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proposal prep costs in cost contract?

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In an ongoing cost-type contract, if the Government requests a proposal for certain work, can it deny reimbursement for the proposal prep costs? My understanding was that it cannot if it directed the contractor to do such proposal work. The Government is asserting that it did not receive any benefit from the proopsal prep work and is denying payment. The Government did not proceed with the planned work because it was too expensive. If the proposal prep costs are reasonable, allocable, and allowable, there would not seem to be a fourth criteria involving benefit. Any thoughts from anyone?

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You said that the government "requested," then you said that it "directed." Which is it? If it directed, who directed whom and how did they do it?

Even if you cannot invoice the cost as a direct charge, you can include it in an indirect cost account.

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Hi RCB,

You need to review 31.205-18, CAS 420 and CAS 402 (Interpretation No. 1).

Bottom line is that proposal prep costs may be charged as direct contract costs if "required" by the contract. Otherwise, such costs are B&P and treated accordingly.

Hope this helps.

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Hi RCB,

You need to review 31.205-18, CAS 420 and CAS 402 (Interpretation No. 1).

Bottom line is that proposal prep costs may be charged as direct contract costs if "required" by the contract. Otherwise, such costs are B&P and treated accordingly.

Hope this helps.

Thanks! Yes, the preparation of the proposal was directed by the contracting officer and just because a case of "sticker shock" may have set in once the proposal was received, it just did not seem reasonable that recovery of the proposal preparation costs would be rejected on a theory that the Government received ni benefit. I will take a look at the CAS references you provided as well as the FAR Part 31 citation.

RCB

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In an ongoing cost-type contract, if the Government requests a proposal for certain work, can it deny reimbursement for the proposal prep costs? My understanding was that it cannot if it directed the contractor to do such proposal work. The Government is asserting that it did not receive any benefit from the proopsal prep work and is denying payment. The Government did not proceed with the planned work because it was too expensive. If the proposal prep costs are reasonable, allocable, and allowable, there would not seem to be a fourth criteria involving benefit. Any thoughts from anyone?

Going back to the original question and information presented with it, this appears to be an RFP for a change involving additional work on a cost type contract.

In that situation, if the Contracting Officer issues an RFP by letter whose subject starts with the contract number (as I have seen in the past), it makes little practical difference whether it's a request or a direction, as that is mainly a matter of courtesy in phrasing.

Been in that situation for changes both small and large, and there was never any question of reimbursement under the cost type contract, even by a federal client whose mind-set ascribes no good faith to contractors, who are all viewed with suspicion as money-grubbers rather than ethical taxpayers with consciences.

On the other hand, on a fixed-price contract, a proposal was requested for a partial redesign, we proposed, negotiated, agreed, certified our cost or pricing data, we were offered a modification which we signed in acceptance, then the government developed sticker shock and declined to go forward based on that new design. Under this fixed-price contract, we did not request an equitable adjustment for the cost of being jerked around on that change (and did not argue about offer and acceptance).

We have observed that our federal clients, even on cost type contracts, have a fixed-price mind-set. This colors their approach to many situations. It should not make a difference whether the client perceives any benefit from the proposal. There is no fourth criterion (the singular form of the plural "criteria"), but arguably the client had the benefit of the cost proposal that it requested, useful for making that one go/no-go decision if nothing else.

These proposal preparation costs would be allocable to an indirect bid and proposal pool if they were for work entirely unrelated to the ongoing contract at hand and the proposal had not been requested under that contract. Otherwise, based on the information presented and the assumptions in my first two paragraphs, the proposal preparation costs should be considered direct and reimbursable.

My $0.02 worth from the school of hard knocks.

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"Directed" in writing? "Directed" in accordance with the SOW or a contract clause? "Directed" pursuant to a contract change?

Hi Vern-

Yes, directed in writing by the contracting officer as a proposed change to the cost contract. However, once the proposal was received, the Government chose to not proceed with the effort.

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Going back to the original question and information presented with it, this appears to be an RFP for a change involving additional work on a cost type contract.

In that situation, if the Contracting Officer issues an RFP by letter whose subject starts with the contract number (as I have seen in the past), it makes little practical difference whether it's a request or a direction, as that is mainly a matter of courtesy in phrasing.

Been in that situation for changes both small and large, and there was never any question of reimbursement under the cost type contract, even by a federal client whose mind-set ascribes no good faith to contractors, who are all viewed with suspicion as money-grubbers rather than ethical taxpayers with consciences.

On the other hand, on a fixed-price contract, a proposal was requested for a partial redesign, we proposed, negotiated, agreed, certified our cost or pricing data, we were offered a modification which we signed in acceptance, then the government developed sticker shock and declined to go forward based on that new design. Under this fixed-price contract, we did not request an equitable adjustment for the cost of being jerked around on that change (and did not argue about offer and acceptance).

We have observed that our federal clients, even on cost type contracts, have a fixed-price mind-set. This colors their approach to many situations. It should not make a difference whether the client perceives any benefit from the proposal. There is no fourth criterion (the singular form of the plural "criteria"), but arguably the client had the benefit of the cost proposal that it requested, useful for making that one go/no-go decision if nothing else.

These proposal preparation costs would be allocable to an indirect bid and proposal pool if they were for work entirely unrelated to the ongoing contract at hand and the proposal had not been requested under that contract. Otherwise, based on the information presented and the assumptions in my first two paragraphs, the proposal preparation costs should be considered direct and reimbursable.

My $0.02 worth from the school of hard knocks.

Hi Cajuncharlie-

Thanks for your thoughts on this (sorry about the "criterion" slip up). Yes, for those working both FFP sand cost efforts sometimes the distinctions blur. I suppose we will have to submit a formal claim for the proposal prep costs because discussion and correspondence have failed to resolve it.

RCB

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Cajuncharlie:

In bringing us back to "the original question" you have shed no light on that question and you have wasted everyone's time with a bunch of irrelevant anecdotes and unjustified assertions.

To rephrase the original question: Under a cost-type contract, is the cost of preparing a proposal that was requested/directed by the CO for ?certain work? chargeable to the contract as a direct cost? In order to answer that question we must first obtain answers to two questions of our own.

Our first question is: What kind of costs are we talking about? We have to know that in order to find the applicable rules. Are the costs ?bid and proposal costs? or are they ?proposal costs required by the contract??

If the proposal preparation costs were not required by the contract, then they are bid and proposal costs. See the definition of bid and proposal costs in FAR 31.205-18(a) and in CAS 420-30(a)(2) [48 CFR 9904.420-30(a)(2)]. If the contract required the contractor to submit a proposal, then they are not bid and proposal costs, but ?proposal costs required by the contract,? in which case FAR 31.205-18 and CAS 420 would not apply.

That raises the second question: What does ?required? by the contract mean?

If we look to CAS 402 for guidance, specifically, the interpretation in CAS 402-61( c) [48 CFR 9904.402-61( c)], we find this:

Under 9904.402, costs incurred in preparing, submitting, and supporting proposals pursuant to a specific requirement of an existing contract are considered to have been incurred in different circumstances from the circumstances under which costs are incurred in preparing proposals which do not result from such specific requirement. The circumstances are different because the costs of preparing proposals specifically required by the provisions of an existing contract relate only to that contract while other proposal costs relate to all work of the contractor.

So the requirement has to be ?specific,? which, according to my dictionary, means "clearly defined and identified." DCAAM 8.402(s) provides the following examples:

Proposal costs incurred pursuant to the specific requirement of an existing contract, such as proposal cost incurred in connection with the definitization of letter contracts and with orders issued under basic ordering agreements, are considered to have been incurred in a different circumstance than other proposal costs and may be charged direct to the specific contract.

In the case of a letter contract, the clause at FAR 52.216-25 expressly requires the submission of a proposal. Since there are no standard terms for a basic ordering agreement, I suppose it would depend on what the agreement says. See FAR 16.703(a)(3) and ( c)(1).

I say that if the CO notified the contractor of his intent to issue a change order and asked the contractor for a ?proposal? for how much the change would cost, the ?proposal? costs could reasonably be charged to the contract as a direct cost. However, if the CO asked the contractor for a proposal for new work, i.e., work outside of the scope of the contract, then the proposal is not required by a specific provision of the contract, is bid and proposal cost, and must be allocated according to FAR 31.205-18, CAS 402, and CAS 420.

For further general discussion of this matter, see "Direct Charging Proposal Costs: Now you see it, now you don't," in The Nash & Cibinic Report (June 1990), 4 N&CR ? 40. For an illustration of a proposal cost required by a contract, see Boeing Co. v. U.S., 862 F.2d 290 (Fed. Cir. 1988). See also Aydin Corp. v. Widnall, 61 F.3d 1571 (Fed. Cir. 1995). For a further discussion of "required," see Manos, Government Contract Costs & Pricing (West 2011), ? 25.6, "Case law interpretation--'Independent' v. 'sponsored' or 'required' effort." See also Arnavas, Government Contract Cost Recovery, Briefing Papers, May 2001, 01-06 BRPapers 1.

We can waste time talking about our own experiences and what we have done or not done, and what we think as a result, or we can look to the regulations, get the facts, and reason to a (hopefully valid) conclusion, and then decide whether further research is required. You have tried the first approach and haven?t accomplished much in the way of producing an answer to the original question. Now I want to try the second approach. (But thanks for the information about the singular of criteria. Good tip. I?m sure that the illiterate among us are appreciative.)

Now, RCB, was the proposal for a prospective in-scope change, pursuant to the Changes clause, or was it for new, i.e., out of scope work.

here_2_help: You know a lot about this. Any comments while we wait to hear from RCB?

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Cajuncharlie:

here_2_help: You know a lot about this. Any comments while we wait to hear from RCB?

Yes, I know a lot about this issue because I deal with it frequently -- as in, just about every other week. Vern, you nailed it. I only have a couple of points to add, for the general benefit of those who might be following this thread.

1. The language Vern quoted (quite appropriately) is not especially clear. Terms such as "specific requirement" and (elsewhere) "provision" are open to interpretation. Vern used a dictionary, which is a start, but also not dispositive. I would expect all mature contractors to have a written policy establishing when proposal prep costs are charged as direct contract costs, and when they are charged as B&P.

2. Note the key phrase is "requirement of an existing contract" (not future contract). More on this to follow.

3. Note that CAS 402-61 is not worded in the imperative. In other words, a contractor may elect to charge proposal prep costs as direct costs in certain circumstances (e.g., follow-on efforts) but is not required to do so. Once the contractor has established a practice, however, it is expected to follow that practice consistently.

The proper charging of proposal prep costs is determined on a case-by-case basis, based on the individual facts and circumstances. There are only a few "bright line" rules and Vern already quoted them. Speaking personally, one of my rules of thumb is to look at the outcome of the proposal. If the proposal results in a new contract award, then I tend to bias towards B&P. But if the proposal results in a modification to an existing contract, then I tend to bias towards a direct charge.

Another rule of thumb is that if the contractor has discretion whether to bid or not, then it's probably B&P.

An offer of conditional reimbursement is a trap. As in, "I will reimburse your proposal prep costs as direct costs in the new contract, if we decide to award. Otherwise, you can recover as B&P." That obligates the customer to nothing and, similarly, does not create a requirement in an existing contract--which is what the Standard looks for.

I can tell y'all that if a DCAA auditor can't find a proposal preparation requirement in the SOW of an existing contract, or there is no written request from the CO telling the contractor that it must submit a proposal as a requirement of the current contract, then there is a high probability of the proposal prep costs being questioned and the contractor being cited for a noncompliance with CAS.

Hope this helps

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Yes, I know a lot about this issue because I deal with it frequently -- as in, just about every other week. Vern, you nailed it. I only have a couple of points to add, for the general benefit of those who might be following this thread.

1. The language Vern quoted (quite appropriately) is not especially clear. Terms such as "specific requirement" and (elsewhere) "provision" are open to interpretation. Vern used a dictionary, which is a start, but also not dispositive. I would expect all mature contractors to have a written policy establishing when proposal prep costs are charged as direct contract costs, and when they are charged as B&P.

2. Note the key phrase is "requirement of an existing contract" (not future contract). More on this to follow.

3. Note that CAS 402-61 is not worded in the imperative. In other words, a contractor may elect to charge proposal prep costs as direct costs in certain circumstances (e.g., follow-on efforts) but is not required to do so. Once the contractor has established a practice, however, it is expected to follow that practice consistently.

The proper charging of proposal prep costs is determined on a case-by-case basis, based on the individual facts and circumstances. There are only a few "bright line" rules and Vern already quoted them. Speaking personally, one of my rules of thumb is to look at the outcome of the proposal. If the proposal results in a new contract award, then I tend to bias towards B&P. But if the proposal results in a modification to an existing contract, then I tend to bias towards a direct charge.

Another rule of thumb is that if the contractor has discretion whether to bid or not, then it's probably B&P.

An offer of conditional reimbursement is a trap. As in, "I will reimburse your proposal prep costs as direct costs in the new contract, if we decide to award. Otherwise, you can recover as B&P." That obligates the customer to nothing and, similarly, does not create a requirement in an existing contract--which is what the Standard looks for.

I can tell y'all that if a DCAA auditor can't find a proposal preparation requirement in the SOW of an existing contract, or there is no written request from the CO telling the contractor that it must submit a proposal as a requirement of the current contract, then there is a high probability of the proposal prep costs being questioned and the contractor being cited for a noncompliance with CAS.

Hope this helps

For a fairly recent decision that addresses this topic, please see, ATK Thiokol v. U.S., Docket No. 2009-5036, decided by the Court of Appeals for the Federal Circuit on March 19, 2010.

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For a fairly recent decision that addresses this topic, please see, ATK Thiokol v. U.S., Docket No. 2009-5036, decided by the Court of Appeals for the Federal Circuit on March 19, 2010.

That is a great decision to read. But it deals with IR&D, not B&P. The issues involved are analogous and closely intertwined, but not the same. In fact, the differences between the two formed a significant aspect of the case.

H2H

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That is a great decision to read. But it deals with IR&D, not B&P. The issues involved are analogous and closely intertwined, but not the same. In fact, the differences between the two formed a significant aspect of the case.

H2H

help: Take a second look. The court held that the meaning of "required" is the same for IR&D and B&P.

While we find the regulatory language and history to be of little help in discerning the meaning of the phrase ?required in the performance of a contract,? we agree with the trial court and ATK that the meaning of that phrase in the definition of IR & D must be the same as the meaning of the identical phrase in the definition of bid and proposal (?B & P?) costs. B & P costs are defined to mean costs incurred in preparing, submitting, and supporting bids and proposals, but not to include the costs of effort ?required in the performance of a contract.? FAR 31.205-18(a); CAS 420-30(a)(2). B & P costs are addressed in the same regulations that govern IR & D costs and are treated similarly to IR & D costs in all pertinent respects. See generally FAR 31.205-18; CAS 420-30. B & P costs ?benefit all business of a contractor rather than a specific existing contract [and thus] treating all such costs as indirect overhead is logical.? Boeing, 862 F.2d at 293.

* * *

In Boeing [Boeing Co. v. U.S., 862 F.2d 290 (Fed. Cir. 1988)], this court held, based in part on Interpretation No. 1, that proposal costs that are not specifically required by a contract are ?properly allocated as indirect B & P costs.? 862 F.2d at 293. As part of its analysis, the court noted that proposal costs that are ?specifically required by an existing contract are incurred in circumstances different from proposal costs relative to all work of the contractor.? Id. The court ruled that it would be legal error to require like accounting for B & P costs that are ?relate[d] to? or ?caused or generated by? a contract, and those proposal costs that are ?specifically required? by a contract. Id. at 292-93.

* * *

Accordingly, the government's policy arguments do not persuade us that the phrase ?required in the performance of a contract? in the definition of IR & D costs should not be accorded the same meaning as the identical phrase in the definition of B & P costs. Because the research and development costs at issue in this case were related to the Mitsubishi contract but were not specifically required by that contract, we uphold the trial court's decision that those costs were indirect IR & D costs within the meaning of the pertinent regulatory provisions.

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help: Take a second look. The court held that the meaning of "required" is the same for IR&D and B&P.

Vern, of course you are correct.

H2H

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