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Transitioning from Subcontractor to Fed Prime Contractor


Runner11

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I've been operating a small business engineering firm for over a year soley through subcontracts. The contract types have primarily been Time and Materials and work has been ok. Some of the past efforts I've supported are going to be recompeted, and I want to pursue the opportunities as a prime contractor, but I'm hesitant to begin conducting business with the government directly.

My major concerns are 1) am I unable to pursue a cost reimbursement contract without an indirect rate agreement? 2) My previous T & M rates have been based on salaries plus "estimates" of overhead and G & A versus actual audited data since I've really only been in business around a year. Would these rates be suitable for the govt? Obviously many of these loadings will be fluctuating as I pursue more business. And how would I determine a reasonable rate without abundant historical data to ensure I cover my cost and also don't unintentionally make too much profit? 3) do my company financials need to be audited regardless of the contract type I pursue?

I really want to pursue this work if the opprortunity arises but I don't want to begin my federal contracting with the government without being fully prepared.

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My two cents. Get real familiar with what it takes to be CAS or modified CAS compliant. Small businesses are generally exempt from CAS but if you think (hope/want) to grow to become a business that will need to be modified CAS compliant, it's easier to get that structure in place early rather than late. The Govt has a long history of dealing with small businesses and knows that indirect rates can fluctate a lot as a business grows. The good part for the Government is that the rates usually drop as the company's direct labor base grows so when final audited rates come in, the Govt gets a credit.

You can't request a DCAA audit but you can establish a relationship with an independent auditing firm to complete an annual outside audit. When I was in private sector, the number of cost-plus contracts we had dropped to 2 at one point. Both were with parts of the same agency and that agency chose to accept our independently audited rates instead of having their own auditors perform the analysis. I know we sent them the complete audit report (which I assume they reviewed) and they would return a letter that generally accepted the rates as indicated by the outside audit.

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Guest Vern Edwards

My major concerns are 1) am I unable to pursue a cost reimbursement contract without an indirect rate agreement? 2) My previous T & M rates have been based on salaries plus "estimates" of overhead and G & A versus actual audited data since I've really only been in business around a year. Would these rates be suitable for the govt? 3) do my company financials need to be audited regardless of the contract type I pursue?

1. You do not need an indirect cost rate agreement to compete for and win a small cost-reimbursement contract. If you win one you will have to negotiate billing rates. See FAR Subpart 42.7.

2. Estimates should be okay, but they will have to be well-documented. See FAR 15.407-5.

3. As a rule, your financial statements need not have been audited, but a CO could demand that of you.

Generally, you should be able to describe what is in your indirect cost pool, what you are using for an allocation base, and how you estimated the costs. You should read FAR Subpart 31.2 and FAR Subpart 42.7, and you should buy and refer to Government Contract Costs & Pricing, 2d ed., by Karen Manos, published by West. You should also have and refer to the Defense Contract Audit Agency Manual (DCAAM), even if you are going to work for civilian agencies. It's available on line; use Google to find it. Also see the audit guidance at the DCAA website.

In my opinion you should not worry about Cost Accounting Standards (CAS) at this point. You are probably a long way from being a large business and when that time comes you will be able to hire a government contracts accountant to get you compliant. What is more important at this time is that you have an accounting system that can track costs. See FAR 16.301-3(a)(3).

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Not your exact question, but if you are going to compete for prime contracts please be prepared. In my recent experience, contracts that have failed or been troubled more often than not have been because of management, not technical, failures. It's not a reflection on the owner or mangers necessarily. But understand that contracts, especially T&M and Cost contracts have lots of demands that are placed on the contractor - legal, programmatic, and human relations wise. So more than worrying about audited rates, I would make sure that you are fully prepared for the contract management side. If you don't feel you are capable, hire a lawyer, former CO, or other dedicated contract manager if you can. Make sure your proposals are up to the challenge. Along with management of the contract, most small businesses don't get contracts because their proposals can't effectively express their technical competence to the Government evaluators.

Good luck with competing for prime contracts.

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I suggest you take a look at Standard Form (SF) 1408 and see how well you stack up against the criteria that define an "adequate" cost accounting system. If you want a cost-plus type contract, then you need an adequate cost accounting system--no ifs, ands, or buts.

With respect to your indirect rates, the SF 1408 has specific requirements. Having an indirect rate agreement is not among them. (If you mean "foward pricing rate agreement," then most major contractors don't have an indirect rate agreement anymore. So don't worry about it.) The SF 1408 focuses on the (a) organization of your indirect cost pools and the appropriateness of the allocation bases used, and ( B) whether you can distinguish between direct and indirect costs, and © whether you can distinguish between allowable and unallowable costs. There are other criteria (of course) but those are the key criteria related to indirect cost rates.

I don't know your geographic location but there are dozens of consultants who would love to help you out in this area. Some are better than others and some are more expensive than others. Try Googling with key words such as "FAR Compliance" or "government contract accounting" and see what you get. LinkedIn is also a good resource for locating consultants.

If you are serious, you will also need a good government contracts attorney, sooner or later. But first you need an adequate cost accounting system, as defined by DCAA and the SF 1408.

Best of luck!

H2H

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Thank you all for your help and guidance. I have my work cut out for me and will concentrate on the FAR parts listed in the postings. I'm aware that I won't become a large business anytime soon, and should focus on the basics as a small business. A lot of consideration will be put into establishing my initial billing rates so as to cover my costs while reasonably making a profit. In the instance of loading my labor rates for a T & M, will my "estimated" overhead/ g&a be subject to a downward adjustment should an audit ever be completed and it's determined I overestimated my costs or vice versa? Even after contract performance? I know this is typically a principle of cost type contracts but didn't know if a similar procedure could be done for T&Ms.

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Runner11,

Assuming you used your "best guess" estimate of your indirect costs, no. But see Vern's Point #2.

You really need to invest in an expert to help you out in this area. You have neither the expertise nor the time to fiddle with this stuff. You have a business to run.

H2H

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Guest Vern Edwards

Listen to here_2_help. Hire an expert to worry about the accounting and focus on proposal preparation. You have to win a contract before you can worry about accounting for costs.

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