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Hi All - I am new to this forum, although not new to the industry (3rd decade), but my experience is with CPFF, T&M then FP, in that order, leaving me light on the end broad category and the combo of FP with SCA.

I should also mention my expertise is on the accounting/compliance side vs. contracts/proposals, etc. but after 25 years as GovCon ee, now last 5 as consultant so trying to broaden my view of the whole enchilada.

I saw discussion in 2002 with Vern and see he is still here, and was hoping he or anyone ese who has been down this path might shed some light on how best to navigate this one without losing your shirt & shorts.

FAR 52.222-43 seems clear on FP contracts there can be no OH, G&A or Fee applied to SCA WD & H&W increases in option years = automatic loss (non-recoverable costs) assuming you allocate those to all contracts.

Hindsight seems to say if you know this going in, you would have to increase initial burden or fee to cover those future option year burden increases, since despite Govt opinion there is no load on SCA rate increases,

my client is currently paying my subcontractor healthy sums of G&A to prepare these SCA cost increase proposals for 9 cent increase on H&W that will add up, but may be 100% G&A actual vs. 4% normally applied.

As accountant, used to fully allocating OH & G&A (Fringe too, but that is another can of worms). Do I assume these costs must be included in base, and then just not billable? I undersatdn FP not billed on cost, but

still like to compare cost to billing internally to monitor profitability. Or are we supposed to exclude some portion of these costs since burdens are allowed on initial proposal, but just not on the increases, so messy.

Up until this issue, I have always been able to follow the FAR logic, like it or not, but this seems like contradictory direction to me with regard to allocating indirect costsand I am finding no good guidance on issues.

I saw some protests, but none quite same (other issues like SCA/CBA rates, etc.). Am I understanding this correctly? Is it really this messed up? How do other contractors do this or why do they want this work?

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Guest Vern Edwards

I am not sure what you are asking. Here is what the clause says in pertinent part:

Any adjustment will be limited to increases or decreases in wages and fringe benefits as described in paragraph (d) of this clause, and the accompanying increases or decreases in social security and unemployment taxes and workers? compensation insurance, but shall not otherwise include any amount for general and administrative costs, overhead, or profit.

When initially pricing the contract, the contractor must estimate what its future overhead and G&A will be and include that in the proposed prices for future years if it wants to avoid a loss, since the government is not going to make any adjustment for those things under the clause.

You seem to be asking whether the clause should affect the way the contractor allocates indirect costs. If that is your question, then I think that the answer is no. The contractor should allocate overhead and G&A as it normally does. The allocation bases for the future years should reflect any changes in direct costs.

I don't understand your question about what is "billable." The contract is fixed-price. You bill the prices stipulated in the contract, as adjusted. No more. No less.

I may be wrong about this, but I don't think so. There is a poster here named here_2_help who seems to know a lot about contract accounting. Perhaps he'll come in and be of more assistance to you.

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Hi All - I am new to this forum, although not new to the industry (3rd decade), but my experience is with CPFF, T&M then FP, in that order, leaving me light on the end broad category and the combo of FP with SCA.

I should also mention my expertise is on the accounting/compliance side vs. contracts/proposals, etc. but after 25 years as GovCon ee, now last 5 as consultant so trying to broaden my view of the whole enchilada.

I saw discussion in 2002 with Vern and see he is still here, and was hoping he or anyone ese who has been down this path might shed some light on how best to navigate this one without losing your shirt & shorts.

FAR 52.222-43 seems clear on FP contracts there can be no OH, G&A or Fee applied to SCA WD & H&W increases in option years = automatic loss (non-recoverable costs) assuming you allocate those to all contracts.

Hindsight seems to say if you know this going in, you would have to increase initial burden or fee to cover those future option year burden increases, since despite Govt opinion there is no load on SCA rate increases,

my client is currently paying my subcontractor healthy sums of G&A to prepare these SCA cost increase proposals for 9 cent increase on H&W that will add up, but may be 100% G&A actual vs. 4% normally applied.

As accountant, used to fully allocating OH & G&A (Fringe too, but that is another can of worms). Do I assume these costs must be included in base, and then just not billable? I undersatdn FP not billed on cost, but

still like to compare cost to billing internally to monitor profitability. Or are we supposed to exclude some portion of these costs since burdens are allowed on initial proposal, but just not on the increases, so messy.

Up until this issue, I have always been able to follow the FAR logic, like it or not, but this seems like contradictory direction to me with regard to allocating indirect costsand I am finding no good guidance on issues.

I saw some protests, but none quite same (other issues like SCA/CBA rates, etc.). Am I understanding this correctly? Is it really this messed up? How do other contractors do this or why do they want this work?

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I am not sure what you are asking.

Vern, I think that Con has expressed two concerns:

1) Con says that the Clause doesn't allow the Contractor to allocate overhead and G&A to the cost delta for the SCA wage adjustment, so it would have had to increase its markups in the initial contract pricing for the outyear options in order to recover those costs.

2) I believe Con says that a sub is charging the prime for its cost to process the mods plus overhead for the increased wages.

Note that if the prime has passed down the clause at FAR 52.222-43 in its subcontracts, the subs probably dont have any more right to charge the prime such costs than the prime has the right to charge the government for those costs.

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Guest Vern Edwards

Thanks, Joel. Here is what he wrote:

FAR 52.222-43 seems clear on FP contracts there can be no OH, G&A or Fee applied to SCA WD & H&W increases in option years = automatic loss (non-recoverable costs) assuming you allocate those to all contracts.

I know what you say he might mean, but I'm still not sure, and he has not come back to explain. My answer is unchanged -- the clause says that the price adjustment cannot include any amount for indirect costs or profit. It does not say anything about the method of allocating overhead and G&A for cost accounting purposes and, in my opinion, it does not require any change in the method of allocating indirect costs. As for what the prime and sub are doing, he wrote:

my client is currently paying my subcontractor healthy sums of G&A to prepare these SCA cost increase proposals for 9 cent increase on H&W that will add up, but may be 100% G&A actual vs. 4% normally applied.

I don't understand that, and I'm not going to make any effort to try. If you think you do and if you have something pertinent to say, have at it. I agree that if the prime flowed the clause down to the sub, then the sub probably is not entitled to indirect costs and profit in the adjustment either.

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Vern, I think that Con has expressed two concerns:

1) Con says that the Clause doesn't allow the Contractor to allocate overhead and G&A to the cost delta for the SCA wage adjustment, so it would have had to increase its markups in the initial contract pricing for the outyear options in order to recover those costs.

2) I believe Con says that a sub is charging the prime for its cost to process the mods plus overhead for the increased wages.

Note that if the prime has passed down the clause at FAR 52.222-43 in its subcontracts, the subs probably dont have any more right to charge the prime such costs than the prime has the right to charge the government for those costs.

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Hello Vern and Joel - Thank you so much for responding and sorry for my delayed return, just been swamped with work.

I actually typed a lengthy reply to Vern last night but must have done something wrong since I do not see it here(rookie).

Also sorry to put so many pieces in one question. Setting aside the Billing since it is FP and cost allocation since internal,

the new territory for me is the proposal side and Vern has the first item exactly right, but I caused confusion on part two.

1) Assuming my interpretation of 52.222-43 is correct, SCA wage rates must be proposed at current hourly WD and H&W

rates, and this clause allows for increases when DOL increases these rates, so even though a proposal is done for 3 years

there is no escalation of the WD or H&W rates, since it is understood there will be increases in these rates on DOL timing.

So at best you have fully burdened and applied Fee to the first set of WD & H&W amounts, then for all future options only

the WD & HW rates increase, but not the burdens or fee, when of course in reality you incur OH & G&A in years 2 & 3 too,

SO YOU JUST DON"T GET THOSE DOLLARS? Or is it expected that you fabricate Year 1 burden or fee to cover years 2&3?

That just seems wrong...which leads to my second issue, which is mostly a comment of disbelief, to confirm I understand.

2) I read that the reason there is no G&A (or OH) allowed is because there is no work required on the part of the contractor

to manage these rate increases to SCA WD and H&W, which I totally disagree with the logic on that thinking because...

I am a consultant assisting the prime contractor (missing Controller) and I have a subcontractor (another consultant)

who has been creating these huge proposals showing, in the latest case, a 9 cent increase on H&W rates, for dozens of

employees with multiple labor categories, WD rates, the old & new H&W = difference plus FICA and WC applied for the

EE's in various locations CONUS/OCONUS multipled by hours for the straight time, OT, DT, Hazard and hardship rates.

So there is very clearly G&A expense related to this exercise. The company had to hire a person just to do these updates,

so what is the logic of no G&A? Since the person doing these was hired specifically to do this, the cost very clearly exists

and is just even more obvious than if a normal employee was performing this task during their normal G&A work day.

Hope this makes sense and I look forward to whatever portions of this you can confirm and/or explain the logic I'm missing.

Thank you!

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1) Assuming my interpretation of 52.222-43 is correct, SCA wage rates must be proposed at current hourly WD and H&W

rates, and this clause allows for increases when DOL increases these rates, so even though a proposal is done for 3 years

there is no escalation of the WD or H&W rates, since it is understood there will be increases in these rates on DOL timing.

So at best you have fully burdened and applied Fee to the first set of WD & H&W amounts, then for all future options only

the WD & HW rates increase, but not the burdens or fee, when of course in reality you incur OH & G&A in years 2 & 3 too,

SO YOU JUST DON"T GET THOSE DOLLARS? Or is it expected that you fabricate Year 1 burden or fee to cover years 2&3?

That just seems wrong...which leads to my second issue, which is mostly a comment of disbelief, to confirm I understand.

2) ...I am a consultant assisting the prime contractor (missing Controller) and I have a subcontractor (another consultant) who has been creating these huge proposals showing, in the latest case, a 9 cent increase on H&W rates, for dozens of employees with multiple labor categories, WD rates, the old & new H&W = difference plus FICA and WC applied for the

EE's in various locations CONUS/OCONUS multipled by hours for the straight time, OT, DT, Hazard and hardship rates.

So there is very clearly G&A expense related to this exercise. The company had to hire a person just to do these updates, so what is the logic of no G&A? Since the person doing these was hired specifically to do this, the cost very clearly exists and is just even more obvious than if a normal employee was performing this task during their normal G&A work day.

Hope this makes sense and I look forward to whatever portions of this you can confirm and/or explain the logic I'm missing.

Thank you!

GovCon, I can confirm the contract requirements but can not necessarily explain the reason behind logic. And yes, at first it seems like inconsistent treatment of the concept of recovery of G&A to have to guess at the magnitude of future SCA increases.

On the other hand, when initially pricing out year work on a FFP contract, a firm has to predict or guess at what the future G&A rates will be, anyway. We usually don't know for sure either the denominator or numerator used to calculate future year G&A rates, right? So, in bidding/proposing prices for an FFP contract that includes out year pricing, one must decide what to use for future G&A markups. One might use a current G&A rate, which may be based upon current or past accounting information and/or trends - or one can use whatever rate they think will be high or low enough to be competitive. No offense intended but, perhaps as an accountant, you are trying to get to precise in the whole G&A pricing for FFP contracts with future year option pricing. As an engineer who has negotiated contracts, changes and claims for years, I have tended to try to fit everything into neat formula pricing scenarios, whereas often contractors must use their best business judgement and approximate what to use in a FFP pricing scenario, which involves some risk.

Regarding the second issue, assuming that your client flowed down the clause in its subcontracts, if the sub has additional G&A expense due to the contract requirement, it is charged with knowing the contract requirements and should have reflected the additional expense in its proposal to your client for the contract or task order. . Then your client should not have to pay additional G&A to the sub for the SCA wage rate modification. If your client was aware of the pricing mechanism in the clause, it should have protected itself from such additional costs from the subcontractor that weren't already reflected in its pricing for the out years.

No offense but it would seem that a prime on a service contract with out year pricing should become familiar with the pricing mechanisms and restrictions for SCA wage adjustments applied to option year pricing before award.

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I can confirm the contract requirements but can not necessarily explain the logic. And yes, it seems like inconsistent treatment of the concept of recovery of G&A to have to guess at the magnitude of future SCA increases.

On the other hand, when initially pricing outyear work on a FFP contract, a firm has to predict or guess at what the future G&A rates will be, anyway. We usually don't know for sure either the denominator or numerator used to calculate future year G&A rates, right? So, in bidding an FFP contract, one might use a current rate, which may be based upon current or past accounting information and/or trends - or can use whatever rate it thinks will be high or low enough to be competitive.

Regarding the second issue, if the sub has additional G&A expense due to the contract requirement, it is charged with knowing the contract requirements and should have reflected the additional expense in its proposal to your client for the contract or task order, if you have flowed down the clause in your subcontracts. Then your client should not have to pay additional G&A to the sub for the SCA wage rate modification.

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Sorry, but I edited my last post above, while you were posting number 11 above...

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Guest Vern Edwards
1) Assuming my interpretation of 52.222-43 is correct, SCA wage rates must be proposed at current hourly WD and H&W rates, and this clause allows for increases when DOL increases these rates, so even though a proposal is done for 3 years there is no escalation of the WD or H&W rates, since it is understood there will be increases in these rates on DOL timing.

So at best you have fully burdened and applied Fee to the first set of WD & H&W amounts, then for all future options only the WD & HW rates increase, but not the burdens or fee, when of course in reality you incur OH & G&A in years 2 & 3 too, SO YOU JUST DON"T GET THOSE DOLLARS? Or is it expected that you fabricate Year 1 burden or fee to cover years 2&3?

I'm not sure that I understand you, but if I do, my response is: NO, NO, NO, NO, NO, NO. You have it all wrong.

First, a contractor can propose any rates and fringes that it wants. Contractors are not limited to proposing the rates and fringes included in the wage determination. The wage determination specifies only the minimum that a contractor must pay.

Second, the only "escalation" that a contractor cannot include in future year labor costs are for those costs for which it will be entitled to an increase under the price adjustment clause. A contractor is not entitled to any increase for internal wage policies decisions, indirect costs, or profit under the clause, so it can escalate those cost elements in out years when it submits its proposal if it wants to do it. Of course, it will be hard to do that intelligently, especially in a competitive acquisition, but that's the contractor's problem, and it shouldn't expect any sympathy from the government.

2) I read that the reason there is no G&A (or OH) allowed is because there is no work required on the part of the contractor to manage these rate increases to SCA WD and H&W, which I totally disagree with the logic on that thinking because...

Where on earth did you read that? Name the publication and the author. I never heard that, and I have worked with the Service Contract Act for almost 40 years. I eagerly await your information about where you read that.

As for your issue with the subcontractor, I do not understand you and so I won't answer.

Federal Publications Seminars, Inc., offers a great short course on the Service Contract Act.

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Joel - No problem, mine crashed so I don't see what I typed posted anywhere now. I understand any proposal uses estimated rates,

no problem there, but it appears it would not matter what rates might be estimated since they cannot be recovered in billing since it

appears there can be no escalation of direct or indirect costs proposed or billed, except for SCA wage or H&W rate increases which

can only be burdened with payroll tax and workers comp on the increased base. No more OH, G&A or Fee on increased portions.

No offense taken, I agree 100%, any contractor should understand the contract they are proposing on. I would never sign a contract

I did not fully understand, but I was not there 3 years ago or even three months ago. I am an independent consultant hired to work

on 2010 YE close in place of a terminated Controller. I am not doing proposals or billing, I am just trying to understand large losses

on this contract for multiple years by looking at proposals and 52.222-43. Looking to confirm my understanding of how this should be

done compared to what has been done and is still being done. (Also need to setup rates for 2011 and 2012, so that in mind as well).

Was hoping someone might be able to fill in the piece I might be missing or share how they make this work to at least break-even

or minimize loss since I just can't believe this is the intention. (Client did not even know there was a loss on prior years till I noted).

Part 2 is not really a "sub", think consultant helping (prime) client with proposals whose costs are booked as G&A expense to client,

indirect expense. Just ironic Govt thinks contractor does not incur/cannot bill G&A expense to process SCA increase proposals.

Sorry to torture you with this.

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