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Reporting Fixed-Priced Incentive Contracts

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My DCAA "friends" tell me that I have to list my fixed-price incentive contracts in my annual proposal to establish final billing rates ("incurred cost submission") because those types are considered to be "flexibly priced" contracts (see Part 30 Definitions). I disagree, because my reading of FAR Part 16 says such contracts don't include the 52.216-7 (Allowable Cost and Payment) clause--or, at least, that clause is not mandatory for that contract type.

I tried to use the Clause Matrix to bolster my position, but I don't see FP Incentive as a column (which may be because I don't understand how to read the Matrix).

Because I don't (necessarily) find the 52.216-7 clause in my FPIF contracts, I don't have to list them, says I. Because the price isn't determined until costs are known, and indirect rates aren't known until claimed and audited and negotiated, I have to list them, says the auditors.

Who's right?

Thanks for the help.

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See DCAA Contract Audit Manual Chapter 6-802.1 which states the following: "Flexibly priced contracts include all cost-type, fixed-price-incentive, and fixed-price-redeterminable contracts, orders issued under indefinite delivery contracts where final payment is based on actual costs incurred, and portions of time-and-material and labor-hour contracts."

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Vern,

That's a good cite -- thanks!

So my (perhaps rhetorical) question is, why doesn't Part 16 require that 52.216-7 be included in these contracts? In other words, why is the contract silent regarding how the final indirect rates are to be calculated? If I had only FP Incentive contracts, I wouldn't know what to do.

Just saying...

H2H

Edited to add:

Lost, The CAM is nice. But it's not regulation and its not a contract clause. Much confusion has been sown by the FAR Councils ill-advised agreement with DCAA that "flexibly priced" is a contract type.

H2H

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Guest Vern Edwards

help:

I no longer try to answer "why" questions about the FAR. It's hopeless. I can't figure out what they're trying to do half the time, much less why they're doing it. I'm not sure they know.

Here's something you can use to pull their chains: The definition of "flexibly priced contracts and subcontracts" in FAR 30.001 is not applicable to FAR Subpart 42.7, because the definitions in particular parts apply only in those parts. See FAR 2.000(B). There is no definition of "flexibly priced contract" in FAR 2.101 or in FAR Part 42.

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Vern,

Thanks for your answer(s). I agree with your points! But I can't use 'em. I would very much like to pull some chains, but unfortunately DCMA has ceded authority to DCAA in these matters, so I have to play nice. (Until it's time to not play nice; that day is coming soon.)

Best!

H2H

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H2H, I think you are bringing up two different issues. One is whether you should include the direct cost of FPI contracts in the bases to establish overhead and G&A. I think you are required to do so using the criteria of what is an adequat incurred cost submission in 52.216-7.

The other question is are you required to submit an incurred cost submission if you do not have any contracts that contain 52.216-7, which is the only clause in the FAR requiring a contractor to submit an ICS. In my opinion, you are not. I have always argued that a contractor is only required to submit an incurred cost submission if that clause or another clause requiring submission of an ICS is in one of its contracts. However, many DCAA auditors believe that a contractor has in inherent obligation to submit an ICS to establish final indirect cost rates. To me they are wrong.

As for Vern's citation to 42.703-1©(2), this shows another glitch in the FAR. That section says that final indirct cost rates will be established to determine the final cost of an FPI contract. However, 52.216-7 is not required for use in fixed price contracts nor is it an optional provision for such contracts. Therefore, if you had only FPI contracts, the contracting officer would have to insert a clause requiring you to submit an ICS so that the contracting officer could comply with 42.703-1©(2).

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H2H, I think you are bringing up two different issues. One is whether you should include the direct cost of FPI contracts in the bases to establish overhead and G&A. I think you are required to do so using the criteria of what is an adequat incurred cost submission in 52.216-7.

The other question is are you required to submit an incurred cost submission if you do not have any contracts that contain 52.216-7, which is the only clause in the FAR requiring a contractor to submit an ICS. In my opinion, you are not. I have always argued that a contractor is only required to submit an incurred cost submission if that clause or another clause requiring submission of an ICS is in one of its contracts. However, many DCAA auditors believe that a contractor has in inherent obligation to submit an ICS to establish final indirect cost rates. To me they are wrong.

As for Vern's citation to 42.703-1©(2), this shows another glitch in the FAR. That section says that final indirct cost rates will be established to determine the final cost of an FPI contract. However, 52.216-7 is not required for use in fixed price contracts nor is it an optional provision for such contracts. Therefore, if you had only FPI contracts, the contracting officer would have to insert a clause requiring you to submit an ICS so that the contracting officer could comply with 42.703-1©(2).

Doesn't FAR 52.216-16, INCENTIVE PRICE REVISION--FIRM TARGET, require submission of an ICS? See paragraph ( c)(1), "...the Contractor shall submit in the format of Table 15-2, FAR 15.408,... [a] detailed statement of all costs incurred..."

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Guest Vern Edwards

Yeah, Retread. I don't understand your post. Help was talking about a final indirect cost rate proposal. If he has cost-reimbursement contracts he must submit a final indirect cost rate proposal for his business unit. He was asked to list his fixed-price incentive contracts, probably so DCAA would know to which of his contracts the final indirect cost rates would apply. They apply to fixed-price incentive contracts for determination of total final cost incurred as stated by FAR 42.703-1( c)(2). In any case, the incentive price revision clauses require submission of an incurred cost submission.

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Retread,

There's no issue with including contract costs in the bases.

[Hypertechnical language follows]

The FP Incentive contract costs ARE included in Schedule H. The issue is whether they need to be listed in Schedule I.

[End Hypertechnical language]

The thing is, even though we won't know the price until the incentive is calculated, we already know the costs. They won't change. (Well, I suppose a major audit finding in the indirects could affect the costs, but only in a downward direction. And most DCAA disallowances have a de minimus effect on rates.) Certainly, it would be unusual to have the direct costs change to any great extent, absent some kind of fraud finding.

The incentive provisions are profit/fee provisions only, and they are based on the incurred costs. That's why this is so vexing. So much work for no value ....

Off to update some schedules for DCAA!

H2H

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Navy and Vern, my post was in response to the questions raised by H2H in his post #4, particularly the last one. For clarity, an "incurred cost submission" is DCAA speak for a proposal to establish final indirect cost rates as described in FAR Subpart 42.7. I disagree that FAR 52.216-16 requires any such submission.

The text of the clause certainly does not mention establishment of final indirect cost rates. In this regard, compare 52.216-16 and 52.216-7. What 52.216-16 requires is a statement of costs incurred in the format found in Table 15-2. Part III.c. of 15-2 gives the format for a price revision/redetermination proposal. Nothing there or anyplace else in 15-2 mentions or implies that a contractor is required to submit a proposal to establish final indirect cost rates.

For these reasons, and 42.705-1( B ), I say that 52.216-7 is the only clause in the FAR that requires a contractor to submit a proposal to establish final indirect cost rates.

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Guest Vern Edwards

I agree that 52.216-16 does not require submission of a final indirect cost rate proposal, and I did not say that it does.

I was using "incurred cost submission" to mean the submission required by 52.216-16( c). (I was unaware that DCAA uses the term "incurred cost submission" for indirect cost rate proposals. FAR calls them "final indirect cost rate proposals." See FAR 42.705-1(B)(1), 42.705-2(B)(1), and 52.216-7((d)(2)(i), not incurred cost submissions. The term "incurred cost submission" does not appear in FAR. You and DCAA can call them what you want, but FAR rules.)

However, final indirect cost rates must be established for FPI contracts, and I read FAR 42.703-1( c)(2) to say that if a contractor has negotiated final indirect cost rates it must use those rates for establishing total final cost for FPI contracts. And I think that's why they asked help to list his FPI contracts, so they would know to which contracts the final rates would apply.

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Vern, I'm not sure you're right that final indirect cost rates must be established for FPI contracts. As a matter of fact, the clause seems to contemplate not waiting for them. Paragraph ( c)(1) calls for submission, within some specified number of days after delivery of the last unit of supplies or completion of services, of a statement of costs incurred, along with an estimate of costs of further performance. Paragraph (d) requires the contracting officer, upon receipt of this data, to "promptly establish the total final price," by negotiating (see paragraph (d)(1)) the total final cost and making the adjustment for profit or loss as specified in paragraph (d)(2).

As I expect everyone knows, final indirect cost rates are rarely established promptly enough to have them available for use in this scenario, unless the number of days specified in ( c)(1) has 4-digits.

I also note that paragraph (e) says the total final price "shall not be subject to revision, notwithstanding any changes in the cost of performing the contract," clearly implying that the total final price will likely be established before the total costs of performance are fully known with audited certainty.

I, too, read FAR 42.703-1( c)(2) to say that if a contractor has negotiated final indirect cost rates it must use those rates for establishing total final cost for FPI contracts, but do you think the language ". . . and in other situations requiring that indirect costs be settled before contract prices are established" implies that it is required for FPI contracts, too?

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Guest Vern Edwards

Navy:

I agree. I don't think the parties have to wait to establish final indirect cost rates per FAR 42.705 before agreeing on total final price under an FPI contract, but that if they have established such rates they must use them to determine total final cost incurred.

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All,

This has been a very helpful discussion. You helped me to solve two problems!

Up until now, it was the opinion of some very savvy and seasoned (contractor) folks that the only way to close-out an FP Incentive contract was to either (1) wait until final rates had been negotiated for all years of performance while funds to pay the incentive fee expired, or (2) convert the contract type to firm, Fixed-price and then close it out. You all have given me a third option, which I very much appreciate.

Thanks!

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