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Revisions to Cost-type Contracts:
Controlling Scope, Schedule, & Cost
Breakout Session # E10
Jo Ellyn Cunningham

Tuesday July 31, 2012
2:30 PM – 3:45 PM

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Contract Types

Two Basic Pricing Arrangements:

Fixed Price:
FFP, FFP/EPA, FP+AF, FP+I, FF Rate, Cost-Share

Cost Reimbursement:
CNF, CPFF, CPIF, CPAW, Cost-Share
T&M, LH

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FPIF or FFP or FPEPA 4 . CPIF. FPIF. Cost-Type Contracts Cost Risk: High >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Low Requirement Definition Vague >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Well Defined Production Stage Concept Exploratory Test/ Full scale Full Studies. FFP. & Development Demo Development Production Basic Research Contract Type Varied CPFF CPIF. FPIF.

Contrast CPFF Completion CPFF Term (LOE) T&M PWS/SOW PWS/SOW PWS/SOW POP POP POP Estimated Cost Estimated Cost Ceiling Price Estimated Cost Estimated Cost Allowable Fixed Fee Fixed Fee Charges Total Cost & Fee Total Cost & Fee LOE Language tying fee to range of hours 5 . Cost Plus Fixed Fee (CPFF) / Time & Materials (T&M) .

Cost-Reimbursement Contract Administration Where the rubber meets the road… 6 .

indirect. & profit. •Typically agreed to prior to award for current year & out years 7 . General & Administrative (G&A) costs. T&M vs. Cost T&M: •Contractor’s labor rates: Loaded to include direct.

T&M vs. Cost T&M: •Materials & Other Direct Costs (ODCs) typically are provided at Contractor’s cost. Contractor may add overhead (OH) to ODCs. & it is his standard accounting practice. •Profit/fee is based on level of risk. •However. performance & technical innovation. 8 . IF he has not already recovered these costs in his Labor rates.

& purchases. & include labor. 9 . •Direct costs are costs directly associated with a specific project. General & Administrative (G&A) & profit/fee. overhead & other indirect costs. travel. Cost-Type COST-TYPE . T&M vs.Handled differently: •Cost elements are reviewed separately to include: direct labor. materials. subcontractor labor. other direct costs.

based on company projections & the changing costs of operating a business. T&M vs. & are allocated using a systematic cost allocation basis. Indirect costs are common costs that can’t be directly assigned to specific projects. performance & technical innovation. 10 . •Profit/fee is based on level of risk. Cost-Type COST-TYPE: •Indirect costs change.

Cost-Reimbursable (With or Without Fee) Contract Mods • THESE ARE NOT TIME & MATERIALS OR LABOR HOUR CONTRACTS • You cannot just “Add Money” 11 .

Modifications to T&M Contracts Issues you must address: Option years & Rate Change Requests:  Direct Labor Rate changes  Indirect Rate changes  Audit contractor’s proposed revised rates? Consider cost of audits  Use GII/DOL factors? 12 .

Modifications to T&M Contracts Issues you must address. continued: Adding Funding:  Will additional funding & work scope lower indirect rates?  Assuming no GII/DOL provisions. has contractor experienced any changes in his indirect rates? 13 .

or unknown conditions exist. Always ask for justification. 14 . Contractor developed LOMs should not be changed after the fact unless Government has caused the change. Modifications to T&M Contracts Questions the Buyer/Contract Specialist (CS) must ask: • What caused the change? • Use loaded rates agreed upon at contract award? • If applicable to this mod. ask for List of Materials (LOM) & costs specific to mod request.

cont’d: • If Contractor is suggesting a labor rate change. 15 . Modifications to T&M Contracts Questions Buyers/Contract Specialists must ask. compare rates against agreed upon Wage Determination in contract. ask for written justification for consideration. Must be a good reason. • If SCA contract. Update if & when an Option is being exercised.

Modifications to T&M Contracts Questions Buyers/Contract Specialists must ask. 16 . the Contractor won this award by proposing an estimated price that demonstrated he/she understood the work. cont’d: If Adding Funding: • Why is additional funding needed if Government has not caused or asked for a change in work? If justified. Be cautious about contractor initial buy-in to a job. Remember. add value of modification to previously obligated amount.

705-2) 17 . Contractor must provide Notice to Government when costs reach 75% of the estimated costs when there is a potential for overrun. but costs incurred exceeded those costs authorized by the contract. who neglected to keep contract specialists on both sides informed! (BEWARE Apparent Authority!) Cost Overrun: No new work is authorized. Contractor overruns are solely at Contractor’s own risk. Government is NOT obligated to cover any costs above the authorized contract amount. Important Concepts Scope: Authorized work per Performance Work Statement (PWS) Scope Creep: New work (beyond PWS authorization) that usually results from discussions between Government & contractor engineers & program managers. (FAR 32.

Important Concepts, Continued

Cost No Fee: Contractor receives no fee.

Cost Plus Fixed Fee: Allowable costs up to a specified
ceiling amount, plus negotiated fee fixed at contract
inception. Fee does not vary with costs incurred; it
may be adjusted as changes to the work are
authorized by the CS or KO.

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Modifications to Cost-No Fee Contracts

Issues Buyers/CSs must address:
• Costs incurred to date (existing scope)
• Estimated Costs to Complete (existing scope)
• Estimated Costs for New Scope
• Is this revision for an overrun?
• Identify the reason for an overrun.

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Modifications to Cost-No Fee Contracts
Issues Buyers/CSs must address,
continued:
• Address Contractor’s Quote(s),
Buyer’s/Contract Specialist’s (CS) Position,
Negotiated Settlement, & Net Impact
• Estimated Schedule for Incurred Costs
• Monitor invoices.
Key Words to Remember: Scope Creep,
Scope Growth, Cost Overrun

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for New Scope? • Identify the reason for an overrun. Modifications to Cost-Plus Type Contracts Questions the Buyer/CS must address: • What are costs-to-date & estimated Cost-to-Complete of Existing Scope? • Is this modification for an Overrun on a Cost-Plus- Fixed-Fee contract? Does the Modification request include an overrun & New Work? • What are estimated costs for New Scope. commensurate with risk. plus Fee. 21 .

keep it separate. • Does modified cost properly exclude non-recurring costs such as tooling. If an overrun is considered in the same modification. or other than certified cost & pricing data? Under what circumstances? (Hint –TINA). • Will Contractor be required to submit certified cost & pricing data. design. & development costs & learning curve? 22 . for new work ONLY. cont’d: • Profit or fee negotiated. should be specifically identified. Modifications to Cost-Plus Type Contracts Questions Buyer/CS must address.

• Define how additional Fee (if any) will be paid out! Tie fee payments to deliverables received & accepted by the Government. Avoid appearance of Cost Plus Percentage of Cost!! This is Illegal! 23 . Modifications to Cost-Plus Type Contracts Questions Buyers/CSs must address. & Document Net Impact (POM/PNM). Monitor invoices to insure Contractor is not invoicing inappropriately for fee. Document Government’s Position & Negotiated Settlement. cont’d: • Review Contractor’s Proposal(s). Incentivize Contractor Performance! DO NOT pay a monthly or quarterly fee amount.

Progress payments are used for FFP contracts. i. DO NOT treat the fee as if it were part of any progress payments. etc.e. Use DD Form 1547 (for non-competitive) when mod exceeds $100K & contract total is $50M or greater per year. • If new work. cont’d: • Fee should be based on the arrangement identified in the RFP. Modifications to Cost-Plus Type Contracts Questions Buyers/CSs must address.. fee will be paid at completion of each separate task. OR at completion of milestone. not CPFF. 24 .

The Contractor’s entitlement is uncertain at the time of contracting. 25 . 2. 3. &. Modifications to Cost-Plus Type Contracts Avoid the appearance of Cost Plus Percentage of Cost!! Definition for Cost Plus Percentage of Cost: The following criteria is used to determine whether a contract has a CPPC arrangement: 1. 4. Payment is on a predetermined percentage rate. The predetermined percentage rate is applied to actual performance costs. The Contractor’s entitlement increases commensurately with increased performance costs.

306(d) 26 . Cost-Reimbursement Contracts: Completion vs. Term The scope of work can be written two ways for a cost reimbursable contract: • Completion • Term Form As found in FAR 16.

27 .. Cost-Reimbursement Scope Approach: Completion vs. a final report of research accomplishing the goal or target) within the estimated cost.g. •If work cannot be completed within estimated cost. Term Completion •States a definite goal or target & specifying an end product. •Contractor must complete & deliver specified end product (e. as a condition for payment of the entire fixed fee. provided Government increases the estimated cost. Government may require more effort without increase in fee.

upon contractor statement that level of effort specified in contract has been expended in performing the contract work. fixed fee is payable at expiration of agreed-upon period. 28 . Term Term Form •Obligates contractor to devote a specified level of effort for a stated time period.. •Renewal for further periods of performance is a new acquisition that involves new cost & fee arrangements. •If performance is considered satisfactory by Government. Cost-Reimbursement Scope Approach: Completion vs.

Quarterly or Monthly Cost Status Reports Regularly Required Cost Status Report Enable Better Contract Management: • Technical progress for period ended • Cost to date for period ended • Estimated costs for next quarter • Technical activities/milestone completion planned for next quarter • Estimated Cost to complete Contract 29 .

Ask the Right Questions: Line Customers What is the technical status of the contract? What is driving the increase? • Cost Growth? • Scope Growth? • Constructive Changes? • Effect on Schedule? Get Project Manager & Budget Analyst Input 30 .

Ask the Right Questions: Contractors What is the technical status of contract performance? What is driving the increased schedule &/or costs? • Scope changes ? Source? • Constructive Changes? • Suppliers? • Subcontractors? 31 .

& Cost SCOPE SCHEDULE COST 32 . The Trinity: Scope. Schedule.

•If there is a projected overrun. Cost Step One – Existing Scope: •Get cost-to-date & estimate to complete existing.to- complete for CPFF LOE Contracts. current work •Get technical status to date •Obtain hours to date & estimated hours. Adding Scope. make sure that Contractor does not mix up cost for new work with overrun in order to get fee on the overrun. 33 . Schedule.

Cost Step Two – Scope Change •Evaluate labor. profit for new work. 34 . material. travel. Step Three •Summarize Changes. Negotiate Schedule & Cost Plus Fee for New Work. Schedule. Adding Scope. Map out how much must be added to the contract to account for (1) cost status of existing contract & (2) proposed new work. indirect costs.

the increased cost is fee-bearing. that cost increase could be fee-bearing • Defective Specifications • Contractor gets order to “speed up” work in face of excusable delays. your organization impedes performance 35 . e. • • If your action has the effect of requiring the Contractor to perform more work. (constructive change).g. CPFF Completion Changes: Fee-bearing Costs & Non-fee-bearing Costs • If PWS/SOW Scope is increased. • Non Cooperation or Interference.

CPFF Changes: Fee-bearing Costs & Non-fee-bearing Costs If increased cost is the result of Cost Growth. requiring Contractor to use more expensive subs. • More hours needed than originally estimated • Material Cost Increases • Proposed subs not available. the increased cost is non-fee bearing. 36 .

37 . • What conditions drove the overrun. CPFF Changes: Overruns If there is an overrun or revised estimate to complete (anticipated overrun) •Contractor needs to provide detail on the overrun: • Cost & technical status of work to date • What cost elements make up the overrun • What technical work will be performed with the overrun.

•Get technical status to date 38 . CPFF Changes: Descopes De-scope: Preferable to a Partial Termination Step One •Get cost-to-date & estimate to complete for current work.

material • Omitting types of labor or material • Omitting Indirect Costs • Omitting Profit 39 . travel. indirect costs. material. CPFF Changes: Descopes Step Two •Evaluate labor. Negotiate Cost Plus Fee for Deleted Work: • Look for the following when evaluating the proposal: • Underestimating labor. profit for new work.

& (2) proposed deleted work. 40 . Map out how much must be added to &/or deleted from the contract to account for (1) cost status of existing contract. CPFF Changes: Descopes Step Two. Continued •Closely review original proposal to see if there was anything originally proposed that is missing from deduct proposal Step Three •Summarize Changes.

868 $1.778 $ 7.337. Example 1: Scope Increase to CPFF Completion-type Contract CS Issued Increased Scope Change on CPFF Completion.132 $ 99.132 41 . Without Getting Cost-to-Complete Status (Bad Move!) Original Quotation Instructions to Contractor: •Propose Estimated Cost & Fixed Fee for adding one support package: Original Negotiated New Contract Contract Increase Value Cost $1.437.354 $118.311.000 $1.222 Fee $ 92.910 CPFF $1.132 $126.218.

& “Balanced the Books” (Much better approach): Quotation Instructions for Existing Status (Step 1) •Provide Cost to Date through the Most Current Accounting Period. 42 . for existing work. Example 1(a): Scope Increase to CPFF Completion-type Contract Increased Scope Change on CPFF Completion. •Provide Estimated Cost to Complete for existing work. Buyer/CS Obtained Cost to Complete Status. for existing work. •Provide Technical Progress Status To Date through most current Accounting Period.

& “Balanced the Books”: Now Address New Work (Step 2) •Propose Estimated Cost & Fixed Fee for adding one support package. Example 1(a): Scope Increase to CPFF Completion-type Contract Increased Scope Change on CPFF Completion. Buyer/CS Obtained Cost to Complete Status. Let’s look at the difference in the results when the more detailed Quotation Instructions were provided! 43 .

441 $1.778 $ 92. 44 .098 $209.311.354 $84.565 $1.395. because it was not an increase in scope.778 $ $ 92.093.876 $209.218.185.565 $1.132 $84.309 Follow up Question to Contractor – Why the $84. causing Prime to go to more expensive shop.778 $ 0 CPFF $1.309 Fee $ 92.302.309 cost growth? Contractor’s Response – Subcontractor shut down.663 $1. Example 1(a): STEP ONE – BALANCE THE BOOKS (1) (2) Actuals to Estimate Total Initial Date plus to Complete Contract Cost Contract Fee Original Work* Amount Growth Cost $1. *NOTE: Not fee bearing.

559 Fee $ 2. •Below is result of Cost analysis for new work: Negotiated Cost $34.Example 1(a): STEP TWO – NEGOTIATE THE INCREASED SCOPE NEGOTIATE THE INCREASED SCOPE •Evaluate labor. material. Negotiate Cost Plus Fee for New Work. & profit for new work. travel. indirect costs.632 45 .073 CPFF $36.

218.311.559 $1.778 $ 0 $ 2. Example 1(a): STEP THREE – SUMMARIZE CONTRACT ACTION Per Contract To Complete Added Scope New Contract Value Cost $1.132 $84.632 $1.851 CPFF $1.222 Fee $ 92.432.309 $36.337.309 $34.073 46 .073 $ 94.354 $84.

222 Fee $ 99.059 47 .073 $5.432.g. e.222 $1. not balancing the books” Example 1 Example 1(a) New Contract Value New Contract Value Difference Cost $1.910 $ 94. 1(a).132 $1.851 $5. Example 1(a): BALANCING THE BOOKS ADVANTAGE! Example 1 vs.437.337.059 (savings) CPFF $1. “Balancing books vs.337.

078 $ 305. Example 2: Adding New Term to CPFF- Level Of Effort Contract Adding new Term Without Getting Cost & Hours.414 $78.119.522 $84. Contract Cost & Fee Thru 8/31/07 New Contract Term Neg.694.817 $3.252.999.826.231 Fixed Fee $ 5. “Balancing the Books” (OOPS!) Quotation Instructions: Propose Estimated Cost & Fixed Fee for adding 4 months.g.425. 9/1/07 – 12-31-07 Value Cost $74.417 48 .251.108 $ 5.to- Complete Status.131. e.186 Total $80.895 $4.

Correctly! Increased Scope Change on CPFF LOE. •Provide Hours through Most Current Accounting Period. & “Balanced the Books”: Quotation Instructions – (Good Work!) Step 1 – Address Existing Work •Provide Cost to Date through the Most Current Accounting Period of existing work.Example 2(a): Adding New Term to CPFF- Level Of Effort Contract. •Provide Estimate to Complete through Balance of Contract Term. 49 . CS Obtained Cost to Complete Status.

Continued – Step 2 – Address New Work •Propose Estimated Hours to Complete through Balance of Contract Term •Provide CPFF & Hours for new Term Let’s look at the difference in the results when the more detailed Quotation Instructions were provided! 50 . Correctly! Quotation Instructions. Example 2(a): Adding New Term to CPFF-Level Of Effort Contract.

403. Buyer/CS negotiated fee reduction of $117. • •Actual plus Estimated Term Costs for P/E 8/31/07 were $72.782. Thus full fee for period ending 8/31/07 was not earned in accordance with the Contract terms.714. 51 . Example 2(a): Adding New Term to CPFF-Level Of Effort Contract.BALANCE THE BOOKS •Actual hours plus estimated hours to complete original work were below negotiated range of hours that Fee was based upon. Correctly! STEP ONE . for period ending 8/31/07.

Correctly! STEP TWO – NEGOTIATE COST & FEE FOR NEW TERM Neg. 9/1/07 – 12/31/07 Cost $3.108 Total $4.131.826.414 Fixed Fee $ 305.522 52 . Example 2(a): Adding New Term to CPFF-Level Of Effort Contract.

Example 2(a): Adding New Term to CPFF-Level Of Effort Contract.817 F.881. Fee $ 5.364 $ 305.782.108 $ 5.289 53 .358.522 $82.576. Correctly! STEP THREE – SUMMARIZE CONTRACT ACTION Actual Cost New + Re-negotiated New Term Contract Fee through 8/31/07 Neg.414 $76.472 Total $78.826.403 $3.490.131.608.767 $4. 9/1/07-12/31/07 Value Cost $72.

490.414> Fee $ 5.817 <$1.128> 54 . e. Example 2 versus 2(a).231 $76.643.252.472 <$ 117. “Balancing the Books vs.289 <$1.251.g.417 $82. Not Balancing the Books” Example 2 Example 2(a) New Contract Value New Contract Value Difference Cost $78.881.999.714> CPFF $84.761.186 $ 5.608.

thus. Not Balancing the Books” KEY POINT 1: In Example 2. e. Example 2 versus 2(a). Buyer/CS did not ask for correct information. Buyer/CS asked for estimated costs for the extended term without asking for cost to date & estimate to complete current term first. Contract was in an underrun situation. too much cost was added. in the New Contract Value.g. “Balancing the Books vs. 55 .

g. Thus. Buyer/CS did not ask for hours for the current term to determine if the contractual LOE had been provided. the new contract value for Example 2 contained too much fee. “Balancing the Books vs. Example 2 versus 2(a). 56 . e. As a result. Not Balancing the Books” KEY POINT 2: In Example 2. the Contractor earned fee for the current term to which they were not entitled.

•Get Technical Status on current work. Example 3: De-Scoped Effort Delete Task #4 – It Is No Longer Required: Quotation Instructions: Step 1: •Provide Cost to Date through Most Current Accounting Period for existing work. 57 . •Provide Estimated Cost to Complete for existing work.

Let’s See How the Savvy Buyer/CS Accomplished This. Use current costs to price the proposal. Example 3: De-Scoped Effort Delete Task #4 – No Longer Required: Quotation Instructions: Step 2: •Propose Detailed Deducted Estimated Cost & Fixed Fee for deleting Task #4. 58 .

59 .500. Estimate at Completion for current work is $1. Example 3: De-Scoped Effort STEP ONE: BALANCE THE BOOKS This is the Original Contract’s Estimated Cost & Fee Cost $1.500.620.000.000 Your Contractor informs you that cost to date for the most current accounting period is $1.000.000 Fee $ 120.000.000 Total $1. which is your current Contractual Estimated Cost.

associated indirect costs & fee.000> <$200. with no overhead. Negotiated amount includes those elements. Buyer/CS argued that negotiated deduct must include current costs.000> <$216. Example 3: De-Scoped Effort STEP TWO: NEGOTIATE COST & FEE FOR DELETED WORK Proposed Negotiated Cost <$100. G&A or profit.000> Contractor proposed only direct costs in deduct.000 Total <$100. 60 .000> Fee < $0 > <$ 16.

500.000 Fee $ 120. Example 3: De-Scoped Effort STEP THREE – SUMMARIZE CONTRACT ACTION Per Contract Negotiated Deduct New Contract Value Cost $1.404.000 CPFF $1.000 <$216.000> $ 104.300.000 <$200.000 <$ 16.000> $1.620.000 61 .000> $1.

00 total estimated cost. $8.000. 62 .00.000.00 (8% fee)= $108. indicating work is complete.000. • Contractor completes the work satisfactorily and submits a final invoice to the Government for a total of $93.000.00 2.000. CS should deobligate the funds and give them back to the customer to reuse. What happens to the remaining $7. Questions: 1. How much fee is the contractor entitled to for this work? 2.00 + $8. Fee Scenario # 1 • Contractor proposed to perform work under the original PWS for: $100.000.00 of the originally estimated cost? Answers: 1.

What fee will you pay the Contractor for this overrun? Answer: 1.000. • Contractor submits a request for change.00 (8% fee) = $108.000. The overrun is due to underestimation of hours by the Contractor. recognizing there was no change to the work. 63 . and the Government has not made or caused a change. Question: 1.000.00 + $8. Fee Scenario # 2 • Contractor proposed to perform the work in the PWS/SOW for: $100. indicating he needs to add 200 hours additional labor as he did not complete the work for the number of hours he/she originally proposed. • The Government has agreed to fund the overrun.00 total estimated cost. None.

NO additional fee will be added for the increase. 64 . After you determine the increased value of the overrun.00 estimated total cost. What will happen to the fee under the 2 circumstances above? (Separate responses required) Answers: 1.00 + $8. the Government has made no change.000. • Government has asked Contractor to add 2 within-scope tasks.000. Question: 1. • Contractor submits a request for more funds to complete the original work.00(8% fee) = $108. New work will include a newly negotiated fixed fee (keep these transactions separate in the modification.000. Fee Scenario # 3 • Contractor proposed to perform the work in the PWS/SOW for: $100. 2.

What happens to the fee under this scenario? Answer: 1. or (if it was not broken out) negotiate the reduction to include all costs plus representative fee.00 estimated total cost.000. Fee Scenario # 4 • Contractor proposed original work for: $100. Question: 1. 65 .00 + $8.000. Buyer/CS will need to determine value of descoped work and associated fee from original proposal.00(8% fee)= $108. and they need to descope the task. • Government decided 7 months into the 12 month performance period that one task will not be performed.000.

00. & add funding to cover the estimated costs. Funding was added without obtaining any cost information of any kind – twice! •Need amendment to extend the contract for a fourth year.000. over a two-year period. Group Exercise: Fixing the Mismanaged CPFF You have inherited a CPFF contract that was treated like a T&M for the last 2 amendments. •Contractor provided detailed cost proposal $795. 66 .

•The current contract value is $750.000.000.00. •Requester thinks 4th year’s level of effort will be about $900. What are the issues you must address? How will you resolve each one? 67 . it was 186% when contract was placed 3 years ago. Group Exercise: Fixing the Mismanaged CPFF •Contractor quoted indirect rate of 387%.00.

materials and any other direct costs.Fixing the Mismanaged CPFF-Resolutions -Request Financial approval for total estimated funding required for all five years. . . since last 2 mods did not address a scope of work. as well as estimate to complete existing scope of work. Use auditor and PM inputs to negotiate costs and fee. if possible if there were cost overruns – probably difficult if not impossible at this point. -Determine. -Get a rationale from contractor for all proposed elements of cost. -Require contractor to provide a quote for existing scope that shows both actual costs incurred to date through end of last month. ask him to comment on reasonableness of labor hours and mix.Create Excel spreadsheet. 68 . Document negotiation. -Define the existing scope of work. based on LOE through end of existing POP.Get assistance from auditor. -Review proposal for new scope with Program Manager. assuming that all options may be exercised (if this has not already been done). Must do this through mutual agreement.

•Evaluate Cost Status vs. Summary •Consider getting Quarterly Cost Status Reports •Avoid adding & deleting funding off CPF’s as if they are T&M’s. 69 . •Understand what is fee bearing & what is not. Go through the proper processes. •Ask the right questions of Line & Contractors. Technical Completion for Cost Type Contracts.

Questions? 70 .