Q. Our City contracts for its transit services under a 5-year contract ending on June 30, 2007. I have a six-month carry-over term but not an Extension clause. I would like to amend the contract to include the Extension clause for an extension of up to 5-years. We see this as advantageous to our system, for it provides the continuity that sometimes is missing from private contracting. Background info: CVT is not a direct grantee of Federal Transit Administration funds. We operate with State of California Transit Development Act funds, but the fleet we operate is funded with FTA capital funds.
Are there any FTA regulations that would prevent us from amending the contract to allow for negotiations for an extension of services provided by our current contractor?
A. From the data you provided we are not sure that this transit services contract is subject to the FTA Procurement Circular 4220.1E. Leaving that question aside, however, we can provide some guidance on FTA requirements regarding contract extensions.
There was a time when FTA had a five-year term limit on service contracts such as this, but that term limit no longer exists except for contracts for rolling stock and replacement parts.
The present services contract was obviously not competed for the five-year (future) period you describe. This means that any extensions to the original contract as competed will be a sole source procurement, requiring justification and approval through the established management officials of your agency. The inclusion of a contract extension clause in the contract does not alter the requirement for a sole source justification. The only way to avoid this would have been to include this five-year period in the original solicitation as an option that was priced by the competitors and evaluated as part of the original contact award decision.
The FTA Best Practices Procurement Manual (BPPM) discusses the topic of contract periods of performance in section 2.2.1. The BPPM is available online here.
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Q. We have a cost-reimbursement, fixed fee contract that contains projections of billable hours. The contractor has submitted a claim asking that we reimburse him at a higher reimbursable rate because our projections were off by more than 10% (i.e. contract reflects 114,000 billable hours; actuals were 97,577 billable hours). Contractor feels we owe him a higher rate for the entire previous year. What, if anything, would we actually consider reimbursing this contractor?
A. Having spoken to you about your contract for paratransit services, we would strongly urge you to research the intent and understanding of the parties as to what payment terms were intended in the solicitation and contract. It would seem from the fact there was an audit of actual fringe benefit costs that the parties understand that a cost-plus-fixed-fee contract was intended, and not a T&M contract with fixed hourly billing rates. We, however, do not understand the intent of the hourly billing rate in the contract. Is that rate intended to be merely a provisional billing rate until final costs can be audited? If so, it would seem prudent to do annual cost audits and annually adjust the billings to date so that the agency is protected from serious over-billings by the contractor and the contractor is not faced with having to refund large amounts of money to the agency at the end of the contract term. This annual audit could also form the basis for adjusting the provisional billing rate to more accurately reflect actual costs being incurred. Related to these issues is the question of whether the contractor is accounting properly for his costs and keeping a real-time picture of costs incurred so that the billings are accurate. Many contractors with cost-reimbursement contracts find themselves in serious trouble because their accounting systems are not adequate to properly account for costs and keep the accounting and the amounts being billed current.
As to the basis of the claim, the first question you need to answer is the question of entitlement under the specific clauses of your contract. In other words, there must be a contract provision that entitles the contractor to an adjustment in the estimated cost and fixed fee of the contract for the fact that the actual hours ordered and worked were less than the projected amount. We would think under these circumstances of less work that your agency would normally expect a credit (reduction) in the estimated cost and, without question, a credit in the fixed fee for ordering fewer hours.
In regard to the fixed fee issue, we would strongly suggest you read section 2.4.3.2 - Cost Reimbursement Contracts in the FTA Best Practices Procurement Manual (BPPM) which is available online here. This section has an excellent write up of fixed fee and the contractor's responsibility to complete performance of the contract in order to earn the full fixed fee. In this case the contractor has furnished about 86% of the hours, so he is entitled to 86% of the fixed fee for the first year, unless the contract specifically says otherwise. This means a substantial credit to you for fee as compared to the amount called for in the contract for the first year. The contractor should have been billing fee as a percent of completion of the work; i.e., based on hours worked and not based on time elapsed or dollars spent.
In regard to costs, if the contractor is claiming a cost increase for having to work less hours, it is his responsibility to furnish detailed cost data to substantiate his claim. We would ask him to present a breakdown of the various cost elements that formed the basis of his cost proposal for the original contract award (e.g., direct labor hours and dollars, fringe benefit costs, home office overhead, materials, equipment, subcontract costs by subcontract (together with a copy of those subcontracts), etc. Alongside these originally projected costs for the period in question we would ask him to submit the actual costs incurred for that cost element, together with an explanation of how the reduced hours affected that cost element. It is essential that he explain why your agency caused his costs to increase. It may be he has fixed costs for things like management and vehicle leases that must be recovered over fewer hours but he needs to present this data and support his request. The same type of explanation and support must be furnished with respect to the subcontractors who form a major part of his cost base. He needs to support why the terms of their subcontracts entitle them to more money, which would then be an allowable cost incurred to him and thus billable to you. I would take care to be sure he has not guaranteed a certain amount of hours and revenue to them in contradiction to the terms of the prime contract which merely estimated the hours to be needed and did not in any way guarantee those hours. Presumably all the parties understood there were no guarantees and accepted this as a risk. Whatever cost increases the subcontractors are claiming, they also need to support with cost data, and we would strongly urge that the subcontractors' costs be audited along with the prime's costs (as suggested below) before any money is paid out for their claims.
Once the contractor has submitted the cost data described above, you should have your auditors examine the contractor's records and the subcontractors' records for the first year's costs incurred and the explanations of why these costs increased, and submit an advisory audit report to you so that you can prepare a pre-negotiation memorandum setting forth the agency's negotiation position (with the help of your legal staff and your audit staff). We would caution you to be diligent in documenting whatever additional money is agreed to so that you do not run the risk of a later review by FTA which would disallow the payment of this claim and cause your agency to have to absorb the full amount of any payment. We would also advise you to review the FTA Master Agreement, Section 43d, which states that FTA reserves the right to concur in any compromise or settlement of any claim, and FTA Circular 5010.1C, Chapter 1, Section 7b(4) which requires FTA concurrence when the proposed claim settlement exceeds $100,000. The FTA Circulars are available at the FTA web site on the "Circulars & Publications" page.
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