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ohnoudidnt14

Percent of cost of performance incurred for personnel

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Reference FAR 52.219-14 (and similar clauses). I've seen several threads in this forum discussing the calculation methodology for determining the “cost of performance incurred for personnel”. I found the “Is this Professor right?” thread (started by contractor100 on 3/23/12) to be particularly informative and, in my humble view, conclusive as to how I have been calculating such costs (Vern's #25, alternate method).

So I need to throw a hypothetical situation out there that I may find myself in soon. On a FFP contract (with resulting FFP subcontracts) I may not have visibility into my subcontractor’s direct labor cost, only an agreed billing rate. How can I credibly calculate the “cost of performance incurred for personnel” if the only data I have from a FFP subcontractor is the total burdened cost of labor? Extending the hypothetical for just a minute, what if I didn't even have the burdened labor rate and purely a FFP subcontract total cost (labor and materials)?

To put this in perspective, say I hire Vernon J. Edwards, Consultant, LLC to assist in contract performance. I pay the LLC $500/hr for services rendered. How could I account for the “cost of performance incurred for personnel” for these services if I have no further data than Vern's external billing rate?

Although it may be inevitable, I don’t mean to get into the nuances of whether or not the LLC (or S-Corp where an owner is performing the work) actually pays a salary to the individual. That is a topic for a different thread.

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Ohno, I'm still at Student Life youth camp this week with only access to a phone and without the inclination to try to search the 13 CFR for Small Business on this phone but did you try looking there? I seem to remember reading about your question there.

I believe that the answer was something to the effect that if you can't determine the personnel cost share of a subcontract then you count the whole subcontract cost as subcontracted personnel. However, I suggest that you seek the answer in Title 13 of the CFRs.

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Oh - First the CFR reference that Joel’s post references is 13 CFR 125.6 but by my read I see nothing that addresses subcontracts in the manner that Joel suggests.

Second and direct to the overall hypothetical I do not get it?

FAR 52.219-14 states that you, as the prime is “agreeing” to meet the subcontracting limitations stated. Pardon me but one would think that since the matter of your agreement to the limitations goes to your “responsibility” to perform that you as the prime would require your proposed and actual subcontractors to furnish you the necessary information to comply. And in those cases where you believe you cannot compel them to do so then I would suggest it would be a risk that you would have to assume. But remember if a CO does want to question your “responsibility” with regard to the limitation matter and refers the matter to SBA properly the SBA will probably ask you some very pointed questions regarding your ability to meet the standards of the subcontracting limitations before determining to issue or denying to issue a COC (FAR Part 19.6).

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Yes, FAR 52.219-14 (or the similar clauses for HUBZone, SDVOSB, WOSB/EDWOSB set-asides) are an "agreement" that a prime contractor commits to with a bid. As a part of the "responsibility", I track this during performance. As work inevitably changes (whether incorporated by contract modifications or not), these percentages vary and in some cases need to be closely tracked. In my case, I have professional service providers (accountants, lawyers, etc.) that may be direct cost to the contract. I don't anticipate being able to get a DLR from these providers, but want to include them in the calculations since they are direct cost "incurred for personnel". I was just hoping that there is some precedence out there somewhere as to how the SBA would figure this...but haven't found anything yet.

Thank you

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There is not much information about the enforcement of subcontracting limitations after contract award. The issue seems to come up mainly during proposal evaluation and in bid protests. It appears that not much effort goes into monitoring contractor compliance after award.

I question whether the limitations are always enforceable if the government modifies the requirement during performance. What if they change the contract in ways that make compliance impossible or impractical?

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I think people are making this far more important than it is. There is simply no need to evaluate 52.219-14 compliance before award -- the only pre-award concern should be if there is something in the proposal that suggests the contractor will not comply -- the clause's real relevance is only post-award, and there it ought to be readily apparent whether or not the contractor is fulfilling the agreement -- if it is not apparent, the contracting officer should simply ask.

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What if they [the Government] change the contract in ways that make compliance impossible or impractical?

I don't know the answer. If performance is possible, but expensive, well, I suppose the Government should pay for the change if it wants the contractor to honor the agreement. If the change makes compliance with the agreement impossible, well, I suppose the contractor's failure could be excused by the contracting officer and serve as a bar to termination for default (or cause).

I am not aware of any authority for the contracting officer to waive the agreement. However, waiving the agreement (because of the impossibility) and forbearing termination (because of the impossibility) are two entirely different matters.

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ji, I think you have underestimated the difficulty with determining compliance with the LOS clause post award. First of all, there is no mechanism provided in the FAR that would allow the government to do this. An audit of costs incurred would not be a mechanism if the prime contract or subcontracts are firm fixed price as the government has no right to audit the costs of such contracts or subcontracts.

Next at what point in time do you measure compliance particularly for supply contracts? During the early stages of a supply contract most of the labor cost may be incurred by subcontractors who are manufacturing components of the end item. This would not be a realistic measurement of compliance for the entire contract.

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I know it is hard for us to PROVE everything.

But we don't have to PROVE everything. If we have some reason to believe, post-award, that a contractor is not complying with the limitations on subcontracting agreement in its contract, it is a simple matter for the contracting officer to require the contractor to show that it is complying -- the burden is on the contractor to comply with the agreement, not on the Government to measure it. Then, the contracting officer's effort is satisfying him- or herself that the contractor has adequately told the story.

[A]t what point in time do you measure compliance particularly for supply contracts?

The contractor's compliance is overall, not on any particular day.

Consider CBCA case no. 2716, Singleton Enterprises. Singleton's contract had a 50% self-performance requirement (but I'm not sure if it was driven by a clause such as FAR 52.219-14 or 52.236-1). Government employees rarely saw Singleton employees and often say subcontractor employees -- based on those observations, the agency decided Singleton was not meeting its 50% agreement and reduced the contract price. The parties ended up at the CBCA. The judge upheld the contract price reduction, writing--

The imposition of damages for failure to meet the 50% threshold is a matter of first impression for this Board. No cases that have been brought to our attention are directly on point, either as to the propriety of assessing damages for this particular breach or how to calculate those damages. That said, after consideration, we find that the Government, as any contracting party, has a right to the benefit of its bargain and, thus, the right to recover damages due to a breach. There is no provision in this contract which prohibits the Government from seeking damages for the breach in issue or which provides a specific remedy for this type of breach.

The judge accepted the Government's observations as establishing proof of Singleton's failure to honor the agreement because Singleton did not provide any proof otherwise.

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I know it is hard for us to PROVE everything.

But we don't have to PROVE everything. If we have some reason to believe, post-award, that a contractor is not complying with the limitations on subcontracting agreement in its contract, it is a simple matter for the contracting officer to require the contractor to show that it is complying -- the burden is on the contractor to comply with the agreement, not on the Government to measure it.

Nonsense. Absent a clause requiring the contractor to prove its compliance, the burden lies with the government to prove noncompliance. Let me put it this way -- noncompliance would be breach of contract. The government cannot validly terminate for default unless it can prove default, and I know of no standard clause that requires a contractor to prove that it is in compliance and not in default with respect to the limitations on subcontracting clause. The decisional language you quoted does not support your proposition that the burden is on the contractor. See Earthstar Construction and Logistics Co., ASBCA 58086, 12-1 BCA ¶ 35461:

Default termination is a drastic sanction that should be imposed “only for good grounds and on solid evidence.” J.D. Hedin Construction Co. v. United States, 408 F.2d 424, 431 (Ct. Cl. 1969). The government bears the burden of proof that a default termination is justified. Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987). Once the government establishes default on the part of the contractor, the burden of proof shifts to the contractor to prove that the default was excusable. DCX, Inc. v. Perry, 79 F.3d 132, 134 (Fed. Cir. 1996); Double B Enterprises, Inc., ASBCA Nos. 52010, 52192, 01-1 BCA ¶ 31,396 at 155,110.

The complete citation for the quote you provided is: Singleton Enterprises v. Department of Transportation, CBCA 2716, 12-2 BCA ¶ 35069. In that case the clause in question was not the FAR 52.219-14. It was probably 52.236-1, since the contract was for construction. The Government had evidence that the contractor did not comply:

In February 2010, beyond the original completion date, but prior to final acceptance, Singleton submitted a form FHWA 1775, Notice of Subcontract Award - Supplemental Information to FHWA. On that form, Singleton specified that it was subcontracting $309,510, or 48.8% of the work, to Talley. FHWA has contended that the above information was false and overstated the value of work retained by Singleton. FHWA relied in large part for its conclusion upon the agreement set out in the August 24, 2009, letter, a document it had not seen during the contract performance. FHWA also relied upon observations of its officials at the site, who uniformly concluded that, at best, the only employees on the site being paid by Singleton were the superintendents, and all physical work was being done by Talley's forces.

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If a contracting officer has no reason to believe the contractor is not meeting the agreement, he or she has no positive duty to inquire. He or she doesn't have to PROVE that the contractor is in compliance with the limitations on subcontracting agreement.

In the Singleton case, the contracting officer had a reason to believe the contractor was not meeting the agreement. The contractor was unable to prove otherwise. The contractor lost.

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ji, I think you have misstated the result in Singleton. The government was able to show by a preponderance of the evidence that Singleton was in default. Singleton was unable to rebut that evidence. Singleton lost.

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ji20874:

You said: 'But we [the Government] don't have to prove anything."

That's wrong. Absent some clause to the contrary, in order for a CO to rightfully take action against a contractor for failure to comply, the CO must be able to prove that the contractor has failed or will fail to comply. With proof in hand, the CO can then demand that the contractor cure or show cause why it should not be held responsible. If you meant something different than what you clearly said, I could not tell from your words.

Yes, the burden is on the contractor to comply, but the burden is on the Government to prove that the contractor did not.

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Vern,

Forget taking action against a contractor. I'm not talking about that. I'm also not talking about proving that the contractor did not comply. I'm talking about contracting officers PROVING that contractors are complying.

I'm saying that as long as a contracting officer has no reason to believe the contractor is failing to live up to its subcontracting limitations agreement, he or she has no duty to PROVE that the contractor is complying. There is no affirmative duty of the contracting officer to do anything regarding the 52.219-14 clause. Absent information suggesting otherwise, contracting officers need not do anything to enforce the 52.219-14 clause. As has been pointed out, there is no good way to PROVE compliance anyway.

I reject the notion that every contracting officer in every federal agency must PROVE that every contractor is complying with its subcontracting limitation agreements, in contracts containing such.

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I think people are making this far more important than it is. There is simply no need to evaluate 52.219-14 compliance before award -- the only pre-award concern should be if there is something in the proposal that suggests the contractor will not comply -- the clause's real relevance is only post-award, and there it ought to be readily apparent whether or not the contractor is fulfilling the agreement -- if it is not apparent, the contracting officer should simply ask.

ji, I disagree with you. See http://www.gao.gov/assets/670/663099.pdf

Years ago, DoD had a special SDB Set-aside program. I could see through all sorts of front schemes that we rejected during source selections. Our actions were upheld in agency protests that went no further at the time.

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ji20874:

You wrote:

Vern,

I reject the notion that every contracting officer in every federal agency must PROVE that every contractor is complying with its subcontracting limitation agreements, in contracts containing such.

So, which COs in which federal agencies must, and which need not? According to FAR 1.602-2, "Responsibilities":

Contracting officers are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships.

Aren't the limitations on subcontracting a term of the contract and an interest of the United States? Isn't that why they are imposed by statute, 15 USC § 657s, and by regulation, 13 CFR § 125.6? And doesn't 13 CFR § 125.6 (j) say:

The contracting officer must document a small business concern’s performance of work requirements as part of the small business’ performance evaluation in accordance with the procedures set forth in FAR 42.1502. The contracting officer must also evaluate compliance for future contract awards in accordance with the procedures set forth in FAR 9.104–6.

In light of the statute and the regulations, why do you reject the notion that every CO should be proactive in ensuring compliance with FAR 52.219-14? I realize that would be impractical, but you seem to reject the notion as a matter of principle. Why, as a matter of principle, shouldn't every CO be proactive in ensuring compliance with the limitations?

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Woah...slow down that horse!!!

Interesting exchanges here to say the least. Keep in mind that MOST of the limitations on subcontracting requirements apply to the entire contract and not to any particular arbitrary time in contract performance. I am making every effort to comply, so If I can lead you all back to the original question: How can I credibly account for the personnel cost for professional services when the only data I have is the fully burdened labor rate from that entity?

That said (and now just to stir the pot a bit), absent any other information (e.g. certified payroll) in the Singleton case, how would you know that the Singleton individuals on the contract weren't compensated at a much higher DLR than their subcontractor personnel, thus possibly meeting the applicable percentage of "cost incurred for personnel"? That is, say four performing subcontractor personnel are making $20/hr and one prime contractor superintendent is making $80/hr. The prime is, thus, incurring 50% of the cost of personnel (simplifying for the point of argument and not considering indirect cost, etc.).

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How can I credibly account for the personnel cost for professional services when the only data I have is the fully burdened labor rate from that entity?

Your question pertains to the limitation on subcontracting clause, FAR 52.219-14, which says, in pertinent part:

( c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for--
(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

"The cost of contract performance incurred for personnel" is the cost to the prime. If a prime is paying a sub by the hour at a burdened hourly rate under a T&M or L&H contract, then the hourly rate paid to the sub for the labor of the sub's employees, less an amount for profit, times the number of hours worked by the sub, is "the cost of contract performance incurred for personnel", as defined in 13 CFR § 125.6(e)(2), for the employees of the sub. The prime ought to know how many hours it is billed for. The prime need not know the composition (breakdown) of the hourly rate paid to the sub, except to allow an amount for profit, which it can guesstimate.

So in order to determine compliance with the limitations clause, FAR 52.219-14( c)(1), the prime needs to know how much it spent for whatever work was done by its own personnel and how much it paid to the subcontractor for the work done by the sub's personnel [hours x (rate - profit)]. The costs for its own personnel plus what it paid for the work of the sub's personnel [hours x (rates - profit)] are the total costs of performance incurred for personnel. The total costs of performance incurred for personnel divided by the costs for the prime's personnel would give the percentage of the costs of performance incurred for personnel for the prime's employees.

Thus, if the prime spent $ 400,000 for the work done by its own employees, and paid its subcontractor at $100 per hour (rate - profit) for 6,000 hours for a total of $ 600,000 for the work done by the sub's employees, the prime's total costs incurred for personnel would be $1,000,000 and the prime would have expended 40 percent of the total cost of performance incurred for personnel for its own employees.

I have answered your question.

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The total costs of performance incurred for personnel divided by the costs for the prime's personnel would give the percentage of the costs of performance incurred for personnel for the prime's employees.

I think you meant the total costs for the prime's personnel ($400,000 in your example) divided by the total costs of performance incurred for personnel ($1,000,000 in your example) would give the percentage of costs of performance incurred for personnel. Your example is correct.

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One point is unclear regarding a determination as to whether a prime contractor has complied with the LOS clause and that is whether some prime G&A should be considered in that determination. If a contractor computes its G&A using a base that includes subcontract costs, a portion of the prime's G&A will be allocated to a contract because of subcontract costs allocated to that contract. It is unclear whether this G&A should be considered in determining whether the prime has complied with the LOS clause.

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Retread:

Here is the definition in 13 CFR 125.6(e)(2):

Cost of contract performance incurred for personnel. Direct labor costs and any overhead which has only direct labor as its base, plus the concern's General and Administrative rate multiplied by the labor cost.

So I think you're right that the prime's G&A must be included in the calculation. Thanks.

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Vern, you were very helpful in answering the question, thank you very much. I think you can understand my hesitation as I was attempting to apply the definition in 13 CFR 125.6(e)(2) to my "cost of contract performance incurred for personnel" of my subcontractor(s). Your way is definitely easier and I hope this helps others out there with a similar question.

When the FAR is ultimately updated to included "similarly situated entities" for SDVOSB, EDWOSB/WOSB, and Total-SB set-asides (like it reads now for HUBZones) this will be increasingly important as some sub-contractors will be counted as satisfying the applicable performance requirement.

As for all of the other discussions here regarding the application of G&A, etc. to the calculation, I encourage you all to go read the “Is this Professor right?” thread started by contractor100 on 3/23/12. It's a long thread, so be sure to read all the way to the end. There is a lot of very good information and (as I mentioned in the initial post here) I have gone with Vern's alternate method in Post #25 of that thread.

Cheers and a safe 4th of July holiday to all.

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Joel,

The case you cite is not relevant to my comment. In my comment, I said, "the only pre-award concern should be if there is something in the proposal that suggests the contractor will not comply."

The case you cite fully supports my comment. Here's an extract--

...MindPoint, on the face of its proposal, took exception to the requirement that employees of MindPoint will perform at least 50 percent of the cost of contract performance incurred for personnel. . . . Where a proposal, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal’s acceptability.

Vern,

You attributed principle to me and practicality to yourself, but maybe they are the same. I say that a contracting officer need not pre-award exhaustively PROVE that a contractor will comply with the limitations on subcontracting agreement in a proposed contract award, in the absence of any indicator otherwise. It's a matter of post-award administration. Similarly, we need not pre-award exhaustively PROVE that a proposed contractor will comply with the Buy American Act all the way down to the nut-and-bolt level -- but the clause is in the contract for post-award adminisration purposes and we might have a submittals approval process. We need not pre-award exhaustively PROVE that a proposed contractor will comply with every jot and tittle of the Service Contract Act. If we tried to pre-award exhaustively PROVE that every proposed contractor would comply with every jot and tittle of every clause and statute, every single one of them, well, we would never get anything awarded -- the burdenon offerors and the contracting agencies would be too high. Note: all of this is in the absence of something indicating otherwise. If there is something indicating otherwise, such as in the procurement history or in the proposals on the table (or an indicator from a competitor), well, that's not the condition I am describing.

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