here_2_help

How about having the supplier certify that the rates/factors used in its proposal are fully compliant with the FPRA they have executed with the government? Would that certification address your concern(s)?

Perfectly quoted. Except for the business case(s) cited by 31.205-26(e), inter-organizational transfers are simply transfers between one organization. See 15.407-2(b): Except as noted above, inter-organizational transfers are "make" not "buy" -- but (as Retreadfed correctly pointed out) the CAS requires them to be treated "as subcontracts" for purposes of CAS coverage.

Hmm. I would say yes but I can't point to a case at the moment. How about let's just say the contractor is in material breach? EDITED: I'm willing to concede that the failure to notify simply means that the government is not required to fund any overruns. A failure to notify does not carry with it an obligation to keep performing. Sorry about that.

Joel, I'm sorry I wasn't clear. My statement: "…but the contractor is still expected to perform the contracted work" was in the context of a FAILURE to comply with the requirements of the clause(s).

If the contractor fails to comply with the LoC or LoF clause (as applicable) then the government is not obligated to provide additional funds but the contractor is still expected to perform the contracted work. In the event performance costs more than available contract funds, then the contractor will incur a loss on performance of the work. I'm talking about project gross margin erosion into negative territory. Okay?

At this point, you have a contract with both (1) an estimated cost and (2) a fixed fee amount. During performance, if your costs increase (because, say, your indirect rates were higher than you expected) you may still bill those costs (assuming they are allowable, reasonable, etc., as ji20874 wrote) up to either (a) the amount funded if incrementally funded or else (b) the full amount of your estimated costs. HOWEVER, if your contract includes 52.232-20 or 52.232-22, then you must comply with those clauses. Normally (with a few exceptions for unforeseen situations) you must notify your customer before spending all the money. If you adhere to the notification requirements, the customer may choose to fund an overrun (regardless of cause); but it need not and then you stop work when you have no more funds or have reached the total estimated cost of the contract. In that manner, your fixed fee is preserved. Note that if your contract includes either or both of those clauses (and it should), then your failure to comply essentially converts your CPFF contract into a FFP contract and you must deliver and the customer has no obligation to fund any overrun/cost growth whatsoever. Increasing indirect rates just burns the available contract funds faster than planned. Whether that situation impacts your expected profit largely depends on your ability to comply with those contract clauses I cited above.

KatzM -- You are asking a question of law and there are no lawyers here who have agreed to provide you or your company with legal advice/assistance. I urge you to obtain the answer to your question from competent legal counsel.

Vern, the issue is that the first company is not selling the materiel to just anybody; they are selling it to a supplier who then sells it back. This is not necessarily a problem but it could be. And if you'll refer to my first response under this thread, I think you'll find that we are in agreement from the buyer's perspective. I was focusing on the accountant's perspective, as I tend to do.

Fair question. First, I only care if amounts are "material" as defined by FAR 30.602 (which directs a contracting office to 48 CFR 9903.305 in CAS-land). If the amounts are not material, then I am not concerned. (Note I will try to use "materiel" for goods to distinguish between goods and the concept of materiality.) To your question: The goal of any indirect rate is to allocate costs across many "cost objects" (let's call them contracts) in reasonable proportion to the benefits received. (Ref. FAR 31.203(c).) The costs in the indirect pools are, generally, related to functions and activities. For example, a materiel burden pool may contain the costs of purchasing, quality control, and other activities related to acquiring and using materiel. In my view, when the materiel was originally acquired it was properly burdened with the costs of those functions/activities. Then the materiel was sold to a supplier. Then the supplier returned the materiel in the form of a finished good. Unless the contractor is careful, that same original materiel cost will be burdened again. That's not a problem so much for the government, because all the contractor is doing is increasing the denominator of its indirect cost rate calculation, but it could result in excess indirect costs being allocated to the contract with this relatively infrequent transaction type while other contracts receive relatively less indirect cost allocations. The issue with double-counting the revenue should be fairly obvious. A succinct summary with a good example is found here. There are other articles available.

Patrick, You haven't made the case for why this is in the government customer's best interest. Why is this transaction being done? Who saves money? Who saves schedule? My recommendation is to start by building the business case for why this makes sense. Perhaps then you will be able to refute the "perception problem" your former DCAA auditors are concerned about. I will share that I have dealt with this situation a couple of times before. In each case, there was a business justification/rationale for the prime selling stuff to the subKtr, who then refined it and sold it back. In each case, we were able to show that the government customer was not paying any more for the end item deliverable than would have been the case if the subKtr had purchased the material input on its own--even with profit added. In fact, we were able to show significant schedule advantages to doing what we wanted to do. Since it was in our government customer's best interest, there were no concerns expressed.

This issue arises frequently because most larger contractors are both competitors and teammates on different contracts, often concurrently. For example, Raytheon may provide avionics to Lockheed Martin while competing against Boeing on a new missile procurement. Typically, the problem is solved by having DCAA audit the major subcontractor proposals rather than having the prime's people do it. This strategy is generally accepted by all the parties (including USG) at the larger contractor levels. Remember, these larger contractors already have cadres of DCAA auditors in their facilities on a daily basis. What's one more audit? Any small contractor that wants to use this strategy is likely to be laughed at. In my experience, the solution for smaller contractors is to execute a Non-Disclosure Agreement, allowing certain prime contractor personnel to review the full detailed proposal support in order to perform cost analysis, while providing assurance that the information will not be used to the future competitive disadvantage of the entity that submitted it.

I have seen a couple of civilian agency contracts (for A/E Services) that prohibit a "consultant" from billing fee/profit for its "subconsultants." However, the prohibition is express--i.e., it's right there from the time of contract formation. Nobody is relying on FAR or an Agency Supplement as the basis for the treatment; it's simply a contract term. Unless the contract specifies otherwise, subcontractor profit is simply a cost to the prime (or higher-tier subcontractor). That said, of course Vern is right that "excessive pass-through" costs, which are defined in FAR clauses he references, are unallowable. (NB: It has always bothered me that the excessive pass-through clauses are found in Part 15 vice Part 31.) Hope this helps.

Your two former DCAA auditors are wrong. A prime/sub relationship does not an "affiliated entity under common control" make. Determining whether there is common control is fact-dependent and requires the exercise of judgment. That said, "Entities that are consolidated by the same parent—or that would be consolidated, if consolidated financial statements were required to be prepared by the parent or controlling party—are considered to be under common control." [Source: PricewaterhouseCoopers website.] The way you describe the transaction, there is no double-dipping. If the subK purchased the material from the distributor on its own, it would pay $1,000 and add $500 in value, and then it would sell the finished good to the prime for $1,500. There is nothing unethical going on here that I can see. However, you have skipped over any discussion of rate impacts, and revenue recognition. In the scenario you describe, the prime has counted the same material cost twice in its indirect rate allocation base--once when it purchases the material and then again when it accepts the subcontractor's finished goods. In my view, that's a problem if the amounts are significant. Also, the prime seems to have recorded revenue twice as well--once when it sells $1,000 of material to the subK and then again when it sells $2,000 worth of product to the end customer. I would be concerned about those impacts. Hope this helps.

Maybe, maybe not. What about when there are progress payments?

I don't think there is a definitive answer to the question, and I like ji20874's response. I also hear "wrap-rate" used frequently--though interpretations of that term vary.

Not sure if this is a DoD procurement, but see DFARS PGI 215.404-3

I don't know a regulation or clause that gives a CO authority to direct the contract type between a Prime and SubK. However, the SubK may have to be submitted for consent in advance of award, right? So ... it seems to me that the Prime should be prepared to justify the contract type used. Also, I wonder if the Prime understands WHY it wants to award a T&M SubK instead of a CPFF one. What is the big benefit?

Don, I find myself in the position of once again disagreeing with your advice. Unless the contracting officer with cognizance over this contract is also the same contracting officer with cognizance over the contractor's final billing rate proposal and negotiation of final billing rates (see 42.705-1), I don't believe they have authority under 42.704 to issue a unilateral indirect rate determination. I base my position on the language at 42.704(a). I note that the original poster used the term "telework" which seems ambiguous. Does telework mean the contractor's employees are working from their own homes, or does it mean they are working from their offices at the contractor's facilities? I don't know. I also don't know whether the contractor is maintaining office space for its employees since they are not working at the government's facilities. That is a key unknown fact. If the contractor maintains office space for its employees then it would be reasonable and appropriate for it to bill the contract at higher indirect rates that include its facilities costs. To me, this issue should have been raised and addressed by the parties back in 2020, when the contractor began teleworking routinely. Now, here we are, two or three years later, trying to fix something that I'm not even sure is a problem. The contract appears to be silent regarding the ratio of onsite and offsite work -- though the parties must have had a notion as to what that ratio was when they negotiated the contract's estimated cost. At this point, given the facts presented, I don't see a way for the contracting officer to force the contractor to change its billing rates. What's likely to happen is that the contractor will burn through its funding quicker than the parties intended ... and the contracting officer will then have leverage to force a change in contract terms (i.e., a third billing rate for teleworking employees) as a condition of either providing more funding or exercising the next Option Year. There will also be an opportunity in the CPARS rating to make any displeasure known.

You know, the FAR addresses this point (somewhat). The theory is, when the government provides facilities then it's duplicative for the contractor to allocate to that same contract indirect costs that contain the contractor's facility expenses.

Given: (1) A choice between two rates and only two rates; and (2) The rate to be used is dependent on the location where the work is actually performed; and (3) The PWS expressly gives the contractor discretion to determine the work location. Then I don't see how did you reached your conclusion, Don. What about the situation makes use of the contractor's facility offsite rate "unreasonable"? Please cite to FAR 31.201-3 in your response.

In June, 2018, DCAA issued MRD 18-PSP-002 on the audit of contractor "Long-Term Agreements" (LTAs). The MRD contained a FAQ Section: (Emphasis added.)

You find Government Contractor M&A targets the same way you would any other acquisition target.

CiyaSoft Corp., ASBCA Nos. 59519, 59913, 6/27/2018. (Emphasis added.)

I don't really doubt you're correct in your assessment of the situation. But to me, what you are saying is that when the government enters the marketplace to acquire commercial items, it is unable to conform to standard marketplace practices and standard terms and conditions. In my mind, that kind of makes a mockery of the entire "commercial goods" and/or "commercial services" concept. If a buyer can't accept what the marketplace is offering, then the notion of market-determined price reasonableness goes out the window.

I don't see it that way. However I have already caveated that I'm not an expert in how DoD does PBPs. In my view, the tool is telling the DoD CO to negotiate the lower price of $91,066,434 if the contractor is permitted to use PBPs instead of progress payments based on (adjusted) costs incurred. I would expect the amount obligated to be equal to the price of the contract awarded.