versus actual cost tracking which tells you only that you are spending money.

There were many responses to the question at the "Linked-In" site. Various approaches were recommended for keeping a new start-up company on track with regard to becoming established within budget and time constraints. EVMS is the most effective project management technique to achieve that sort of objective.

Please visit the below Wikipedia article from which the graphic leading this post was downloaded for an excellent explanation of EVMS and its application on projects:

http://en.wikipedia.org/wiki/Earned_value_management

In short, the technique:

1. Ties budget to schedule

2. Establishes measurable means to track project status

3. Accounts not only for the money being spent but also for what is being accomplished with the expenditure.

4. Allows in-process cost and schedule corrective action in time to favorably influence the project outcome.

I have utilized the EVMS technique from the smallest of projects to large-scale systems programs. It is well worth learning and practicing. If you become involved in large enough government projects EVMS will be required under your contract by government and prime contractor customers.

Many companies recognize the benefits of EVMS project management and apply it without being required to do so by contract. It produces excellent results.

Tuesday, April 1, 2008

FEDERAL GOVERNMENT CONTRACT TYPES

Link to Ken Larson Counseling Request:

http://www.micromentor.org/


Key Words: "Federal Government Contracting"

FEDERAL GOVERNMENT CONTRACT TYPES

In contracting for supplies and services the federal government utilizes several different contract types. The nature of these contract vehicles has evolved over a period of years based on the government's experience in the acquisition types discussed in the January 2008 posting to this blog.

At the heart of selecting the contract type is an analysis of risk involved to the contractor and administrative burden to both the government and the supplier.

Firm, Fixed Price contracting under FAR Part 12, "Commercial Contracting" is by far the most simple form of government contract because the contractor assumes all the risk and the price is fixed, regardless of cost incurred to the supplier.

Other acquisition types, such as new technology development or service contracts in a war zone where the scope of work is unpredictable and subject to change, gravitate to cost plus or time and material contract types. These contracts pose a lower risk to the supplier but also entail considerable audit and systems support costs in both governement and contractor business operations.

The following is an extract from the Federal Acquisition (FAR) describing the major contract types utilized by the federal governmment:

FAR 16.202 - FIRM FIXED PRICE CONTRACTS

16.202-1 -- Description.

A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

16.202-2 Application

A firm-fixed-price contract is suitable for acquiring commercial items or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications when the contracting officer can establish fair and reasonable prices at the outset, such as when -

(a) There is adequate price competition;
(b) There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid cost or pricing data;
(c) Available cost or pricing information permits realistic estimates of the probable costs of performance; or
(d) Performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing assumption of the risks involved.

FAR 16.203 - FIXED-PRICE CONTRACTS WITH ECONOMIC PRICE ADJUSTMENT

16.203-1 -- Description

A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. Economic price adjustments are of three general types:

(1) Adjustments based on established prices - These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.
(2) Adjustments based on actual costs of labor or material - These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.
(3) Adjustments based on cost indexes of labor or material - These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.

The contracting officer may use a fixed-price contract with economic price adjustment in conjunction with an award-fee incentive and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost. The contract type remains fixed-price with economic price adjustment when used with these incentives.

16.203-2 -- Application

A fixed-price contract with economic price adjustment may be used when:

(i) there is serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance
(ii) contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract. Price adjustments based on established prices should normally be restricted to industry-wide contingencies. Price adjustments based on labor and material costs should be limited to contingencies beyond the contractor’s control.

In establishing the base level from which adjustment will be made, the contracting officer ensures that contingency allowances are not duplicated by inclusion in both the base price and the adjustment requested by the contractor under economic price adjustment clause.

In contracts that do not require submission of cost or pricing data, the contracting officer obtains adequate information to establish the base level from which adjustment will be made and may require verification of data submitted.

FAR 16.204 - FIXED-PRICE INCENTIVE CONTRACTS

A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.

A fixed-price incentive contract is appropriate when

(1) A firm-fixed-price contract is not suitable.
(2) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor’s assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance.
(3) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor’s management of the work.

FAR 16.205 -- FIXED - PRICE CONTRACTS WITH PROSPECTIVE PRICE REDETERMINATION
16.205-1 -Description
A fixed-price contract with prospective price redetermination provides a firm fixed price for an initial period of contract deliveries or performance and prospective redetermination, at a stated time or times during performance, of the price for subsequent periods of performance.

16.205-2 -- Application
A fixed-price contract with prospective price redetermination is used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance.
The initial period is the longest period for which it is possible to negotiate a fair and reasonable firm fixed price. Each subsequent pricing period is at least 12 months.
The contract may provide for a ceiling price based on evaluation of the uncertainties involved in performance and their possible cost impact. This ceiling price provides for assumption of a reasonable proportion of the risk by the contractor and, once established, may be adjusted only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.

FAR 16.206 - FIXED-CEILING-PRICE CONTRACTS WITH RETROACTIVE PRICE REDETERMINATION

16.206-1 -- Description
A fixed-ceiling-price contract with retroactive price redetermination provides for a fixed ceiling price and retroactive price redetermination within the ceiling after completion of the contract.

16.206-2 -- Application

A fixed-ceiling-price contract with retroactive price redetermination is appropriate for research and development contracts estimated at $100,000 or less when it is established at the outset that a fair and reasonable firm fixed price cannot be negotiated and that the amount involved and short performance period make the use of any other fixed-price contract type impracticable.
(a) A ceiling price is negotiated for the contract at a level that reflects a reasonable sharing of risk by the contractor. The established ceiling price may be adjusted only if required by the operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(b) The contract is awarded only after negotiation of a billing price that is as fair and reasonable as the circumstances permit.
(c) Since this contract type provides the contractor no cost control incentive except the ceiling price, the contracting officer makes clear to the contractor during discussion before award that the contractor’s management effectiveness and ingenuity will be considered in retroactively redetermining the price.

FAR 16.207 - FIRM-FIXED PRICE, LEVEL OF EFFORT TERM CONTRACTS

16.207-1 -- Description.
A firm-fixed-price, level-of-effort term contract requires --
(a) The contractor to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms; and
(b) The Government to pay the contractor a fixed dollar amount.

16.207-2 -- Application.
A firm-fixed-price, level-of-effort term contract is suitable for investigation or study in a specific research and development area. The product of the contract is usually a report showing the results achieved through application of the required level of effort. However, payment is based on the effort expended rather than on the results achieved.

FAR 16.302 - COST CONTRACTS

(a) Description. A cost contract is a cost-reimbursement contract in which the contractor receives no fee.

(b) Application. A cost contract may be appropriate for research and development work, particularly with nonprofit educational institutions or other nonprofit organizations, and for facilities contracts.

FAR 16.303 - COST SHARING CONTRACTS

(a) Description. A cost-sharing contract is a cost-reimbursement contract in which the contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs.

(b) Application. A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits.

FAR 16.304 - COST-PLUS INCENTIVE-FEE CONTRACTS

A cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for an initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. Cost-plus-incentive-fee contracts are covered in Subpart 16.4, Incentive Contracts.

FAR 16.305 - COST-PLUS-AWARD-FEE CONTRACTS

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of

(a) a base amount (which may be zero) fixed at inception of the contract and
(b) an award amount, based upon a judgmental evaluation by the Government, sufficient to provide motivation for excellence in contract performance.

FAR 16.306 - COST-PLUS-FIXED-FEE CONTRACTS

(a) Description. A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. This contract type permits contracting for efforts that might otherwise present too great a risk to contractors, but it provides the contractor only a minimum incentive to control costs.

(b) Application.

A cost-plus-fixed-fee contract is suitable for use when certain conditons are present for example --
(i) The contract is for the performance of research or preliminary exploration or study, and the level of effort required is unknown; or
(ii) The contract is for development and test, and using a cost-plus-incentive-fee contract is not practical.

FAR 16.403 - FIXED-PRICE INCENTIVE CONTRACTS

(a) Description. A fixed-price incentive contract is a fixed-price contract that provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset.

(b) Application. A fixed-price incentive contract is appropriate when --

(1) A firm-fixed-price contract is not suitable;
(2) The nature of the supplies or services being acquired and other circumstances of the acquisition are such that the contractor’s assumption of a degree of cost responsibility will provide a positive profit incentive for effective cost control and performance; and
(3) If the contract also includes incentives on technical performance and/or delivery, the performance requirements provide a reasonable opportunity for the incentives to have a meaningful impact on the contractor’s management of the work.

FAR 16.403-1 - FIXED-PRICE INCENTIVE (FIRM TARGET) CONTRACTS

(a) Description. A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs.

(b) Application.

A fixed-price incentive (firm target) contract is appropriate when the parties can negotiate at the outset a firm target cost, target profit, and profit adjustment formula that will provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk. When the contractor assumes a considerable or major share of the cost responsibility under the adjustment formula, the target profit should reflect this responsibility.

FAR 16.403-2 - FIXED-PRICE INCENTIVE (SUCCESSIVE TARGETS) CONTRACTS

(a) Description.
(1) A fixed-price incentive (successive targets) contract specifies the following elements, all of which are negotiated at the outset:
(i) An initial target cost.
(ii) An initial target profit.
(iii) An initial profit adjustment formula to be used for establishing the firm target profit, including a ceiling and floor for the firm target profit. (This formula normally provides for a lesser degree of contractor cost responsibility than would a formula for establishing final profit and price.)
(iv) The production point at which the firm target cost and firm target profit will be negotiated (usually before delivery or shop completion of the first item).
(v) A ceiling price that is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
(2) When the production point specified in the contract is reached, the parties negotiate the firm target cost, giving consideration to cost experience under the contract and other pertinent factors. The firm target profit is established by the formula. At this point, the parties have two alternatives, as follows:
(i) They may negotiate a firm fixed price, using the firm target cost plus the firm target profit as a guide.
(ii) If negotiation of a firm fixed price is inappropriate, they may negotiate a formula for establishing the final price using the firm target cost and firm target profit. The final cost is then negotiated at completion, and the final profit is established by formula, as under the fixed-price incentive (firm target) contract.

(b) Application.

A fixed-price incentive (successive targets) contract is appropriate when --
(1) Available cost or pricing information is not sufficient to permit the negotiation of a realistic firm target cost and profit before award;
(2) Sufficient information is available to permit negotiation of initial targets; and
(3) There is reasonable assurance that additional reliable information will be available at an early point in the contract performance so as to permit negotiation of either
(i) a firm fixed price or
(ii) firm targets and a formula for establishing final profit and price that will provide a fair and reasonable incentive. This additional information is not limited to experience under the contract, itself, but may be drawn from other contracts for the same or similar items.

FAR 16.404 – FIXED-PRICE CONTRACTS WITH AWARD FEES

(a) Award-fee provisions may be used in fixed-price contracts when the Government wishes to motivate a contractor and other incentives cannot be used because contractor performance cannot be measured objectively. Such contracts shall --

(1) Establish a fixed price (including normal profit) for the effort. This price will be paid for satisfactory contract performance. Award fee earned (if any) will be paid in addition to that fixed price; and
(2) Provide for periodic evaluation of the contractor’s performance against an award-fee plan.
(b) A solicitation contemplating award of a fixed-price contract with award fee shall not be issued unless the following conditions exist:
(1) The administrative costs of conducting award-fee evaluations are not expected to exceed the expected benefits;
(2) Procedures have been established for conducting the award-fee evaluation;
(3) The award-fee board has been established; and
(4) An individual above the level of the contracting officer approved the fixed-price-award-fee incentive.

16.405-1 - COST-PLUS-INCENTIVE-FEE CONTRACTS

(a) Description.

The cost-plus-incentive-fee contract is a cost-reimbursement contract that provides for the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This contract type specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After contract performance, the fee payable to the contractor is determined in accordance with the formula. The formula provides, within limits, for increases in fee above target fee when total allowable costs are less than target costs, and decreases in fee below target fee when total allowable costs exceed target costs. This increase or decrease is intended to provide an incentive for the contractor to manage the contract effectively. When total allowable cost is greater than or less than the range of costs within which the fee-adjustment formula operates, the contractor is paid total allowable costs, plus the minimum or maximum fee.

(b) Application.

(1) A cost-plus-incentive-fee contract is appropriate for services or development and test programs when --
(i) A cost-reimbursement contract is necessary and
(ii) A target cost and a fee adjustment formula can be negotiated that are likely to motivate the contractor to manage effectively.
(2) The contract may include technical performance incentives when it is highly probable that the required development of a major system is feasible and the Government has established its performance objectives, at least in general terms. This approach also may apply to other acquisitions, if the use of both cost and technical performance incentives is desirable and administratively practical.
(3) The fee adjustment formula should provide an incentive that will be effective over the full range of reasonably foreseeable variations from target cost. If a high maximum fee is negotiated, the contract shall also provide for a low minimum fee that may be a zero fee or, in rare cases, a negative fee.

FAR 16.405-2 - COST-PLUS AWARD FEE CONTRACTS

(a) Description.

A cost-plus-award-fee contract is a cost-reimbursement contract that provides for a fee consisting of
(1) a base amount fixed at inception of the contract and
(2) an award amount that the contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in such areas as quality, timeliness, technical ingenuity, and cost-effective management. The amount of the award fee to be paid is determined by the Government’s judgmental evaluation of the contractor’s performance in terms of the criteria stated in the contract. This determination and the methodology for determining the award fee are unilateral decisions made solely at the discretion of the Government.

(b) Application.

(1) The cost-plus-award-fee contract is suitable for use when --
(i) The work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule;
(ii) The likelihood of meeting acquisition objectives will be enhanced by using a contract that effectively motivates the contractor toward exceptional performance and provides the Government with the flexibility to evaluate both actual performance and the conditions under which it was achieved; and
(iii) Any additional administrative effort and cost required to monitor and evaluate performance are justified by the expected benefits.
(2) The number of evaluation criteria and the requirements they represent will differ widely among contracts. The criteria and rating plan should motivate the contractor to improve performance in the areas rated, but not at the expense of at least minimum acceptable performance in all other areas.
(3) Cost-plus-award-fee contracts shall provide for evaluation at stated intervals during performance, so that the contractor will periodically be informed of the quality of its performance and the areas in which improvement is expected. Partial payment of fee shall generally correspond to the evaluation periods. This makes effective the incentive which the award fee can create by inducing the contractor to improve poor performance or to continue good performance.

FAR 16.502 – DEFINITE –QUANTITY CONTRACTS

(a) Description.

A definite-quantity contract provides for delivery of a definite quantity of specific supplies or services for a fixed period, with deliveries or performance to be scheduled at designated locations upon order.

(b) Application.

A definite-quantity contract may be used when it can be determined in advance that --
(1) A definite quantity of supplies or services will be required during the contract period and
(2) The supplies or services are regularly available or will be available after a short lead time.

FAR 16.503 – REQUIREMENTS CONTRACTS

(a) Description.

A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period, with deliveries or performance to be scheduled by placing orders with the contractor.

(1) For the information of offerors and contractors, the contracting officer shall state a realistic estimated total quantity in the solicitation and resulting contract. This estimate is not a representation to an offeror or contractor that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contracting officer may obtain the estimate from records of previous requirements and consumption, or by other means, and should base the estimate on the most current information available.

(2) The contract shall state, if feasible, the maximum limit of the contractor’s obligation to deliver and the Government’s obligation to order. The contract may also specify maximum or minimum quantities that the Government may order under each individual order and the maximum that it may order during a specified period of time.

(b) Application.

A requirements contract may be appropriate for acquiring any supplies or services when the Government anticipates recurring requirements but cannot predetermine the precise quantities of supplies or services that designated Government activities will need during a definite period.

FAR 16.504 – INDEFINITE – QUANTITY CONTRACTS

(a) Description.

An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period. The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values.
(1) The contract must require the Government to order and the contractor to furnish at least a stated minimum quantity of supplies or services. In addition, if ordered, the contractor must furnish any additional quantities, not to exceed the stated maximum. The contracting officer should establish a reasonable maximum quantity based on market research, trends on recent contracts for similar supplies or services, survey of potential users, or any other rational basis.
(2) To ensure that the contract is binding, the minimum quantity must be more than a nominal quantity, but it should not exceed the amount that the Government is fairly certain to order.
(3) The contract may also specify maximum or minimum quantities that the Government may order under each task or delivery order and the maximum that it may order during a specific period of time.
(4) A solicitation and contract for an indefinite quantity must—
(i) Specify the period of the contract, including the number of options and the period for which the Government may extend the contract under each option;
(ii) Specify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract;
(iii) Include a statement of work, specifications, or other description, that reasonably describes the general scope, nature, complexity, and purpose of the supplies or services the Government will acquire under the contract in a manner that will enable a prospective offeror to decide whether to submit an offer;
(iv) State the procedures that the Government will use in issuing orders, including the ordering media, and, if multiple awards may be made, state the procedures and selection criteria that the Government will use to provide awardees a fair opportunity to be considered for each order.
(v) Include the name, address, telephone number, facsimile number, and e-mail address of the agency task and delivery order ombudsman if multiple awards may be made;
(vi) Include a description of the activities authorized to issue orders; and
(vii) Include authorization for placing oral orders, if appropriate, provided that the Government has established procedures for obligating funds and that oral orders are confirmed in writing.

(b) Application.

Contracting officers may use an indefinite-quantity contract when the Government cannot predetermine, above a specified minimum, the precise quantities of supplies or services that the Government will require during the contract period, and it is inadvisable for the Government to commit itself for more than a minimum quantity. The contracting officer should use an indefinite-quantity contract only when a recurring need is anticipated.

FAR16.601 -- TIME AND MATERIAL CONTRACTS

Description.

A time-and-materials contract provides for acquiring supplies or services on the basis of—
(1) Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and
(2) Actual cost for materials.

Application.

A time-and-materials contract may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence
(1) Government surveillance. A time-and-materials contract provides no positive profit incentive to the contractor for cost control or labor efficiency. Therefore, appropriate Government surveillance of contractor performance is required to give reasonable assurance that efficient methods and effective cost controls are being used.
(2) Fixed hourly rates.
(i) The contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor.
(ii) For acquisitions of noncommercial items awarded without adequate price competition the contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor to be performed by—
(A) The contractor;
(B) Each subcontractor; and
(C) Each division, subsidiary, or affiliate of the contractor under a common control.
(iii) For contract actions that are not awarded using competitive procedures, unless exempt under paragraph (c)(2)(iv) of this section, the fixed hourly rates for services transferred between divisions, subsidiaries, or affiliates of the contractor under a common control—
(A) Shall not include profit for the transferring organization; but
(B) May include profit for the prime contractor.
(iv) For contract actions that are not awarded using competitive procedures, the fixed hourly rates for services that meet the definition of commercial item at 2.101 that are transferred between divisions, subsidiaries, or affiliates of the contractor under a common control may be the established catalog or market rate when—
(A) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor of any division, subsidiary or affiliate of the contractor under a common control; and
(B) The contracting officer has not determined the price to be unreasonable.
(3) Material handling costs. When included as part of material costs, material handling costs shall include only costs clearly excluded from the labor-hour rate. Material handling costs may include all appropriate indirect costs allocated to direct materials in accordance with the contractor’s usual accounting procedures consistent with Part 31.

16.603 - LETTER CONTRACTS

Description

A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.

Application

(a) A letter contract may be used when
(1) the Government’s interests demand that the contractor be given a binding commitment so that work can start immediately and
(2) negotiating a definitive contract is not possible in sufficient time to meet the requirement. However, a letter contract should be as complete and definite as feasible under the circumstances.
(b) When a letter contract award is based on price competition, the contracting officer shall include an overall price ceiling in the letter contract.
(c) Each letter contract shall contain a negotiated definitization schedule including
(1) dates for submission of the contractor’s price proposal, required cost or pricing data, and, if required, make-or-buy and subcontracting plans,
(2) a date for the start of negotiations, and
(3) a target date for definitization, which shall be the earliest practicable date for definitization. The schedule will provide for definitization of the contract within 180 days after the date of the letter contract or before completion of 40 percent of the work to be performed, whichever occurs first. However, the contracting officer may, in extreme cases and according to agency procedures, authorize an additional period.
(d) The maximum liability of the Government shall be the estimated amount necessary to cover the contractor’s requirements for funds before definitization. However, it shall not exceed 50 percent of the estimated cost of the definitive contract unless approved in advance by the official that authorized the letter contract.

16.702 -- BASIC ORDERING AGREEMENTS

(a) Description.

A basic agreement is a written instrument of understanding, negotiated between an agency or contracting activity and a contractor, that
(1) contains contract clauses applying to future contracts between the parties during its term and
(2) contemplates separate future contracts that will incorporate by reference or attachment the required and applicable clauses agreed upon in the basic agreement. A basic agreement is not a contract.
(b) Application. A basic agreement should be used when a substantial number of separate contracts may be awarded to a contractor during a particular period and significant recurring negotiating problems have been experienced with the contractor. Basic agreements may be used with negotiated fixed-price or cost-reimbursement contracts.
(1) Basic agreements shall contain --
(i) Clauses required for negotiated contracts by statute, executive order, and this regulation and
(ii) Other clauses prescribed in this regulation or agency acquisition regulations that the parties agree to include in each contract as applicable.
(2) Each basic agreement shall provide for discontinuing its future applicability upon 30 days’ written notice by either party.
(3) Each basic agreement shall be reviewed annually before the anniversary of its effective date and revised as necessary to conform to the requirements of this regulation. Basic agreements may need to be revised before the annual review due to mandatory statutory requirements. A basic agreement may be changed only by modifying the agreement itself and not by a contract incorporating the agreement.
(4) Discontinuing or modifying a basic agreement shall not affect any prior contract incorporating the basic agreement.
(5) Contracting officers of one agency should obtain and use existing basic agreements of another agency to the maximum practical extent.
16.703 -- Basic Ordering Agreements.
(a) Description. A basic ordering agreement is a written instrument of understanding, negotiated between an agency, contracting activity, or contracting office and a contractor, that contains
(1) terms and clauses applying to future contracts (orders) between the parties during its term,
(2) a description, as specific as practicable, of supplies or services to be provided, and
(3) methods for pricing, issuing, and delivering future orders under the basic ordering agreement. A basic ordering agreement is not a contract.

(b) Application.

A basic ordering agreement may be used to expedite contracting for uncertain requirements for supplies or services when specific items, quantities, and prices are not known at the time the agreement is executed, but a substantial number of requirements for the type of supplies or services covered by the agreement are anticipated to be purchased from the contractor. Under proper circumstances, the use of these procedures can result in economies in ordering parts for equipment support by reducing administrative lead-time, inventory investment, and inventory obsolescence due to design changes.

Saturday, March 1, 2008

ESTABLISHING FAR AND CAS COMPLIANT SMALL BUSINESS SYSTEMS FOR FEDERAL GOVERNMENT CONTRACTS



I. INTRODUCTION

To effectively market a federal government contract a small business must sell on the basis of having a business system as well as technical performance infrastructure ready to run the job when a contract proposal is submitted. This dual requirement is where many small businesses fall short in their federal government contract start up planning.

Parallel thinking is required to plan for government project technical effort against a template of necessary business process infrastructure, driven by introducing Federal Acquisition Regulations (FAR) into the company. Key elements of the necessary business system infrastructure are discussed in this article which assumes that your are in the federal government services contracting business, that you plan to price your services at an hourly rate and sell them by labor categories with professional job descriptions to perform the government's statement of work and bill by the hour. This article also assumes that you are not contracting under FAR Part 12, "Commercial Contracting".

A. Labor Categories

Each skill set in the company must be specified and defined as chargeable directly to a contract, or indirectly to a cost center overhead, a material handling pool or a general and administrative pool. Each labor category must have a job description and a prospective salary range for proposal purposes.

B. Cost Center

A Cost Center is a single business entity within the company, organized for a group of business lines and clients with close similarities for technical and business management purposes. Cost centers are also driven by geographic location and the requirement to separate commercial from federal government business. Projects performed in government facilities may also require a separate cost center, since many of the associated expenses for such operations are born by the government. Cost centers usually have individual subsidiary ledgers, balance sheets and profit and loss statements and are summarized monthly to a company total. Each cost center must have job cost accounting for the contracts residing there and a cost center unique overhead rate.

Examples:

Commercial Cost Center

Federal Government Cost Center

Government Site Unique Cost Center

C. Annual Overhead Rate

An overhead pool is made up of individual Cost Center indirect expenses projected for a given year divided by the projected Cost Center direct labor dollars for that year to determine a rate. Typical Cost Center Overhead general ledger expenses are those which cannot be effectively charged direct to contracts. These include Cost Center management, building lease, telephone, fringe benefits, electricity, capital equipment, depreciation, and the like.

THUS: 2008 Overhead (OH) =

2008 Gen Indirect Exp for cost center =          $459,800
____________________________________ ______ = 110% OH Rate
2008 Projected Dir. Labor $for cost center = $418,000

The estimated annual Cost Center Overhead Rate is applied to direct labor cost estimates to price labor cost through overhead for 2008 for the Cost Center. When a contract is awarded, actual overhead expenses are allocated monthly to direct labor by contract on the basis of direct labor dollars incurred. Projected overhead rates are adjusted based on actual total cost center experience as the year progresses.

D. Annual Material Handling Rate (if required) - Corporate wide expenses specifically associated with buying, storing and shipping material for a given year divided by the projected direct material dollars projected company-wide for that year. Not all companies have business that is material intensive enough to warrant a separate pool for material handling. Where extensive buying or subcontracting is conducted out of the corporate headquarters and inventory and shipping labor are high, a material handling pool is permitted by the government when it is not administratively possible to charge these expenses directly to contracts.

The estimated annual Corporate Material Handling Rate is applied to direct material cost estimates to price material for all Cost Centers. When a contract is awarded, actual material handling expenses are allocated monthly to direct material by contract on the basis of direct material dollars incurred. The projected material-handling rate is adjusted based on actual total company experience as the year progresses.

E. Annual General and Administrative Rate (G&A) is corporate indirect expenses projected for a given year divided by the total projected direct cost plus overheads for all cost centers for that year. Typical G&A general ledger expenses include costs which cannot be charged direct to contracts or to cost center overhead expenses such as corporate executive management, headquarters building leases, legal expenses, company wide insurance, corporate advertising, and the like.

II. MANAGEMENT FACTORS

A. Success will be determined by managing the numerator in each of the above equations and winning or maintaining the projected direct cost programs in the annual denominator. If expenses increase due to unforeseen events or if the company loses more projects than planned in the annual denominator base, the associated rate will go up for estimating purposes and under cost plus or time and material contracts the rate billed to the government will also increase. Existing fixed price contracts under these circumstances will become less profitable. Pricing for future fixed price contracts must reflect the increased rates being experienced to avoid further losses.

B. Correspondingly, if expenses decrease due to unforeseen events/good management or if the company wins or grows more projects than planned in the annual denominator base, the associated rate will decrease for estimating purposes and under cost plus or time and material contracts the rate billed to the government will also decrease. Existing fixed price contracts will become more profitable. Pricing for future fixed price contracts must reflect the decreased rates being experienced.

C. For time and material and cost plus contracts, monthly billing rates utilized are "Provisional Rates" that the contractor is free to change based on experience as long as he informs contracting officers and the local Defense Contract Audit Agency (DCAA) of the changes and reasons for the changes can be demonstrated. Before time and material and cost plus contracts can be closed out, provisional rates must be adjusted to reflect actual rates experienced. The contractor will owe the government if provisional billings have been higher than actual cost history. Correspondingly, if the actual rates for cost plus or time and materials contracts have been higher than the provisional rates billed by the contractor, the government will owe the contractor at closeout. Firm, Fixed Price Contracts are not billed based on provisional or actual rates. They are billed at negotiated fixed prices by line item at contract award and paid upon final delivery and acceptance or through monthly progress payments based on incurred cost with a percent of payment retention by the government until deliveries are complete. Fixed rate contracts are billed on a monthly basis through hours incurred. The hourly rates are fixed for the contract term and do not change.

COST ESTIMATING/COST ACCOUNTING EXAMPLE

A. Consider an 12-month project priced in a hypothetical small business utilizing forward pricing "Provisional Rates." The contract begins in July of 2008 and continues to July of 2009. Direct labor rates are escalated between 2008 and 2009 by 3.5% based on the Consumer Price Index. The company decides to keep the indirect rates for Overhead and G&A the same for pricing purposes in 2008 and 2009. The company has no Material Handling Pool and charges purchasing, inventory and shipping costs direct to contracts.

B. This government contractor maintains Overhead and G&A rate databases in Excel by month by year to forward price projects such as the one in this example. The databases all utilize the same generic chart of expense accounts as a template for the Cost Center Overhead and G&A monthly expense forecasts (equation numerators). The project is priced in cost center 1 at an overhead rate of 110% and a corporate G&A rate of 10%.

C. Cost Center Direct Labor forecasts in the databases are projected by hours and salary dollars for each existing and anticipated project and then summarized to determine the equation denominator which when divided into the Cost Center Numerator B, above) yields the Cost Center Overhead forecast by month by year. Direct Labor is then burdened by the projected Cost Center Overhead and added to Material and Travel to yield a total Cost Center business summary through Overhead.

D. The G&A rate data base summarizes total direct labor through overhead, material and travel cost for all cost centers (equation denominator) and divides it into the total corporate G&A expense (equation numerator) The equation result yields the projected G&A rate by month by year. All cost center labor through overhead, material and travel are then summarized and burdened through G&A to forecast a total cost projection by Cost Center at "Provisional Overhead and G&A Rates.

E. A copy of the annual baseline projected rate database is adjusted with actual expense data each month in the numerator after closing. The denominator for the month is also updated with actual existing and new business developments at the cost center level and G&A monthly actuals at the corporate level. The resulting actual rate experience is then analyzed for trends as the year proceeds and utilized for making potential adjustments in provisional rates. When provisional rate changes are necessary, the government is notified in advance and provided with trend information justifying the rate change. Upon approval by the government, the baseline forecast is adjusted and utilized for billing on T&M and Cost Plus Contracts. The adjusted rates are also utilized to price all future projects. DCAA does not audit management decisions. They simply check the math.

F. Rate databases are usually fully detailed by month for the current year and 1-2 years into the future. Years 3-5 typically have summarized assumptions through use of escalation factors. Bids for out years 5-10 if required by the government definitely utilize escalation factors. Very few government contractors are willing to bid on a firm, fixed price basis beyond out year 5.

G. To comply with Cost Accounting Standards 401 and 402, this company must set up each new government contract on job cost accounting in the identical manner in which it was proposed; in effect identifying direct labor, direct material and other direct costs to each contract monthly and allocating overhead and G&A utilizing the same numerator and denominator relationships upon which the contract was originally estimated.

H. The larger the direct cost incurred on a contract in this company the greater the share of the cost center overhead and corporate G&A it will incur.

I. The entire content of this company's business system is subject to audit and verification by the Defense Contract Audit Agency (DCAA) against Cost Accounting Standards 401 and 402. DCAA validates company records by requiring "Incurred Cost Submissions" from this contractor. The submissions validate final rates for cost plus and time and material contract closeouts. Fixed price contracts are closed out when final delivery is received and accepted. Retention on monthly progress payments under fixed price contracts is released at closeout.

SUMMARY:

The software tools discussed in the February posting at this blog are designed to assist you in running the above process from a job cost accounting perspective. However, they must be set-up to reflect the unique way you are organized and they must reflect your specific business plans as discussed in this article. They will not do that for you.

Illustrations of the the rates, pricing and the long range plan utilized in the above example are available in Chapters 45 and 51 through 53 of my free book, "Small Business Federal Government Contracting" and appendices A&B. You may download the book and related documents from the "Box Net" Cubes in the left margin of this site.