Recently, I wrote about the risks and benefits of IDIQ contracts as it concerned requirements. This month I would like to comment on the risk and benefits of pricing IDIQ contracts.
When I was a Procuring Contracting Officer for Naval Air Systems Command (PCO is the term used for the contracting officer for a program office) at least once a month I would get asked “why can’t we just do an IDIQ and not have to go through these production contracts every year?” My response was usually “The manufacturer will build too many price contingencies into that second year price and it will be very costly”
In developing pricing for any long-term contract there is a higher risk on price impacts over time than requirements changing. When pricing the IDIQ, contractors may have to agree to prices 2-3 or even 5 years in the future. How confident is anyone in what cost and other factors will affect the company’s bottom line down that far down the road?
A good example of the risk that I have seen in recent years was a contract I worked on to purchase bomb training rounds. There was a 5-year contract that was ending after I had assumed my role as PCO for that weapon. When we got the prices back for the next 5 years we were stunned at the cost for the first year and the out years grew at rates that were beyond our understanding. Since this was sole source, we had to negotiate the contract and the price became the focus. The negotiation became a detailed analysis of the production cost as the contractor claimed that he lost money the last two years of the contract in producing the item. Therefore, the price jumped way beyond what the government had budgeted for the current year and for the out years. It was over a 60% jump in unit cost, from the last year of the current IDIQ, in the first year alone.
For my government friends who read Skyway blogs, you all know how hard it is trying to explain a jump of that much in price to the system in your clearance documents. In the contract above, we had to walk the price back to the 5-year point and start from there to get through the price analysis part of this effort. We also discovered that the manufacturer was trying to sustain his engineering staff in hopes of not losing people as his business base shrunk. That added to the cost that was not present 5 years ago and impacted the option years of this IDIQ.
The engineering issue described before is a good example of the issues any service contract can run into. Pricing people and the cost over the life of the contract can be difficult. If you have professional people, what will the cost to retain these people over the contract? Will you offer raises to people? If the positions are covered by wage determination, the price of those people will have to match any wage increases. If benefits are part of your compensation package for employees, how will those costs grow? Just think about how much health care costs have increased and your head will hurt! If you have contracts with employees for wages that expire while the contract is running, it will impact the price as those new wages come on line in the follow-up years.
If you can get a good handle on cost over a projected contract period, I would think any company would leap at the opportunity to have a contract for a long period of time. Just remember that getting the requirement right is also a factor in price. Making sure the work will materialize from the government will affect the bottom line. These two factors do go hand in hand and getting them both right will lead to a profitable contract.