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FAR 31.109 Advance Agreements


jeff4757

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I am generating an Advance Agreement on questionable costs to be billed. In actuality, our CO/KO is telling us to bill them but its my company's position that they would be dis-allowed.

If we get the agreement signed by the CO/KO, can DCAA find the costs unallowable inn the future.

'

It is my uiderstanding the risk transfers to the Government when an agreement is signed.

Any input appreciated!

Many thanks!

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We initially took exception to providing a proposal for commercial SW licenses under a CPFF contract. Our company position was that the SW licenses are NOT a cost but an "intangible asset" and thus proposed as FFP. The CO said to propose it as FFP and invoice against the ODC.

The customer has included an ODC/material description in CLIN001 but the CLIN is CPFF. Our Finance manager insists we cannot bill them as they would be disallowed under the CPFF contract as well as incurring an audit finding.

Thus the introduction of the Advance Agreement.

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The thing is, your CO does not have the authority to enter into an agreement that violates a FAR requirement. Or so the auditors and lawyers will say.

Now back to your (recurring) issue. The fact that the CLIN is Cost-type does not prevent you from billing a fixed-price ODC item in it. For example, you can enter into a FFP purchase order to acquire 10 pencils from Office Depot in the amount of $100.00. You can then bill that $100.00 on your cost-type CLIN. That's not a problem.

Your problem is that there is no cost associated with your item. Well, there is a cost, but it's on your balance sheet somewhere and not on your project expense subledger. So you are in the position of billing the government for a cost you did not incur. That looks bad to auditors.

It seems to me that you should be able to justify that this is a COMMERCIAL item. (Remember when I suggested that in the other thread?) If it's a commercial item then you are billing a price and not a cost. Which will be just fine.

This all hinges on the commerciality of your SW license fee. See FAR Part 2.101 and Part 12. If you can support the commercial nature of the license fee, you'll be just fine. Trust me on this.

(Yeah, you should not really trust a stranger you met on the internet. But a savvy attorney or Big 4 accounting firm government contracting partner might just tell you the same thing.)

This will help!

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  • 2 weeks later...

The thing is, your CO does not have the authority to enter into an agreement that violates a FAR requirement. Or so the auditors and lawyers will say.

Now back to your (recurring) issue. The fact that the CLIN is Cost-type does not prevent you from billing a fixed-price ODC item in it. For example, you can enter into a FFP purchase order to acquire 10 pencils from Office Depot in the amount of $100.00. You can then bill that $100.00 on your cost-type CLIN. That's not a problem.

Your problem is that there is no cost associated with your item. Well, there is a cost, but it's on your balance sheet somewhere and not on your project expense subledger. So you are in the position of billing the government for a cost you did not incur. That looks bad to auditors.

It seems to me that you should be able to justify that this is a COMMERCIAL item. (Remember when I suggested that in the other thread?) If it's a commercial item then you are billing a price and not a cost. Which will be just fine.

This all hinges on the commerciality of your SW license fee. See FAR Part 2.101 and Part 12. If you can support the commercial nature of the license fee, you'll be just fine. Trust me on this.

(Yeah, you should not really trust a stranger you met on the internet. But a savvy attorney or Big 4 accounting firm government contracting partner might just tell you the same thing.)

This will help!

If jpaynehydroid has a CPFF contract, how is commericality of the software license going to help? This is a cost-reimbursement contract, under which the contractor may bill only for actual incurred costs. It isn't obvious to me how the software license being "commercial" helps. Additionally, except for the limited circumstances in which a time-and-materials type of contract is authorized, aren't agencies required to use fixed price contracts for the acquisition of commercial items?

Are suggesting that there's a way to acquire commercial software licenses under a CPFF contract?

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Navy,

Yes. Of course. Once commerciality is established, the price becomes the contractor's cost -- just as it would if the contractor entered into a FFP subcontract. Why would you think otherwise?

H2H

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Navy,

Yes. Of course. Once commerciality is established, the price becomes the contractor's cost -- just as it would if the contractor entered into a FFP subcontract. Why would you think otherwise?

H2H

I was thinking otherwise because the OP said that "the SW licenses are NOT a cost," so I'm having difficulty understanding how one can bill such items under a CPFF contract.

I understand how a FFP subcontract is a cost, but I don't understand how "the price becomes the contractor's cost" for commercial license fees. In my perhaps simplistic view, I read FAR 52.216-7, paragraph (b )(1), which says "...the term "costs' includes only--

(i) Those recorded costs that, ... the Contractor has paid...for items or services purchased directly for the contract; [and]

(ii)...costs incurred but not necessarily paid, for [purchased supplies and services, materials, labor, travel, ODC and associated indirect costs,]" and I don't see where the commercial license fees fit.

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Retreadfed,

It doesn't matter. The cost to be billed is the price to be paid. The contractor simply charges the contract its normal commercial price (assuming that commerciality can be established).

H2H

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H2H, I'm not so sure that it doesn't matter. Under a CPFF contract the contractor is entitled to be paid its allowable costs as determined by the cost principles in effect on the date of a contract. Thus, we have to look to the cost principles to justify every cost a contractor claims under a CPFF contract. That being the case, which of the general or enumerated cost principles supports your position?

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Retreadfed,

I like the way you have reversed the burden of proof, much like today's DCAA, in which the contractor is required to prove all costs are allowable and allocable. Yet, the burden of proof is actually on the Government to show that questioned costs are not allowable or allocable.

That being said, I'll bite.

First, you can't find a definition of "cost" in the FAR. Nor can you find a cost principle that deals with this specific issue. Since there's no cost principle that's specifically on point, we need to look for the closest priciple (31.204(d).) I assert the closest analog is 31.205-26(e). 31.205-26(e) references 15.403-1(B). Under the "definitions" section of 15.401 we find that a "subcontract ... also includes a transfer of commercial items..."

Thus, I conclude that a commercial item price is the equivalent to a subcontract's price. Granted, I'm using TINA to justify cost allowability, but that's what the FAR gives me.

Again, I don't need to justify my position. The onus is on the government to justify -- with specific reference to a cost principle or similar -- why my position is wrong.

Hope this helps!

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H2H, in theory, the government has the burden of proving a cost is not allowable. However, the contractor has the burden in regard to allocability and reasonableness. That being said, I would assert that 31.205-26(e) is not applicable. That cost principle deals with transfers of material between entities under common control. While we may analogize material to software licenses, which I can accept, there is no transfer between entities under common control here. Further, 31.205-26 also permits a contractor to claim what it pays for material to a subcontractor as a cost. However, I see nothing in the cost principle to permit a contractor to claim the price which it charges to a customer for software as a cost under a prime contract.

Compare this to the situation with a T&M contract. Although material under such a contract is subject to the Allowabile Cost and Payment clause, 52.216-7, 52.232-7 has a special carve out for commercial items (software) that the contractor makes. Instead of this material being subject to the cost principles, 52.232-7 permits the contractor to bill the government for the catalog price of the commercial items. This demonstrates to me that the FAR Councils know how to exempt commercial items produced by a contractor from 31.205-26. However, they have not done so in regard to cost reimbursement contracts.

Thus, I am still not convinced that it doesn't matter whether the software in this case is owned by the contractor or is a license obtained from a third party to be provided to the government.

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Retreadfed,

Well, just as you find my analogy questionable, I find your analogy of comparing cost-type contract requirements to T&M contract requirements a bit weak.

That said, I hold you in high respect and would enjoy arguing contract cost accounting nuances over a glass of wine some time.

Best!

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Retreadfed,

I like the way you have reversed the burden of proof, much like today's DCAA, in which the contractor is required to prove all costs are allowable and allocable. Yet, the burden of proof is actually on the Government to show that questioned costs are not allowable or allocable.

...Again, I don't need to justify my position. The onus is on the government to justify -- with specific reference to a cost principle or similar -- why my position is wrong.

Hope this helps!

"31.201-2 -- Determining Allowability.

(a) A cost is allowable only when the cost complies with all of the following requirements:

(1) Reasonableness.

(2) Allocability.

(3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

(4) Terms of the contract.

(5) Any limitations set forth in this subpart.

(B) Certain cost principles in this subpart incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using the criteria in those selected standards. Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS-covered (see Part 30). Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations. The applicability of the CAS rules and regulations is determined by the CAS clause, if any, in the contract and the requirements of the standards themselves.

© When contractor accounting practices are inconsistent with this Subpart 31.2, costs resulting from such inconsistent practices in excess of the amount that would have resulted from using practices consistent with this subpart are unallowable.

(d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

"31.201-3 -- Determining Reasonableness.

(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(B) What is reasonable depends upon a variety of considerations and circumstances, including --

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

(2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

(3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor’s established practices.

31.201-4 -- Determining Allocability.

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it --

(a) Is incurred specifically for the contract...."

I'm not arguing that a contractor can't establish a price for software license...

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Retreadfed,

I like the way you have reversed the burden of proof, much like today's DCAA, in which the contractor is required to prove all costs are allowable and allocable. Yet, the burden of proof is actually on the Government to show that questioned costs are not allowable or allocable.

That being said, I'll bite.

First, you can't find a definition of "cost" in the FAR. Nor can you find a cost principle that deals with this specific issue. Since there's no cost principle that's specifically on point, we need to look for the closest priciple (31.204(d).) I assert the closest analog is 31.205-26(e). 31.205-26(e) references 15.403-1( B). Under the "definitions" section of 15.401 we find that a "subcontract ... also includes a transfer of commercial items..."

Thus, I conclude that a commercial item price is the equivalent to a subcontract's price. Granted, I'm using TINA to justify cost allowability, but that's what the FAR gives me.

Again, I don't need to justify my position. The onus is on the government to justify -- with specific reference to a cost principle or similar -- why my position is wrong.

Hope this helps!

h2h,

It may not be titled "Definition," but, as I pointed out in Post #7, FAR 52.216-7, pretty much defines it in paragraph (b )(1), to wit--

"...the term "costs' includes only--

(i) Those recorded costs that, ... the Contractor has paid...for items or services purchased directly for the contract; [and]

(ii)...costs incurred but not necessarily paid, for [purchased supplies and services, materials, labor, travel, ODC and associated indirect costs.]"

Under which of these are you suggesting the commercial license fees be claimed?

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Navy,

If the commercial item has a commercial price, then recording that price as a contract cost satisfies the 52.216-7 requirements you quote.

This doesn't strike me as a particularly agressive argument. It is essentially restating the primary motivation for FASA. Commercial items are commercial and should not be subject to government-unique cost accounting requirements. The fact that the Government wishes to acquire commercial items as miscellaneous purchases under a cost-type contract that was awarded for non-commercial goods and services, does not invalidate that policy position. At least as I see it.

H2H

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H2H,

I interpret FAR 52.216-7 to require as a condition of reimbursement that a cost must be a recorded cost paid, or incurred, even if not paid yet. You apparently think otherwise, but don't explain how you reconcile that position with the plain language of the clause.

Until someone can explain how a "price," that admittedly is NOT a cost, fits into one of the categories in FAR 52.216-7, paragraph (B), Reimbursing costs, we will remain in disagreement.

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Navy,

With all respect, you don't sound like an accountant. Let me simply reiterate that (1) a "cost" is nowhere defined in the FAR; (2) for contract costing and billing purposes, a cost is that which is recorded on the contractor's books and records, and (3) a price paid to a supplier or vendor is a recordable cost.

You seem to think I'm disagreeing with 52.216-7. I'm not. I'm disagreeing with your interpretation of the clause language, which I believe to be based on an erroneous understanding of the relevant cost accounting concepts.

H2H

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Guest Vern Edwards
Once commerciality is established, the price becomes the contractor's cost -- just as it would if the contractor entered into a FFP subcontract.

Help, I hate to find myself questioning you on a matter like this, because I usually take your statements about such matters on faith. But I have read the thread and am intrigued by the quoted statement. Can you cite anything other than accounting theory and practice in support of that statement. Anything from DCAA or Manos?

I can understand how price would be cost when the contractor pays the price and wants to be reimbursed. I can even understand how price would be cost when the contractor includes a commercial item in a deliverable. But I don't understand how the contractor's price for a contract deliverable becomes the contractor's incurred cost for that deliverable under a cost-reimbursement contract. I'm not sure that an item being a deliverable makes a difference, but it seems like it should. I'm sure that I am missing something very elementary, but would you please explain it to me?

(This is a classic example of the problem of explanation and persuasion that interests me so much these days.)

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Guest Vern Edwards

H2H, in theory, the government has the burden of proving a cost is not allowable. However, the contractor has the burden in regard to allocability and reasonableness.

Technical correction: Since reasonableness and allocability are elements of allowability, the contractor bears the initial burden of proving allowability. In addition to FAR 31.201-3(a), see Manos, Government Contract Costs & Pricing, Sec. 7:6, "Allowability--Reasonableness" and Sec. 7:7, "Allowability: Allocability."

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Vern,

In response to your second post, you are correct insofar as allocability in an element of allowability. However, I was referring to the aspect of determining whether or not a cost complies with 31.201-2(a)(5), not 31.201(a)(2) -- which I note is covered in great detail by 31.201-4. A contractor needs to demonstrate compliance with 31.201-4 in order for a cost to be allowable, granted. But the burden of proof is on the government to show noncompliance with 31.201-2(a)(5) -- i.e., the Cost Principles of 31.205.

H2H

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H2H, while the FAR does not explicitly define the term "cost," the accounting literature does. Without going into great detail, in simple terms, an entity incurs a cost when it makes an economic sacrifice. I am having trouble conceiving of the price a contractor charges for a product being an economic sacrifice since, in theory, the price includes profit. I am particularly having trouble in this case because the item in question is a software license. While the contractor may have made some economic sacrifices to develop the software, what is the contractor's cost (economic sacrifice) in regard to the license?

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Guest Vern Edwards

Vern,

In response to your second post, you are correct insofar as allocability in an element of allowability. However, I was referring to the aspect of determining whether or not a cost complies with 31.201-2(a)(5), not 31.201(a)(2) -- which I note is covered in great detail by 31.201-4. A contractor needs to demonstrate compliance with 31.201-4 in order for a cost to be allowable, granted. But the burden of proof is on the government to show noncompliance with 31.201-2(a)(5) -- i.e., the Cost Principles of 31.205.

H2H

Help:

I understand that. I was commenting on something Retread wrote.

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Vern -- got it. Sorry for the confusion. Still considering your first question (which I trust was directed at me).

Retreadfed -- We've been through this. Not you and me -- DOD and its contractors. Remember Motorola giving away its commercial products for free during Desert Storm, because it was cheaper to do that than to comply with CAS and FAR? Thus: we had FASA. FASA addressed acquisition of commercial items (among other things). The Executive Branch was directed to procure commercial items at commercial prices where the market permitted. What's changed since then?

Let's go back to the original post. The government issued a cost-type contract to acquire non-commercial goods/services. Subsequently, the government desired to acquire a commercial software license via contract mod. What do you want the contractor to do -- give something away for free because its GAAP-compliant accounting doesn't meet somebody's notion of a "cost" as defined by some FAR clause?

Screw that. The government will pay the commercial price for the commercial product it wants to acquire. The commercial price is defined by what the market pays and it's not cost based. Simple as that.

The contractor did indeed incur a cost for that software product, a license to which the government now wants to acquire. While I don't know for certain, I'd bet that the cost is sitting on the contractor's balance sheet and is being amortized somehow (over units sold would be my first guess). It spent its funds in advance of sales and now is entitled to recoup those funds, plus interest, plus a profit, for its initial investment. This is fair. It's not only fair, it's compliant with FAR. Or (if you'd like) you can't prove it's not compliant.

The alternative is either to (a) keep commercial companies from selling to the government, or (B) keep commercial companies from investing in new products that might have governmental applications, because they won't be able to recoup their investment on governmental sales.

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Guest Vern Edwards

Help:

I attended a conference in D.C. today at which Karen Manos and Terry Albertson made a joint presentation of developments in cost-related litigation during 2012. I thought about you. I know Terry, but I've never met Ms Manos. She is very impressive, and she and Terry were funny. It was a very informative and even entertaining hour and a half.

By the way, West has published her Government Contract Costs & Pricing Handbook, which looks like a good deal for $79.00.

Vern

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