Jump to content

G&A and Profit on Bonds


Velhammer

Recommended Posts

Vel, please illustrate how the G&A and profit is being applied to the bond. Years ago , I had one contractor apply G&A to the bond in the calculation but never encountered that since.

Link to comment
Share on other sites

Hi Joel. Sure, here is what they do (numbers are fictious).

Assume the contract amount is: $100,000 including G&A and profit. They will use the same rates to apply to the bond premium amount, illustrated below.

Bond Premium: .80% $800

G&A: 5.% $40

Profit 5.% $42

Link to comment
Share on other sites

Is this a sole-source cost-reimbursement construction contract? Are you pre-award, and negotiating the price?

It is interesting to note that Government reimbursement for bond premiums in fixed-price construction contracts is limited to the amount the contractor actually pays, and only after the contractor provides evidence of full payment to the surety. See para. ( g ) of the contract clause at FAR 52.232-5. If you're still pre-award, and are negotiating a sole-source cost-reimbursement construction contract, you can try to negotiate bond premium costs out of the G&A and profit pools, treating bond premiums as a direct reimbursable with no overheads or mark-ups. In a competitive environment, well, the competition should provide some weight to keep prices reasonable.

Link to comment
Share on other sites

JI20874: No, it is a FFP MACC. The contractor in question is consistent in using this method for pre-award proposals or post award changes. Understand about reimbursement of the premium, but that doesn't mean they cannot apply G&A and profit and spread those costs over the actual construction activities in the schedule of values. The firm is a major player, and we aren't their only customer. Understand everything is negotiable, but at the moment I'm just trying to find out if it is allowable.

Link to comment
Share on other sites

Vel, thanks for the information. I just realized that I misspoke in my earlier post. That contractor didnt apply G&A to the bond. It applied bond to the bond, because of the method that I believe bonding companies use to bill construction companies for payment and performance bonds. We would get monthly or periodic inquiries from the bond issuing agency, requesting the current contract price, as modified. Upon final payment the agency would inquire as to the final contract price (and time? I don't recall). When I asked a couple of agents, then explained that the they settle up at the end of the contract, based upon the final contract price.

Therefore, your contractor's method of adding G&A and profit to the bond amount isnt proper or representative of the actual bond premium and appears to just be another bite at the apple. The bond premium would actually be .008 X 100,882 or $807.06.

It would be fairer to allow the additional bond premium, based upon .8% of $100,000 bond => $800, plus .8% of the $800 =>$6.4. Using that calculation yields a final price of $100,806.40. PERIOD - no additional G&A or profit. Your method of calculating the total contract price doesnt represent what the contractor's bond or G&A really are.

The oft used methods for determining a G&A rate based on cost of sales for allocation to contracts is developed by dividing total general and administrative expenses by the selected allocation base, e.g., total cost input (i.e., total direct and indirect costs, except G&A), value added cost input (i.e., total cost input except G&A, material and subcontract costs), or single element cost input (e.g., direct labor dollars, direct labor hours, direct materials costs). REF: http://mmcnew.wordpress.com/2010/03/03/overhead-vs-ga-what-is-the-difference/%C2'>

Link to comment
Share on other sites

Joel,

I'm confused. If you are correct that the G&A rate is calculated by dividing the G&A expense pool by the appropriate cost input base, and if the bond premium was an expense included in the cost input base, then wouldn't the contract be applying G&A to the bond premium? That seems to be your arithmetic.

Thanks for the assist.

H2H

Link to comment
Share on other sites

H2H, yes the math does work that way. EDIT: I just never saw G&A applied this way, directly to the bond premium - which will increase the bond premium.

The bonding companies charge the premiums based upon the total contract cost, including the bond.* A point I wanted to make is that the Contractor's point of charging markup on the bond also ends up increasing the bond premium. Thus the bond premium as proposed in the example doesnt represent the actual bond premium to be paid. It would seem that there is a spiral iteration process if one adds anything beyond the bond premium, to the subtotal of direct and indirect costs plus profit. Each time you add anything after "bond", the actual bond premium would be applied to that and goes up.

The one firm that added the additional premium to cover bond premium on the bond premium was closer to being correct, in my opinion. I never saw any other company include the bond premium, then add G&A and profit to it, which would then cause the bond premium to go up by (in this case) .8% of the G&A and profit added. So, if this were a cost type contract, I suppose that the customer would be asked to reimburse that additional cost, too?

The contractor might be able to technically argue that, since bond premiums are in the cost of sales pool that the effective G&A rate is calculated, so then G&A "should" be charged to it. I think that this is negotiable and that such practice actually increases the bond cost.

On the other hand, adding profit after the bond and additional general and administrative overhead cost on the bond - to me- is strictly subjective and negotiable.

*Edit: after this post, I found Engineer Technical Letter ETL 1110-2-573 dated 30 Sep 08. Chapter 5 Covers indirect costs, profit, bods, taxes, etc. Under bonds, it states that the "premium for a performance-payment bond" [are] "written in the full amount of the contract price (including bond)..." Adding G&A and profit to that just isn't normally done and will thus increase the bond price further, which is unreasonable, in my opinion.

Link to comment
Share on other sites

Joel - Just to clarify I have a queston.

In making your points on how G&A and profit are calculated for a bond and applied to the total contract price are you saying that G&A and profit are not allowed on a direct cost of a bond what so ever? If so could you please point to a reference in the FAR, specifically FAR Part 31, that states this.

Link to comment
Share on other sites

I'm not not saying that it is prohibited. I'm saying that it isn't reasonable in my opinion for the reasons explained.

Link to comment
Share on other sites

Velhammer - I do not know of any prohibition in applying G&A and profit to bond premium. In view of a FFP contract my read of FAR Part 31 suggests strongly that bond costs and associated G&A and profit can be found to be reasonable, allocable and therefore allowable (FAR 31.2). Further FAR 31.205-4 specifically states that required bonding is an allowable cost.

Noting comments in the thread one should not confuse the payment for the “bond premium” with determining costs to price a contract that requires bonding.

By example it would seem to me that when preparing costs and a final price for a contract a contractor could and should apply G&A & profit to bond premium. You have provided one example which could be representative of a standalone CLIN for the bond. Here is another if the bond was included in a Mobilization CLIN and suggests the same end result, the bond premium has added G&A and profit applied to it.

Dozer to site $1000

Mobile Office Trailer to Site $1000

Bond Premium $800

Total Mobilization Costs $2800

G&A $140 (5%)

Profit $147 (5% of total costs inclusive of G&A)

Total Price for Mobilization CLIN $3087

Further I disagree with the comment in the thread that adding G&A and profit to bond changes the premium. The bond premium by implied definition of the usual FAR payments clause for construction (52.232-5) is that which is charged and billed by the bonding company. Or stated another way it is not the “contract price” it is the “bond premium”. At completion of contract the full FFP for the CLIN whether for Bond only or, by example for Mobilization, shall be paid. By both your example and mine that means the contractor can get $800 in a progress payment when the appropriate documentation is provided and get the remaining based on either the term of the contract or in final payment if the terms and conditions do not clarify. It is the FFP!

Link to comment
Share on other sites

Carl, if a contractor marks up the bond premium again after adding the bond premium to the subtotal price, I'm saying that it is negotiable. I said that the bonding company will charge the contractor a premium based upon the total price including the further markups on the bond, not what the contractor said the bond premium would be. Further marking up of the bond has not traditionally been the practice in the construction world.

Link to comment
Share on other sites

But you are free to advise Velhammer as you please. And correct, the question has nothing to do with the government making a payment for the bond premium

Link to comment
Share on other sites

Joel Appreciate your perspective but my first hand experience supports that contractors have and will do markups on bond premiums especially in cases where bonding is part of a CLIN such as mobilization. This experience is based on being a KO with the Corps as well as four other agencies.

Link to comment
Share on other sites

  • 1 month later...

I say no to adding G&A and/or profit to bonds cost. It's based on para g of 52.232-5, Payments under Fixed-Price Construction Contracts (Sept 2002) which says, Gov't shall reimburse the amount of premiums paid.

(g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in paragraph (e) of this clause shall not apply to that portion of progress payments attributable to bond premiums.

I don't currently do construction contracts but when I did, we told them how to submit their invoices. We paid for bonds separately and subtracted that from total contract amount to determine base for percent of completion progress payments.

Link to comment
Share on other sites

Regor, to clarify - the question doesn't pertain to how to reimburse the contractor for the bond in a progress payment. That is pretty straight forward .

I believe that the question concerned how to negotiate the contract or modification price when including the cost of the bonds. The debate here concerned whether or not the contractor can charge overhead and profit on the cost of the bond in calculating the total price. In my experience since 1971 with contract and mod negotiating I only remember encountering one construction contractor that charged anything on the cost of the bond. In that case, they charged bond on the bond to account for what the bonding company would actually charge at the end of the contract. My last experience was with a $25 million equitable adjustment in 2012 and they did not charge any G&A or profit on the bond cost.

Others here said they have seen such charges.

The bonding company calculates the final bond cost as a percentage of the final contract price, in my experience.

Link to comment
Share on other sites

Reform, to clarify - the question doesn't pertain to how to reimburse the contractor for the bond in a progress payment. That is pretty straight forward .

I believe that the question concerned how to negotiate the contract or modification price when including the cost of the bonds. The debate here concerned whether or not the contractor can charge overhead and profit on the cost of the bond in calculating the total price. In my experience since 1971 with contract and mod negotiating I only remember encountering one construction contractor that charged anything on the cost of the bond. In that case, they charged bond on the bond to account for what the bonding company would actually charge at the end of the contract. My last experience was with a $25 million equitable adjustment in 2012 and they did not charge any G&A or profit on the bond cost.

Others here said they have seen such charges.

The bonding company calculates the final bond cost as a percentage of the final contract price, in my experience.

I thought it was about invoicing as the OP said it was TO against MACC. I figured that MACC would be competitive so bonds were included in total price. But I'm not working in construction and haven't in a while but when I did, we never asked for nor received a detailed breakout. Our award decision was based on current performance and price so we never saw the bonds, just in payments. When they invoiced for bonds, we took total price, subtracted bonds to establish progreess payment percentage base. I guess I just didn't see a reason to evaluate bond costs separately on a MACC TO. My mistake.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...