Monday, April 29, 2013

Pricing Out Deleted Work

In cases of contract change orders, modifications, and claims, contractors are often required to price out the cost of work not yet performed. The work was part of the original contract but for some reason, is no longer required. The question that often arises is: At what price do you value the deleted effort - the price originally negotiated or the price based on current estimates. This is not an insignificant question as it could directly affect a contractor's bottom line.

Say for example, in 2012, a contractor negotiated a contract with indirect rates based on the current FPRA (Forward Pricing Rate Agreement). The G&A rate was 25 percent. In 2013, because workload diminished, the G&A rate jumped to 35 percent. Do you burden the deleted work with a 25 percent rate or a 35 percent rate? Similarly, if the price of raw materials (e.g. steel) jumped significantly from 2012 to 2013 do you price out the deleted work at the negotiated prices or the prices in effect today.

FAR 15.408, Table 15-2, Instructions for Submitting Cost/Price Proposals When Certified Cost or Pricing Data Are Required, answers this question pretty plainly. Table 15-2, Section B.(2) states:
Include the current estimates of what the cost would have been to complete the deleted work not yet performed (not the original proposal estimates), and the cost of deleted work already performed.
So there you have it; you must use current estimates. This represents a potential significant risk to contractors (it could also allow contractors to reap a windfall if prices and rates go down from what was originally bid/negotiated). Even where the initial contract price was based on competition or data other than certified cost or pricing data, modifications to those contracts often require the submission of certified cost or pricing data. Contractors that aggressively priced a contract for competitive reasons, could easily find that they have to delete more costs than they negotiated.

The contracting officer does have some discretion in determining what is fair and reasonable (to both parties). If you ever find yourself in this situation, be sure to let your contracting officer know. Maybe fairness and equity will prevail.

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