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Proposing Indirect Costs


Runner11

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Can a contractor propose and charge (if awarded) less indirect costs than are allowable under their indirect rate agreement? For instance, not charging indirect costs on items they normally would (and their NICRA allows) like pass through subcontracts or various vendor costs or materials and supplies, etc. in order to reduce a proposal. If so, how would something like that get written into a contract, and how would one verify these costs are invoiced properly on a month to month basis i.e. without the indirect costs? On the other hand, how does the contractor account for not charging the indirects they normally would on these items? Wouldn't that have implications on how their rate agreement is negotiated? Doesn't the contractor need to be consistent with their practices for allocating indirect costs for these items? Does anyone have any experience with this, or know where I can find some discussions on this topic? Many thanks.

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Guest Vern Edwards

Yes, you can propose an "advance agreement" to charge a lower than actual rate in order to be competitive. See FAR 31.109 about advance agreements on cost. Such agreements are sometimes referred to as rate "caps." This practice is not uncommon. You must then account for the uncharged allowable costs as unallowable costs in accordance with FAR Subpart 31.201-6.

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On the other hand, how does the contractor account for not charging the indirects they normally would on these items? Wouldn't that have implications on how their rate agreement is negotiated? Doesn't the contractor need to be consistent with their practices for allocating indirect costs for these items?

Runner11,

You don't need to calculate separate, or new, indirect cost rates in the scenario you describe. This is the way it works: for cost accounting purposes you allocate all indirect costs to the appropriate cost elements in the allocation base. You do nothing different, at all. Nothing.

With respect to billing--and billing only--you make a management decision not to bill otherwise allowable and allocable indirect costs to your customer. You probably don't get to bill any fee on the withheld indirect costs (because of the way your billing system likely works) but that's kind of a gray area. But the key point is that you decision to not bill indirect costs does not affect the rate calculation. All it does is reduce your project revenue and your project gross margin.

You may or may not have the advance agreement that Vern describes in order to do this -- but you need to be very clear in your proposal exactly which costs will be burden-free. And then you must be meticulous to make sure you follow your proposed billing methodology.

In essence, your management decision has just made certain indirect costs "mutually agreed to be unallowable" costs with respect to that contract. See FAR 31.201-6, as well as CAS 405 if you are CAS-covered.

Hope this helps.

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Guest Vern Edwards

help:

I assume that you agree that for proposal purposes he'll have to propose a maximum reimbursement rate or some other form of contractually binding limit on what he intends to bill. Otherwise his proposal will be viewed as an empty promise.

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Vern,

Yes, sure.

I'm just trying to help out with the cost accounting and billing aspects.... the original post seemed to have a bit of confusion in it on those points.

H2H

Edited to add:

Look, this is a bad idea. The whole notion of not billing indirect costs that are perfectly allowable and allocable on certain pre-selected elements of costs, but billing them through on others, is a compliance nightmare. This idea reeks of a "brilliant" business development strategy. Clearly, this would-be contractor is ignoring one of Vern Edward's 14 Tips for Would-Be Clueless Contractors -- the one about controlling one's business development marketeers.

And this will be LOTS of fun should any of those pre-selected cost elements experience any cost growth. The more costs are incurred, the more indirect costs will be allocated, but those costs will be (by mutual agreement) unallowable. Clearly, the initial amount of the management "investment" is only as good as the initial cost estimate ... and we all know just how accurate those are.

If a contractor wants to buy-in, then fine. It should take a cut on the bottom line and show that amount as an "investment"--rather than playing accounting games in one of the toughest industries in which to do accounting.

Or not. Lawyers gotta eat, too.

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