Page 36 - AASBO EDGE Winter 2023

PROCUREMENT

BY GARY BARKMAN, ACBS, NIGP-CPP, CPPB AND BILL MUNCH, NIGP-CPP, CPPO CPPB
Prohibitions of Cost-Plus-a-Percentage-of-Cost

Contracts?
Gary Barkman Bill Munch

The School District Procurement Rules in R7-2- Therefore, the cost list from a manufacturer is an
1001 tells us: “Cost-Plus-a-Percentage-of-Cost "Established Catalog Price." At least conceptually
Contract" means a contract that, prior to completion we believe that is true. As long as a vendor is
of the work, the parties agree that the fee will be a providing you with a published manufacturer's
predetermined percentage of the cost of the work.” price list, they can use that price list and give
R7-2-1092 states, “Subject to the limitations of you a percentage mark-up on the price. This does
this section, any type of contract that would be not constitute a Cost-Plus-a-Percentage-of-Cost
advantageous to the school district may be used, Contract as prohibited by the Procurement Rules.
except that the use of a Cost-Plus-a-Percentage-of- If a vendor submits a manufacturer's price list and
Cost Contract is prohibited.” adds a mark-up, which is really a negative discount
off of manufacturer's price list – that is acceptable.
As we talk with procurement and business officials A 5% mark-up is nothing more than a discount of
across this great state of ours, there appears to be – 5% really!
some confusion from time to time about what type
of contracts are REALLY prohibited by this rule. As we did research for this article, we turned to
We sometimes hear that this rule prohibits us from the National Institute of Government Purchasing
allowing a vendor to submit a manufacturer’s price (NIGP), the foremost authority for all things public
list with a mark-up. This type of price list with a purchasing. We went to NIGP for its definitions
mark-up is NOT a Cost-Plus-a-Percentage-of-Cost in its official Dictionary of Definitions: (http://
Contract as prohibited by the Procurement Rules. www.nigp.org/eweb docs/education/OnlineDict/
The rest of this article will provide the justification DictC.htm). The first thing we note is that NIGP
for this statement. recognizes another term. “Cost Plus Fixed Fee
Contract (CPFF), which is defined by NIGP as: “A
If we look at R7-2-1001 again it also says: contract whereby the contractor is reimbursed for
"Established catalog price" means the price its actual incurred cost for material, labor and other
included in a catalog, price list, schedule or other agreed to incidentals, plus a fixed sum established
form that: in the contract. (Harney, 1992)”. Further, “Cost-
A. Is regularly maintained by a manufacturer, Plus-a-Percentage-of-Cost Contracts” is defined
distributor or contractor. as: “An agreement on a construction project
B. Is either published or otherwise available in which the contractor is provided a specified
for inspection by customers. percentage profit over and above the actual costs of
C. States prices at which sales are currently construction. These contracts are considered poor
or were last made to a significant number of business practice because the contractor has little
any category of buyers or buyers constituting incentive to hold down costs. This type of costing
the general buying public for the materials method is prohibited in federal purchasing. A cost-
or services involved.” plus-fixed-fee contract is a better approach.”

|
36 THE EDGE WINTER 2022-2023