here_2_help

Mr. Edwards, Thank you!!

While this is excellent feedback, it addresses whether or not the "findings", as the result of having performed a DP review, are significant.

I have a recollection that DCAA had some manner of a Matrix or decision tool they used to determine if a particular contract award was even worthy of bothering to do a review.

Does anyone else have similar rememberances?

Casius,

DCAA obtains a listing of all pricing actions subject to defective pricing (i.e., subject to TINA) which is the "universe of activity". The entity is given a PASS rating which is the overall risk assessment of the likelihood of defective pricing based on DCAA's experience. PASS = Post-Award Something Something (I forget.) The PASS is essentially a co-efficient that drives sample selection; the higher the PASS rating the larger the sample size selected from the universe of activity.

Hope this helps.

I completely agree with Vern's post in every respect.

I would add that, as missgamecock noted in passing, contractors' travel costs are subject to a number of allowability limitations. (See 31.205-46.) For many if not most contractors, travel is the number one source of unallowable costs. For example, many times it is impossible for a contractor on travel to find lodging within the FTR locality limits, which causes unallowable costs to be incurred. Those unallowable costs come out of contractor profit. If a CO says "no profit on travel" then the government is essentially asking the contractor to take a loss on its travel costs.

Moreover, complying with the FAR cost principle related to travel is hard to do, and expensive as well. The recent change in air fare allowability rules, for example, has significantly impacted companies' ability to determine allowable air fares. Policies and procedures are being rewritten, employee training is being rolled out, and travel agency reporting is being revised.

My point being that to treat travel costs as some kind of unworthy "pass through" cost, for which the contractor adds no real value, betrays ignorance of the true situation (as Vern correctly pointed out). But it also does the contractor, and its administrative/compliance staff, a real disservice.

I think the clause is inappropriate for the solicitation. However, I think it is more or less harmless - although the 20% final payment is above my normal commercial practices.

Whynot,

Consider the FAR policy at 32.10, the solicitation clause at 52.232-32, and DoD's User's Guide to Performance-Based Payments. You may be able to get the contracting officer to move from cost-based progess payments to PBPs, which are the Government's "preferred" method of contract financing.

Hope this helps.

We spend about $16K a year for the use of a high tech engineering software necessary to perform data analysis and modeling. Can we expense each of several in-house government contracts utilizing the software for the cost as a direct charge?

smallbus, yes, you can.

But before you do so, I recommend you familiarize yourself with 31.205-4 "Determining Allocability" and 31.202 "Direct Costs" and 31.203 "Indirect Costs". Notice the part that says, "No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective." CAS 402 says much the same thing, but I'm going to assume you're exempt from CAS based on your User Name.

If you decide to treat this "high tech engineering software" as a direct cost, then you need to treat the cost of all such similar software as a direct cost as well. You need to be consistent in how you account for "high tech engineering software" across your portfolio of contracts. In addition, you need to ensure that you have priced those costs into your contract prices, to the extent that FAR Part 31 applies to them.

So go ahead, but make sure you've thought your decision through carefully, and are prepared to be consistent across all contracts and keep similar software costs out of your overhead/G&A pools. It will be difficult to undo your decision once made.

Hope this helps.

I am fairly new to international companies. We just set up an SSA and I have several "sister" companies who will be subcontractors to us and need help in making sure that we do this right!

Specific question on my plate: Our sister was a subcontractor to a large prime. Once the SSA was set up (earlier this year), we novated the contract to the SSA and now our sister is our subcontractor. We want to charge the sister Material & Handling/G&A of say, 18%. I have support for the rate, but are we able to burden the cost from our "sister sub"?

95% of our work will be us as "Prime" and sister companies as "subcontractor". We have no facilities, just our OH (Contracts, PM, Legal, B&P, Sales and Market, Finance, etc) How should we set up IC trading rules for this type of activity?

Thanks, Mark

Hi Mark,

FAR 31.205-26(e) requires that (unless certain exceptions exist) costs transferred between divisions under common control must be made on the basis of "actual costs" (which include all applicable burdens from the performer). Whether the recipient applies indirect burdens depends on its disclosed/established practices. Generally, the answer is yes.

In particular, current DCAA audit guidance is biased heavily towards the receiver applying G&A to the performer's fully burdened costs.

Hope this helps.

My understanding is that the contractor has "voluntarily" agreed to stop imprinting the ACOGs with the biblical references. Moreover, it is offering its end-users kits to remove the markings from already-accepted ACOGs. I found it interesting that end-users include foreign governments (FMS perhaps?).

http://abcnews.go.com/Blotter/jesus-rifles...8791&page=2

Is there an operative difference between a teaming partner vs. a subcontractor?

Cheskieb,

I believe there could be. If the teaming partners agreed to create a joint venture or similar stand-alone entity, and infuse it with employees and its own cost structure, and then subcontract to that entity for additional services, then you could have such a distinction. Certain costs would be incurred by the teaming partner in its role as, say, accounting or program management function, while other costs would be incurred in its role as performing entity.

I experienced this type of arrangement a decade ago. Pretty dang complicated in terms of direct and indirect costs.

On the other hand, that is a pretty specific situation. If you are making a general inquiry, then I would answer that a teaming partner is an entity that was a party to a teaming agreement, while a subcontractor has actually entered into a subcontract. Many times (but not always), a teaming agreement is an agreement to agree -- i.e., not a fully executed contract.

Hope this helps.

I would not discuss risk analysis or disclose pricing contingencies in a cost proposal unless asked to do so.

There's another point of view that says all risk analyses and/or contingency analyses must be disclosed if the pricing action is subject to TINA. I don't agree with that point of view. But I can tell you that the Department of Justice does. I believe SAIC paid at least $2.5 million to settle the False Claims suit.

Here's one link to the story.

http://legacy.signonsandiego.com/uniontrib...s_1b11saic.html

Cg1

If you are so inclined, I would be interested to see your proposed direct labor cost escalation cap language. I am not sure what element of direct labor cost you intend to cap? Do you intend to cap: salary, overhead or hours; by individual or in aggregate; by each contract period or by total contract? Do you intend to cap actual direct labor costs against proposed direct labor costs? I am interested in the what and the how. How exactly are you going to do it?

Also, when you capped direct labor cost escalation and raised the fee did the overall contract price go up, go down or stay the same?

Whynot, if the contractor received an increased fixed fee as a result of the government imposing limits on the amount of direct labor escalation, I doubt I would have ever posted on this thread. My impression, rightly or wrongly, is that the contractor received no compensation for its increased cost containment risk.

So get off your "timing" bandwagon and deal with the issue, which is whether a cap on escalation rates is inherently unfair, wrong, bad, evil, whatever. If you think so, then we are in irreconcilable disagreement. If you not think so, then I don't have anything to argue with you about. Bite the bullet. What's your position?

Vern, I'm not obligated to defend a strawman position that you create for me.

I see that cg1 has left the scene and is, I hope, dealing with the situation. I don't see any need to continue to reiterate--or, if you prefer, to defend--my prior posts.

FYI,

DefenseAlert is reporting a sustained bid protest by both BAE Systems and Navistar in the award to Oshkosh of the recompete of the FMTV contract. According to the GAO press statement (actual decision is currently under seal), the Army misevaluated Oshkosh's capability and also misevaluated Navistar's past performance. The GAO recommends a new evaluation of the offerors with respect to those to items. The other allegations of errors were not sustained.

Maybe this is not such a big deal, but the award was worth billions -- reportedly at least $3 billion. Given the stakes, and perhaps the complexity of the requirements, I can see making a mistake in an evaluation criteria. But past performance?

In any case, now it's back to the drawing board for the Army evaluators.

The government does not control spending. It controls reimbursement, and it often does so through negotiated contract terms.

Your "smells like interference in the contractor's business" comment is absurd. You must be thinking about fixed-price contracts. When a contractor gets to spend the government's money and doesn't have to deliver anything in return, which is the case under a cost-reimbursement contract, it has no business in which the government is barred from interfering in order to limit its cost liability. What's ironic about your comments is that you seem to think that it's better for the government to limit costs through regulation and auditors than through face-to-face negotiation. Really, H2H, that strikes me as a peculiar notion.

I would not say that caps are necessary or unnecessary, only that they may be prudent from a negotiator's point of view. Caps can be an effective way to limit the government's cost liability. A cap says nothing more than: I will not pay more than this much. There is nothing unfair or in bad faith about the government seeking to cap its cost liability. The only issue is whether a cap would be prudent in a specific set of circumstances. That's a judgment to be debated at the negotiation table. Putting it another way, it's a matter of what is wise a given case, and negotiators may differ in their opinions.

Cost caps in a cost-reimbursement contract are not inherently unfair.

Vern, your point ignores the timing of the negotiation. As I noted in a previous post, we apparently have different impressions of that timing.

Capping indirect costs in a cost-reimbursement contract is not new. I personally know of an agency that has used such caps with long-term, on-site, support-service contracts since back in the early sixties.

br549,

In this scenario the indirect caps are being applied to labor escalation -- i.e., limiting the amount of raises the contractor can give its employees with respect to this contract. If the contractor gives its employees raises that result in labor costs that are in excess of the negotiated labor escalation factor(s), then the amount over the cap would result in unallowable direct labor costs plus unallowable indirect costs allocated to that direct labor.

Well, I'm going to contradict your most recent statements as a mass of gross over-generalizations.

I don't recall anyone saying anything about attempting to impose caps after negotiations are concluded. That's a red herring, and I don't know why you brought it up. All the same, I don't see any inherent unfairness in the government wanting to revisit a deal that's already been made. Business people do that all the time.

So? I don't know of any reason why all contracts must or should be treated the same.

Gross over-generalization. "Contractors" takes in too much territory to permit such a statement. Be even if it's true, so what? If the company takes the deal then they should think about what they're going to tell their employees. If they can't stand to do it, then they shouldn't take the contract.

Please. Spare me. I don't like Mom and Apple Pie arguments, whether it's coming from industry or the GAO and DCAA. If I'm awarding a cost-reimbursement contract and the contractor is going to be spending my money, then I see no reason whatsover to give them the benefit of any doubt about costs. That's ridiculous. We're talking about business relations, not marriage.

What are you talking about? What are you thinking? Where have you been? Hello! Throughout the 20th Century the government has reserved the right to tell contractors how to run their businesses under cost-reimbursement contracts, and other contracts as well. There are countless examples of laws, regulations, and clauses through which the government does just that. That's a reality of the marketplace. Any company that cannot stand that should stay away from government contracts. I don't see any mass movement to reject government cost-reimbursement business. If you take a contract that allows you to spend my money and doesn't require you to finish the job as a condition, then I damned well reserve the right to tell you how to spend it and how not to spend it.

Need has nothing to do with it. The question is whether such a cap would be prudent under a specific set of circumstances.

The first of those two sentences makes good sense. As for the second, diatribes are not illegal. Do all you want.

You, like Cg1, should be careful about how you use "bad faith."

Vern, we have a different impression/interpretation of the situation. I read the original post as saying that price negotiations had concluded and then the government slipped in the bit about escalation caps as the contract language was being finalized. In my mind, if the contractor had known that the government had wanted to impose caps on labor escalation (not caps on indirect cost rates) then the contractor would have wanted more fee to compenate for the increased risks.

The rest of your points strike me as perhaps my points struck you. Of course the government can tell the contractor how to spend the money. That wasn't my point at all. My point is that the government does so through regulations and contract language and through a COTR and through DCAA audits. (And we still get many delay/disruption claims...) The caps on labor escalation veers dangerously close to something much more, something that smells like interference in the contractor's business. Given that they are unnecessary (for the foregoing reasons as well as others made in my prior posts) they should be avoided if at all possible.

Scenario --

Contractor submits a cost proposal for a CPFF contract. Presumably, the cost proposal was based on forecasted costs, including future labor costs based on known or forecasted wage increases. Government objects to labor escalation values used by contractor and associated direct labor cost estimate. Contractor agrees to revise cost proposal commensurate with Government's desired labor escalation rate. Accordingly, a new estimated cost and associated fixed fee is agreed upon.

Contractor does this because, regardless of what labor escalation rate is agreed-upon, at the end of the day it will be reimbursed for its allowable cost incurred. Profit erosion risk is manageable.

After negotiations are concluded, Government attempts to impose "caps" on the amount of actual labor escalation--effectively limiting the amount of allowable pay raises the contractor can give to its employees for the instant contract. Contractor objects, because if it gives employees the raises it knows (e.g., collective bargaining agreement) or forecasts (based on plans & budgets), it will incur an unallowable cost with respect to this contract. If it limits pay raises to the Government's desired escalation factor, it affects staff morale and perhaps breaches collective bargaining agreements.

Moreover, imposing contract-specific escalation rates signals to the contractor and its employees that this contract is to be treated differently from the contractor's other contracts (assuming it has other contracts). Remember that most (but not all) pay raises are applied to the employee population as a whole, or to salary bands, or to functions -- and not to individuals. Contractors do not, as a rule, identify a small group of employees working on one contract and say, "you guys get 100% raises while everybody else gets 3% raises."

1. Contractors run a competitive business, or try to. Please give them the benefit of the doubt. More to the point, the Government shouldn't assume the right to tell the contractor how to run its business, including what raises to give its employees. If the government wants to in-source the work, do it. Otherwise get out of the contractor's knickers and let it do its job as it proposed.

2. The Government doesn't need to impose contract-specific "caps" in order to control the salary/wage increases a contractor provides its employees. For example, DCAA has an audit program that addresses contractor compensation ceilings. FAR 31.205-6 addresses the allowability of compensation, and contractors with CPFF contracts have to comply. The FAR definition of reasonableness would cover the scenario above, where one set of employees gets a huge raise while other similar employees do not -- and the excessive raises could well be unreasonable and thus unallowable as a contract cost.

Cq1 hints at facts and circumstances that have not been shared. Fine, if there is a bona fide reason that the government feels the need to control the contractor's contract-specific labor costs, then do it. In that case, the above comments should be read as a diatribe aimed at the general 1102 population and not at anyone in particular.

Vern, I appreciate your comments made in addition to my own, augumenting but not contradicting my statements (as best I can tell).

That's exactly what happened. Fee was negotiated and there was a tradeoff. There was enough give and take here for them to understand the context and implication of offering and accepting reduced escalation and receiving more fee. That's why their response, while not surprising, is a little hard to understand under the circumstances and I can only interpret it as bad faith. What I'm not hearing from you is why it appears to be acceptable reach a mutually acceptable objective, but not reasonable to make the contractor accountable for meeting it? Again, if the point of negotiating how future cost are accumulated and the contractor indicates their understanding of this, why should they be averse to the mechanism that acheives the understanding?

Cg1,

I do not agree with your assessment, based on the facts as you have presented them. The point of negotiating the estimated cost and associated fixed fee is to establish a target for various management purposes. The government's primary controls relative to price are on the funding, not the costs incurred.

The reason (presumably) that the government chose a CPFF contract type is because the scope was unknown and therefore it was not prudent to hold the contractor to a strict price. If you now want to hold the contractor to a strict price, consider changing the contract type and making the contract a firm fixed-price type -- and be prepared to reopen negotiations. Otherwise, let the contract pricing and billing work as the FAR intends them to.

I really don't know you and I certainly don't know all the facts and circumstances. But based on your posts I have to say that the interpretation of bad faith doesn't seem to be on the contractor's side in this discussion. You want CPFF, then execute it.

H2H

I concur with Don's point(s). In a cost-type contract, the government agrees to reimburse the contractor for actual allowable costs incurred (subject to funding limitations). The estimated costs are simply that -- estimated. Not fixed. Apples and oranges.

When the government imposes a cost ceiling or cap, it is essentially converting that portion of the contract from cost-type to fixed-price. The contractor accepts increased risk. If you want the contractor to accept that risk, you need to offer consideration--commonly increased fee.

It's not really "fair" to expect the contractor to accept the increased risk while simultaneously reducing the estimated cost and fee, right?

Hope this helps.

NPRM issued in August by Dept. of Labor.

See http://www.regulations.gov/search/Regs/hom...9000064809fff38

Hope this helps.

It's not clear to me whether this new process replaces the current internal DCMA review process (i.e., one or two reviews of a CO's decision when the decision is to disagree with DCAA), or if the new process is an additional one.

Looking at the process on its own, without context, it doesn't seem as onerous as some of the alternatives I've heard and read about. For example, one alternate approach was to have DCMA accept all DCAA recommendations, period. Another thought was to merge the two agencies and have the CO's report to the auditors. This new approach seems far better than it could have been.

In the Lockheed Martin example from H2H. LM treats trademarks as an intangible assets with indefinite useful life and realizes their amortization expense - see page 68 of their 2008 annual report.

Whynot, that speaks to the GAAP accounting treatment but not to the cost allowability.

Also, it's interesting that LM would assert that the trademark has an "indefinite useful life" because I would have thought (perhaps naively) that one needed to establish a finite useful life in order to amortize a cost. In order to create an amortization expense, one divides the asset value by the number of periods of useful life to calculate a fixed amount per period. I would have thought that having an indefinite life in the denominator would be like dividing by zero. I guess that's why LM doesn't hire me to do their accounting!

Is that enough discussion?

Thanks Vern. I only wish our DCAA auditors had your discernment.

Vern,

I find it interesting that you spend a lot of time quoting 31.205-1 but omit any discussion of the definition of "public relations" which I would assert covers a trademark which is used to protect the branding of an entity's products. Also "prosecuting a trademarK" is pretty self-evident, is it not? It is the effort of applying for and receiving a recognized and officially registered trademark. Prosecute as in "make an effort to attain".

Of course you and the others are correct that there is nothing directly on point, which is why one needs to analogize to another principle. I chose 31.205-1 but others have made different analogies. Who's to say, outside of a court of law, who's made the best analogy?

To loul,

I'm confused by the notion that such costs would be allowable but not allocable to a specific cost objective. Are you saying, then, that they are allowable G&A expenses? Are you familiar with the various cases pertaining to allocability, including Boeing North American, FMC, and (more recently) Teknowledge and BearingPoint?

Look, I'm not necessarily against that position. If you paid me I would make that argument with a straight face and mean it sincerely. I just think an auditor or IG could make a strong case that such costs are not in fact "necessary" as much as they are beneficial to the contractor. When Lockheed Martin registers "We never forget who we're working for" how does the Government benefit? Why does LM feel having such a catchphrase is desirable? Would the company get as many contracts if it didn't have such a catchphrase?

Again, one could make the argument that such costs are those that would be incurred by a prudent businessperson in the conduct of a competitive business; however, I would be uncomfortable using that as a counter argument should DCAA or whomever assert that such costs were unreasonable, unallowable, and/or unallocable because there is no beneficial nexus between the cost and a Government contract. The recent court decisions in this area have been going against the contractors more often than not....

Maybe it's just me.

H2H

I would look at 31.204-4? - I think trademark expenses could meet that allocability test. Also, 31.205-30 - I would group trademarks with patents.

Whynot, why would you group trademarks with patents? They are not at all the same thing. Patents, copyrights, and data rights concern limits on the use of intellectual property. A trademark is a sign or indicator used by an entity to identify certain products/services to consumers.

The cost of trademarks is not specifically covered by the FAR Part 31 cost principles. That said, however, I would think that the cost of trademarks would be covered by 31.205-1.

"(a) ?Public relations? means all functions and activities dedicated to?

(1) Maintaining, protecting, and enhancing the image of a concern or its products; ....

"(f) Unallowable public relations and advertising costs include the following:

(1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38((5)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company?s products or services."

Given the foregoing, I would classify such costs as unallowable.

Hope this helps.

here_2_help,

I have been reassigned as Contract Specialist to 15 different contracts that were awarded by a former Specialist and found several discrepancies. I am trying to correct the discrepancies to ensure that they do not end up in a protest. In reviewing the contract, I did see that the file was documented to include "adequate system for cost-type contracting only?; however, I did not see a Disclosure Statement. I very much understand your response and I agree. What can I do to clean up the contract?

Acq_4_life,

If I understand your situation correctly, your agency has awarded a cost-type contract to a contractor who has been determined to have an adequate accounting system. You say the contractor is performing a "commercial service" but you don't say whether the contract was awarded pursuant to Part 12 or if it contains any commercial item clauses.

Putting this all together, you may have an illegal contract (cost-type commercial item procurement). Or not. But either it needs to be a full-on commercial item contract (convert to FFP or T&M, and lose any clauses inconsistent with commercial item acquisitions), OR it needs to be full-on cost-type (specify some invoicing requirements and lose any clauses that smack of commercial item acquisitions). One way or the other; not both. To help me decide which way to go, I would look at the original solicitation, contractor's proposal and bid evaluation.

In the meantime, I would pay the contractor's invoice as submitted and ask your friendly audit agency to do a post-payment voucher review. (I think they might call it a booked-to-billed reconciliation.)

I'm sure there's more to be said -- and others to say it. Hope this helps.

I assume you have the following clause in your contract: 52.216-7 Allowable Cost and Payment (Dec. 2002).

Note this sentence in (a) (1): "The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract."

Note the phrase in the middle of the sentence: "...in such form and reasonable detail as the representative may require, ...".

I think you are entitled to ask for details on the contents of the direct labor.

Quote

(a) Invoicing.

(1) The Government will make payments to the Contractor when requested as work progresses, but (except for small business concerns) not more often than once every 2 weeks, in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract.

Unquote

Can I just add in here that we seem to have some information missing? What we do know is that the contractor is billing the customer is exactly the same way its costs were negotiated and contracted-for, no more and no less. Now somebody is saying, after award, wait a minute, maybe we need some more detail. Do we know whether the contractor's system has any more detail? Do we know whether the system was found to be adequate for cost-type contracting? Do we know if the contractor has a Disclosure Statement and how it accounts for its costs?

Nope.

Seems to me we need the answers to those questions before we make any suggestions here. Sombody (me) might say, it's unfair to tell the contractor <i>after submission of the first invoice</i> the customer needs more detail. Somebody (me) might say, you didn't need that detail to find the offer fair & reasonable, and you didn't need that detail when you negotiated the price -- so what has changed here? The only thing that's changed is that you want to change the ground rules after the game has started, which will delay the contractor's payment and might cost it more in admin. costs.

But I'm not saying that -- yet -- because I believe there's too much information missing.

Hope this helps.

NOTE: I see Vern just posted while I was reviewing this. I concur with him but will post this anyway. H2H