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Everything posted by InNeedofWisdom

  1. Thank You, H2H. I am learning about CAS. What you say makes sense. It might be defective pricing if the defense contractor did not let the customer know how much its actual costs were expected to be, but it should not be a CAS 401 non-compliance. Actual cost is allowed to be estimated at per diem. I am with you in thinking that the situation doesn't "smell right." You might be amazed with what happens OCONUS (v. CONUS). When defense contractor employees get to pocket the difference between actual lodging cost and per diem lodging cost, they find very creative ways to maximize their return. In the above hypothetical example, the defense contractor had a history of allowing its employees to pocket the difference between actual cost and per diem. After the disclosure statement inconsistency was identified, they started billing the government for only actual cost (or per diem, if lower).
  2. I am glad you asked. You are right that if the "unnecessary" labor charged to the contract was determined by the contracting officer to be unauthorized, it would not be allowable; and the contractor would violate CAS 405 if it billed this cost instead of segregating it appropriately as unallowable. When I say "unnecessary" labor, I am thinking more of "inefficient" labor that would otherwise be unproductive and charged to overhead. The likelihood of this hypothetical situation is increasing with the significant decreases in defense spending. If the company does not lay off these unproductive people, they may find "less-than-efficient" ways to keep them on hoping for future contracts.
  3. Great Questions! This helps me to get a sanity check and put any potential issue in perspective. The starting point for this thread is that the hypothetical defense contractor actually stated in the proposal that lodging was being proposed at actual cost. If the defense contractor had the premise that estimated actual cost equaled the maximum per diem allowance, then the proposal makes perfect sense. You are right about an inflated NTE limit having limited or no impact for a CR travel CLIN. If the defense contractor knew actual lodging costs were going to be 50% to 70% of per diem AND there was only one CLIN with all cost elements included, the defense contractor could put "unnecessary" direct labor on the contract that would otherwise have been charged to overhead as idle time. Yes, there is no fee on the CR CLIN for travel. I appreciate your perspective inside a government agency. I am actually on the other side trying to help a defense contractor stay out of trouble. If no one sees a serious problem with the situation, it looks like the hypothetical defense contractor would just need to clarify its statement about proposing lodging at "actual cost" (i.e. per diem). Thank you for your help.
  4. Yes, that is correct. Sister B has asserted that its NDI qualifies for Definition 8 of the FAR 2.101 commercial item definition. I agree with you that Definition 5 specifically references (1), (2), (3), and (4). Sister B wants to assert that its NDI support services qualify under Definition 6 without an established catalog (or at least sales data allowing Sister A to make that inference). With the above hypothetical approach, Sister A is trying to explore any other potential options (e.g. Definition 5). Thank you for your input about DoD.
  5. Thank You. Have you heard of any initiative to include support services for qualifying NDI (i.e. which qualify as commercial under Definition 8 of the commercial item definition in FAR 2.101) as qualifying for Definition 5 commercial item support services? (I am sorry I did not make this clearer in my earlier posts that the NDI qualifies for Definition 8.) Definition 6 could be used to claim these NDI support services are commercial services, but the established catalog or market price requirement does not appear to have been met. In the above hypothetical approach, Sister A believes that it would have a better chance with Definition 5 because of Sister B (hopefully) providing "similar services" to the public and (hopefully) during the same time as the contract.
  6. Thank You. I wish there was a clear provision in FAR 2.101 for NDI support services to qualify for commerciality like Definition 5 of the commercial item definition. The draft version of the DoD handbook says on page 4 that NDI is a category related to commercial item but not synonymous with commercial item. Also, page 1 follows a similar outline to the FAR 2.101 definition by first defining (1), (2), and (3) and then saying a support service is considered commercial if it meets the commercial item definition "as previously defined." Do you know what the DoD is doing out in the field, or if there have been any DoD memos or discussion on this topic?
  7. If a contract is CAS-covered, is it in accordance with CAS 401 for a defense contractor to propose the maximum per diem rate for hotel (which is estimated to be 50-75% more than expected actual cost) when the defense contractor will only bill/voucher the DoD for actual cost? Assume that there is a current proposal for a contract modification over TINA for a cost-reimbursement CLIN. Also, assume that the defense contractor's disclosure statement and travel policies both say lodging cost will be reimbursed at the lower of actual cost or per diem. Is there any materiality threshold applicable to CAS 401 besides "significant cost" and "reasonable"? It looks like proposing lodging at the maximum per diem rate simply inflates the NTE ceiling. If the cost reimbursable CLIN is only for travel, there seems to be a low risk of the defense contractor billing the DoD for "unnecessary" costs to cover its fixed expenses.
  8. Is there any DoD guidance or work instructions that allows for a non-developmental item (NDI) support service to qualify as a commercial item based on Definition 5 (versus Definition 6) of the commercial item definition in FAR 2.101? Previous Hypothetical Scenario: 1. Sister A signed a sole-source FFP prime contract with a DoD customer, and FAR 52.215-10 was included. 2. FAR 52.215-10 was flowed down in the inter-organizational transfer (IOT) at price with Sister B (see FAR 31.205-26). 3. Sister A performed a price analysis of Sister B's IOT based on FAR 15.401 and Table 15-2 II.A of FAR 15.408. 4. No cost data from Sister B was included in Sister's A proposal to the DoD customer because of commerciality. 5. Sister A's price analysis was included in its proposal, and it was based on PO history and an unpublished price list. 6. The PO history was not shown to be fair and reasonable, and Sister B did not provide any data of sales to the public. Current Hypothetical Approach: 1. If possible, Sister A wants to utilize any DoD guidance or work instructions to deem the NDI support services as commercial under Definition 5 instead of Definition 6 (because there is no apparent market price or catalog with any sales to the public.) 2. If possible, Sister A wants to obtain a statement from Sister B that these NDI support service are "similar" to other support services provided at the same time to the general public. (There might not be any sales data to the public provided by Sister B.) 3. If possible, Sister A wants to obtain sales data from Sister B for NDI support services provided to other federal agencies for similar services as a basis for (hopefully) an "appropriate" price analysis following the FAR "policy" outlined in FAR 15.404-1. The DoD Sample Commercial Item Checklist in Appendix B of the 08-01-2011 "Draft" Commercial Item Handbook (Version 2.0) shows NDI being grouped on page 74 with other commercial items in Part 1 prior to considering commercial services in Part 2. http://www.acq.osd.mil/dpap/cpic/draftcihandbook08012011.docx Is there anything else that Sister A in the above hypothetical approach can use in good faith to deem these NDI support services as commercial items under Definition 5 instead of Definition 6 of FAR 2.101? (I believe the definition does not provide for it.)
  9. That is a reasonable conclusion to make. The FAR 2.101 definition for a commercial item focuses on the item itself in (1), (2), and (3). There may be some vendors that only sell to the government and never sell to the public. FAR 15.404-1( b )(2)(ii) provides for evaluating price reasonableness based on historical prices paid by government and commercial customers for the same or similar items.
  10. H2H, I may have been asking the obvious earlier. I agree with you that the CO determines whether or not there is adequate competition. If an IOT at price for a non-commercial item (over TINA) is determined by the CO to not have been based on adequate competition, a key negotiating point for the CO would be the elimination of profit wrapped into the IOT. I was hoping that you or Vern would have additional insight beyond the referenced FAR sections to 1) The definitions of a subcontract and an IOT and 2) How this affects expectations about the appropriateness of price/cost analysis.
  11. H2H, Yes, thank you for bringing this up. This section is actually the basis for the original question. Like you point out, FAR 31.205-26(e)(1) does not say commercial item, but rather commercial work. However, the subject of (e)(1) is the established practice of the transferirng entity (v. the item actually being transferred). The transferred item is the subject for the following paragraph (e)(2) and appears to allow for adequate competition as an exception. Is there any confusion about my earlier question? Thank you for your help.
  12. Thank you everyone for your replies! Retreadfed - You are right on about DCAA not opining on profit and not even providing a recommended amount for proposed cost elements. (It's a "calculated" amount.) I should have thought to phrase the question differently by replacing with the "contracting officer" instead of "DCAA" being the questioner. H2H - Yes, someone challenged me about the possibility of this scenario and I couldn't see any clear problems with it from FAR. Thus, I wanted to see if people like you could identify any problems. Are you saying that this IOT at price for a NON-commercial item might not qualify as a subcontract per FAR 15.401, and therefore might not be "adequate competition" for purposes of FAR 15.403-1( b )? Vern - Yes, you are right on about the FAR Part 44 definition not being binding on other parts. Thank you for pointing out that section in FAR Part 2. Do you think that since FAR Par 2 does not define subcontract, but refers to subcontracts in regards to consent to subcontract, make-or-buy, etc. that FAR Part 44 is giving the "normative" (non-binding) definition of a subcontract by referring to the definition in FAR Part 2 for a contract and talking in detail about consent to subcontract and so on?
  13. What would you say to a defense contractor who wanted to take the following approach in preparing a sole-source FFP proposal subject to TINA for a DoD customer? Scenario: KTR-A wants to include its sister company KTR-B in a sole-source FFP acquisition by a DoD customer. KTR-A prepares a SOW for a NON-commercial item and issues a RFP to KTR-B and a number of qualified, responsible competitors. It turns out that KTR-B beats everyone else out on performance, schedule, and price (including proposed profit). KTR-A negotiates a "subcontract" [really an inter-organizational transfer (IOT) at price] with KTR-B and includes KTR-B's certified cost or pricing data as part of KTR-A's submission to the DoD customer. KTR-A does not submit a cost or price analysis (PNM) for KTR-B's proposal since it is does not meet the definition of a "subcontract" in FAR 15.401 and would be categorized as a "make item" for FAR 15.407-2. KTR-A discloses in its proposal the profit rate negotiated with KTR-B and states that the subcontract was awarded based on adequate competition. Questions: 1. Does a DCAA auditor have any clear regulatory basis to question KTR-B's proposed profit and KTR-A's proposed profit on top of KTR-B's proposed profit? 2. Does a DCAA auditor have any clear regulatory basis to unsupport KTR-B's proposed profit until being provided additional information on the subcontract competition? 3. Do you consider FAR Part 44 to positively define a subcontract in its normative sense and FAR Part 31 to positively define an IOT in its normative sense? 4. Would you say that a CPSR reviewer should only look at any make or buy documentation for this particular IOT and not expect a PNM to have been written?
  14. H2H, Yes, and Thank You! I think you are right on about there being no need for Subsidiary A to perform cost or price analysis in the hypothetical situation. Maybe people higher up at my company will come around to the same conclusion. Your take on DCAA's role is also right on. Hopefully, the CO will understand. Thank you for your help.
  15. H2H, Thank you for the reply. I agree with you about IOTs being "makes" for purposes of FAR 15.407-2. DCAA takes this position as well. The company that I work for has taken the position of performing cost/price analysis on IOTs to minimize DCAA findings and issues. This hypothetical situation can very well "materialize" [no pun intended! ] I may have a gap in my logic about spreading overhead cost over a wider base. With our hypothetical situation, Subsidiary B would have semi-fixed overhead pools. If it did not perform the procurement with the outside vendor, it would not have as great a direct material base for its material overhead rate and then for its G&A rate. Both subsidiaries would be similarly capable of performing the procurement and both would have sufficient capacity for warehousing the parts. Subsidiary A procuring the part would avoid a 60%+ mark-up from Subsidiary B, (besides Subsidiary A's mark-up and profit on top of that 60%+ mark-up.) In the position I am in, I am trying to do the best I can to help my company avoid issues with DCAA. To paraphrase the words of the cognizant DCAA auditor, 'We tear up IOTs.' Any additional insight you may have about FAR 15.401 (a subcontract definition) or FAR 31 would be much appreciated. I am learning and thank you for your help.
  16. H2H, Please allow me to reference your older post from last year. Based on your statement below that IOTs are not subcontracts, would you say that a defense contractor needs additional support for the hypothetical situation listed under your quote? There are two subsidiaries of a major defense contractor. Both subsidiaries are in different interim home divisions/companies that report to the parent holding company. Subsidiary A is negotiating a prime contract with a DoD customer and also negotiating a "subcontract"/inter-organizational transfer (IOT) with Subsidiary B. Approximately 80% of the "subcontract"/IOT would consist of purchasing non-commercial, component parts to be integrated by Subsidiary A into the prime contract with the DoD customer. The value added by Subsidiary B would consist of placing the order for component parts with the outside vendor, receiving the component parts into Subsidiary B's warehouse, and then shipping the component parts upon request to Subsidiary A. The prime contract would be sole-source and FFP. When purchased from the outside vendor, the non-commercial, component parts would be under the TINA threshold for requiring certified cost or pricing data, but then greater than the TINA threshold for requiring certified cost or pricing data after applying Subsidiary B's overhead and G&A rates. While no profit would be proposed by Subsidiary B, over a 60% mark-up would be applied to the non-commercial, component parts by Subsidiary B prior to Subsidiary A applying its own indirect rates and profit mark-up on the prime contract. (Unknown in this hypothetical situation would be whether or not the outside vendor originally manufactured these component parts to the specifications of Subsidiary A or Subsidiary B.) Potential Issues: DCAA might assert that the "subcontract"/IOT is subject to FAR 51.215-23 due to the potential inclusion of this clause in the prime contract. DCAA might assert that the cost is simply "unreasonable" based on FAR Part 31 and the nature of the value added by Subsidiary B. DCAA might assert that Subsidiary A should have picked up the phone and placed the order itself instead of Subsidiary B (that would be funny.) Do you know of any regulations or guidance that could be used to head off these kinds of issues with DCAA? (I think this hypothetical situation could potentially represent a widespread practice by defense contractor's to spread out their indirect costs over a larger base to make their rates lower on competitive DoD contracts.)
  17. Vern, I looked up FAR 31.202 - Direct Costs and it looks very straight-forward like you say. I wonder what happens when a cost that could go either way (direct or indirect) is specifically required by a DoD customer to be allocated direct, but has previously always been allocated indirect by the defense contractor. I am thinking specifically of DBA insurance. If the following provisions are met, do you think the contractor is justified in following the customer's requirement for charging DBA insurance direct as an ODC? 1) A different overhead rate is developed for the contract/program that excludes all DBA insurance cost from its overhead pool, 2) The directly allocable DBA insurance is separately accumulated and clearly identified on any contract billings, and 3) A revised disclosure statement is submitted that documents all these changes to meet the customer's requirement. Given the above provisions, would the customer also need to process a deviation from FAR part 31.202, and, is that even possible? I want to do things "by-the-book" and am thankful for people like you and H2H that have so much experience.
  18. Thank You! I am learning. (I should have thought to look outside of FAR to DFARS for additional guidance.) This is just what I needed to know.
  19. Is there such a thing as a FFP/O&A contract type? I need to try out the following logic and argument. A hypothetical company has a FFP prime contract for DoD aircraft operations and maintenance with a CPFF CLIN for engine overhaul. The engine overhauls for the last four years have been subcontracted out to Vendor A. To speed up turn around on the subject contract, Vendor B (a separate, designated, overhaul facility for Vendor A) is being sole/source selected to alleviate Vendor A’s capacity constraints across contracts. The best sole/source justification for selecting Vendor B instead of incumbent Vendor A appears to be a simple application of 6.302-3( (iii) at the prime level to meet customer requirements for turn-around. Because the aircraft is sold commercially, these engine repairs are deemed to be commercial. However, neither Vendor A nor Vendor B is willing to commit to a FFP contract without a clause covering its O&A material cost. For each engine repair, material drives anywhere from 60% to 80% of the overhaul price. Vendor B has proposed 10% of its “estimated”, average, engine overhaul price as a flat labor charge and an additional 10% for mandatory supplies, kits, and tests. The additional 80% of its “estimated” price is based on actual material prices for services provided to other companies in the last two years. Vendor B has proposed the flat labor charge and mandatory supplies, kits, and tests as FFP; and has proposed the material charges as O&A (to be individually determined for each engine overhaul with no ceiling price.) Originally, the company wanted to describe its subcontracts with Vendor A as being T&M. Two seeming difficulties with this are FAR 12.207( (1) and FAR 16.601(d). The reason FAR 12.207( (1) seems problematic is that the company was not regularly soliciting more competition on its engine overhaul subcontracts after Vendor A became the established service provider. The reason FAR 16.601(d) seems problematic was that the company did not establish a ceiling price for each engine overhaul. Now, the hypothetical company wants to describe its proposed subcontract with Vendor B as being FFP due to an estimated 20% being fixed with Vendor B’s flat labor charge and mandatory supplies, kits, and test. The commerciality of the engine overhaul and the O&A estimate (not ceiling) is mentioned in the analysis. Is there any regulation similar to FAR 16.102( that would further support this commercial contract without running into difficulties due to FAR 16.301-3( and the 60%-80% O&A portion of the contract?
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