Wednesday, May 2, 2012

Fixed Fee on Reduced Scope Contracts

We became aware of a situation recently where a CPFF (Cost Plus Fixed Fee) contract with a twelve month period of performance (POP) was modified to reduce the POP from twelve months to ten months. The question raised by both parties (the Government and the contractor) was whether under these circumstances, the contractor was entitled to keep the entire fixed fee. The contractor has been billing the fee on a pro-rata basis (one-twelfth of the negotiated fixed fee each month). The Government had a notion that the contractor should not be allowed the full negotiated fee.

Unfortunately for the Government, the question of the fee was the least of its worries. By modifying the contract using the "changes" clause, the contractor was entitled to file a claims proposal for increased costs resulting from the change. These increased costs included unemployment/layoff related costs, cost of finding new employment, equipment storage, and lease termination. Ultimately, the Government ended up paying more as a result of reducing the POP by two months than it would have paid had they allowed the contract to simply expire.

Oh yes, and the Government did determine that the contractor was entitled to the entire fixed fee.

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