Joint Venture Control and FAR 31.205-26(e)

[Lost]

Hello All,

I have searched this topic on the forum and have found lots of useful information/threads on the topic. However, I would still like to get other's input who are more knowledgeable on the topic.

FAR 31.205-26(e) states the following: "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...."

DCAA CAM Chapter 7.1810.1 ( b ), FAR Compliance, states the following: "Material/Service Costs and Venture Control. When one of the venture participants exercises majority control over the joint venture, FAR 31.205-26(e) specifically provides that the transfer of material costs or service costs from any of that company's segments to the joint venture should be on the basis of cost incurred, unless competitive or catalog prices are involved. In the event that the venture members appear to be equal participants, the provisions of FAR 31.205-26(e) still apply, if the auditor can determine that one of the members actually exercises predominant control over the venture. To help make this determination the auditor should look at the venture agreements to ascertain if any member has significant risk or underwriting responsibility in disproportion to the others."

May I kindly request other forum user's input on the following scenario?

A Joint Venture is formed between Contractor X and Contractor Y. The joint venture subcontracts out all the contract effort to Contractor X, Contractor Y, and numerous other subcontractors. The Joint Venture incurrs no direct or indirect costs of its own. The Joint Venture only has one indirect pool (G&A) which includes only costs invoiced up from Contractor X and Contractor Y for subcontract management costs. On paper (the JV agreement) it appears that both venturers are equal participats (e.g., equal votes on the board, etc.). However, in actuality it appears that Contractor Y excercises more control over the JV (e.g., the JV program office is at Contractor Y's location, Contractor Y is responsible for the JV's accounting and billings, the JV program and financial manager are Contractor Y employees, etc.)

(1) Is it allowable for Contractor X to place fee on its subcontract costs billed to the Joint Venture (assuming the JV in turns adds the contractual fee rate to the subcontract costs before billing the costs to the Gov't)? Is it allowable for Contractor Y to place fee on its subcontract costs billed to the JV (assuming the JV in turns adds the contractual fee rate to the subcontract costs before billing the costs to the Gov't)?

(2) The G&A services billed up to the JV by Contractor X and Contractor Y include fee on the G&A services. For example, Contractor X bills $1,000 in G&A services (Subcontract management) costs up to the Joint Venture plus a 5% fee on the G&A services. The JV places the entire $1,050 in its G&A pool which is applied to the direct subcontract costs. Is the fee on the G&A services an allowable expense?

(3) If Contractor X and Contractor Y appear to be equal participants and we cannot determine with certainty that one of the contractors excercies predominant control over the JV, does that make FAR 31.205-26(e) not applicable?

I appreciate any input the readers may offer and I apologize for the lengthyness of this post. Thanks.

[Guest Vern Edwards]

Please explain why you ask about the allowability of fee on G & A services -- Question (2) -- in terms of the materials cost principle, 31.205-26. Do you consider those services to be covered by that cost principle?

[Lost]

Please explain why you ask about the allowability of fee on G & A services -- Question (2) -- in terms of the materials cost principle, 31.205-26. Do you consider those services to be covered by that cost principle?

Hello. I did consider those services to be covered by FAR 31.205-26 ( e ) since they are services (G&A) transfered from Contractor X and Contractor Y to the Joint Venture (which is made up of Contractor X and Contractor Y). Was I wrong in this assumption? For example, the JV issues a letter subcontract to Contractor X for Contractor X to provide G&A services to the JV. The G&A services include a 5.9% fixed fee. The letter subcontract was signed by John Smith, who is the Financial Officer of the Joint Venture, and Jane Doe, SR. VP. of Contractor X. John Smith is also a VP of Contractor X (as well as being the financial officer of the JV). Hope this wasn't too confusing. Thanks,

[here_2_help]

Lost,

The relationship you describe is worrisome. You state "The joint venture subcontracts out all the contract effort to Contractor X, Contractor Y, and numerous other subcontractors. The Joint Venture incurrs no direct or indirect costs of its own. The Joint Venture only has one indirect pool (G&A) which includes only costs invoiced up from Contractor X and Contractor Y for subcontract management costs."

The subcontract management costs you mention seem to be the JV members OWN subcontract management costs and not properly indirect costs of the JV itself. Further, you mention that one JV member provides "G&A" services to the JV on a cost plus fixed fee basis. But those costs are subcontract costs (with respect to the JV) and not indirect costs, right? The "real" indirect expenses should come from CAS 403 Home Office Allocations (see, e.g., 9904.403-30(a)(4), "segment" definition).

You ask good questions. The DCAA CAM audit guidance is not obviously wrong (as far as I can tell). Normally, all this stuff is spelled-out in a well-written operating agreement. It should specify the percentage of ownership and how JV operating costs will be differentiated from acquisition of subcontracted services to perform the contract. Start there -- that's my recommendation.

Hope this helps.

[Guest Vern Edwards]

I did consider those services to be covered by FAR 31.205-26 ( e ) since they are services (G&A) transfered from Contractor X and Contractor Y to the Joint Venture (which is made up of Contractor X and Contractor Y).

Well, 31.205-26 says:

(a) Material costs include the costs of such items as raw materials, parts, subassemblies, components, and manufacturing supplies, whether purchased or manufactured by the contractor, and may include such collateral items as inbound transportation and in-transit insurance. In computing material costs, the contractor shall consider reasonable overruns, spoilage, or defective work (unless otherwise provided in any contract provision relating to inspecting and correcting defective work).

That makes no mention of services. However, I do see that services are mentioned in paragraph (e).

[Lost]

Lost,

The relationship you describe is worrisome. You state "The joint venture subcontracts out all the contract effort to Contractor X, Contractor Y, and numerous other subcontractors. The Joint Venture incurrs no direct or indirect costs of its own. The Joint Venture only has one indirect pool (G&A) which includes only costs invoiced up from Contractor X and Contractor Y for subcontract management costs."

The subcontract management costs you mention seem to be the JV members OWN subcontract management costs and not properly indirect costs of the JV itself. Further, you mention that one JV member provides "G&A" services to the JV on a cost plus fixed fee basis. But those costs are subcontract costs (with respect to the JV) and not indirect costs, right? The "real" indirect expenses should come from CAS 403 Home Office Allocations (see, e.g., 9904.403-30(a)(4), "segment" definition).

I probably didn't describe that well enough. The JV has no employee's of its own. The joint venturer (Company X) has employees that do the joint venture's accounting, billings, and subcontract management (all indirect expenses). These expenses are tracked by Company X and invoiced to the Joint Venture. So they are indirect expenses. Not subcontract expenses incurred in performing on the contract.

[here_2_help]

Lost,

Yes I understood you the first time. The problem is, expenses cannot be both indirect and direct (subcontract) expenses at the same time. In your hypothetical, Company X provides subcontracted services, some of which are charged to the contract and get a burden (G&A, I assume) while others are charged to an indirect cost account and become G&A that's allocated to the same company's other services. That's going to be a problem, it seems to me--especially if Company X (or the JV) is subject to Cost Accounting Standard 403.

JV management is a complex art and not a science. There is not very much guidance out there for the government cost accounting side of things. So I would be very surprised if you have any definitive answers supported by statute, regulation or case law. (But see the article on PMO JV Partnership in the Analytics/Reading section.

H2H

[Retreadfed]

H2H, can you be a bit more specific concerning the article you reference. Maybe I am looking in the wrong place, but I could not identify it.

[here_2_help]

Retreadfed,

http://www.wifcon.com/anal/PMO_JV_Article.pdf

H2H

[Retreadfed]

Thanks.

[Lost]

Can someone please be kind enough to offer their opinion on what this sentence means?

"affiliates of the contractor under a common control" (FAR 31.205-26(e)). Would either of the two joint venture partners be considered affiliates of the contractor under a common control?

Thanks,

[here_2_help]

Lost,

That is more of an GAAP accounting description than anything else.

DCAA has some words about the issue in the CAM at 7-1800. You might want to check it out.

Hope this helps.

[Retreadfed]

Can someone please be kind enough to offer their opinion on what this sentence means?

"affiliates of the contractor under a common control" (FAR 31.205-26(e)). Would either of the two joint venture partners be considered affiliates of the contractor under a common control?

Thanks,

If you can find it, read Talley Defense Systems, Inc., 93-1 BCA ¶25,521. It describes the analytical approach used by the ASBCA in addressing the question of common control.