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Procurement, Management, and Administration of Engineering and Design Related Services - Questions and Answers

V. Contract Negotiation

  1. Under competitive negotiation/qualifications based selection (Brooks Act) procurement procedures, what are the requirements for negotiation of a contract? (Posted 7-20-11)
  2. How should fixed fee be established or negotiated on FAHP funded engineering and design related services contracts? (Posted 7-20-11)
  3. May a contracting agency utilize statewide average indirect cost rates in the estimation, negotiation, administration, and payment of FAHP funded engineering and design related services contracts? (Posted 7-20-11)
  4. May a contracting agency question the reasonableness of indirect cost rates for use and application to FAHP funded engineering and design related services contracts? (Posted 7-20-11)
  5. When advertising for services, estimating and negotiating contract costs and terms, or administering a contract, may a contracting agency request/establish limitations of a consulting engineering firm's direct salaries and wages? (Posted 7-20-11)
  6. Does the method used to procure engineering and design related services influence the ability for a State or local public agency to limit/benchmark a consulting engineering firm's indirect cost rate or the direct salary or total compensation of employees on contracts? (Posted 7-20-11)
  7. May a contracting agency limit/benchmark a consulting engineering firm's indirect cost rate or direct salary rates on engineering and design related service contracts that do not utilize FAHP funding? (Posted 7-20-11)
  8. May a contracting agency require discount payment terms (e.g. 2% 10 Net 30) on FAHP funded engineering and design related services contracts? (Posted 7-20-11)
  9. Once a FAHP funded engineering and design related services contract has been negotiated, signed, and becomes binding, may a contracting agency request or require a consulting firm to reduce fees or overall contract costs? (Posted 7-20-11)

1. Under competitive negotiation/qualifications based selection (Brooks Act) procurement procedures, what are the requirements for negotiation of a contract? (Posted 7-20-11)

Upon completion of a qualifications based evaluation and ranking of proposals, the contracting agency initiates negotiations with the most highly qualified consulting engineering firm to arrive at a fair and reasonable compensation for the solicited services which considers the scope, complexity, professional nature, and estimated value of the services to be rendered (as specified in 23 U.S.C. 112(b)(2)(A), 40 U.S.C. 1104, and 23 CFR 172.5(a)(1)).

The primary objective in negotiation is to reach agreement on a price which is fair and reasonable to the contracting agency while providing the consulting firm the greatest incentive for efficient and economical performance. A successful negotiation will result in a fair and reasonable price for the contracting agency and fair and reasonable compensation for the consulting firm. The focus of negotiations should be on improving identification of the scope/tasks to be performed, the level of effort to complete those tasks, the experience and classifications of staff required/assigned to complete those tasks (which collectively result in total direct labor costs), other direct contract costs, and fixed fee.

Following ranking and selection, the contracting agency and most highly qualified consulting firm will typically meet to establish a detailed understanding of the scope, services to be provided, and responsibilities for project development, deliverables, schedules, and other important facets of a project. Once a detailed, mutual understanding of the scope has been made, the most highly qualified consulting firm will prepare a complete cost proposal to perform the services and the contracting agency will prepare/refine an independent estimate. The contracting agency independent estimate becomes the basis for ensuring the consultant services are obtained at a fair and reasonable cost and will be used as the basis for negotiations.

Prior to receipt of the consulting firm's cost proposal, the contracting agency will prepare/refine an independent estimate of the work to be performed on the contract. This independent estimate should consider the person-hours and classifications to complete project tasks (which collectively result in total direct labor costs), other direct contract costs, and fixed fee. As required by Federal laws and regulations and to allow for a fair and reasonable negotiation of costs, the contracting agency must use and apply the consulting firm's approved indirect cost rate for estimation, negotiation, and administration of the contract (See Indirect Cost Rates and Audits Question & Answer Nos. 4 and 17-32 and Contract Negotiation Question & Answer Nos. 3 and 4).

As the allowability of costs is determined by the FAR cost principles, a contracting agency may limit or benchmark consulting firm direct salary rates only if a contracting agency has performed an assessment of the reasonableness of proposed direct salary rates consistent with the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)). To ensure a fair and reasonable negotiation of costs, the consulting firm's actual direct salary rates or those established via this assessment for particular employees or classes of employees must be used in the negotiation and administration of the contract. If an assessment of reasonableness in accordance with the FAR has not been performed, the consulting firm's actual direct salary rates must be applied to the contract without limitations. Limitations or benchmarks on direct salary rates which do not consider the factors prescribed in the FAR cost principles are contrary to qualifications based selection procedures (as specified in 23 U.S.C. 112(b)(2)(A), 40 U.S.C. 1104(a), and 23 CFR 172.5(a)(1)), which require fair and reasonable compensation considering the scope, complexity, professional nature, and value of the services to be rendered. (See Contract Negotiation Question & Answer No. 5)

The most highly qualified consulting firm will submit a complete cost proposal which proposes the firm's person-hours and classifications to complete project tasks, direct contract costs, and fixed fee and applies the firm's direct salary rates and approved indirect cost rate. Overall cost or bottom line price alone are not justification to terminate negotiations with a firm, as the contracting agency must make a good faith effort to negotiate the scope, level of effort, and reasonable price with the highest rated firm. If the contracting agency and the most highly qualified firm are unable to negotiate a fair and reasonable contract, the contracting agency may formally terminate negotiations and undertake negotiations with the next most qualified firm, continuing the process until an agreement is reached (as specified in 40 U.S.C. 1104(b)).

If the programmed funding or contracting agency budget are not adequate to accommodate the cost of the contract once a firm's approved cognizant indirect cost rate and direct salary rates are applied to the agreed/negotiated scope, person-hours, and classifications, then the contracting agency should consider reducing, clarifying, and/or re-negotiating the details of the scope (e.g., tasks, schedules, deliverables, assumptions), person-hours, or classifications for completing tasks. Arbitrary reduction or capping of indirect cost rates or direct salary rates is not permitted under Federal laws and regulations. Failure to negotiate in good faith by focusing on only overall cost or bottom line price, without regard for the scope of work and associated level of effort, is contrary to the intent of the qualifications based selection process.

It may become necessary to re-advertise for the desired services if the scope or other parameters of the project are modified from the original announcement/advertisement during the course of negotiations. It also may be necessary to re-advertise for the desired services if the project's scope is modified and there is not sufficient funding programmed or available for the project. Additionally, all actions and decisions made throughout the procurement and negotiation process should be adequately documented and maintained to demonstrate compliance with applicable Federal laws and regulations (as specified in 49 CFR 18.42).

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2. How should fixed fee be established or negotiated on FAHP funded engineering and design related services contracts? (Posted 7-20-11)

The establishment of the fixed fee should be project specific and shall consider scope, complexity, and professional nature of the services to be rendered (as specified in the 40 U.S.C. 1104(a)). Other considerations may include the size and type of contract as well as the duration and degree of risk involved in the work. Fixed fees in excess of fifteen (15) percent of the total direct and indirect costs of the contract may be justified only when exceptional circumstances exist.

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3. May a contracting agency utilize statewide average indirect cost rates in the estimation, negotiation, administration, and payment of FAHP funded engineering and design related services contracts? (Posted 7-20-11)

Contracting agencies shall use and apply a consultant's cognizant approved indirect cost rate, or an accepted rate established in accordance with the FAR cost principles (as specified in 48 CFR 31), for the purposes of contract estimation, negotiation, administration, reporting, and contract payment, and the rate shall not be limited by administrative or de facto ceilings of any kind (as specified in 23 U.S.C. 112(b)(2)(C)-(D) and 23 CFR 172.7(b)). Use of a statewide average indirect cost rate in the analysis of contract costs or the negotiation and administration of the contract creates an arbitrary limitation which does not comply with Federal requirements.

A contracting agency may use a statewide average indirect cost rate to estimate overall project costs to initially scope or program a project and to serve as an indicator of the level of effort moving forward. However, once the most highly qualified consulting firm is identified, contracting agencies must use the consulting firm's cognizant approved indirect cost rate, or rate accepted for use by the contracting agency if a cognizant approved rate does not exist (See Indirect Cost Rates and Audits Question & Answer Nos. 4 and 17-32), in preparing/revising an independent cost estimate to be used in negotiating and administering contracts or contract amendments in accordance with the aforementioned Federal laws and regulations.

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4. May a contracting agency question the reasonableness of indirect cost rates for use and application to FAHP funded engineering and design related services contracts? (Posted 7-20-11)

Reasonableness is determined during the audit or other evaluation of the indirect cost rate, conducted in accordance with GAGAS, and following the AASHTO Uniform Audit & Accounting Guide, and risk assessment process/risk management framework (See Indirect Cost Rates and Audits Question & Answer No. 3). Contracting agencies shall use and apply a cognizant approved indirect cost rate established in accordance with the FAR cost principles (as specified in 48 CFR 31) for the purposes of contract estimation, negotiation, administration, reporting, and contract payment, and the rate shall not be limited by administrative or de facto ceilings of any kind (as specified in 23 U.S.C. 112(b)(2)(C)-(D) and 23 CFR 172.7(b)). (See Indirect Cost Rates and Audits Question & Answer Nos. 17-32 for a detailed discussion of the use of indirect cost rates other than as established through the cognizant approval process or when such rates are under dispute (as specified in 23 CFR 172.7(c)))

A contracting agency shall not request or start negotiations to obtain a lower indirect cost rate than was established by a cognizant approved audit (as specified in 23 U.S.C 112(b)(2)(C)-(D)). A lower indirect cost rate may be used only if offered/submitted voluntarily by a consulting firm as part of a cost proposal during contract negotiations. A consulting firm's offer of a lower indirect cost rate shall not be a condition or qualification to be considered for the work or contract award (as specified in 23 CFR 172.7(b)). (See Indirect Cost Rates and Audits Question & Answer No. 21)

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5. When advertising for services, estimating and negotiating contract costs and terms, or administering a contract, may a contracting agency request/establish limitations of a consulting engineering firm's direct salaries and wages? (Posted 7-20-11)

State and local public agency recipients of Federal grants are required to apply the FAR cost principles to determine the allowable costs for personal services contracts with commercial, for-profit entities (as specified in 49 CFR 18.22(b)). Limitations or benchmarks on consulting firm direct salaries and wages may be acceptable only if a contracting agency has performed an assessment of the reasonableness of proposed direct salary rates and established the limitations in accordance with the reasonableness provisions of the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)).

This assessment of reasonableness should include a variety of factors. In addition to the provisions specified in 48 CFR 31.201-3, in determining the reasonableness of compensation for particular employees or job classes of employees, a contracting agency must consider factors determined to be relevant by the contracting office. Factors that may be relevant include, but are not limited to, conformity with compensation practices of other firms: (i) of the same size; (ii) in the same industry; (iii) in the same geographic area; and (iv) engaged in similar non-government work under comparable circumstances.

An assessment consistent with the FAR cost principles for determining the reasonableness of direct salary costs would permit contracting agencies to establish direct salary compensation limitations or benchmarks based upon the objective consideration of the compensation factors discussed above. This assessment would be used to determine what is reasonable for the subject work to be performed based on the classification, experience, and responsibility of the employee performing the work, taking into consideration the factors identified above.

To ensure a fair and reasonable negotiation of costs, the consulting firm's actual direct salary rates or those established via this assessment for particular employees or classes of employees must be used in the negotiation and administration of the contract. If an assessment of reasonableness in accordance with the FAR has not been performed, contracting agencies must use and apply the consulting firm's actual direct salary rates in preparing or revising the independent cost estimate to be used in negotiating or administering contracts or contract amendments.

Limitations or benchmarks on direct salary rates which do not consider the factors prescribed in the FAR cost principles are contrary to qualifications based selection procedures (as specified in 23 U.S.C. 112(b)(2)(A), 40 U.S.C. 1104(a), and 23 CFR 172.5(a)(1)), which require fair and reasonable compensation considering the scope, complexity, professional nature, and value of the services to be rendered. Additionally, if limitations or benchmarks on direct salary rates are too low, their use is likely to limit the number of consulting firms and the qualifications of the firms which submit proposals to perform work on projects. Furthermore, as a consulting firm's indirect cost rate is applied to direct labor costs, any direct labor limitations or benchmarks not supported by the FAR cost principles have the effect of creating an administrative or de facto ceiling on the indirect cost rate, contrary to FAHP requirements (as specified in 23 U.S.C. 112(b)(2)(D) and 23 CFR 172.7(b)).

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6. Does the method used to procure engineering and design related services influence the ability for a State or local public agency to limit/benchmark a consulting engineering firm's indirect cost rate or the direct salary or total compensation of employees on contracts? (Posted 7-20-11)

Yes, subject to State laws, policies, and approved procedures, State and local public agencies may be able to place a limitation or benchmark on a consulting firm's indirect cost rate when using the small purchase procedures or noncompetitive negotiation (e.g., emergency procurement) procurement methods (See Other Procurement Procedures Question & Answer Nos. 2-5) for engineering and design related services contracts that utilize FAHP funding. Regardless of the procurement method utilized, State and local public agencies may establish limitations or benchmarks on consultant direct salary rates provided the limitations are established in accordance with the reasonableness provisions of the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)). (See Contract Negotiation Question & Answer No. 5)

Small purchase and non-competitive negotiation procurement methods are not required to follow a qualifications-based selection process (as specified in 23 U.S.C. 112(b)(2)(A), 40 U.S.C. 1101-1104, and 23 CFR 172.5(a)(1)) and therefore are not required to comply with the indirect cost rate provisions specified in 23 U.S.C. 112(b)(2)(C)-(E). For these procurement methods, the State or local public agency must complete the procurement in accordance with its own State or local laws, regulations, policies, and procedures provided that these requirements are not in conflict with applicable Federal laws and regulations (as specified in 49 CFR 18.4 and 18.36(a)). When the State or local policies or procedures are in conflict with Federal requirements, the Federal requirements prevail where use of Federal funds is involved.

As such, State and local public agencies may negotiate indirect cost rates in accordance with applicable State and local laws, regulations, policies, and procedures when procuring engineering and design related services contracts under small purchase or non-competitive negotiation procedures.

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7. May a contracting agency limit/benchmark a consulting engineering firm's indirect cost rate or direct salary rates on engineering and design related service contracts that do not utilize FAHP funding? (Posted 7-20-11)

Yes, subject to State laws, policies, and procedures, State and local public agencies may place a limitation on or benchmark a consulting firm's indirect cost rate and direct salary rates if the engineering and design related services contract does not utilize FAHP funding.

The reasonableness provisions of the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)) for determination of allowable costs for personal services of commercial, for-profit entities(as specified in 49 CFR 18.22(b)) apply only when any Federal grant funds are involved. Additionally, the indirect cost rate provisions of 23 U.S.C. 112(b)(2)(C)-(E) apply only when FAHP funding is participating on engineering and design related service contracts that directly relate to a highway construction project subject to the provisions of 23 U.S.C. 112(a).

However, as with other project expenditures that do not comply with Federal requirements, the cost of consultant service contracts that utilize only State or local public agency funding which were not procured, negotiated, or administered in accordance with applicable Federal and State laws and regulations would not subsequently be considered as eligible for the purpose of meeting the non-Federal share of costs for subsequent phases of a FAHP funded project. More information on non-Federal match requirements may be found at: http://www.fhwa.dot.gov/legsregs/directives/policy/memonfmr20091229.htm.

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8. May a contracting agency require discount payment terms (e.g. 2% 10 Net 30) on FAHP funded engineering and design related services contracts? (Posted 7-20-11)

No, a requirement for a unilateral discount from a consulting firm's negotiated compensation due to early payment would be in violation of Federal laws and regulations applicable to engineering and design related services contracts utilizing FAHP funding and directly related to a construction project.

Given the ability for most contracting agencies to promptly pay invoices via electronic methods, required discount payment terms would essentially provide the contracting agency an arbitrary discount beyond the negotiated fair and reasonable compensation. A required discount of a firm's invoiced amount, if paid within an established time frame, essentially creates an arbitrary reduction of the negotiated fair and reasonable compensation required by the Brooks Act (as specified in 40 U.S.C. 1104(a)); creates an arbitrary ceiling on the firm's approved indirect cost rate required to be applied to contract negotiation and payments (as specified in 23 U.S.C. 112(b)(2)(D) and 23 CFR 172.7(b)); and creates an arbitrary reduction of direct salary/wage rates which does not provide consideration of the reasonableness provisions of the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)). (See Contract Negotiation Question & Answer Nos. 1, 4, and 5)

As such, a contracting agency may not require or request discount payment terms via a solicitation/request for proposal, during the subsequent evaluation and selection process, as a negotiation point, or through standardized contract documents/templates. However, if a consulting firm, in the interest of its own financial management of the contract, voluntarily offered a discount payment term in its price proposal during negotiations, the contracting agency could accept the discount payment terms provided the firm's offer is not a condition or qualification to be considered for the work or contract award. FAHP funding participation would then be limited to the Federal share of the discounted payments actually made by the contracting agency.

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9. Once a FAHP funded engineering and design related services contract has been negotiated, signed, and becomes binding, may a contracting agency request or require a consulting firm to reduce fees or overall contract costs? (Posted 7-20-11)

Unilateral modifications to the pricing of FAHP funded engineering and design related services contracts without engaging in good faith negotiations with the consulting firm are contrary to applicable Federal laws and regulations.

An arbitrary reduction of fees or overall contract costs is inconsistent with qualifications based selection procedures (as specified in 23 U.S.C. 112(b)(2)(A), 40 U.S.C. 1104(a), and 23 CFR 172.5(a)(1)) for negotiation of fair and reasonable compensation considering the scope, complexity, professional nature, and estimated value of the services to be rendered. Reductions to overall contract costs also creates a de facto ceiling on a firm's approved indirect cost rate required to be applied to contract negotiations and payment (as specified in 23 U.S.C. 112(b)(2)(D) and 23 CFR 172.7(b)) and creates an arbitrary reduction of direct salary/wage rates which does not provide consideration of the reasonableness provisions of the FAR cost principles (as specified in 48 CFR 31.201-3 and 31.205-6(b)(2)). (See Contract Negotiation Question & Answer Nos. 1, 2, 4, and 5)

In order to reduce expenditures associated with existing FAHP funded engineering and design related services contracts, a contracting agency may cancel or delay a contract as permitted within the provisions of the contract, re-negotiate the terms of the contract, or terminate the project.

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