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Can CAS Apply to an Interorganizational Order


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One  segment of a company receives a prime CAS-Covered contract. A portion of the work is completed by another segment of the company through an interorganizational transfer, without the work being competed. 

There is no "subcontract" issued, but instead an interorganizational order. 

Assuming no exception to CAS applies, would CAS apply to this interorganizational order?

 

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If FAR 52.230-2 is included in the prime contract, 48CFR 9903.201-1(b) appears to be applicable and provides in part as follows:

(a) This subsection describes the rules for determining whether a proposed contract or subcontract is exempt from CAS. (See 9904 or 9905, as applicable.) Negotiated contracts not exempt in accordance with 9903.201-1(b) shall be subject to CAS. A CAS-covered contract may be subject to full, modified or other types of CAS coverage. The rules for determining the applicable type of CAS coverage are in 9903.201-2.

(b) The following categories of contracts and subcontracts are exempt from all CAS requirements:

(2) Negotiated contracts and subcontracts not in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation (41 U.S.C. 1908 and 41 U.S.C. 1502(b)(1)(B)). For purposes of this paragraph (b)(2), an order issued by one segment to another segment shall be treated as a subcontract.

(5) Contracts and subcontracts in which the price is set by law or regulation.

(6) Contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.

(7) Contracts or subcontracts of less than $7.5 million, provided that, at the time of award, the business unit of the contractor or subcontractor is not currently performing any CAS-covered contracts or subcontracts valued at $7.5 million or greater.

 

Edited by Neil Roberts
correct clause citation
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14 minutes ago, Neil Roberts said:

If FAR 52.230-2 is included in the prime contract, 48CFR 9903.201(b) appears to be applicable and provides in part as follows:

(a) This subsection describes the rules for determining whether a proposed contract or subcontract is exempt from CAS. (See 9904 or 9905, as applicable.) Negotiated contracts not exempt in accordance with 9903.201-1(b) shall be subject to CAS. A CAS-covered contract may be subject to full, modified or other types of CAS coverage. The rules for determining the applicable type of CAS coverage are in 9903.201-2.

(b) The following categories of contracts and subcontracts are exempt from all CAS requirements:

(2) Negotiated contracts and subcontracts not in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation (41 U.S.C. 1908 and 41 U.S.C. 1502(b)(1)(B)). For purposes of this paragraph (b)(2), an order issued by one segment to another segment shall be treated as a subcontract.

(5) Contracts and subcontracts in which the price is set by law or regulation.

(6) Contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.

(7) Contracts or subcontracts of less than $7.5 million, provided that, at the time of award, the business unit of the contractor or subcontractor is not currently performing any CAS-covered contracts or subcontracts valued at $7.5 million or greater.

 

Thanks, I guess the bigger question is whether the transfer is considered a subcontract. Currently, they don't issue a subcontract to the other segment, just an order. 

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My comment above cited eCFR, which is not the official version. It appears to me that there could be some ambiguity in it. I am checking for the official CFR version and will update the potential format paragraph or subparagraph ambiguity I see if needed.

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16 minutes ago, Former_DCAA said:

Thanks, I guess the bigger question is whether the transfer is considered a subcontract. Currently, they don't issue a subcontract to the other segment, just an order. 

In context of the situation, calling the transaction a subcontract would not be appropriate for an inter-organizational segment order/contract because that term generally connotes an arms length transaction with a party capable of being sued if necessary for breach of contract. A prime contractor with segments, like divisions, can not maintain lawsuits by one segment against another segment because both segments are actually the same party.  The potential ambiguity with 48 CFR 9903.201-1 I see is whether the segment is to be considered a subcontract for all paragraphs under (b) or only under (b)(2).   

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On 2/14/2023 at 7:06 AM, Retreadfed said:

Yes, if the order exceeds the cost or pricing data threshhold.

(b)(2) above bothers me. It indicates that a "segment" order shall be treated as a subcontract. I don't understand this because (b)(2) also states that negotiated subcontracts may be exempt. Segment means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. See FAR 2.101. I have never been able to consider Divisional inter-organizational orders to be negotiated because those segments are part of a common company and are not separate companies. So, it is not clear to me why treating it as a subcontract matters, no CAS exemption seems applicable to me under (b)(2) for inter-organizational orders. This seems contrary to what may have been the intent.

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6 hours ago, Neil Roberts said:

I have never been able to consider Divisional inter-organizational orders to be negotiated because those segments are part of a common company and are not separate companies.

You did not quote the entire definition of "segment."  Although the FAR has the definition formatted differently, the CAS state "Segment means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The terms include Government-owned contractor-operated (GOCO) facilities, and joint ventures and subsidiaries (domestic and foreign) in which the organization has a majority ownership. The term also includes those joint ventures and subsidiaries (domestic and foreign) in which the organization has less than a majority of ownership, but over which it exercises control."  Thus, separate companies can be "segments" of an organization.  In this regard, the CAS do not say that inter corporate orders are subcontracts.  Instead, such orders are to be "treated as subcontracts."

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@Retreadfed, the clause bothers me and seems ambiguous. And, it may also be more complex than it looks at first glance. I would not issue an inter-organizational  order between subsidiaries or joint venture entities because my understanding is there are tax consequences to doing so instead of issuing a subcontract (inter-organizational "order" makes it seem like the parties are one entity). On the other hand, an inter-organizational "transfer" (which poster mentions, and also calls it an inter-organizational "order"), can be issued according to FAR 31.205-26 for commercial work transfer at cost. Commercial work may be "exempt" from CAS. But, poster facts excluded any CAS "exceptions."

Due to the complexities, it is suggested poster seek an answer from a well versed attorney or accounting and finance expert.     

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On 2/15/2023 at 3:42 PM, Retreadfed said:

You did not quote the entire definition of "segment."  Although the FAR has the definition formatted differently, the CAS state "Segment means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The terms include Government-owned contractor-operated (GOCO) facilities, and joint ventures and subsidiaries (domestic and foreign) in which the organization has a majority ownership. The term also includes those joint ventures and subsidiaries (domestic and foreign) in which the organization has less than a majority of ownership, but over which it exercises control."  Thus, separate companies can be "segments" of an organization.  In this regard, the CAS do not say that inter corporate orders are subcontracts.  Instead, such orders are to be "treated as subcontracts."

Perfectly quoted.

22 hours ago, Neil Roberts said:

@Retreadfed, the clause bothers me and seems ambiguous. And, it may also be more complex than it looks at first glance. I would not issue an inter-organizational  order between subsidiaries or joint venture entities because my understanding is there are tax consequences to doing so instead of issuing a subcontract (inter-organizational "order" makes it seem like the parties are one entity). On the other hand, an inter-organizational "transfer" (which poster mentions, and also calls it an inter-organizational "order"), can be issued according to FAR 31.205-26 for commercial work transfer at cost. Commercial work may be "exempt" from CAS. But, poster facts excluded any CAS "exceptions."

Except for the business case(s) cited by 31.205-26(e), inter-organizational transfers are simply transfers between one organization. See 15.407-2(b):

Quote

"Make item," as used in this subsection, means an item or work effort to be produced or performed by the prime contractor or its affiliates, subsidiaries, or divisions.

Except as noted above, inter-organizational transfers are "make" not "buy" -- but (as Retreadfed correctly pointed out) the CAS requires them to be treated "as subcontracts" for purposes of CAS coverage.

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