Needforspeed

Thank you Retread, Neil, Help, Voyager for your perspectives and the thought generating conversation. Very helpful!

In my experience on the civilian agency contracting side, most COs would not know the difference between provisional and actual indirect rates. They also would not have any real awareness for how or why rate fluctuations occur. Maybe if there was a cost/price analyst in the office. If awarding a cost plus contract COs knew they had to document their analysis of the rates in the negotiation memorandum to demonstrate they reviewed the rates and found them reasonable. Even if that meant pointing to the previous rate agreement used for the same contractor five years back and not wanting anything updated. Forward pricing rates? Not a shot. To counter Retreads point that contractors forget to track indirect costs - any adequate accounting system should have a decent ability to estimate and compare actuals to provisionals throughout the year. I think most project and finance staff grasp that concept pretty well. I don’t know that they forget to track them though - how could one even forget and still be compliant with the award - only calculating your indirects once after the completion of the entire fiscal year? I would say more likely the estimation of the rates was just bad. For whatever reason. The fluctuations were so drastic they could not have seen the broader impact against available funding before it was too late. Unless you are in a really big company, the act of estimating the rates is probably a job privy to one or two people in the company.

What if DCAA already agreed to the now current year target rates which are different from the ones first proposed? Agree about disclosing it - of course. But is there an actual obligation to amend your pricing if required to sign a C&P certificate - if the government doesn’t ask for a final proposal revision?

Thanks Neil. All I can really say is that it has always worked that way, and I have never heard of the government requiring the FP versus just accepting provisional billing rates as the award basis. I’m with you though, they two agreements would seem to serve fundamentally different purposes. If we sent a proposal at our current year provisional indirects last June, and the government now intends to award today (new fiscal year, new rates), would we be required to disclose the new rates and submit a final proposal revision? (Assuming a certificate of cost and pricing data were required). I suppose with the FP the rationale is that forward period would already be covered with an approved rate correct - unless true government took a really long time to make the award?

As far as I can tell, my company has never had a forward rate pricing agreement (FRPA) but has always had negotiated provisional billing rates with DCAA (NICRA). Given the absence of an FRPA, the NICRA has been a catch-all rate agreement used in all cost plus billings subject to the allowable cost and payment clause, but also used in all cost proposal and pricing activity. Is this process alone deficient? The rates estimation process has always been very successful and never results in material fluctuation of the rates. In fact, the provisional rates are always quite close to our actuals, so to use them in our proposals seems very reasonable and is a good indicator of what our future costs may be. I know the FRPA and NICRA are for different purposes but I am much more familiar with NICRAs. Is there an inherent risk of bidding contracts in this way?

To throw out another perspective, the entity’s actual G&A rate for a given fiscal year is calculated for the organization [first], then applied to contracts where it is required. The number of contracts where G&A is ‘charged’ or billed through its invoicing does not impact the G&A calculation itself. Say your G&A expense pool (numerator) is $125K. Your G&A base (denominator) is $1M. Your G&A is 12.5%. Provisional or ‘target’ indirect rates that track closely against the ‘actual’ rates allow for the rate variance to be kept to a minimum. It seems unusual if the government required proof of provisional billing rates during negotiations that there would be rates bid all over the place or without consistency. It may be helpful to visualize a pyramid. At the top of the pyramid are your company’s contracts that contain FAR 52.216-7, as Help already said. Those are the contracts where you are *required* to perform the true up of applicable indirect rates charged at ‘target’ versus ‘actual’. Would focus on those first. The next down on your pyramid could be subcontracts where the federal government is the ultimate customer, or other cost plus or grant agreements with non federal customers. Read the contract terms to see what if any terms dictate the settlement of indirect rates. Read the proposal too if you can. Everything else at the bottom of the pyramid - commercial contracts - should not require much additional analysis. Seems unlikely a ‘requirement’ would exist to perform a rate true up for a commercial non-FAR customer although I suppose it is possible. More likely the company bid G&A as an administrative ‘markup’ or material handling rate without the intent of ever settling the difference between ‘target’ and ‘’actual’

@Neil Roberts thanks for proving that link, interesting. Reading FAR 31.112 it allows the government CO to ‘encourage’ contractor payment for unpaid subks, ‘reduce or suspend’ payments to prime contractor when subks are left unpaid, and shall ‘advise the subcontractor’ whether ‘final payment under the contract has been made…’ So, as a prospective subk where the prime inserts pay-when-paid language, if one cannot strike the language altogether, it seems reasonable to request FAR 31.112-1,2 be added to allow for some escalation to the government when a subk goes unpaid. That is something, I guess. I did see an old 2001 wifcon thread on the web that suggested this FAR only applies if the prime is using progress payments, not sure if that still applies. @here_2_help thank you that is very helpful as well. Not to mention risking noncompliance with prompt payment for small business etc. These are smart factors to consider in a subk where the prime is covered by the FAR. It does not help where the prime may be under a state or local government for example, but the idea of crafting specific language that allows for the unpaid subk to go directly to the ultimate client contracting office is compelling. Essentially a threat to expose a prime contractor for not paying their bills. Will probably get most folks’ attention.

@Neil Roberts Let me try to rephrase what I’m really after. I agree that a subk’s opportunity to nix this payment clause is during the negotiations. And for me a subk should really never agree to it unless there is a specific application that makes sense. Again, it seems unfair and unreasonable to have your payment tied to some means far outside your control. But that is still not what I’m after here. I want to know what happens if a subk delivers exactly as prescribed in their subcontractor. The prime accepts said deliverables. For whatever reason, small hypothetical, the prime is never paid for work purported to include a portion of the said work subk performed. Therefore, prime never pays subk. Is subk left holding the bag, even though they complied with all requirements of the subk? Why would anyone agree to this?

Correct. Thanks, Neil. Sorry for not clarifying that up front. I do not have any language in front me, but this would not be a FAR clause of any sort, rather a commercial payment term negotiated into a subcontract. For example, instead of saying “subcontractor will be reimbursed within 30 days receipt of an acceptable invoice” the agreement says “subcontractor shall be paid 30 days after corresponding payment is made to prime contractor”

I have always despised these payment terms in subcontracts. Subcontractor A/R managers scoff each time they see them knowing their leverage to collect payment is altered from its normal state; drastically reduced. The only fair, practical application I can see them used is where the subcontractor performs the preponderance of the prime contract SOW, and the prime is just a pass through. From a cash flow perspective the prime doesn’t want to go out pocket to pay the subk knowing the invoice could be held up or rejected by the client for various reasons, and payment to the subk could have already occurred. Are there any other practical uses for these clauses? Does anyone feel these clauses are misused and except in special cases, should not be agreed to by subcontractors? Are there any primes out there who have held some false sense of security that the a pay when paid clause protects the prime from ever having to pay the subk if there is an issue at the prime contract? If a subcontractor performed the work as intended, they should be reimbursed. Whether the prime is paid by the ultimate client is the prime’s job to figure out. It is silly to think the two should be linked, in my opinion. Does anyone know of a subk that was stiffed by a prime because of this type of payment clause, took the prime to court, and what happened?

Thanks all for the added dialogue on this one. Neil, I think the reference provided at 4.703 (b) (2,3) answers my question. Which, until I found the file the government was asking about, was what happens if a cost plus contract was not closed out nor settled for indirects, and the contractor has no record of it. Suffice to say, not good. I believe that FAR reference to say the contractor is on the hook- pretty much forever in the case of retaining files that were not properly closed out and in accordance with the allowable cost and payment clause.

Thanks, C Culham, for the reference. Let's assume this is from a contractor's perspective. The government is asking for a final voucher - in furtherance of contract closeout. Let's assume the final payment occurred ten years ago. The contractor may or may not have complied with the allowable cost and payment clause, so let's also assume unreconciled indirect variance could exist. Is there anything that would compel a contractor to unearth a contract that old, more than ten years, and inspect and perform a reconciliation of final costs? In other words, does final payment occur only after all rate variance adjustments have been performed - in which case the six year clock would not start until then? I realize I may be conflating retention requirements with compliance on allowable cost and payment clause.

In the absence of a "closed out" cost plus contract, can anyone point me to guidance re: how long you must keep your files? I perused FAR 4.7 and 4.805 but didn't see the answer specific to my question. For example, would the "6 years after final payment" laid out in 4.805 apply to all contract types?

Thanks Help, correct - with a contractor. These are great questions. Can you clarify what you mean on question 2? For question 3, are you referring to something above and beyond the accounting system - does Sharepoint qualify as a database? Or something like an Access database? If you could expand on what a relational database is to you that would help.

Current filing structure is pretty chaotic/disorganized, so wanted to see if anyone has any good suggestions or best practices in how they maintain their e-files. My thinking is to create a Sharepoint site that is organized by internal project number - which is a number that is also linked to the project number assigned in our accounting system. That sounds better than by client, for example. Then, potentially separating the files by active/inactive. In the contract folder, you would have a contract brief, all awards and mods, a folder for subcontractors or consultants, if any. The proposal folder would be linked or visible in the folder and contain final proposal revisions/budget docs, etc. Outside of using a contract database, any ideas for a good file structure on Sharepoint?

😂 Thank you for your service WifWaf

Having worked with consultants/subcontractors over the years - some brand new to government contracting - I always felt some folks just compared themselves to their competitors - through GSA schedules or other means - tried to decide if they were more or less valuable than these other companies, then picked labor rates for their services that were comparable and went with it, regardless of their expenses or cost rate structure. Then figured out this whole indirect cost rate stuff later 😀.

Thanks all the for the discussion and making some citations which I will continue to peruse.

Vern the overarching themes between the article Don provided and the CPA article are the same to me. My only hangup is "business development". The explanation that overhead includes the indirect costs of managing contracts makes sense to me and that is an easy visualization. But I generally see that going hand in hand with capture managers growing a business line - finding partners, keeping tabs on agency spending and RFP release, business strategy, whatever. So, I would consider business development overhead rather than G&A. The CPA article says: The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting... I think what we have agreed is that business development can be either, so long as the contractor is consistent in its treatment of the cost as it goes into the expense pool. From a perspective of explaining it to the staff managing these lines of business, I would rather say "capture manager, VP business development, business strategy, whatever, all of your time is overhead, no matter what." I also do not think business development has to or necessarily will serve the greater benefit of the company, not like an accounting department would anyway. Your capture team selling to client A serves no benefit to client B and except for maybe someday (maybe not) bringing in revenue to your company, does not benefit the company as a whole.

Fantastic article Don. Thank you!!

Hey Don - I guess that is part of my question. I can recall seeing the same or similar type expenses classified in one company as overhead and another G&A. Like HR for example, IT, security, Finance and accounting. Is it up to the contractor to decide what they classify as such and treat that consistently? If anyone has any good, reliable literature to read up I’d be thankful

Are there any recommended readings for how and why a contractor assigns corporate or operating expenses to overhead versus G&A? Does this factor into the strategy of how one designs their indirect cost rate structure?

Thanks Help I will review that when I get some time. Without going into an elaborate proposal, I’m sure someday soon if not already, there is an artificial intelligence program out there that could pick up on these “unreasonable” irregularities incurred during performance of a cost reimbursement contract. Maybe an audit software is out there already. Following completion of a contract, the contractor agrees to let DCAA drop their contract in their software, and the software generates a bill to the contractor for anything they charged that was out of bounds. If the contractor takes exception, they decide if it is worth the effort to defend and if not they cut a check to the government. I think that is ultimately what the system is designed to do. But, it takes years and millions of dollars to do it…badly…the government is bad at this. Is this so far fetched? That would seem like real accountability to me. And efficiency. If it takes everyone 30 years of their career to get good at this the system is doomed. Focus on the pre award evaluation of the contractor and their price. Emphasize that if they mischarge the government, they will be caught, and quickly. Not five, ten, or twenty years later, enough time for any bad actors to move on to the next govcon down the road or have taken their golden parachute. If the general public knew the IRS wouldn’t get around to their tax return for a decade they may find it more tempting to play fast and loose. The acquisition system all but advertises to contractors that they will not get around to holding them accountable for a while.

Thank you help, retread and rea’n for the added context and experiences. Even having read the sections Retread quoted a couple times already I’m realizing there are more protections afforded to the government than I first convinced myself. I agree as everyone has stated these are complicated, complex issues. I don’t know that it has to be. If we can imagine a contracting industry without fraudsters where not every contractor is out to squeeze every penny from the government, aren’t the evaluations of the contractors themselves and their policies and procedures, and the work solicited, designed to burden the contractor with the risk and assumption they are doing the right thing. For example, if I filed my income taxes and claimed some big credit for a donation to charity that was never made, I know that is fraud, and the IRS will find me and penalize me monetarily or criminally. A government contractor should know similarly that if they charge for something unreasonable as defined in this thread, there is a risk they get caught. By accepting the contract they know as discussed here the burden of proof is on them. Isn’t that..good enough? Going back to Vern’s point that a CO had better be clued in on such a rate change, to Maker’s example, individuals put on a project aren’t walking around with a margin on their forehead. Is surveilling a contractor’s direct labor so closely post award really a job of the CO and is it a good use of their time to do it to such a micro level? If we can’t trust the contractor to do the right thing, why are they getting a cost reimbursement contract award in the first place?

Thanks Help. So, against my better judgement, I am going to suggest there is more meat left on this thread. Mainly looking to draw on experiences from other posters in this similar situation. So, without putting words in anyone's mouth, we have established that, absent an advance agreement, or specific language that the government inserted into a contract (preaward) that addresses the issue, and assuming it does not result in an increase to the overall cost of the contract, nothing in a customary negotiated cost reimbursement contract prohibits charging $50 per hour for someone that was bid in your proposal, initially, at $30 per hour. Except -- reasonableness. Which, for the non-layperson is a principle not to be trifled with. I am interested in knowing: has a Contracting Officer ever disallowed your direct labor charges because they were much, much higher than initially bid (like more than 50% higher, as in this example.) If so, what happened? Were you successful in demonstrating reasonableness, or was it escalated to a higher court? As a Contracting Officer, have you ever disallowed direct labor charges because you felt they were too high? If so, what was your rationale in doing so? Were you successful in inhibiting such direct labor cost increase, or did you compromise with the contractor? Or, to industry, is this just commonplace, to charge the government at the hourly rate the market will bear, regardless of the rates used in the cost proposal?