Neurotic

2 minutes ago, joel hoffman said:

The initial post didn’t differentiate, between the first and following contracts.  The initial responses discussed adjustments to the contract price.

 

 

My last post only addressed the initial contract, as if the contractor is seeking reimbursement…

Thanks for the responses. My agency does not have an issue with reimbursing the contractor. The government created the requirement/conditions for the cost to happen. My original question goes to the treatment of the cost since the cost principles make this cost unallowable. The contractor (and at this point we don't see any other way) wants to include the tax differential cost in the profit of the T&M CLIN. I was asking if anyone had dealt with this type of cost and how they accounted/paid the contractor for it. 

On 2/3/2024 at 5:14 PM, joel hoffman said:

Yes it is likely a matter between the employees and employer.

If the scope of the project anticipated or required long term TDY, the employer should have been aware of the taxation and planned for it, if they thought there would be a problem with retention or dissatisfaction by the workforce.

It appears that the original poster hasn’t been back since posting Friday at noon*. So, without further details, readers are left to ask for further clarifications and to speculate. Several questions by us were asked on Friday and on Saturday afternoon.  

*Edit: Still evident at 0915 CST on Monday morning.

**Edit. Add:

Upon rereading the initial post, it’s not clear to me now (Sunday morning) whether initial contract negotiations are ongoing or the contract has been negotiated and awarded.

If still under negotiation, the contractor could adjust the proposed wages or salaries to attract or retain employees that would be TDY. If awarded, I see no contractual basis for an adjustment (assuming that the location and length of assignments should have been known or otherwise anticipated. 

Apologized for the delayed response. The government created the conditions (Pandemic) for extended TDY during performance.  Extended TDY was never considered prior to award (2019). We are negotiating a follow on contract and the extended TDY conditions remain.  

Appreciate the responses. In a nutshell, the inclusion of these expenses in profit seem to be reasonable given the circumstances. I did not mention in the original post that my agency is not bound by any limitation in profit so it will just be a matter of getting to a reasonable/supported agreed upon profit rate/dollars.  Thanks again.

On 2/5/2024 at 12:06 PM, here_2_help said:

My read of the OP is that the contract has not yet been awarded and the parties are negotiating price. If I'm correct, then I believe the contractor has a valid reason for trying to obtain a higher profit that the government initially established in the pre-negotiation objective. The tax costs are unallowable and the contract is going to pay them on behalf of its employees (similar to a relocation tax gross-up). The unallowable costs will come out of expected profit. Seems reasonable to me.

Alternate approach: the contractor rotates staff to avoid paying taxes, which will require a larger staff from which to draw on. Further, the transitions between employees may cause inefficiencies. Suboptimal. So: pay the higher profit rate.

Good insight, will give some thought to the rotating option although additional personnel is unlikely. This is a highly specialized field. Thanks

On 2/6/2024 at 2:28 AM, joel hoffman said:

After thinking about it, that may be less expensive than increasing the labor costs to cover taxes on the travel reimbursement.

Agree. If we account for it as a cost it will be burdened with indirects and even profit. Thanks

On 2/2/2024 at 11:15 PM, joel hoffman said:

Was the location of the work, whether extended TDY or otherwise, known at the time of the negotiation of the sole source contract?

*Edit: If so, on what basis would the contractor be entitled to a price adjustment?

No, nor the vendor or the agency foresaw the extended TDY. The pandemic created the situation during contract performance. The original POP ended so the agency is negotiating a follow on contract (although first time through my desk). The conditions for extended TDY continue.   

On 2/2/2024 at 3:33 PM, ji20874 said:

When you say "contractor," do you mean (1) a business concern who has a contract, or (2) an employee of such a concern?

On 2/2/2024 at 4:42 PM, Don Mansfield said:

 

What would be the consideration for the rate increase?

Contractor meaning a large business enterprise. The rate (assume you meant profit) increase is to get compensated for the tax differential, basically circumvent cost principles to get reimbursed for the add cost.  

I'm assisting a CO with a sole source award as follows: 

-T&M contract with a 38- month POP (Base and Options).  

-Contractor employees will be on Extended TDY (Therefore IRS rules recognize all reimbursed expenses as taxable income). TDY is CONUS. 

-The contractor is seeking reimbursement of the these taxes. 

-Contract cost principles (Personal Compensation/Taxes (federal income)) seem to make these costs unallowable. Both the Gov and contractor agree on this. The contract includes the Cost Principles Clause. Contract is not CAS covered.

-The contractor proposed to increase the profit within the fully burdened rate in the T&M Clin in order to recoup this tax differential associated with the travel expenses. 

-The contract includes a cost reimbursement non-fee bearing CLIN and an ODC which only includes employee completion bonuses, also non-fee bearing. 

-Relocation does not seem a likely option due to many uncertainties. 

I'm looking to see whether anyone has come across a similar situation and how they incorporated this type of cost into a contract. Tying anything (cost or Profit) to an indefinite quantity (hours) contract is likely not the best option business-wise. Any suggestions are welcomed as well. For what is worth, the Gov reimburses its own employees for this additional income tax. Thanks      

24 minutes ago, Retreadfed said:

You are confusing allocation of costs and recovery of costs.  The contractor's actual OH and G&A will be allocated to the contract, but the contractor may or may not recover those actual costs.

You may be right. I'm thinking about how would the vendor recover OH and G&A when wages are adjusted. Seems like based on the other responses they just don't. 

14 minutes ago, Retreadfed said:

Why does this not result in a cost plus percentage of cost contract?

It could potentially be cost plus, but not percentage of cost, since the profit amount does not vary regardless. 

The SCA (Now SCLS) Price Adjustment clause provides for adjustment of wages and fringe and the accompanying increases or decreases in social security and unemployment taxes and workers' compensation insurance, but “must not otherwise include any amount for general and administrative costs, overhead, or profit.”

G&A and OH is expected to be affected with the increase in wages. I presume the increase in wages will not absorb any OH but, at the same time, the OH might decrease because of the increase in direct labor, if the OH base is DL.  The questions are:

- How is the vendor supposed to account for any OH not being allocated to the increase in that contract?

-Also, some Contracting Officers in our agency are allowing vendors to maintain the OH and G&A percentage unchanged (as originally proposed) when incorporating new WDs but naturally this way OH and G&A dollars will increase with an increase in wages. Is this the proper method to apply to manage the price adjustments under SCA? If not, what are other agencies managing the adjustments or what is the correct method if other.

Assume the contract is FFP, the vendor does not perform in any cost type contracts and it’s small business so it’s not CAS covered.  

45 minutes ago, joel hoffman said:

My sense is that neurotic’s questions concerned what terms the price analyst should use in their report, since they are providing input to the KO to make the actual determination.

Thanks Joel. That's exactly the point in question.

"From what I have been reading, unless the government intends to accept a price as bid, offered, proposed, etc. it would be premature to include the term “fair” as in “fair and reasonable”  in a price analysis report. “Fair and reasonable”  implies that it is acceptable to both parties. If you plan to negotiate, you don’t know if the other party will accept something other than what was offered."

I agree with this statement. The cost/price analyst would not know if the proposed solution, for the proposed price, is fair to the government.    

1 hour ago, joel hoffman said:

If we used additional cost and or price analysts,  their products were their opinion and recommendations. If “fairness” relates to the acceptability of a price to both parties, perhaps cost/price analysts shouldn’t include that term in their recommendation, unless it is a recommendation to accept the proposed price for negotiations? Im probably getting too nit picky about that.  

That's our team's role, cost/price analysts (i.e. field support). We are not warranted, do not directly negotiate with offerors/contractors, and are not the award decision makers. We only get to analyze price or cost proposals. I agree that fairness is related to acceptability, so without consideration of other aspects of the proposal (i.e. value for the $) I do not agree with using the term "fair and reasonable" in a cost/price analysis report. That F&R determination cannot be based on price alone. We currently document findings and recommendations and determine reasonableness of a cost and/or price, based on analysis techniques. However, some COs seem to equate reasonableness (as indicated by cost or price analysts techniques) with fair and reasonable and occasionally some COs have even requested cost/price analysts to make the F&R statement in the cost/price report.       

Thank you all for the input. We may just be overthinking this a bit! 

Joel, thanks for your response. I'm not concerned about the grammar but they way they are used as a term of art.  Having said that, I don't think a price analyst should use the term that a price is "Fair and Reasonable" in its report to the CO/KO. The price analysts cannot make this determination. So the question is, if the price analyst uses the term "reasonable price" or just "reasonable", do you believe would be the same as saying "Fair and Reasonable"? Thanks 

Is "Reasonableness" the same as "Fair and Reasonable Price"? 

The subject came up in a conversation about how a cost/price analyst should document findings and conclusions of its price analysis since the Fair and Reasonable determination is made by the CO or KO.   

And to add to the real subject, here's a previous post found here in this website: "excerpt from Formation of Government Contracts, Third Edition, by Cibinic & Nash (p. 1107-8): 

Vern

To respond to your question : FAR 15.404-1 (d) (2) (i). Thanks for your input. It looks like this forum has certainly changed since the last time I was here. 

Vern

I believe award has to be made at the proposed estimated cost. However, we know that the estimated cost does not consider the impact of the updated indirect rates. Therefore, we would be awarding at an estimated cost that we know that on contract day one will increase because of the higher rates. I may be looking too much into this. But, I think would be kind of stupid to award at a price that we are already almost certain is lower than it would be.  

We performed a cost realism for a cost reimbursement acquisition. One offeror submitted an FPRP to DCMA for indirect rates after proposal submission. The agency incorporated the FPRP rates into the realism and made an upward adjustment for the MPC. Since the MPC is used for tradeoff and the award will be made at the proposed price, we are wondering how to deal with a situation of a known potential cost overrun, if that offeror is selected for award.

Would you request an updated proposal (after source selection)incorporating the FPRP rates? or maybe just ignore this issue for award purposes and closely monitor (what we should do anyway) the rates during performance?      

Thank you all for your responses.

One of our COs wants to issue a solicitation (cost type contract) that would assess cost risk and assign a risk rating to cost/price as a stand-alone factor. Below are the risk ratings/criteria proposed for the solicitation.  In my opinion the risk should be assessed on the non-price factors (the degree to which these factors are present or not) which are the cost drivers. Other than that I am struggling to articulate in an email why assigning a risk rating to the cost factor would be a bad idea (if it really is). Any thoughts on this?  

Thank you

Vern

Thanks for your response. I think that's my point. The provision is inconsistent with what we would like to do (price analysis). The provision seems to mandate that we do realism any time the provision is included: 

...The Government will evaluate the plan to assure that it reflects a sound management approach and understanding of the contract requirements. This evaluation will include an assessment of the offeror’s ability to provide uninterrupted high-quality work. The professional compensation proposed will be considered in terms of its impact upon recruiting and retention, its realism, and its consistency with a total plan for compensation... 

Should I interpret the inclusion of this provision as a requirement to perform realism?

Our office is preparing the evaluation criteria for a T&M contract for computer engineering/software development. It is not commercial. Adequate competition is expected so we would like to do price analysis on the fully burdened rates. There is no current contract for the same effort.

It has been determined that clause  52.222-46 -- Evaluation of Compensation for Professional Employees will be included in the contract. Therefore, a question has been raised about whether price analysis on the fully burdened rates would satisfy the language of this clause since it requires to look into compensation (salaries, fringe benefits)...and suggests price realism?

We are not asking for cost breakdown in the RFP because do not plan to do realism. We will say in the RFP that we reserve the right to do realism. (and no, we do not say that a price too low may result in no award-because that statement mandates realism. We may have to go back and request more data if the unlikely need for realism arises. 

Other than this clause, we do not see the need to evaluate further than fully burdened rates per labor category. Even in some cases some contractors do not "build" (salary+FR+OH+fee) the rates, they propose going market rates for the type of labor so there is no breakdown.

Have you had any experience on non-commercial competitive labor hour evaluations when 52.222-46 is on the solicitation? 

Have you analyzed the compensation or have you been able to do price analysis without reviewing compensation?