DOD Memo on LPTA, Cost type and T&M Contracts
The following is extracts from a recent Department of Defense memo on lowest price, technically acceptable (LPTA) contracts. LPTA is the appropriate source selection process to apply only when there are well defined requirements, the risk of unsuccessful contract performance is minimal, price is a significant factor and there is neither value, need nor willingness to pay for higher performance. LPTA has a clear but limited place in the source selection “best value” continuum. Used in appropriate circumstances and combined with effective competition and contract type LPTA can drive down costs and provide a best value solution. LPTA can offer a streamlined and simplified source selection approach to rapidly procure commercial and non-complex services and supplies but if not applied appropriately, DOD can miss an opportunity to secure an innovative, cost effective solution while maintaining a technological advantage. The memo states time and material contracts lack incentives for cost control and labor efficiencies because the fully burdened labor rates are fixed for the skill levels and mix requiring the government to pay the full labor rate despite contractor efforts to reduce their own costs by seeking lower labor rates. On the other hand, cost plus fixed fee labor of effort (CPFF LOE) is well suited for professional and management services because it requires a contractor to perform a set number of hours at the required skill mix and levels over a stated time period to earn a fixed fee. The benefit of CPFF LOE is direct labor rates and other costs are not fixed and therefore if the contractor reduces the skill mix and level lower direct labor rates are generated costing the government less. Unlike firm fixed price and T&M, CPFF LOE contracts allow the government to take advantage of the contractor’s ability to create savings by adjusting the skill levels and mix. A comment on this memo by Darrell Oyer in his April 20th newsletter disagrees with the conclusion that CPFF LOE are superior over T&M contracts. He observes that CPFF LOE lack incentives for cost control because an increase in skill levels will result in higher billed costs to the government while the fixed rates under a T&M contract is more suited to professional services because its fixed rates will allow for increased skill levels with no additional cost to the government.
