1. If BiC-1 is awarded a Contract as a PRIME, including parts of an AWARD(s), extras, add-ons, modifications, extensions, renewals, etc., CLIENT agrees to pay fees as follows then our members/partners will receive a contract/subcontract:
a. Our target price theory:
Target pricing is a customer-driven pricing strategy where the selling price is set based on what the target market is willing to pay for a product. It involves STAHL conducting market research and Agency visits to understand customer preferences, perceived value, and price sensitivity.
b. Our target pricing approach:
The main aim of target pricing is to plan, manage and of course reduce costs. The focus and the attention of this model should be on the competition and the market. The strategy focuses on the customer’s needs and requirements in terms of the WBS functions and quality, also in terms of delivery and price.
c. Our Target price methodology:
Target pricing is a pricing strategy that focuses on setting a price point for a product or service that will appeal to customers and still provide a reasonable profit for the business. Our target price is selected based on factors such as the cost of the product or service, competitors’ Intel prices, and customers’ buying History.
d. Greater Control:
The JV has control over the project, including the ability to select and manage subcontractors. Financial Rewards: Our contractors often receive higher payments compared to subcontractors, reflecting their greater responsibilities. The JV manages all the Back Office responsibilities as well as Program Management Responsibilities for AQM COs and Program Office PMs.
e. Compatibility issues are often:
Funding, problems with the Joint Venture Agreement, and differing profit/outcome expectations, STAHL will manage this using its pricing process with full disclosure, and pricing model example, acceptance and issue avoidance.
f. The JV picks tiered subcontractors for their specialized Services:
Subcontractors typically possess specialized skills, expertise, or equipment that are required for a specific task within a project (Towers, Products or Services). The contractor hires them for their unique capabilities (CPARS, Agency-People Qualifications/Certifications/Clearances rather than general labor) STAHL had 4 kinds of subcontractors
- Tier 3 Strategic or MP subcontractor.
- Tier 2 Nominated Lead subcontractors.
- Tier 1 Domestic subcontractors.
- Tier 0 Named contingency subcontractors.
What percentage of Profit will we pay a subcontractor, The profit for the subcontractor will be the program profit between 3%-10% of the projected actual project, per the target model WBS workshare and actual invoicing to the government.
g. PREFERED TYPE OF CONTRACTS (FFP) Option C & D:
FFP Option C: Target contract with activity schedule and T&M Option D: Target contract with bill of Labor Hours quantities. work package.
h. JV Markup on subs:
Example Only – Most government contractors are looking at about a 35% margin, so they need a markup of 54%, or 1.54. Subs can often get a profit margin of 50%, so they need a markup of 100% or 2x, as shown in the STAHL Model. For some contractors, they have 35% gross profit and 25% goes to overhead and 10% is left in the company.
i. Can joint ventures have subcontractors: Yes
As the joint venture prime of either a full or partial set-aside contract, the small business concern must agree to the following limitations on subcontractors for the respective contract types: Pay no more than 50% of the amount paid by the government to non-similarly situated firms for service contracts.
j. The Rule of 40% Rule:
The Rule 40% states that, at scale, a company’s revenue growth rate plus profitability margin should be equal to or greater than 40%.
Is a Target Price Contract Enforceable?
Challenges to the enforceability of target price contracts
Case Law: In government contracting, parties routinely use target price contracts. In fact, the FAR provides for target price contracting as one of several approved methods for federal contracting. See FAR 16.201(a) (“Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both.”). Additionally, courts routinely enforce target price clauses. For example, in federal court in Massachusetts, a court denied summary judgment related to the target price incentive clause in an environmental clean-up project. AECOM Tech. Servs. v. Mallinckrodt LLC, 117 F. Supp. 3d 98, 110 (D. Mass. 2015). Similarly, the Court of Claims upheld a target price provision and found they “encourage specific efforts and discourage inefficiency and waste.” McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 299 (Ct. Cl. 1997).
STAHL has Drafted Enforceable Target Price Provisions
While target price provisions are generally upheld, drafting to address existing case law may avoid later challenges. STAHL’s word choice is clear with examples and deliberate, we avoid duplicative damage provisions. STAHL negotiates the provisions and ratio and uses a reasonable basis to choose the ratio (for a subcontractor, for example, it may be reasonable to choose a ratio equal to the subcontract value’s percentage of the prime contract value). Finally, we are making sure the parties mutually intend for the provision to be a risk allocation provision and is not a liquidated damage or indemnity provision.
Conclusion
Target price contracts are becoming more widely used in our IT & Cyber industry because they provide an alternative method for shifting portions of price risk. While they are usually upheld, our careful drafting is required to avoid known traps and clearly communicate the intent of the parties to incentivize efficient performance and disincentivize inefficient performance, not to penalize any of our partners for exceeding the target price.