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govtacct02

Interdivsional Transfers on the basis of cost incurred

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The FAR material cost principle states at 31.205-26 (e)

"Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart."

Hypothetical situation: Let's assume that there is work being performed by a sister unit for your company (separate CAS Segment), who is an affiliate under common control. The affiliate does not qualify to be able to transfer costs at price. Let's say for financial measurement purposes, you contracted for the work to be done by this affiliiate on a FFP basis. Your prime contract is CPFF, so the prime contract has the Allowable Cost & Payment clause. Therefore, you have to submit and certify final indirect rates. Let's say the affiliate's cost is part of an allocation base for an indirect rate of yours.

If the affiliate otherwise has no requirement to submit final indirect rates (no flexibly priced business), would they have to operate (for your sake) as if they were covered by the Allowable Cost & Payment clause (even though this is a FFP arrangement) and adjust their billings or memo entry their costs to you on an allowable actual costs incurred basis because of the fact that you have a CPFF contract and the above stated cost principle is in effect in your prime contract?

Would you include their actual costs incurred (both allowable & unallowable) in the allocation base for the indirect rate as mentioned above, or their FFP billings to you?

Thanks for your help.

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Hi govtacct02,

Let me recap my understanding. You are contracting with a sister division -- you are incurring an inter-organizational transfer cost -- never mind the contract type. Because you must comply with 52.216-7 (Allowable Cost and Payment) you must follow the Part 31 Cost Principles. One of the Cost Principles (31.205-26(e)) requires that inter-organizational transfers must be made on the basis of actual allowable costs, unless the transaction qualifies for an exception. This transaction does not qualify.

You want to know if the sister (performing) division must adjust the costs it is transferring to the buying (responsible) division, to reflect actual, allowable direct and indirect costs calculated in accordance with Part 31 Cost Principles? You want to know if the performing division must do this even though it doesn't do flexibly priced billings, never calculates allowable costs, and never submits a final indirect cost rate proposal for Government audit?

Yes. It must do so.

You also want to know what costs should be included in the responsible division's indirect cost allocation base(s)? Should the reponsible division include the original billings or the final, adjusted billings? That is a more complex question.

First, what does the Disclosure Statement say? Do inter-organizational costs received get a full, reduced, or zero share of indirect costs? What about inter-organizational costs transferred out from the performing division--do such costs get fully burdened or no? The cost accounting practices you choose, and disclose, will impact the answer to your question. The more burdens that get applied, the more adjustments will need to be made.

Second, there is a timing issue involved. The responsible division might not know the performing division's actual, allowable costs for up to six months after the books close for the year. You need to think through what costs qualify for this year's rate calculations (e.g., what is the definition of current period "cost input" for compliance with CAS 410). You could put yourself into a CAS 410 or even 406 noncompliance if you're not careful. Once you have a policy position, make sure it is consistently followed.

Finally, the FFP billings can't be the right answer. As indicated above, there is a spectrum of "right" answers, but that one ain't among 'em. The FFP billings are a budgetary answer, not an actual cost answer.

Hope this helps.

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I assume that you do not have an established practice to price inter/intra-organizational transfers, and that before this contract the affiliate did not contribute costs to your indirect base.

You may not have a problem.

I believe that the affiliate?s billings to you become part of your actual indirect base, just as a subcontractor billing would do.

I would look at 31.102 for the applicability of 31.205-26(e). If the conditions at 31.102 are met (the affiliate?s FFP is not based on cost analysis or requires the determination or negotiation of costs), then 31.205-26(e) is not applicable. You could get an advance agreement that clarifies this understanding ? probably not necessary.

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I assume that you do not have an established practice to price inter/intra-organizational transfers, and that before this contract the affiliate did not contribute costs to your indirect base.

You may not have a problem.

I believe that the affiliate?s billings to you become part of your actual indirect base, just as a subcontractor billing would do.

I would look at 31.102 for the applicability of 31.205-26(e). If the conditions at 31.102 are met (the affiliate?s FFP is not based on cost analysis or requires the determination or negotiation of costs), then 31.205-26(e) is not applicable. You could get an advance agreement that clarifies this understanding ? probably not necessary.

Hi Whynot,

The problem(s) I see with your post include the following:

1. As I've posted before, there is some language in both FAR and CAS that support treating interorganizational transfers like subcontracts. There is nothing that suggests interorganizational transfers are subcontracts. In fact, they are separate elements of cost, subject to differing treatment (particularly application of indirect cost burdens). It is not at all the case that interorganizational transfers automatically "become part of your actual indirect base, just as a subcontractor billing would do." If you look at a Disclosure Statement, it clearly indicates that interorganizational transfers (both in and out) are subject to discretionary indirect cost allocation practices, and might receive full burdens, abated burdens, or even no burdens.

2. Your advice to look at 31.102 ignores the fact that govtacct02's organization is already subject to full application of the cost principles by virtue of receipt of contracts containing the 52.216-7 Allowable Cost & Payment clause. In order for it to claim the interorganizational transfer billings as allowable costs, the billings must comply with 31.205-26(e). I believe that claiming an exemption to the requirements of 52.216-7 based on a lack of cost analysis applied to interorganizational transfer pricing would be a bit of a reach, to say the least.

3. Also, if you look at the language of 31.102, it provides guidance to Federal contracting officers with respect to the "pricing of fixed-price contracts, subcontracts, and modifications ..." but it does not address pricing of interorganizational transfers (see my first point, above). Secondly, by what contract clause does the guidance at 31.102 flow to contractors? Unless you can show me a contract clause that tells a contractor to follow the guidance at 31.102, I cannot understand how it would be applicable.

Hope this helps.

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I think your point that while inter-organizational transfers can be treated like a subcontract doesn?t mean that they are subcontracts is way too fine a point. Talk about a stretch. The direction to treat an inter-organizational transfer as a subcontract is stated upfront in 9903.201-1 -- CAS Applicability.

FAR 31.1 is called Applicability (31.102). Something is applicable or it isn?t.

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I think your point that while inter-organizational transfers can be treated like a subcontract doesn?t mean that they are subcontracts is way too fine a point. Talk about a stretch. The direction to treat an inter-organizational transfer as a subcontract is stated upfront in 9903.201-1 -- CAS Applicability.

FAR 31.1 is called Applicability (31.102). Something is applicable or it isn?t.

Whynot, it's not my intention to debate folks in this Forum. However, your posts may mislead others so I need to correct you.

1. Contrary to your post, the citation you used (9903.201-1) does not in fact provide "direction to treat an inter-organizational transfer as a subcontract." What it does say is that, in order to determine whether a contract or subcontract is exempt from CAS using the $650,000 monetary exemption at 9903.201-1(B)(2), "For purposes of this paragraph (B)(2) an order issued by one segment to another segment shall be treated as a subcontract." That's it. That's the entirety of the "direction," which (clearly) does not address cost accounting or pricing treatment of the two cost elements. And (by the way) the CASB statement is consistent with my earlier post.

2. For those interested, the purpose for the language cited by Whynot was explained in Preamble F (Dec. 1974) as follows: "As the [CAS] Board stated ... its contract requirements have been applied to business units, such as a profit center, division, subsidiary, or similar unit of a company, which perform the contract, even in those cases where the contract was entered into on behalf of the overall company rather than the business unit. This application of the Board's requirements to a performing business unit is well established and unchallenged ..."

3. If you look at any Disclosure Statement, Form CASB DS-1, at 4.5.0, you will see that subcontract costs are quite clearly separate and distinct from costs of interorganizational transfers. It is also quite clear that a contractor can burden the two distinct cost elements in different ways. Conflating the two concepts leads to incorrect cost accounting and pricing treatment.

4. An example of an incorrect accounting result would be miscalculating a G&A expense rate when using a value-added cost input base (?VAB?). The definition of VAB is Total Cost Input less Direct Material Dollars less Subcontract dollars. (Ref. CAS 410.) If one were to treat interorganizational transfers ?as subcontracts,? then one would exclude those dollars as well, which would inappropriately reduce the VAB, and thus inflate the G&A expense rate used for cost accounting and pricing contract actions.

5. With respect to you point on Applicability of the Cost Principles, I believe you may not have fully grasped my point. 'Nuff said.

Hope this helps.

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I don't mind the debate.

I think we got off track. It was my belief that the interdivisonal cost (price from transferring division) needs to be included in the indirect base like a subcontractor's cost (price from subcontractor). We are not talking about indirect expense pools and their application, but the calculation of the indirect base. I don't mean to imply that interdivisional transfers are subcontracts, but for purpose of calculating the indirect base they could be treated the same as subcontracts.

total cost input base example (most common)

From the DCAA CAM Chapter 8 Cost Accounting Satndards

8-410.2 Illustrations

The following illustrations supplement those in paragraph 410.60 of the standard. They are to be used as a guide in determining whether a contractor's practices comply with the standard.

a. Problem. Division X excludes from its total cost input base, the cost of intercompany transfers from Division Y.

Solution. The intent of the standard is that all actions which represent the total productive activity of the segment should be included in total cost input. The costs of the intercompany transfers should, therefore, be included in the total cost input base used to allocate G&A expenses. Division X's exclusion of the intracompany transfers from the base does not comply with the standard.

I think the bigger issue is - can we use price from the transferring division as opposed to cost from transferring division. I think in certain situations you can use price, obviously those situations specifically exempting CAS as in 9903.201-1, those in FAR 31.205-26 (original poster said we can't), and I believe those described in FAR 31.1. FAR 31.1 does not exempt you from CAS but lets you take a modified CAS approach.

You will also happen to find interdivisonal transfers co-mingled with subcontracts in the DCAA Audit Program - E Subcontracts (and only there).

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I don't mind the debate.

I think we got off track. It was my belief that the interdivisonal cost (price from transferring division) needs to be included in the indirect base like a subcontractor's cost (price from subcontractor). We are not talking about indirect expense pools and their application, but the calculation of the indirect base. I don't mean to imply that interdivisional transfers are subcontracts, but for purpose of calculating the indirect base they could be treated the same as subcontracts.

total cost input base example (most common)

From the DCAA CAM Chapter 8 Cost Accounting Satndards

8-410.2 Illustrations

The following illustrations supplement those in paragraph 410.60 of the standard. They are to be used as a guide in determining whether a contractor's practices comply with the standard.

a. Problem. Division X excludes from its total cost input base, the cost of intercompany transfers from Division Y.

Solution. The intent of the standard is that all actions which represent the total productive activity of the segment should be included in total cost input. The costs of the intercompany transfers should, therefore, be included in the total cost input base used to allocate G&A expenses. Division X's exclusion of the intracompany transfers from the base does not comply with the standard.

I think the bigger issue is - can we use price from the transferring division as opposed to cost from transferring division. I think in certain situations you can use price, obviously those situations specifically exempting CAS as in 9903.201-1, those in FAR 31.205-26 (original poster said we can't), and I believe those described in FAR 31.1. FAR 31.1 does not exempt you from CAS but lets you take a modified CAS approach.

You will also happen to find interdivisonal transfers co-mingled with subcontracts in the DCAA Audit Program - E Subcontracts (and only there).

Whynot, I think we are getting closer. I'm familiar with the DCAA CAM guidance, which is essentially a verbatim restatement of DOD CAS Working Group guidance (W.G. 78-21, Question #4). That is the infamous W.G. "guidance" that sparked the Ford Aerospace case, which established the rules of the road for CAS 410 and led to the 1981 Amendment 1 to W.G. 78-21. However, when the Working Group amended its position(s) in response to the Ford Aerospace decision, it did not modify its position on including interorganizational transfers in the cost input base used to absorb G&A expense. Arguably, it should have done so. So there is a theory (in my mind at least) that the current CAM guidance is in error. At a minimum, the CAM guidance (like the DOD CAS Working Group guidance) lacks any contractual effect, not being tied to a statute, regulation or contract clause -- and is arguably an unlawful interpretation of a statute (the CAS), which was expressly left to the CAS Board to interpret.

When one looks at CAS 410 in light of the Ford Aerospace decision, I can't see how one escapes the conclusion that inter-organizational transfers are to be burdened with G&A (i.e., included in the cost input base) if and only if (a) the activity performed is one that is managed by the receiving business unit/segment, and (B) the costs are a significant element of the receiving segment's cost input base (i.e., current period cost of production). More could be said but I think that's sufficient.

Hope this helps.

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Hello all-

I'm a past member of this board, a continual lurker, and have just re-registered after reading this thread. Thank you for this discussion as interdivisional transfers are near and dear to my heart.

I'm a Contract Manager for an international company with close to 80 separate legal entities performing as one company. Our company, an LLC, was established specifically to do business with the Government and is CAS Compliant (most days). We have moved most of the U.S. based performing resources into the LLC and have, thereby, solved many of the problems we had on this side of the pond. However, one of our selling points is access to the technologies and technologists that we have in other divisions abroad. Currently I am managing six different interdivisional transfers to sister companies performing U.S. contract work in Europe. After six years I can tell you that interdivisional transfers have caused more heartburn then any other issue that I've encountered in my 25+ years of dealing with the government!

Quickly, here are a couple of points of note:

Interdivisional transfers at cost are make and not buy (FAR15.407-2) and are not considered as subcontracts. As such you can treat them differently than subcontracts in terms of indirect pools. For us we use a determining factor based if we consider the effort "staff augmentation" and have criteria defined to make the determination.

FAR 31.205-26(e), "on the basis of cost incurred" can ONLY be interpreted as 52.216-7 if you have a cost type prime. This a really poorly thought out idea IMO. The goal seems to be to remove any opportunity to pyramid fee, but because of the 52.216-7 requirements I have had divisions failing accounting system audits, floor check audits, and have had to require them to submit IC submissions, all for $40k in annual cost. Throwing out the rest of Part 15 (T&M no fee, fixed price no fee, etc.) and with no way to bring materiality (or sanity) in to the equation makes dealing with affiliates much worse than subcontractors.

6-313, Intercompany Transfers, of the Audit Manual states, "Under these conditions, amounts in excess of actual or estimated cost should be questioned." Has anyone ever gotten DCAA to accept "estimated" costs as part of an incurred cost audit? Our foreign divisions can do an o.k. job of estimating what the Government considers allowable costs but have a hard time accumulating and reporting in a manner that the DCAA will accept. It appears from this guidance that they could accept less than full compliance but they won?t.

Interdivisional transfers at price are still considered make but are identified separately in in proposal in accordance with FAR 15.2. In our accounting system we treat these the same as subcontracts but I do not treat them as subcontracts for Subcontracting Plans and other reporting. I have pushed hard with my customer to obtain exemptions based on commercial knowing that it's a real stretch for most services but also knowing it's the only way to bring some sanity to the process for smaller efforts.

One little issue that's been growing with DCAA European are indirect allocations to our affiliates from our parent as part of the affiliate's IC audit. They say that because the affiliate includes those allocations in its indirect calculations then the costs must be supported with an Incurred Cost Submission and audit. DCAA over here has asked for support for indirect allocations from the parent as part of our audits but has never asked for an IC Submission from the parent.

I am currently in the process of writing a policy for interdivisional transfers to our LLC. If someone out there already has such an animal I would love some insight.

Thanks again for addressing this issue, and I welcome any input you might have.

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Hello all-

I'm a past member of this board, a continual lurker, and have just re-registered after reading this thread. Thank you for this discussion as interdivisional transfers are near and dear to my heart.

I'm a Contract Manager for an international company with close to 80 separate legal entities performing as one company. Our company, an LLC, was established specifically to do business with the Government and is CAS Compliant (most days). We have moved most of the U.S. based performing resources into the LLC and have, thereby, solved many of the problems we had on this side of the pond. However, one of our selling points is access to the technologies and technologists that we have in other divisions abroad. Currently I am managing six different interdivisional transfers to sister companies performing U.S. contract work in Europe. After six years I can tell you that interdivisional transfers have caused more heartburn then any other issue that I've encountered in my 25+ years of dealing with the government!

Quickly, here are a couple of points of note:

Interdivisional transfers at cost are make and not buy (FAR15.407-2) and are not considered as subcontracts. As such you can treat them differently than subcontracts in terms of indirect pools. For us we use a determining factor based if we consider the effort "staff augmentation" and have criteria defined to make the determination.

FAR 31.205-26(e), "on the basis of cost incurred" can ONLY be interpreted as 52.216-7 if you have a cost type prime. This a really poorly thought out idea IMO. The goal seems to be to remove any opportunity to pyramid fee, but because of the 52.216-7 requirements I have had divisions failing accounting system audits, floor check audits, and have had to require them to submit IC submissions, all for $40k in annual cost. Throwing out the rest of Part 15 (T&M no fee, fixed price no fee, etc.) and with no way to bring materiality (or sanity) in to the equation makes dealing with affiliates much worse than subcontractors.

6-313, Intercompany Transfers, of the Audit Manual states, "Under these conditions, amounts in excess of actual or estimated cost should be questioned." Has anyone ever gotten DCAA to accept "estimated" costs as part of an incurred cost audit? Our foreign divisions can do an o.k. job of estimating what the Government considers allowable costs but have a hard time accumulating and reporting in a manner that the DCAA will accept. It appears from this guidance that they could accept less than full compliance but they won?t.

Interdivisional transfers at price are still considered make but are identified separately in in proposal in accordance with FAR 15.2. In our accounting system we treat these the same as subcontracts but I do not treat them as subcontracts for Subcontracting Plans and other reporting. I have pushed hard with my customer to obtain exemptions based on commercial knowing that it's a real stretch for most services but also knowing it's the only way to bring some sanity to the process for smaller efforts.

One little issue that's been growing with DCAA European are indirect allocations to our affiliates from our parent as part of the affiliate's IC audit. They say that because the affiliate includes those allocations in its indirect calculations then the costs must be supported with an Incurred Cost Submission and audit. DCAA over here has asked for support for indirect allocations from the parent as part of our audits but has never asked for an IC Submission from the parent.

I am currently in the process of writing a policy for interdivisional transfers to our LLC. If someone out there already has such an animal I would love some insight.

Thanks again for addressing this issue, and I welcome any input you might have.

Gwestbury, Thanks for a great post.

I like the reference to 15.407-2 and am now adding to my ammo belt to be used when discussing subcontracts versus inter-organizational transfers. If you are talking about accounting system audits and floorchecks and etcetera, for $40,000 in work, then that's ridiculous. The only thing I have found that helps companies such as yours is competition. Companies that compete their affiliates against non-affiliated entities stand a better chance of getting out of the mess(es) caused by 31.206-26(e) and 52.216-7.

In one case we gave up on pricing any corporate allocations into rates just to avoid the associated reviews & audits. In another case, we negotiated a memo of understanding that the ultimate Government customer would accept audit reports/findings from the local country audit agency (not DCAA!). The amusing part is that the audit reports were prepared in the native language, and somebody (not us) had to get the reports translated.

Other than that, I've got nothing.

Hope this helps.

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Gwestbury, Thanks for a great post.

I like the reference to 15.407-2 and am now adding to my ammo belt to be used when discussing subcontracts versus inter-organizational transfers. If you are talking about accounting system audits and floorchecks and etcetera, for $40,000 in work, then that's ridiculous. The only thing I have found that helps companies such as yours is competition. Companies that compete their affiliates against non-affiliated entities stand a better chance of getting out of the mess(es) caused by 31.206-26(e) and 52.216-7.

In one case we gave up on pricing any corporate allocations into rates just to avoid the associated reviews & audits. In another case, we negotiated a memo of understanding that the ultimate Government customer would accept audit reports/findings from the local country audit agency (not DCAA!). The amusing part is that the audit reports were prepared in the native language, and somebody (not us) had to get the reports translated.

Other than that, I've got nothing.

Hope this helps.

Thanks. An advance understanding would have helped greatly with my affiliates and will be "Option 3" of my interdivisional transfer policy. If I could get the customer to agree to something other than 52.216-7 our company would certainly agree to a less than what we consider cost position just to avoid the foreign (to them) process.

It would look something like this: The affiliate would certify its cost in accordance with its accounting practices and native audit. The cost would be transferred using their standard practice (cost plus intercompany profit is our company wide standard practice). During our IC audit DCAA could consider those costs as "estimated" in accordance with 6-313 then question the intercompany profit and a percentage of costs based on statistical analysis (documented of course). We take the hit to unallowable on our books and everybody is happy.

Only problem is that on most of our projects we are in a teaming arrangement of some sort and do not have a direct relationship to the CO. That means seeking an advance understanding on a transfer that might end up being 1% of the project's overall annual costs. Instead it just gets dumped on me!

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Regarding 31.205-26(e), it seems obvious to me that a wholly-owned subsidiary (established as an LLC), would be subject to the rules pertaining to interdivisional transfers. Do I have that straight?

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Steveatus have you defined your CAS segments? Is the subsidiary a separate segment?

H2H

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H2H,

I believe the answer to your question is yes. This LLC has a separate disclosure statement from the Corporate element holding the prime contract.

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Then yes, your subsidiary LLC is a separate but affiliated entity subject to the requirements pertaining to Inter-organizational Transfers.

H2H

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Does anything special have to happen for interdivisional work with corporate controlling entity being priced as a commercial item (LLC is already sold products on a commecial basis directly to USG).

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Steveatus,

Your question implied you had read 31.205-26(e). Have you also read 31.205-26(f)?

The short answer is yes, but it's all explained in (f) and the links to Subpart 15 found in the Cost Principle.

H2H

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H2H - Thanks again for the help. I should have been more specific. Under 31.205-26(e)(1), it refers to "...established practice of the transferring organization to price interorganizational transfers at other than cost for commerical work...", Does established practice mean it needs to be documented in the Disclosure Statement?

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Steveatus,

No, I wouldn't think so. If the transferring (performing) org does a lot of commercial business, it may not even have a Disclosure Statement. And the Disclosure Statement of the receiving org should focus on its own cost accounting practices, and not the cost accounting practices of another segment.

Stated another way: Practices are established based on what actually happens, what a contractor actually does every day. When required by CAS, established practices may have to be disclosed in a Disclosure Statement. CAS normally refers to "established or disclosed" cost accounting practices to be on the safe side.

H2H

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Guest jrt132

To keep this thread going, I have a quick follow on question. I have read FAR Table 15-2, FAR 31.205-26(e) & (f), CAM 6-313, and DCAA Memo 10-PSP-009® dated March 2, 2010 regarding IOT addition guidance, and lastly several threads on WIFCON regarding IOTs.

I want to ensure I understand IOTs regarding proposing and billing fee/profit on an IOT. This is how I interpret the readings.

1. An IOT based on cost incurred does not allow the prime contractor to bill fee on the affiliated organizations fee.

2. An IOT based on price does allow the prime contractor to bill fee on the affiliated organizations profit.

Is my interpretation correct?

Thanks,

JRT

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1. An IOT based on cost incurred does not allow the prime contractor to bill fee on the affiliated organizations fee.

Yes, there should be no compounding of profit on an IOT at cost. However, if the affiliated organization proposed/made its transfer in accordance with FAR 31.205-26(e), the affiliated organization should not include any fee within its IOT at cost. It is possible that the prime contractor and its affiliate could decide to split the profit from the prime level. If so, the transfer of split profit should be handled separately as an unallowable cost in order to prevent application of any burdens at the prime level on the affiliate's share of the prime's profit.

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I agree with point no. 1. The contractor bills fee once. Fee is not pyramided.

WRT point no. 2, I think it's more accurate to say that the affiliated organization's transfer price already includes profit. That transfer price becomes the cost to the "prime" organization. To the extent fee is being calculated or billed based on incurred costs, the "prime" organization is able to apply fee to the IOT cost it has received.

Hope this helps.

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Guest jrt132

Here2Help,

That does clarify my understanding. How you phrased your understanding of point number 2 provided the "missing link" for me.

Josh

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