contractor100

Is this Professor right?

33 posts in this topic

https://dap.dau.mil/...estionID=110935

The issue is what does the "cost of contract performance incurred for personnel" in the limitations on subcontracting clause mean. He or she says it cannot include any G&A. I cannot understand the reasoning below.

"3. As indicated above, FAR 52.219-14( B)(1) states that the base for calculating the prime contractor’s “50%” (i.e., versus a “51%”) expenditure requirement is the cost of contract performance incurred for personnel. First, because G&A expense includes both labor and non-labor costs, the entire G&A expense could not, in any event, be counted in the labor cost base to determine whether the contractor’s proposal is compliant with the “50%” work percentage requirement because the relevant cost of contract performance must be incurred for personnel only. Furthermore, pursuant to the definition in FAR 2.101, unlike “direct” labor cost, G&A expense covers the general management and administration of the business unit as a whole and does not include those management expenses whose beneficial or causal relationship is associated with a particular cost objective (i.e., an individual contract). Therefore, even if that portion of the G&A expense which represents only labor costs could be segregated, such labor costs cannot be included as part of the performance cost base to determine compliance with "The 50% Rule"."

Also please note the question was not answered, the question was:

Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

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https://dap.dau.mil/...estionID=110935

The issue is what does the "cost of contract performance incurred for personnel" in the limitations on subcontracting clause mean. He or she says it cannot include any G&A. I cannot understand the reasoning below.

"3. As indicated above, FAR 52.219-14( B)(1) states that the base for calculating the prime contractor’s “50%” (i.e., versus a “51%”) expenditure requirement is the cost of contract performance incurred for personnel. First, because G&A expense includes both labor and non-labor costs, the entire G&A expense could not, in any event, be counted in the labor cost base to determine whether the contractor’s proposal is compliant with the “50%” work percentage requirement because the relevant cost of contract performance must be incurred for personnel only. Furthermore, pursuant to the definition in FAR 2.101, unlike “direct” labor cost, G&A expense covers the general management and administration of the business unit as a whole and does not include those management expenses whose beneficial or causal relationship is associated with a particular cost objective (i.e., an individual contract). Therefore, even if that portion of the G&A expense which represents only labor costs could be segregated, such labor costs cannot be included as part of the performance cost base to determine compliance with "The 50% Rule"."

Also please note the question was not answered, the question was:

Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

The professor is not correct. Here is what 13 CFR 125.6 has to say on this question "Cost of contract performance incurred for personnel. Direct labor costs and any overhead which has only direct labor as its base, plus the concern's General and Administrative rate multiplied by the labor cost."

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See also SM Systems & Research Corp., Inc., SBA No. 3241, Jan. 2, 1990:

We are unpersuaded by Appellant's argument that the Regional Office's analysis is flawed because it did not exclude indirect costs from its calculations. The requirement for prime contractor participation in small business set-aside contracts, is set forth at 15 U.S.C. 655:

(o)(1) A concern may not be awarded a contract under subsection (2) as a small business concern unless the concern agrees that—(A) in the case of a contract for services (except construction), at least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern. . . .

The statutory provisions of this section are dispositive here. We agree with the position expressed by Science Systems and the SBA that indirect costs are an integral part of labor costs and cannot be excluded. Furthermore, there is nothing in the legislative history of 14 U.S.C. 644(o)(1)(A) that even suggests that indirect costs should be excluded in considering whether a firm complies with the 50-percent rule. In Size Appeal of Tampa Shipyards, Inc. No. 2958 (1988), we considered the analogous question of the costs to be included for purposes of determining under 15 U.S.C. 644(o)(1)(B) whether a manufacturing firm ‘will perform work for at least 50 percent of the cost of manufacturing the supplies.’ There, we pointed out that Congress had specifically excluded from the cost of manufacturing only the cost of materials, and we rejected the argument that certain indirect costs, such as inspection, testing, and project management should be excluded... Since Congress has not excluded any costs, from determining the cost of personnel, all costs, including indirect costs, must be included for purposes of determining compliance with the 50-percent rule.

The answer from the "professor" is a darned shame.

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FYI, the Ask-A-Professor program now allows anyone to rate a particular answer from 1-3 stars.

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Don:

That answer does not deserve any stars. The problem with the AAP rating system is that it does not allow you to state what is wrong with the answer.

AAP is and has long been a disgrace. It casts DAU into disrepute. Most people don't know that the "professors" are not DAU faculty. You members of the faculty should take this up with the DAU president and ask that she shut the site down until some kind of quality control can be established.

Vern

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Vern,

The professors are typically DAU faculty. Some questions are farmed out to experts in niche areas. I believe Joel used to answer questions regarding Construction/A&E.

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Vern,

I believe Joel used to answer questions regarding Construction/A&E.

That is correct, but not since mid 2007 or so. After critiquing some of the answers for a few years back in the late 1990's and early 2000's, I was asked by AAP if I would be willing to take over the A&E and Construction Contracting Topic Area. Since I had direct access to numerous resources at that time, I agreed. One must be careful about complaining if one isnt willing to help fix something. It was like ignoring the old military adage - "Never volunteer!" :D

Some times the questions are as inane or obscure as the answers. I usually tried to contact the questioner and obtain more details and also find out which service they worked for. Many of the answers were partly or fully dependant upon a specific Branch's policies or supplements.

At any rate, I asked the current site moderator to review this thread...

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Please note that the "Ask A Professor's" questioner did not ask the question that the Professor answered (incorrectly.)

I believe the questioner was asking, Can the prime include the prime's markup on the sub's labor (G&A, materials handling fee) as "cost of contract performance"?

That is a harder question, I cannot find the answer either. Does anyone else know?

Original question:

"Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

Scenario - This is in reference to a CPFF type contract for technical/scientific support to an 8(a) ANC [Alaska Native Corporation] contractor serving as the prime; however they have proposed a subcontractor (a small business), and per FAR 52.219-14(B)(1) "Limitations on Subcontracting", the prime must perform at least 50% of the cost of contract. During review of the proposal, based on direct labor cost, the subcontractor is performing more than the prime. It appears the prime is including the G&A on subcontracts as labor."

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Please note that the "Ask A Professor's" questioner did not ask the question that the Professor answered (incorrectly.)

I believe the questioner was asking, Can the prime include the prime's markup on the sub's labor (G&A, materials handling fee) as "cost of contract performance"?

That is a harder question, I cannot find the answer either. Does anyone else know?

Original question:

"Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

Scenario - This is in reference to a CPFF type contract for technical/scientific support to an 8(a) ANC [Alaska Native Corporation] contractor serving as the prime; however they have proposed a subcontractor (a small business), and per FAR 52.219-14( B)(1) "Limitations on Subcontracting", the prime must perform at least 50% of the cost of contract. During review of the proposal, based on direct labor cost, the subcontractor is performing more than the prime. It appears the prime is including the G&A on subcontracts as labor."

I have posed the question you asked to the policy folks at SBA responsible for writing the regulations in question. Their response was, "We do not think it is proper accounting for a contractor to allocate G&A to subcontract costs." H2H, don't faint.

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Answers obtained from anonymous "policy folks" are absolutely worthless. ABSOLUTELY. What counts is the regulation, and the SBA's regulation is clear, as is the case law from their board of hearings and appeals.

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Please note that the "Ask A Professor's" questioner did not ask the question that the Professor answered (incorrectly.)

I believe the questioner was asking, Can the prime include the prime's markup on the sub's labor (G&A, materials handling fee) as "cost of contract performance"?

That is a harder question, I cannot find the answer either. Does anyone else know?

Original question:

"Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

Scenario - This is in reference to a CPFF type contract for technical/scientific support to an 8(a) ANC [Alaska Native Corporation] contractor serving as the prime; however they have proposed a subcontractor (a small business), and per FAR 52.219-14( B)(1) "Limitations on Subcontracting", the prime must perform at least 50% of the cost of contract. During review of the proposal, based on direct labor cost, the subcontractor is performing more than the prime. It appears the prime is including the G&A on subcontracts as labor."

I don't see what you see in that question.

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I believe the questioner was asking, Can the prime include the prime's markup on the sub's labor (G&A, materials handling fee) as "cost of contract performance"?

In my opinion, even if the contractor's normal rate structure included material handling overhead and/or G&A on subs, they probably could not include those costs in determining whether they met the limitation on subcontracting. Material handling overhead generally wouldn't have "direct labor as its base" and there is a difference in including all G&A costs as opposed to only including the "G&A rate multiplied by the labor cost."

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I don't see what you see in that question.

From the boldface type below?

"Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

Scenario - This is in reference to a CPFF type contract for technical/scientific support to an 8(a) ANC [Alaska Native Corporation] contractor serving as the prime; however they have proposed a subcontractor (a small business), and per FAR 52.219-14( B)(1) "Limitations on Subcontracting", the prime must perform at least 50% of the cost of contract. During review of the proposal, based on direct labor cost, the subcontractor is performing more than the prime. It appears the prime is including the G&A on subcontracts as labor."

I don't see the answer in the reg:

"(a) In order to be awarded a full or partial small business set-aside contract, an 8(a) contract, or an unrestricted procurement where a concern has claimed a 10 percent small disadvantaged business (SDB) price evaluation preference, a small business concern must agree that:

(1) In the case of a contract for services (except construction), the concern will perform at least 50 percent of the cost of the contract incurred for personnel with its own employees. ...

(2) Cost of contract performance incurred for personnel. Direct labor costs and any overhead which has only direct labor as its base, plus the concern's General and Administrative rate multiplied by the labor cost. "

That can't mean, "Prime's G&A multiplied by the entire labor cost?"

Also, what about the sub's G&A.

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From the excerpt posted above, the clause is clear that the percentage of subcontracted services is determined by a ratio of the prime's cost of contract performance to the prime's total cost. The ratio is calculated as follows:

The numerator is the prime's total cost of contract performance--with total "cost of contract performance" being "labor cost" plus G&A expenses allocable to labor cost, where "labor cost" equals direct labor cost plus all overhead costs allocable to direct labor.

The denominator is the prime's total contract cost, including all direct and indirect costs, which obviously includes subcontracted services.

It's just division. If the math says the prime is performing 51% then the prime is complying.

That's how I see it. Comments about G&A allocated to subcontractors' costs, or treatment as labor costs, seem irrelevant.

Hope this helps.

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From the excerpt posted above, the clause is clear that the percentage of subcontracted services is determined by a ratio of the prime's cost of contract performance to the prime's total cost. The ratio is calculated as follows:

The numerator is the prime's total cost of contract performance--with total "cost of contract performance" being "labor cost" plus G&A expenses allocable to labor cost, where "labor cost" equals direct labor cost plus all overhead costs allocable to direct labor.

The denominator is the prime's total contract cost, including all direct and indirect costs, which obviously includes subcontracted services.

It's just division. If the math says the prime is performing 51% then the prime is complying.

That's how I see it. Comments about G&A allocated to subcontractors' costs, or treatment as labor costs, seem irrelevant.

Hope this helps.

Are you including subcontractor profit in the total cost to the prime?

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Several things:

First, there are four limits, each very different than the others. Here they are as stated in FAR 52.219-14:

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Second, note that for services and supplies the limit on subcontracting is 50 percent, not 51 percent.

Third, the limitation percentages are applied to three different bases: (a) “cost of contract performance incurred for personnel,” (B) “cost of manufacturing the supplies, not including the cost of materials,” ( c) “cost of the contract, not including the cost of materials.” Each of those terms is defined in 13 CFR 125.6(e), along with “cost of materials” and “subcontracting.” I won’t quote them. Go see for yourselves.

Fourth, the mathematical procedure for determining the proper measure of each base will be different. The most problematic one appears to be the one for services – the “cost of contract performance incurred for personnel.” There are about 250 decisions (Court of Federal Claims, boards of contract appeals, GAO, and SBA Office of Hearings and Appeals) that address compliance with FAR 52.219-14, and there are a number of articles and professional texts that address it. Nowhere have I found a clear statement of how to calculate the “cost of contract performance incurred for personnel.” I am still reading cases. The other bases appear to be less problematical.

In any case, it is clear from 13 CFR 125.6 that (a) overhead applicable to labor and (B) G&A are to be applied to direct labor costs when calculating the cost of performance incurred for personnel, so the “professor” was clearly wrong.

contractor100 thinks s/he knows what the questioner at AAP really wanted to know. Here is the question as posted:

Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?

contractor100 thinks that really means:

Can the prime include the prime's markup on the sub's labor (G&A, materials handling fee) as "cost of contract performance?

Well, maybe it does, but I don’t see it. I don’t know what “the G&A on subcontracts” means. I guess you can say that someone else’s question says whatever you think it should, but the better procedure would be to ask for clarification before venturing an answer. Hit the “professor” another lick.

Let me know if any of you figure out whatever it is you’re trying to figure out.

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“Personnel” equal the “concerns number of employees” which are “all individuals employed on a full-time, part-time, or other basis. This includes employees obtained from a temporary employee agency, professional employee organization or leasing concern”. Concern is the prime SB. (REF: 13 CFR 121.106 and 13 CFR 125.6)

“Cost for contract performance incurred for personnel” equal the direct labor costs and overhead attributed to the direct labor plus the G&A times the concerns (prime) direct labor cost. (REF: 13 CFR 125.6)

"Cost of contract" equals all allowable costs allocable to the contract excluding profit or fees. (13 CFR 125.6)

Subcontractor G&A is generally considered an indirect cost that is allowable. (REF: FAR Part 31)

Subcontractor G&A as an indirect is generally considered allocable. (REF: FAR Part 31)

The clause 52.219-14 - "At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern." Again concern is the prime SB.

The calculation: The numerator is the concerns (prime) cost incurred for personnel which are the direct labor and overhead attributed to direct labor plus the concerns (prime) G&A times the direct labor, the denominator is cost of the contract performance (which includes the subcontractors G&A as being allowable/allocable) but not the concerns (prime) profit/fee.

Simple example - $110,000 prime contract where profit/fee is $10,000 making "cost of contract" (REF: 13 CFR 125.6) $100,000. $60,000 is the cost incurred for personnel by the concern (prime).

$60,000 = .60 or 60%

$100,000

To the question of the thread and by my example if you take out the subcontractors G&A, which is $10,000 for the example, from the denominator the percentage changes to 66.6%. As stated the professor is wrong as the subcontractors G&A is included as part of the contracts total "cost of contract" in the calculaton if it is allowable and allocable.

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Where did you get that calculation, or is it one of your own devising? How does your numerator/denominator give us the prime's share of the cost of contract performance incurred for personnel?

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“Personnel” equal the “concerns number of employees” which are “all individuals employed on a full-time, part-time, or other basis. This includes employees obtained from a temporary employee agency, professional employee organization or leasing concern”. Concern is the prime SB. (REF: 13 CFR 121.106 and 13 CFR 125.6)

“Cost for contract performance incurred for personnel” equal the direct labor costs and overhead attributed to the direct labor plus the G&A times the concerns (prime) direct labor cost. (REF: 13 CFR 125.6)

"Cost of contract" equals all allowable costs allocable to the contract excluding profit or fees. (13 CFR 125.6)

Subcontractor G&A is generally considered an indirect cost that is allowable. (REF: FAR Part 31)

Subcontractor G&A as an indirect is generally considered allocable. (REF: FAR Part 31)

The clause 52.219-14 - "At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern." Again concern is the prime SB.

The calculation: The numerator is the concerns (prime) cost incurred for personnel which are the direct labor and overhead attributed to direct labor plus the concerns (prime) G&A times the direct labor, the denominator is cost of the contract performance (which includes the subcontractors G&A as being allowable/allocable) but not the concerns (prime) profit/fee.

Simple example - $110,000 prime contract where profit/fee is $10,000 making "cost of contract" (REF: 13 CFR 125.6) $100,000. $60,000 is the cost incurred for personnel by the concern (prime).

$60,000 = .60 or 60%

$100,000

To the question of the thread and by my example if you take out the subcontractors G&A, which is $10,000 for the example, from the denominator the percentage changes to 66.6%. As stated the professor is wrong as the subcontractors G&A is included as part of the contracts total "cost of contract" in the calculaton if it is allowable and allocable.

Subcontractor labor would be a direct cost of the prime, i.e., a cost allocated only to one contract, as would subcontractor G&A. The unresolved issue is whether prime G&A should be allocated to subcontractor cost of personnel in determining compliance with the "50% rule." I can see arguments either way, and my research has not revealed any decision that addresses this specific question.

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So what am I missing as the following is my read of the regulations?

“Cost of contract” is everything that is allocable and allowable to the performance of the contract except profit or fee as defined by 13 CFR 125.6(e)(1) therefore the concern (prime) can include the concerns (prime) G&A against subcontractor labor in the total “cost of contract” if the concerns (prime) G&A that is being attributed to the subcontractor labor is allowable and allocable and it generally is.

“Personnel” is defined by 13 CFR 125.6(e)(6) as being those employees of the concern (prime) as defined by 13 CFR 121.106 therefore the concern (prime) must perform at least 50% of “cost of contract” performance with the concerns “personnel” those personnel being as defined, again, by 13 CFR 121.106(a).

So by my read the concerns (primes) G&A on the subcontractor labor is included in the “cost of contract”. I cannot conclude that the concerns (primes) G&A on subcontractor labor is actually cost incurred for “personnel” in the context of Clause 52.219-14 as it is not “personnel” again defined by 13 CFR 121.106 and neither is it a cost for “employees of the concern” which is not defined anywhere but is taken at its plain meaning.

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Dear Carl and H2H,

For services, the denominator (base) just can't be "cost of performance" or "contract cost."

The reg says, "50 percent of cost of performance incurred for personnel."

Like Vern and Retreatfed, I can't find a definition of how to calculate that base in the regs and cases, and am glad of confirmation from better researchers than me.

SBA's accounting opinion is astonishing.

Thanks to all.

C100

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I haven’t gotten into the fray earlier as far as trying to answer the question and I'm not commenting on the AAP program. I haven’t had the time to do full research.

I don't KNOW the answer to the specific question asked, which seems to concern limitations on contracting for services. The question appears to be whether, in addition to the subcontractor's cost of labor (which includes direct and indirect labor costs per 13 CFR 125.6( e)(2), does the "cost of the [prime] contract" for the sub's labor include the prime's G&A cost?

I used to develop and maintain the methodology for my organization to determine compliance with the Limitations on Subcontracting clause's limits on subcontracting for construction contracts and I coordinated it with the SBA regional office back in the 1990's. Compliance for general construction does include G&A on the contractor's share of the work (less the cost of material**) as well as its G&A on the rest of the work (less materials) for sake of comparison - if the prime normally charges G&A on subcontract costs in its accounting system***. I brought it up because I question why the philosphy of determining the prime's share of a services contract cost for a labor comparison should be different than determining the prime's share of the cost of the construction contract, less materials.

I think it would be logical to include G&A on subcontracts - again, if the prime contractor normally charges G&A to subcontracts - because that would be part of the contract cost for having the sub perform that labor, using similar logic as on a construction contract. However, I haven’t researched case law on it. Including the prime's G&A, if normally charged in its accounting system on subcontracts, would increase the contract's cost for subcontracted labor, thus probably making a sub's comparable labor more expensive than if it were prime's labor. So what? That's consistent with logic used in a construction contract comparison. Of course, contracting rules aren't always logical.

** The reason materials were excluded for construction was that primes often try to take credit for self performance by buying materials for subcontractors to install. But that is another discussion.

*** I have dealt with some construction companies that don't charge G&A to subcontracts. Some of these firms also do a lot of A-E and other service contracting.

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Carl:

What you are missing is that "cost of the contract" is a factor only in the limitation on subcontracting for construction contracts. The factor in the limit on service contracts is the "cost of contract performance incurred for personnel," not the "cost of the contract."

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Correcting myself above:: "The question appears to be whether, in addition to the subcontractor's cost of performance incurred for labor (which includes direct and indirect labor costs per 13 CFR 125.6( e)(2), does the "cost of the [prime] contract" for the sub's labor include the prime's G&A cost?"

In addition to what I said above it seems to me that the subcontract labor's share of the prime's G&A* would be a cost that is incurred for labor on the contract.

*when a prime normally charges G&A to subcontracts

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In determining compliance with the limit on service contracts the numerator should be the cost of contract performance incurred for personnel by the prime. The denominator should be the total cost of contract performance incurred for personnel by the prime and all subcontractors.

I think an argument can be made that the total cost of contract performance incurred for personnel by the prime and all subcontractors could be:

(the prime's direct labor cost + the prime's overhead on its direct labor + the prime's G&A on its direct labor and overhead) + (the total subcontractor direct labor cost + the total subcontractor overhead on direct labor + the total subcontractor G&A on direct labor and overhead).

Alternatively, it could be:

(the prime's direct labor cost + the prime's overhead on its direct labor) + (the total subcontractor direct labor cost + the total subcontractor overhead on direct labor + the total subcontractor G&A applied to direct labor and overhead) + the prime's G&A applicable to all of the foregoing.

I do not know which is correct. I can find no guidance. But it seems to me that the latter is more consistent with normal cost accumulation and that it is thus the more appropriate calculation.

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