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									OFFSETTING FACILITIES CAPITAL COST OF MONEY – REGULATIONS AND GENERAL GUIDANCE

April 2010 – Jamie King

In reviewing pre-negotiation position plan files and in talking with GSFC procurement folks, I’ve come to
realize there is a good bit of inconsistency and some misunderstanding regarding offsetting Facilities
Capital Cost of Money, or FCCM, in the development of fee objective positions for a pending
negotiation. Fundamental to this problem is this: people are not grasping that NASA’s policy is, in
effect, that FCCM is to be treated as an element of a company’s profit when looked at within the specific
context of establishing a fair and reasonable fee position. If that sounds strange or misguided, read on
and I’ll try to make it clear.

First off, the NFS is clear that FCCM must be offset (subtracted) from the fee objective amount, and is
also clear as to the process. It states:

1815.404-471-5 Facilities capital cost of money.
(a) When facilities capital cost of money is included as an item of cost in the contractor's proposal, it shall
not be included in the cost base for calculating profit/fee. In addition, a reduction in the profit/fee
objective shall be made in the amount equal to the facilities capital cost of money allowed in accordance
with FAR 31.205-10(b) or 1 percent of the cost base, whichever is less.

As you can see, it is a two step process. Step One is to exclude FCCM from the cost base against which
fee is calculated; Step Two is to calculate the fee amount (usually by applying a fee percentage to the
cost base established in Step One) and to then reduce that fee amount by the amount of FCCM (but
only up to an amount equal to 1% of the total cost base). Let’s look at an example to reinforce how this
is done, first starting with a hypothetical contractor’s proposed cost and fee values:



                                                   Company A Proposal

Total Cost (excluding FCCM)                        $150,000

FCCM Proposed                                      $1,125 (0.75%)

Total Cost including FCCM                          $151,125

Fixed Fee                                          $12,000

In the above example, Company A is proposing $12,000 of fixed fee, which is 8% of the total proposed
cost (excluding FCCM), calculated as follows:

$12,000/$150,000 = .08 (8%)
In practice, some contractors exclude FCCM from the cost pool when they calculate their fee position,
while others leave it in. If they were to include FCCM in the pool, they would say they are proposing
7.94% fee as a percentage of total cost, calculated as follows:

$12,000/$151,125=.0794 (7.94%)

Contractors can say and do what they want in the proposal regarding fee and how they calculate it, but
their proposals rarely if ever reflect that the proposed FCCM has been subtracted (offset) from the fee
amount that they derive by applying their desired fee percentage to the proposed cost. Our job at NASA
is to a) understand what they have proposed in terms of methodology and percentage, and b) establish
a fair and reasonable fee position that is consistent with the NFS requirement for FCCM offsetting. So,
let’s start with the first part - looking at the contractor’s methodology so we can describe their fee offer
in NASA terms, versus their varying terms.

What profit are they really proposing?

When all is said and done the only thing that goes into the contract is the fee amount that the
contractor can potentially earn, so percentages and offsets are just tools to arrive at these amounts. In
the above example, the most important detail from the contractor is that they proposed $12,000 of
fixed fee. The second most important detail is that they have proposed FCCM, and the NFS therefore
requires us to “offset” FCCM from what we would otherwise consider to be a reasonable amount of
profit (i.e., had they not proposed any FCCM). We then look at fee percentages as a way to evaluate the
reasonableness of a fee position, and to derive a dollar amount for the Government to use in its
negotiation of fee. Since contractors rarely, if ever, propose fee in a manner that is completely
consistent with the NASA FCCM offset policy (nor are they required to), the concept and practice of
offsetting FCCM can become a major source of confusion when we are evaluating their proposal and
generating/justifying our objective fee position. If the contractor proposed consistent with the policy,
the above example would actually look like this (assuming their intent was to propose a fixed fee
amount of $12,000):

                                                          Company A Proposal



Total Cost (excluding FCCM)                               $150,000

FCCM Proposed                                             $1,125 (0.75%)

Total Cost including FCCM                                 $151,125

Total Proposed Profit (8.75% of costs excluding FCCM) $13,125

FCCM Offset                                               ($1,125)

Fixed Fee                                                 $12,000
So, even though the Contractor might state in their proposal that their fee is 8% or even 7.94%, they are
effectively proposing a profit (as viewed by NASA) of 8.75%, calculated as follows:

$13,125/$150,000 =.0875 (8.75%)

The profit percentage as viewed by NASA is higher using this method because NASA policy considers the
amount of FCCM as an element of profit for purposes of evaluating a fee proposal and establishing a fee
objective. This is not necessarily something you need to get the contractor to accept, but it is a relevant
part of your documentation and justification for the fee objective you will establish, and will help in
doing an “apples to apples” comparison of proposed versus objective fee amounts. In particular, if you
perform a structured fee analysis using NASA Form 634 (Structured Approach Profit/Fee Objective) it
must yield a pre-offset percentage of at least 8.75% to be fully supportive of a fixed fee amount of
$12,000 based on the above example.

How do I develop my Objective/Maximum Position consistent with the FCCM offsetting requirement?

If you are using the NASA Form 634 (the requirements for its use are found at 1815.404-4 Profit), it
helps you keep the offsetting and the percentages straight; just follow the format and the instructions
that support the form and you won’t get mixed up. It will produce a bottom line fee position that
correctly offsets the FCCM.

If you’re using some other method to establish a reasonable fee position, it’s important that it is applied
consistent with the offsetting steps described in the NFS. The most common circumstance is where you
are negotiating a contract change using the authority under FAR Part 43, or other action where you’ve
determined the added/changed requirement warrants the same fee consideration as was established
for the basic contract (ref. NFS 1815.404-4 Profit for exceptions to using the NF 634). To do this
properly, you need to go back to the original contract fee agreement, and combine both the negotiated
FCCM and fee components to determine what the original profit (as defined by NASA) was at the time.

For example, if the basic contract was awarded at an estimated cost of $298,000 (excluding FCCM),
included FCCM of $2,000, and had a negotiated fixed fee of $21,000, then the effective profit
percentage for the basic contract is 7.72%, calculated as:

Total Cost:             $300,000

Less FCCM:              ($2,000)

Fee-bearing cost base: $298,000

Profit (at 7.72%)       $23,000

FCCM Offset:            ($2,000) (.67% of fee bearing costs)

Fixed Fee               $21,000 (7.05% of fee bearing costs)
Using this NASA-defined profit percentage of 7.72%, you apply it to your objective cost base (excluding
FCCM) for the new action to derive the appropriate profit, then reduce that amount by the objective for
FCCM (for the new action) to establish the fee amount for the new action.

How do I write all this up in my PPM Fee Position?

The best thing to do is to be very specific about what you are discussing and describing. Never say “the
contractor proposed a fee of 8%” and leave it at that. Remember, there are potentially 3 different ways
that it can be interpreted, and you want to be clear in what you say and demonstrate that FCCM has
been properly addressed/offset as required by the NFS. Based on our original “Company A” example
above, you could use the following words to describe the particulars:

Company A proposed a fixed fee of $12,000, which is 8% of the total proposed costs excluding FCCM.
This equates to an effective profit of 8.75% when treating FCCM as an element of profit (consistent with
NASA’s Structured Approach for Profit/Fee described in NFS 1815.404-471).

With the above, you have reconciled the Contractor’s proposed fee percentage to the FCCM offset
process. The next step is describing your Objective Position (and Maximum, if you have one) in such a
way that it is clear that you offset the FCCM consistent with NFS requirements. Let’s use an example
where you didn’t use the NASA 634, but rather have determined that the fee agreement associated with
the current contract is appropriate for use on a change order modification you are definitizing. You
could say:

 The fee rate calculated/negotiated for the basic contract has been determined appropriate for use on
this action, since the conditions affecting profit or fee (including risk, complexity, and the general nature
of the work) are essentially unchanged from the basic award. The basic contract was negotiated with an
effective profit rate of 7.72%, calculated as fixed fee plus FCCM as a percentage of cost excluding FCCM.
Therefore, for this action, the fee objective is calculated as follows:



Total Objective Cost:    $151,125

Less FCCM:               ($1,125)

Fee-bearing cost base: $150,000

Profit (at 7.72%)        $11,580

FCCM Offset:             ($1,125) (.75% of fee bearing costs)

Fixed Fee                $10,455 (6.97% of fee bearing costs)

You would follow the same basic steps in developing your maximum, replacing the objective cost values
with the maximum ones, and justifying/applying a higher profit percentage if that is your intent.
One last thing to note with the above example: the FCCM rate at time of award of the basic may be
different than the current rate, which would produce some variability in the post-offset fee percentage.
In the example above, the FCCM rate that produced the original contract profit rate of 7.72% was .67%,
and the current FCCM rate for the action being negotiated now is .75%, so the proportion of total profit
that ends up in fixed fee is slightly lower for the current action (7.05% basic versus 6.97% this action) .
Conversely, if the current FCCM rate was .50%, the proportion of total profit reflected as fixed fee would
be higher (7.22%). What is important is to maintain consistency with the overall profit percentage
(treating FCCM as an element of profit). Contractors may not like this variability, but it is the simplest
way to maintain consistency in the approach and compliance with the FCCM offsetting requirement, and
there is equal potential for it to be advantageous or disadvantageous to the Contractor.

If you have any questions, give me a call at 4-6932.



Jamie King

								
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