Corduroy Frog

Thanks - I didn't know the awarded contract could be available under FOIA.  Thanks also for not offerring that I'm making math errors.  I am not.  I might be making errors in my approach.

I have been underbid three times this summer, which shouldn't raise any eyebrows.

But all of these have WD released with Labor Categories defined, and fringes defined as well.  The FTE requirements were such that bidding fewer people would have been next to impossible - in fact one of these was a defined hours level-of-effort.

And I have been underbid 25-30%.  The winner has to bid the same WD wages and fringes as I do, and there is no wiggle room for FTEs.  Indirects do exist but are not high enough to warrant this kind of difference.

Any idears about how this is happening?  My stacking and math are quite accurate, please take this possibility off the table.

Joel, the captioned quote was from me.

A more accurate statement might be:  "Unallowable costs are not chargeable to either a G&A pool or an Overhead Pool." 

Regards, Corduroy Frog

13 hours ago, Vern Edwards said:

Yes, a molehill of a routine accounting problem that some of you are turning into a mountain. If I were Corduroy I'd walk away.

Vern, this is exactly what I'm going to do.  This overblown bloviating of a discussion is exactly what I wanted to avoid when I preferred simple answers, and I was even criticized for that.  Of course, almost nothing has a simple answer, but in the evaluation of options available to you at the time, you appreciate clarity - not a cesspool of uncertainty in which to wade around.

You guys spend as much time feuding with yourselves as you do feuding with me.  I'm surprised for accomplished experts that you have so much time on your hands.  I would, however, extend appreciation for those posts that appeared to be a bona fide effort to help.

3 hours ago, joel hoffman said:

Corduroy, since you are a “beginner”, you may not have noticed that unallowable costs are not normally to be “charged” to a federal contract as overhead,  G&A or direct costs, when costs are being identified claimed and/or negotiated.  When the cost principles are applicable to a pricing action. 

You can account for them as costs to the company but cannot properly charge them to the government.  

And H2H’s answer is correct concerning how to account for allowable business development or other costs. 

See, for instance, FAR 31.201 and subparagraphs. 

Thanks for your post Joel.  I mentioned examples of activities which all companies engage, and the general consensus is that all of these activities are not even allowable at all.  Unallowable means neither G&A nor Overhead.

I have not extended the FAR definition of "advertising and promotion" to include business development activities such as examining the FBO, schmoozing the customer, knocking on doors, consulting with existing contracting officers to acquire additional scope, etc.  All companies do this kind of stuff.  Am I to believe these kinds of activities are unallowable under the mindset of advertising and promotion?

Vern, you did give me what I asked for.  If I can get straight up answers I can put up with the acerbity.  Thanks.

1 hour ago, Retreadfed said:

CR, what activities are you considering to be business development?

 

 

Thanks to all who have responded.  Vern Edwards, despite his legendary acerbity, really cut through all this with a single one-word answer.

Activities include such things as daily filtering and examination of the FBO, knocking-on-doors with customers, consulting with contracting officers in an attempt to expand scope of work.  Travel to customers, meals and meetings to schmooze relations with customers, meeting with team members, etc.  Not nearly big enough for CAS to apply.

Does NOT include site surveys after an RFP has been released, or any proposal costs.

Is there no definitive answer to the above?  "Here_2_help" has a great history of helping with questions, but this time can anyone derive an answer from the above?

Maybe the problem is me, in assuming that there would be a widely-held view that prefers one over the other.  I am currently involved in a feud between a party who believes this stuff should be G&A, and another who believes this should be Overhead.

Maybe, as Here_2_help says, there is no conclusive answer.

We're all familiar with this, although perhaps under different names.  Most of us know advertising is unallowable, but the unallowable nature is sometimes attempted to apply to Marketing.

There is Marketing Research, Market Development, Business Development, etc. that is completely allowable and expected.  Membership in a local chamber of commerce is not unallowable.  Printing of capabilities brochures is not unallowable. 

My question regards "Business Development" or whatever name you know.

Expenditures for business development, including labor, travel, etc. is most commonly charged as:

1. G&A Expense
2. Overhead Expense

This is a general question with general answers expected.  Some large contractors may form elaborate service centers which encompass some or part of the above, but I'm hoping for general answers.

The question, if not otherwise clearly stated, is "which pool are business development costs normally charged to - G&A or Overhead?"

Thanks in advance...

Thank you.

I believe the proper way to price is to enter data at the lowest level of detail, and allow it to perculate up to a final bid price.  Managers and owners often have a problem with this -- they seem to find a "top-down" approach preferable.  They don't want to go to the trouble to provide low-level data, and are totally in love with the price they think will work.  Often their instruction to underlings is to "find a way to make it work" when it is simple as their numbers just won't work - 2+2=5 syndrome.

I have a customer who takes my pricing and waltzes off into a delusional sunset by "playing" with numbers, and I am about to quit since I have other work to keep me busy and don't really need the money.  These fictional prices are accompanied with a narrative which says:  "ABC follows a pricing model based on rates resulting from a submission of 5-year plan coupled with the effect of an award"  DCAA would crucify their "top-down" practices if they ever checked in - but in recent years DCAA has just about quit fooling with smaller contractors.

I don't know that I can forge a question from the above, but I would like to hear from some of you as to whether this is normal and what you do about it.  Comments welcomed.

Thanks to all.  The last two posts have answered my questions and the foregoing conversations were helpful as well.

Best regards, Corduroy Frog

Sorry, Vern, I don't have it because right now we are being approached verbally.  I think when the threshold statement becomes available, it will be extremely revelant, and may answer some of the questions.  I'll quote it when I see it - or maybe it will be in the form of a FAR clause.

Thanks, Corduroy Frog

Of course not.  I didn't regard the matter of spelling germane enough to the conversation to make a difference.

So far, the forum is 0-2 in answering any questions.  I thought this was the purpose of this site.

You mention "simplified acquisition threshold."  That might be what I'm asking about.  I did read the FAR clause which assures that the contractor performance must exceed 50% if "above" the threshold.

Also learned that I may have misspelled "contractual".

Appreciate your response, but from where I am in my knowledge base, none of the three questions have been answered. 

The specific questions for conversations are:

1. What is the current threshold?
2. Does the threshold apply to a single year or the total contract value?
3. If there is a FAR Clause which determines this?  (So I can keep up with it if it changes)

Can you help with any of these?

Yes, contractural threshold - of which there are many.

This specific threshold deals with a threshold whose excess will prevent a contractor from using primarily non-employees to deliver.  Under the threshold, a contractor may use a subcontractor or consultant entirely instead of using their own employees.  At one time I understood the threshold to be $150,000. 

The specific questions for conversations are:

1. What is the current threshold?
2. Does the threshold apply to a single year or the total contract value?
3. If there is a FAR Clause which determines this?  (So I can keep up with it if it changes)

Most of you probably have easy answers to the above as applies in most cases.  Not asking about remote circumstances which will scarcely be encountered by a small contractor.

Thanks in advance, Corduroy Frog

Regardless of what contract type, a separate CLIN for travel can exist, and can be charged at the direction of the customer.  And the CLIN will be cost-reimbursable.

To my knowledge, these Travel CLINs have never allowed Fee to be applied, but conventionally, G&A could be applied to the reimbursable approved cost of travel.  In recent years, certain DoD contracts are insisting that G&A can no longer be applied.  This concept seems to be immensely popular and spreading like wildfire.  Government is going after this idea like a pig after slop.  Imagine - no delay in DCAA approval of incurred cost of G&A, not to mention the cost savings to begin with.  They should be deliriously happy.

I can understand if this is put into a contract, but the fact remains that administration of travel is arguably the most cumbersome and time-consuming things that a staff can do.  For the government not to at least reimburse G&A is not fair.  Is it common for contractors to compensate for this by adding about a 1/2 of one percent to the fee?

Thanks for the discussion.  I can answer for the tax ramifications:  so long as the rebates are treated as income (most likely "Other Income" on a profit & loss statement), the IRS will be happy.  In the case of "points" (or frequent flyer miles), as long as the applied expense is reduced, the IRS will be happy too.

Appreciate all the fine points of discussion.  Suffice it to say that unless a cost-reimbursable contract or CLIN is involved, the pursuit of application to reducing cost is really a dead-end street.

A company receives several hundred $ in promotional credit card rebates every month.  The rebate approaches 1% of the entire bill.  Which of the following describes the best treatment?

1. The company must allocate the rebate proportionately over all charge numbers during the monthly billing period. 
2. The company may simply put the cash in the bank and not allocate to anything.
3. The company may let the cash accumulate, and apply it to a free airline ticket at some point.  They have to allocate the credit to the charge number of the airline ticket.
4. Does the answer to any of the above change if some of the charges are for a cost-type contract?

Looking for a Low-Cost screening software to identify opportunities.

The standard-bearer is believed to be GovWin, by Deltek.  We cannot spend $5- $6000 to spend on this Cadillac product.

We're looking for an affordable "Chevy" product.  Something better than waiting on .fbo but stopping short of GovWin.  Ready to listen to alternatives and what features they possess.

Thanks Pepe for this rousing display of support.

12 hours ago, here_2_help said:

You are missing the point on many levels. Let me try to help you understand where you are going wrong.

1. The RFP instructions that state the government will not pay for proposal prep costs are there to tell bidders not to include proposal prep costs as estimated direct costs in their cost proposals. There is absolutely no prohibition on including proposal prep costs in a B&P pool allocated on the same base as is used for G&A expense allocations. (Ref. FAR 31.205-18.) One reason you don't include your proposal prep costs as estimated direct costs in your cost proposal is that you might not win. And then you have to absorb those costs out of profit. But if you include them in your B&P pool then you recover them along with your G&A expenses, against active contracts.

2. "Overstated OH and G&A" is a strange phrase to use. Please stop using it. I understand why you say this.  OH and GA are real costs of doing business, however, bid strategies do not believe the entire cost will be spent in the event of a win.  Real as they may be, a significant portion of OH and GA are fixed costs and are not variable.  That's why many bidders are willing to put a ceiling on G&A.  The cost pools and associated indirect cost rates are not overstated if they are based on budgetary estimates (or actual costs). Do you mean forward-priced, estimated, OH and G&A indirect cost rates? You said "we have a five-year forwarding averaging plan on file with DCAA" which is another unclear phrase. Do you mean you have submitted a Forward Pricing Rate Proposal (FPRP) that has become an Forward Pricing Rate Agreement (FPRA)? Most small companies don't do that, so I'm not sure where you are at with DCAA. Regardless you should use the indirect cost rates in your proposal that are the most accurate estimates of the indirect rates you expect to incur. To me, that would mean (at a minimum) including the proposal prep costs in the appropriate indirect cost pool and including the contract award in your business base that is used for cost allocation. You don't "overstate" your indirect costs, you estimate them as accurately as you can.

3. If you add your proposal prep costs to your G&A expense pool, you do not "spread that cost over several bids." Instead, you will allocate your B&P expenses plus your G&A expenses to all active contracts you have during the year. To be clear: B&P and G&A expenses are period expenses, meaning you can only allocate the costs you incur during your fiscal year to contracts that are active in that same fiscal year. You can increase your out-years' estimated indirect rates based on budgeted (future) spending, but you can only recover actual spending against the actual contracts on which you are performing.

4. To answer your question: NO. The company does not "absorb" the proposal prep costs because it allocates the costs to its active contracts. If you have only FFP contracts and the actual G&A expense rate is higher than you bid, so sorry. You should have budgeted better and forecasted an increase in proposal prep costs.

4.a Also, you forgot the profit component No.  You can only get away with so much Fee.  If you raise your Fee from 8 to 12 per cent on a contract this small  you scarcely make a dent in recovering the aforementioned B&P costs.  This contract is small enough that it could be subject to reveal cost and pricing data, and we certainly don't want to put a glaring Fee in the pricing.  you get to add to your cost estimate, which is not nothing. Further, you forgot the possibility that you might underrun your FFP contract, which has been known to happen from time to time, especially at contractors whose business base is growing. When the large defense contractors laid off thousands in the mid-nineties, their top-line revenue dropped but their bottom line profits shot up because their indirect costs dropped suddenly, and those costs were allocated to FFP contracts.

5. From a financial statement perspective the contract's margin, if it is awarded, is the difference between costs incurred and costs billed. By "costs incurred" I mean costs before G&A is allocated, because (as noted above) G&A is a below-the-line period expense for financial statement purposes; it is not included in Cost of Sales. So if you do a good job forecasting your expenses (including indirect expenses) then the margin equals G&A expense plus profit (it excludes OH because OH is part of Cost of Sales on financial statements). If you underrun, you make more margin; if you overrun, then so sorry.  I believe you are making reference to the GAAP format for financial statement presentation, which prefers that administrative costs be shown below the gross profit line.  I believe you to be quite correct, but not necessarily relevant for this discussion.

6. It is a rational approach to add the costs of preparing a proposal, supporting fact-finding and audit, and negotiating with the government and then compare that number to the expected margin that will be earned if the contract is awarded. If the math indicates that the cost is more than the expected margin, then you should not bid. That's the business decision that needs to be made.  Yes, that appears to be the obvious dilemma.  Contractor wants to "buy in" (if you will) to this small bid in order to attract more business in the future.  Sometimes this works, sometimes it backfires.

 

Hope this helps.  Yes, you are quite helpful.  I appreciate your expertise and willingness to add clarity to many of my recent posts.  Thank you.

I have heard there is a FAR clause that regulates this, but I don't know what it is, or if it even exists.

The purported clause limits the amount of profit a company can make on a contract - as a percentage of the work.

I've heard the percentage varies with the contract type - cost plus/ T&M/ Fixed price.  I have heard the profit for Fixed price is limited to 30%.  Fee is calculated as a percentage of cost, not percentage of the selling price.

Example:  Fixed price contract has $25,000 in direct cost plus another $20,000 in fringe/overhead/ganda for a total cost of $45,000.  Revenue on the contract is $75,000 meaning the Fee (or profit) is $30,000.  Since $30,000 is 67% of $45,000, if the FAR ceiling is 30%, then profit would be limited to $13,500.  Under this purported FAR clause the contractor would have to give $16,500 back to the government.

Is there such a FAR clause that limits profit?  If so, have I applied it correctly?  Does such a FAR clause have to be "invoked" upon the contract to be effective?

It is (apparently) not the intent of the government to pay for rfp bid & proposal costs.  Many rfp's state so.

At issue is a small $28K bid.  The "margin", including Fee and overstated OH and G&A, amounts to some $7000.  Since the anticipated OH and G&A are nebulous and not as "free" as often purported, we think the absolute most the company can realize out of this small bid is only $7000.

As you must realize, the size of this effort is tiny in the spectrum of contracts.  However, meeting the requirements of the rfp requires much intensive effort, likely to be $8,000.  It is obvious to us that the rfp was not written for this small effort, but is probably the result of some overdeveloped government boilerplate.  The scope of work (PWS) is only four pages long, and is the only thing which matches the small effort.  The remainder of the rfp is some 59 pages long, and contains trivial detailed instructions causing the production of the response to be unduly expensive.  And of course, the government doesn't want to pay for any of this.

We have a five-year forwarding averaging plan on file with DCAA, but this effort doesn't go beyond year 1.  One idea I had was to increase the annualized G&A by an estimated $8000 in B&P cost, thus spreading the cost over several bids, or better yet, focusing to this one bid by adding a few percentage points to our bid G&A rate. 

Great numbers in the idea, but does this not effectively cause the government to pay extra because of an inflated G&A rate?  The contract will be fixed-price, so the G&A/OH rates are static and not reimbursable once established.

Question:  Is this situation so stark that the company is left with no alternative except to absorb the B&P cost, and effectively perform the contract for nothing?

Good recommendations, Mr. Edwards.  I guess I did not realize how much of a beginner I was, and will try out the beginner forum for my next question.  I am not quite the neophyte in the area of preparing pricing, but I have quite a bit to learn about strategy, and what is allowed and what is not.  I am much ill-informed when it comes to contracts.  I will be on the beginner's forum before the evening is over.