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Recently, the question of who has title to contractor acquired property under a cost sharing contract has come up in regard to two contracts. FAR 52.245-1 states that "Title to all property purchased by the Contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor's delivery of such property." Does this mean that the government obtains title to property acquired under a cost sharing contract and charged as a direct cost of the contract regardless of the government's cost share under the contract?

Anxillary to this question is the language in FAR 52.232-20 which states that "If this contract is terminated or the estimated cost is not increased, the Government and the Contractor shall negotiate an equitable distribution of all property produced or purchased under the contract, based upon the share of costs incurred by each." Thus, if a contract is terminated after the vendor has delivered property that is charged as a direct cost of the cost sharing contract, what is the proper interaction between 52.245-1 and 52.232-20?

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Recently, the question of who has title to contractor acquired property under a cost sharing contract has come up in regard to two contracts. FAR 52.245-1 states that "Title to all property purchased by the Contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor's delivery of such property." Does this mean that the government obtains title to property acquired under a cost sharing contract and charged as a direct cost of the contract regardless of the government's cost share under the contract?

Anxillary to this question is the language in FAR 52.232-20 which states that "If this contract is terminated or the estimated cost is not increased, the Government and the Contractor shall negotiate an equitable distribution of all property produced or purchased under the contract, based upon the share of costs incurred by each." Thus, if a contract is terminated after the vendor has delivered property that is charged as a direct cost of the cost sharing contract, what is the proper interaction between 52.245-1 and 52.232-20?

Hi Retreadfed,

You do ask some good questions. I'm not so sure that anybody, even Vern, can give you definitive answers. I will direct you to a January 2006 Federal Circuit Decision (Jacobs Engineering Group Inc. v. United States) regarding the termination of a cost-sharing contract. If you are not familiar with it, I think it may open your eyes or at least get you thinking in a new direction.

Wish I could be more help.

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Guest Vern Edwards
FAR 52.245-1 states that "Title to all property purchased by the Contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor's delivery of such property." Does this mean that the government obtains title to property acquired under a cost sharing contract and charged as a direct cost of the contract regardless of the government's cost share under the contract?

No. The Government gets title to only property "for which the Contractor is entitled to be reimbursed... ." Whether the contractor is entitled to be reimbursed depends on the terms of the cost-sharing agreement.

The issue is not whether the cost of the property is charged as direct. The cost will be charged as direct whether the Government reimburses the contractor or not. The issue is whether the Government reimburses the contractor for the acquisition of the property. When negotiating a cost-sharing contract, the parties are supposed to reach an advance agreement about reimbursement for and title to contractor-acquired property. The contract should include a schedule of the property to be acquired and identify that for which the contractor is to be reimbursed and that for which the contractor will pay for out of its share. When it is not possible to prepare such a schedule in advance, the contract should provide for a procedure for identifying the property for which the contractor is to be reimbursed prior to its purchase. Advance agreement will enable the parties to avoid disputes over reimbursement and title.

Anxillary [sic] to this question is the language in FAR 52.232-20 which states that "If this contract is terminated or the estimated cost is not increased, the Government and the Contractor shall negotiate an equitable distribution of all property produced or purchased under the contract, based upon the share of costs incurred by each." Thus, if a contract is terminated after the vendor has delivered property that is charged as a direct cost of the cost sharing contract, what is the proper interaction between 52.245-1 and 52.232-20?

The "proper interaction" depends on the advance agreement between the parties. If the contract is terminated and the contractor is reimbursed for the cost of acquiring the property, then the Government gets title. If the contractor pays for the property out of its share of the cost, then the contractor gets title.

If you are administering cost-sharing contracts for which no advance agreement was negotiated, under which the contractor acquired valuable property, and under which the parties merely split the cost without keeping track of who paid for what, you may have a problem. Any CO who let that happen wasn't much of a "business advisor."

For an old case about these issues under a cost-sharing contract containing clauses similar to today's and involving a termination for convenience, an advance agreement, and a dispute over title to contractor-acquired property, see Acurex Corp., EBCA No. 217-8-82, 84-1 BCA ? 17113.

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No. The Government gets title to only property "for which the Contractor is entitled to be reimbursed... ." Whether the contractor is entitled to be reimbursed depends on the terms of the cost-sharing agreement.

The issue is not whether the cost of the property is charged as direct. The cost will be charged as direct whether the Government reimburses the contractor or not. The issue is whether the Government reimburses the contractor for the acquisition of the property. When negotiating a cost-sharing contract, the parties are supposed to reach an advance agreement about reimbursement for and title to contractor-acquired property. The contract should include a schedule of the property to be acquired and identify that for which the contractor is to be reimbursed and that for which the contractor will pay for out of its share. When it is not possible to prepare such a schedule in advance, the contract should provide for a procedure for identifying the property for which the contractor is to be reimbursed prior to its purchase. Advance agreement will enable the parties to avoid disputes over reimbursement and title.

The "proper interaction" depends on the advance agreement between the parties. If the contract is terminated and the contractor is reimbursed for the cost of acquiring the property, then the Government gets title. If the contractor pays for the property out of its share of the cost, then the contractor gets title.

If you are administering cost-sharing contracts for which no advance agreement was negotiated, under which the contractor acquired valuable property, and under which the parties merely split the cost without keeping track of who paid for what, you may have a problem. Any CO who let that happen wasn't much of a "business advisor."

For an old case about these issues under a cost-sharing contract containing clauses similar to today's and involving a termination for convenience, an advance agreement, and a dispute over title to contractor-acquired property, see Acurex Corp., EBCA No. 217-8-82, 84-1 BCA ? 17113.

Vern, thanks for your thoughts and information on this. You wrote: "When negotiating a cost-sharing contract, the parties are supposed to reach an advance agreement about reimbursement for and title to contractor-acquired property. The contract should include a schedule of the property to be acquired and identify that for which the contractor is to be reimbursed and that for which the contractor will pay for out of its share." I have looked in both FAR Subpart 45.4 and Part 16 to see if I can identify where this is stated, but cannot find it. Maybe I am missing something, but do you have a regulatory cite for this?

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Vern, thanks for your thoughts and information on this. You wrote: "When negotiating a cost-sharing contract, the parties are supposed to reach an advance agreement about reimbursement for and title to contractor-acquired property. The contract should include a schedule of the property to be acquired and identify that for which the contractor is to be reimbursed and that for which the contractor will pay for out of its share." I have looked in both FAR Subpart 45.4 and Part 16 to see if I can identify where this is stated, but cannot find it. Maybe I am missing something, but do you have a regulatory cite for this?

In my opinion, its called the rule of common (business) sense. Anytime you are paying the full cost or even a share of the cost of some equipment or materials which have significant continuing value/use beyond the contract or have salvage value after use on the contract, the government negotiator needs to take that into account in the amount of money to pay or allow for the item.

When I worked in Saudi Arabia 25 years ago on a large project, I discovered that we had paid 100% of the cost of purchasing several expensive custom machines and custom built paver forms on some change orders, which had significant salvage value. I directed the contractor to leave all that equipment with the Saudis upon demobilization. There hadn't been any advanced agreement on who could keep the equipment, but the contractors didn't normally argue with the Saudi's.

Why do some contracting specialists often seem to require some regulation or FAR cite to back them up? It should be obvious that if you are going to be charged for the purchase of non-consumable materials or equipment for a project which have significant salvage value or which may have future use, you'd better either negotiate some type of cost share or consider who should get title to the items upon completion. Contracting personnel want to be considered "professional business advisors", "business professionals", etc. Well, sometimes that requires the application of common sense, not just reading some rule or legal citation.

Just my opinion.

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Guest Vern Edwards
Vern, thanks for your thoughts and information on this. You wrote: "When negotiating a cost-sharing contract, the parties are supposed to reach an advance agreement about reimbursement for and title to contractor-acquired property. The contract should include a schedule of the property to be acquired and identify that for which the contractor is to be reimbursed and that for which the contractor will pay for out of its share." I have looked in both FAR Subpart 45.4 and Part 16 to see if I can identify where this is stated, but cannot find it. Maybe I am missing something, but do you have a regulatory cite for this?.

Retreadfed:

You must think that the FAR is some kind of handbook for people who don't have a brain in their head. God help us if there are many who think like that.

That question cost you my respect.

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Retreadfed:

You must think that the FAR is some kind of handbook for people who don't have a brain in their head. God help us if there are many who think like that.

That question cost you my respect.

I no longer work for the government, but advise companies who contract with the government. The latest issue arose in regard to the negotiation of a cost sharing contract. The government has taken the position that the government gets title to all equipment the contractor acquires which is charged as a direct cost of the contract relying upon 52.245-1. I am trying to come up with a strategy, other than to argue for common sense, to counter the government's position. Contracting officers generally react more positively if you can point out a regulation that helps get to a desired result than if you tell them they don't have a brain in their head. As you have noted before, some contracting officers still adhere to the notion that if the regulations don't say they can do something, they assume they can't. Trying to price and negotiate a contract in this circumstance is rather challenging.

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I no longer work for the government, but advise companies who contract with the government. The latest issue arose in regard to the negotiation of a cost sharing contract. The government has taken the position that the government gets title to all equipment the contractor acquires which is charged as a direct cost of the contract relying upon 52.245-1. I am trying to come up with a strategy, other than to argue for common sense, to counter the government's position. Contracting officers generally react more positively if you can point out a regulation that helps get to a desired result than if you tell them they don't have a brain in their head. As you have noted before, some contracting officers still adhere to the notion that if the regulations don't say they can do something, they assume they can't. Trying to price and negotiate a contract in this circumstance is rather challenging.

I thought that Vern's post number 3 provided a good interpretation of the clause in question and offers a way forward.

If you are helping to negotiate a cost sharing contract and your client will purchase some of the items and the government will purchase some, then can't the parties negotiate some reasonable or theoretical split of the cost of the items in question? That way the contractor can keep those items that it theoretically paid for itself. The KO can keep those items that the contractor is "reimbursed for". The KO is covered and so is the kontr.

I suppose that the parties would have to work through some type of split for purchases not known at the original negotiations. Is my scenario too simplistic?

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Guest Vern Edwards

I would explain as follows:

The Government Property clause does not say that the government gets title to all property purchased by the contractor. It clearly says that the government gets title only to what it pays for. We are negotiating a cost-sharing contract, which means that the government won't pay for everything, and that it gets title only to property covered by its share. Instead of getting into an argument about it later, let's make a list of the capital equipment that the contractor will purchase, and of its cost, and then agree in advance about who will pay for what. The contractor will then request reimbursement for only those things covered by the Government's share. We can put the list in the contract. That way, there will be no disagreement about title. We can also agree to a contract clause that allows us to decide later about any items that must be purchased after award that are not covered by the advance agreement.

If there is an overrun, we can distribute the shares accordingly and modify our advance agreement, if necessary. If the contract is terminated or ends pursuant to the Limitation of Cost clause, we can agree at that time as to reimbursement for and disposition of property for which reimbursement has not yet been made.

Are the government folks you are dealing with able to understand that? Do they think that the FAR covers everything?

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Obviously I was wrong, Vern is quite capable of providing definitive answers to Retreadfed's questions. Good answers, too.

The only quibble I have with the 1:24 AM post is the use of the term "capital equipment". Technically, capital equipment (or capitalized equipment) is distinguished from expensed equipment. If the cost of a tangible asset is charged as a direct contract expense, it is not considered to be a capital asset. A contractor's capital assets are shown as assets on the balance sheet and depreciated over time. The depreciation costs are recovered (generally) as part of indirect cost rates.

Sorry to be pedantic; I figured some folks might find the addendum helpful.

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Guest Vern Edwards

Pedantry is good. Thanks for the correction. I should have been more careful in my use of terminology. "Durable" is what I should have said. I think.

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Pedantry is good. Thanks for the correction. I should have been more careful in my use of terminology. "Durable" is what I should have said. I think.

How about referring to them as "non-consumables" ?

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I would explain as follows:

The Government Property clause does not say that the government gets title to all property purchased by the contractor. It clearly says that the government gets title only to what it pays for. We are negotiating a cost-sharing contract, which means that the government won't pay for everything, and that it gets title only to property covered by its share. Instead of getting into an argument about it later, let's make a list of the capital equipment that the contractor will purchase, and of its cost, and then agree in advance about who will pay for what. The contractor will then request reimbursement for only those things covered by the Government's share. We can put the list in the contract. That way, there will be no disagreement about title. We can also agree to a contract clause that allows us to decide later about any items that must be purchased after award that are not covered by the advance agreement.

If there is an overrun, we can distribute the shares accordingly and modify our advance agreement, if necessary. If the contract is terminated or ends pursuant to the Limitation of Cost clause, we can agree at that time as to reimbursement for and disposition of property for which reimbursement has not yet been made.

Are the government folks you are dealing with able to understand that? Do they think that the FAR covers everything?

Vern, I cannot tell you what they think (or if they do). The only thing I can tell you is the position they have taken and the rationale they have advanced to support it. I appreciate these thoughts. I believe what you and Joel have said has given me some ideas of how to proceed in responding.

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