Preface: This blog is intended for companies that do not have extensive experience with Federal Government contracting. It is written for contracts. Grants are not covered, as grant negotiations include different concepts to consider when going through the grant award process.
What Kind of Government Contracts Require Negotiation?
“FAR Part 15 - Contracting by Negotiation - This part prescribes policies and procedures governing competitive and noncompetitive negotiated acquisitions. A contract awarded using other than sealed bidding procedures is a negotiated contract.” The types of negotiated acquisition are “sole source acquisitions” and “competitive acquisitions.” That leaves a lot of contracts that are negotiated...
Types of Government Contracts
There are 3 basic types of contract that create different negotiating strategies, techniques, and risks. Many research contracts are a Cost Plus Fixed Fee (CPFF) form. The basic concept is that the Government (or a prime contractor customer) bears most of the financial risk. In this form, the Government pays direct and allocated indirect cost associated with the direct cost. The contractor makes a best effort attempt to perform the statement of work. When the money is used up, the contractor can stop work. Thus, the bulk of the financial risk is with the Government and the company negotiator can take a less stringent approach to the negotiation of the price.
Another basic type of contract is the Firm Fixed Price (FFP) form. In this form, the contractor carries the bulk of the financial risk. Thus, the company negotiator must be very disciplined in setting up and conducting the negotiation process. With this form of contract, aspects of the Statement of Work (SOW) and the deliverable specification enter into the negotiation process since reduced performance can sometimes mean a lower cost.
The third contract form is the Time and Material (T&M) contract. In this form, the Government carries most of the financial risk since the price of ALL the hours and the cost of ALL the material up to a total negotiated maximum dollar amount used in the job are paid by the Government. The amount paid for each hour is negotiated, and negotiating the price for an hour of a labor category is a financial risk carried by the company. However, the risk is substantially less than a FFP contract.
There are a number of variations on these three forms such a Fixed Price Incentive and CPFF with incentive fee to consider as well.
Contrast to Commercial Negotiation
Per FAR 15.404-1, “The objective of proposal analysis is to ensure that the final agreed-to price is fair and reasonable.” The words “fair” and “reasonable” are very important in the Government contracting world. However, these words have different meanings in the Government world and the commercial world. This causes company negotiators to start a negotiation with the Government or a prime contractor with a misleading approach to communicating and interacting with government negotiators.
“Reasonable” cost in the commercial world often means the lowest possible cost or combination of cost of services or items when compared to the company negotiator’s business experience. For the Government negotiator (and cost analyst), the word means that the combination of numbers make sense when viewed as a group and it is “reasonable” that a prudent business person would include such cost in operating a business or building something or providing a service. An example would be in negotiating a “fair and reasonable” cost for fringe benefits for employees providing a service on a contract. It would be “reasonable” (i.e. makes sense) that a fringe benefit would include a company contribution to an employee’s 401k retirement to a Government negotiator, while a commercial company negotiator might have the attitude that the employee could do without a company contribution to the 401k retirement since that would lower the cost of the contract. The concept is “makes sense” and not “lowest possible cost."
A Stylized Negotiation Method
A different way of stating this is that the Contracting Officers (CO) of the Government follow a standard negotiation process. This process is as follows:
- The CO asks if you want to update the proposal before the negotiation starts. This is the time to fix what you have realized was wrong after you submitted the proposal.
- Fact finding stage: Prove what you put in your proposal is verified by something.
- Government offer stage: After the Government is satisfied you have presented your facts and opinions, they make an offer based on their build up of the cost proposal.
- Counteroffers occur based on facts presented and subjective opinions from both sides until the cost is agreed to.
- Profit and Fixed Fee Negotiation: For DoD, it is based on the weighted guidelines in the DFAR. This provides a good understanding of how the Government weights the different issues they consider to be risks and rewards for the contractor.
- Disclosures of all facts (a fact is a written company document) and certification the company is following the Truth-In-Negotiations Act (TINA). As it implies, the act requires that the company tell the truth in negotiating prices with the Government. This also applies when negotiating with a prime contractor since they flow the requirement down to your company. TINA is the law of the land and applies even if you don’t sign the certificate that you have disclosed all written documents that could affect the price. Sometimes the Government does a post award audit to see if you disclosed all the facts. If they find something that could have led to a lower price, they will ask for a refund of that amount. TINA has a dollar limit under which it does not apply. It has been changing of the years and depends on the type of business and the purpose of the contact.
Involvement of Multiple Federal Parties – Who Does What?
- Contracting Officer - Has the final say.
- Contract Administrator - Does most of the detailed negotiation but has to clear it with the CO.
- Contracting Officer’s Technical Representative - Evaluates potential changes to the SOW.
- DCMA Engineer - Figures out if estimates of efficiency are reasonable for production contracts.
Things I've Discovered & Contract Negotiation Techniques
- Language and requests from Government: The Government negotiators have a language that has evolved over time that often has a different meaning than is commonly used in the commercial world. Thus, in negotiating, asking questions about the meaning of words in offers and requests for data from the Government is prudent. Don’t assume that you know and don’t be embarrassed to ask.
- Delegation of Chief Negotiator for the Company: If possible, the president of the company should not be the primary negotiator but should appoint a negotiator and retain the final say of the offers. The president being the negotiator leads to acceptance of offers too quickly, resulting in not enough review (often leaving money on the table).
- Setting up the negotiation in advance is critical. Developing a negotiating strategy will result in a higher price. Advance preparation will enable the negotiation to flow in the favor of the most organized party.
- Giving ground: Develop aspects of the cost proposal that you are willing to give up or willing to agree that the estimate might be too high. A prime contract negotiator is accustomed to seeing reduction in proposed prices and expects some reduction for their negotiation effort and to feel that they have earned their keep. Government negotiators have a lesser tendency to want a reduction if the facts back up the cost proposal.
- Don’t assume you know what the other party wants. Explore their wants and needs through conversation and questions. I have been surprised many times that something that did not matter to me was very important to the other party.
- Make sure your team is clear and up to speed on your strategy. You might have to negotiate with your own team, and coach each person that will be providing explanations to the other party about cost or operational data. Engineers are notorious about wanting to confess that the company wants too much money. This is a result of them not understanding the negotiation process.
- Don’t make a final counter offer immediately. Some negotiators (usually with an engineering background) want to dispense with the offer, counteroffer, counter-counter offer, etc. process, thinking it is inefficient and a waste of time. The urge is to present the final offer immediately and not waiver. This tactic is contrary to a long practice in negotiations and an insult to the other party since all negotiations they have been in have been a back and forth exchange of information with each side giving ground in subjective parts of the proposal. It also results in a lower price since the other side will keep pecking away at dubious data.
- SBIR Contract versus Unrestricted Procurement Contract Negotiation. Small Business Innovation Research (SBIR) contracts are set asides for small business that have a maximum value. As a result of these two conditions, the Government negotiators take a more lenient approach to acceptance of subjective engineering estimates of the time involved in the research proposed. Deliverables are typically periodic reports with a final required report. Thus, a “best-efforts performance sticking to the SOW” produces what is expected of the contractor. The material and subcontract cost evidence (facts) is still required to show reasonable proof that the cost proposed is close or can be extrapolated in a method that makes sense.
For parting comments, the Government and primed contractor customers have a very standardized method of negotiation. A lot of the effort in these negotiations is the verification of proposed cost elements. So, find something in the instances that you have made up (engineering estimates), and some numbers, in a hurry, and make sure you've got your bases covered. And understanding the need for the Contracting Officer to have a well documented negotiation file that stands up to the CO’s files being audited helps you appreciate the minutia and process involved. Finally, these negotiations take some time. I would plan on a couple of months from selection to award.
If you would like to learn more about our Government Contract and Grant Management & Negotiation services, visit our Contract Management page, or contact us at any time. ReliAscent® provides these services to all of our monthly accounting clients, as well as on an as-needed basis to any small to medium-sized businesses working with the Federal Government.
- Brian Sperry
Co-Owner, ReliAscent® LLC