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Subcontracting Rules under A-87


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We (a local Government) have encountered a challenge pertaining to subawards within the guidance of A-87.

The case: A local Government has received a federal award under A-87 to deliver a certain services or projects for the Government.

In order to complete the project, the local Government solicit bids using the applicable local and state bidding procedures and awards contract to lowest responsible bidder. The standard award process of the local Government is to award contract plus a set amount for additional anticipated costs (usually 5 - 10% of award fee). All costs are covered by the original federal award, which is based on cost proposal from local Government and IGE.

The challenge: Does A-87 prohibits the use of contingencies when a Governmental Unit as prime recipient uses a subcontractor to help deliver services under a federal award?

The Office of Management and Budget including the section on page 5, paragraph 3, titled, ?Application?. It is in this section that the Office of Management and Budget set forth the ?intent? to utilize or apply the contents of the OMB A-87circular.

In subparagraph (a) of Section 3, Application, OMB states the following:

?The principles will be applied by all Federal Agencies in determining cost incurred (emphasis added), by governmental units (emphasis added) under Federal awards (including subawards)??

In subparagraph (:huh: however, OMB specifically sets out that the Governmental Unit is not to be bound by the cost principles of A-87 when the actions are between Governmental Units and Commercial Organizations, to wit:

?(B). All subawards are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a governmental unit...this Circular shall apply.?

I appreciate any insights or further questions.

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The standard award process of the local Government is to award contract plus a set amount for additional anticipated costs (usually 5 - 10% of award fee). All costs are covered by the original federal award, which is based on cost proposal from local Government and IGE.

Let me get this straight. The local government conducts a competition, selects the offeror that offered the lowest price, then awards a contract to that offeror for the price they offered plus 10%?

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Let me get this straight. The local government conducts a competition, selects the offeror that offered the lowest price, then awards a contract to that offeror for the price they offered plus 10%?

Thank you for the question. No, the local Government awards just the bid amount to the lowest bidder - however, the Council also awards a limited contigency amount to the project fund to account for future anticipated costs.

As an example: Government awards based on cost proposal and IGE for a minor construction contract to Local Government as prime contractor, task order is for 300K; local Government goes out for bid and awards bid to lowest bidder in the amount of 200K; Council following Local Government's finanical management practice awards just the low bid amount for 200K and authorizes project manager to spend up to 10% of bid amount for furture anticipated costs within the scope of work - should they occur. Project gets completed at 205K, Local Government returns unspent 95K to Federal Government.

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Ok. Here's what A-87 says about "Contingency Provisions"--

9. Contingency provisions. Contributions to a contingency reserve or any similar provision made for events the occurrence of which cannot be foretold with certainty as to time, intensity, or with an assurance of their happening, are unallowable. The term "contingency reserve" excludes self-insurance reserves (see Attachment B, section 22.c.), pension plan reserves (see Attachment B, section 8.e.), and post-retirement health and other benefit reserves (see Attachment B, section 8.f.) computed using acceptable actuarial cost methods.

See Attachment B. Does that answer your question?

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Ok. Here's what A-87 says about "Contingency Provisions"--

See Attachment B. Does that answer your question?

Thank you Sir. Unfortunately, not. We believe that the 9. Contingency Provisions states in general terms which costs are allowable and which costs are not allowable. As such contigencies are not allowable. We do understand and accept that.

A critical part of our review was to re-evaluate the circular in its entirety as the Office of Management and Budget intended it be understood in its entirety.

During this review it became abundantly clear that OMB wanted to make sure that the application of the contents of OMB Circular A-87 was understood early on. The Office of Management and Budget did this by including the section on page 5, paragraph 3, titled, ?Application?. It is in this section that the Office of Management and Budget set forth the ?intent? to utilize or apply the contents of the OMB A-87circular.

In subparagraph (a) of Section 3, Application, OMB states the following:

?The principles will be applied by all Federal Agencies in determining cost incurred (emphasis added), by governmental units (emphasis added) under Federal awards (including subawards)??

In subparagraph (B) however, OMB specifically sets out that the Governmental Unit (= Local Givernment) is not to be bound by the cost principles of A-87 when the actions are between Governmental Units and Commercial Organizations, to wit:

?(B). All subawards are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a governmental unit...this Circular shall apply.?

The Local Government interprets this to clearly mean that if the Local Government subawards to another governmental unit such as City 123, City XYZ, State, or any of those identified in the definitions section of OMB Circular A-87, page 8, B. Definitions, subsection 13, ?Governmental Unit?, etc., the costs principles set forth in the body of OMB Circular A-87 will follow through to the next governmental unit.

However, subsection (B) goes on to set forth what is clearly the present action of the Local Government, to wit:

??if a subaward is to a commercial organization, the cost principles applicable to commercial organizations shall apply?? (emphasis added).

Because the Circular cites ?commercial organization? it was necessary to determine what the Circular means by ?cost principles applicable to commercial organizations? and this is accomplished by looking to the ?Implementation Guide For Office Of Management And Budget Circular A-87 (ASMB C-10)?.

On page 13 of the Implementation Guide directs that cost principles for commercial (or for profit) entities is covered by 48 CFR 31, it states within the chart the following (detailed for reference):

For the Costs of a? Use the Cost Principles in ?

For-profit organization other 48 CFR Part 31, Contract Cost

than a hospital or an organization Principles and Procedures, or

Named in OMB Circular A-122 as uniform cost accounting

Not subject to that Circular standards that comply with

cost principles acceptable to

the Federal agency

Upon review of 48 CFR 31, the applicable section is 48 CFR 31.205.7 Contingencies (a) and © and (1) and (2). It is section (a) © (1) that is directly on point on how the City of Monterey prepares its estimates with respect to reasonably foreseeable future costs:

(a) Contingency, as used in this subpart, means a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time.

?© In connection with estimates of future costs, contingencies fall into two categories:

(1) Those that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy, e.g., anticipated costs of rejects and defective work. Contingencies of this category are to be included in the estimates of future costs so as to provide the best estimate of performance costs? (emphasis added)

(2) Those that may arise from presently known or unknown conditions, the effects of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government (underlying added) e.g., results of pending litigation, Contingencies of this category are to be excluded from the cost estimates under the several items of cost, but should be disclosed separately (including the basis upon which the contingency is computed) to facilitate the negotiation of appropriate contractual coverage?

You will note that it is the intent of the authors of OMB A-87 to connect their rules and implementation guidelines to FAR 31.205.7 in order to allow Contracting a maximum degree of applicability for the efficient use of federal funds.

I apologize for the lenghty research and hope that we did not confuse the issue. Bascially, our concern goes back to the contract award by the Federal Government to the Local Government. IGE = Cost Proposal and subsequent award. Local Government is requires to deliver the project to the Federal Government for the amount awarded in the task order. Local Government can ( as tried to proof above) apply their own best management and finanical practices to ensure a economic delivery of the project for the Federal Government. Unused funds have to be returned, of course.

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Thank you Sir. Unfortunately, not. We believe that the 9. Contingency Provisions states in general terms which costs are allowable and which costs are not allowable. As such contigencies are not allowable. We do understand and accept that.

A critical part of our review was to re-evaluate the circular in its entirety as the Office of Management and Budget intended it be understood in its entirety.

During this review it became abundantly clear that OMB wanted to make sure that the application of the contents of OMB Circular A-87 was understood early on. The Office of Management and Budget did this by including the section on page 5, paragraph 3, titled, ?Application?. It is in this section that the Office of Management and Budget set forth the ?intent? to utilize or apply the contents of the OMB A-87circular.

In subparagraph (a) of Section 3, Application, OMB states the following:

?The principles will be applied by all Federal Agencies in determining cost incurred (emphasis added), by governmental units (emphasis added) under Federal awards (including subawards)??

In subparagraph (B) however, OMB specifically sets out that the Governmental Unit (= Local Givernment) is not to be bound by the cost principles of A-87 when the actions are between Governmental Units and Commercial Organizations, to wit:

?(B). All subawards are subject to those Federal cost principles applicable to the particular organization concerned. Thus, if a subaward is to a governmental unit...this Circular shall apply.?

The Local Government interprets this to clearly mean that if the Local Government subawards to another governmental unit such as City 123, City XYZ, State, or any of those identified in the definitions section of OMB Circular A-87, page 8, B. Definitions, subsection 13, ?Governmental Unit?, etc., the costs principles set forth in the body of OMB Circular A-87 will follow through to the next governmental unit.

However, subsection (B) goes on to set forth what is clearly the present action of the Local Government, to wit:

??if a subaward is to a commercial organization, the cost principles applicable to commercial organizations shall apply?? (emphasis added).

Because the Circular cites ?commercial organization? it was necessary to determine what the Circular means by ?cost principles applicable to commercial organizations? and this is accomplished by looking to the ?Implementation Guide For Office Of Management And Budget Circular A-87 (ASMB C-10)?.

On page 13 of the Implementation Guide directs that cost principles for commercial (or for profit) entities is covered by 48 CFR 31, it states within the chart the following (detailed for reference):

For the Costs of a? Use the Cost Principles in ?

For-profit organization other 48 CFR Part 31, Contract Cost

than a hospital or an organization Principles and Procedures, or

Named in OMB Circular A-122 as uniform cost accounting

Not subject to that Circular standards that comply with

cost principles acceptable to

the Federal agency

Upon review of 48 CFR 31, the applicable section is 48 CFR 31.205.7 Contingencies (a) and ? and (1) and (2). It is section (a) ? (1) that is directly on point on how the City of Monterey prepares its estimates with respect to reasonably foreseeable future costs:

(a) Contingency, as used in this subpart, means a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time.

?? In connection with estimates of future costs, contingencies fall into two categories:

(1) Those that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy, e.g., anticipated costs of rejects and defective work. Contingencies of this category are to be included in the estimates of future costs so as to provide the best estimate of performance costs? (emphasis added)

(2) Those that may arise from presently known or unknown conditions, the effects of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government (underlying added) e.g., results of pending litigation, Contingencies of this category are to be excluded from the cost estimates under the several items of cost, but should be disclosed separately (including the basis upon which the contingency is computed) to facilitate the negotiation of appropriate contractual coverage?

You will note that it is the intent of the authors of OMB A-87 to connect their rules and implementation guidelines to FAR 31.205.7 in order to allow Contracting a maximum degree of applicability for the efficient use of federal funds.

I apologize for the lenghty research and hope that we did not confuse the issue. Bascially, our concern goes back to the contract award by the Federal Government to the Local Government. IGE = Cost Proposal and subsequent award. Local Government is requires to deliver the project to the Federal Government for the amount awarded in the task order. Local Government can ( as tried to proof above) apply their own best management and finanical practices to ensure a economic delivery of the project for the Federal Government. Unused funds have to be returned, of course.

I'm not sure I follow everything you have written, but here is my understanding of how A-87 works. Internal costs incurred by the governmental entity receiving the award will be governed by A-87. However, if the governmental entity makes a subaward to a commercial organization, the allowability of costs incurred by the commercial organization will be determined by FAR Part 31. Thus, when the government does its final review of the costs incurred by the governmental entity, the government will determine the allowability of the internal costs incurred by the entity using A-87, but it will determine the allowability of the costs the entity reimbursed the commercial organization using FAR Part 31.

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I'm not sure I follow everything you have written, but here is my understanding of how A-87 works. Internal costs incurred by the governmental entity receiving the award will be governed by A-87. However, if the governmental entity makes a subaward to a commercial organization, the allowability of costs incurred by the commercial organization will be determined by FAR Part 31. Thus, when the government does its final review of the costs incurred by the governmental entity, the government will determine the allowability of the internal costs incurred by the entity using A-87, but it will determine the allowability of the costs the entity reimbursed the commercial organization using FAR Part 31.

Thank you for your response. Your answer is in line with our interpretation of the A-87, the Implementation Guide for the A-87 and FAR 31. I am wondering of Don Acquisition agrees with us?

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My understanding is the same as Retreadfed's. However, the way you described the situation, the local government is incurring the contingency--not the commercial organization performing the construction. Further, I don't see how FAR Part 31 would apply to the subcontract, since you are not negotiating the subcontract on the basis of cost. You are conducting a competition and awarding to the low bidder.

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