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Contract Type: CPFF

I am currently analyzing a pricing proposal that used a combined OH and G&A Rate. I am concerned on how it's used for their breakdown. Example below:

  1. Direct Labor: 100,000
  2. Rate (OH + G&A = 100%): $100,000
  3. Materials: 50,000
  4. ODC: 500
  5. SubK: 1000
  6. Subtotal: 251,500
  7. Fee (1%): 2,515
  8. Total Price: 254,015

My concern is that the G&A was not applied to the other cost elements of 3 and 4. The subk total should not be counted, if I am not mistaken, due Value Added reasons.

My Question is if anyone has encountered this before of a proposal using a combined rate? if so, is the breakdown example the "correct way" of applying the rate?

Any suggestions would be appreciated. Thank you.

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Is your question regarding the G&A being based only on direct labor and materials, without including other direct costs and subcontracting costs?

See DCAA Manual 7641.90, Information for Contractors: "The G&A rate 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)."

Or is your question on the notion of a combined overhead and G&A rate?

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Govpricer2015, you did not say if the contract is subject to the CAS. However, because the contractor is using a single indirect cost rate, I will assume that it is not CAS covered.

The FAR does not require contractors to establish any specific indirect cost pools. All the FAR does is require that a contractor accumulate indirect costs in pools so that each cost in the pool has essentially the same beneficial or equitable relationship to base costs as other pool costs. As long as that requirement is met, the government should have no complaint. Look at the contractor's accounting policies and procedures to see how it allocates indirect costs, i.e., the pools and bases. If the contractor has complied with its accounting policies, you have to determine if the application of those policies results in an allocation of indirect costs in accordance with FAR 31.203.

As for G&A on non-CAS covered contracts, the FAR does not limit a contractor to the three allocation bases found in the CAS. Thus, a contractor is free to use whatever allocation base it wants so long as it results in the contractor complying with 31.203.

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Since the contract is CPFF, you have to make sure that the proposal reflects the offeror's likely costs as it will bill them. FAR 52.216-7 and 31.203 apply. FAR 2.101 defines G&A.

CAS aside, your example makes no sense based on ordinary cost accounting terminology and practice. The combined rate would result in what would ordinarily be an inappropriate allocation of G&A expenses. You should seek clarification and and explanation from the offeror. What does the offeror mean by G&A. What expenses are included in G&A? Are those expenses properly allocated only to direct labor? Is the combined rate reflective of the contractor's standard practice?

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Govtpricer2015, another thought. The contractor needs to have an adequate accounting system in order to be awarded a CPFF contract and to be found responsible. Have you thought about having the offeror's accounting system reviewed to determine if it meets FAR and any agency supplement requirements?

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If the contractor has a single element G&A expense allocation base (as permitted by CAS 410) which uses direct labor dollars as the allocation base, and if it has an overhead pool that also uses direct labor dollars as the allocation base, then there is absolutely nothing -- repeat nothing -- wrong with combining those two pools and applying them as one to the direct labor dollars being proposed. That's just an estimating technique that mimics how the costs will be incurred and billed.

The example in the original post makes perfect mathematical sense and is 100% compliant with all rules and regulations, assuming the contractor applies G&A on the single element of direct labor dollars, which it can choose to do. For example, in an engineering services environment where what is being managed is labor and not the other cost elements, a single element G&A base using direct labor dollars would not only be permissible, it would be REQUIRED (see the Ford Aerospace decision).

Hope this helps.

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help:

Don't you think it matters that the offeror is describing its rate as "combined"? It is including what it is calling "overhead" with what it is calling "G&A", with both applied to the same allocation base. Wouldn't that make you want to ask some questions?

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Vern,

I don't know. I worked for a multi-billion dollar engineering services provider for a number of years; we were on the DOD Top 100 contractor list. We used a combined rate that included fringe, overhead and G&A expense. Everything was allocated on Direct Labor dollars. If you have all the pools allocated on the same single cost element then it doesn't matter whether you combine them or not; you still get the same answer.

What is the contractor's normal practice? What is the size of the contractor? Does it have multiple pools and multiple bases? Is this an abberration or the normal practice? We don't know because those facts weren't specified.

My point was that the proposed approach was not automatically wrong. It could be right. Certainly, a savvy CO should probe a bit. Are there recent DCAA audit reports that might be relevant? Is there a Disclosure Statement? Does it matter if the two pools are separated and proposed separately? No reason not to probe and probably worth doing. Just please don't assume the approach is wrong.

When I teach cost/price analysis (or CAS) I have an exercise where the same costs are allocated over different bases, so show why just looking at a rate and automatically assuming it is too high or low is not a good approach. The contractor is going to recover its allocated indirect costs based on how the allocation base is consumed during contract performance, regardless of the base used.

Anyway, submitted for what it's worth.

H2H

P.S. I have sent two inquiries to FAR Bootcamp/Critical Thinking and not yet received any reply. Can you speak to the people running the show and ask them to reply, please?

H2H

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Thank you for everyone's input! It is a tremendous help getting everyone's perspectives on how to approach this analysis. Questions have been asked but there still needs more clarification on the K's side.

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