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Proposal Costs Incurred on a FFP Contract

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My Contracting Officer issued a RFP to us on an existing contract for some additional items to be procured by us. The contract is FFP and we spent about $5K of labor costs obtaining the necessary quotes and preparing the price proposal for submission to the USG. Those (proposal) costs were included in the FFP price we submitted (to the USG). Shortly after the proposal was submitted, we were notified that the USG has determined they no longer need the additional items to be procured. What are our options for seeking reimbursement of the $5K in proposal costs?

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Were you required by the terms of your contract to provide a proposal? If not, then the costs must be recovered through the appropriate indirect expense pool (see FAR 31.205-18.) If the terms of your contract explicitly required you to submit a proposal, then you may have a case for an equitable adjustment, depending on what the precise terms of your contract say about the matter.

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Let me add to what Navy said.

The allocability of the cost turns on the contractor's practices, and whether the proposal prep costs were required by the existing contract. Was the proposal requested through the Changes clause or via a SOW line item? If the proposal were to be accepted, would the result be a modification to the existing contract? If the contractor were to refuse to submit a proposal, would it be in breach of the contract? What does the contractor do in such circumstances? Remember it has to be consistent from one contract to the next. It cannot pick and choose when it charges proposal prep costs direct and when it charges them indirect.

If the contractor's practice is to charge proposal preparation costs to the requiring contract AND it is concluded that the existing contract required the proposal to be submitted, then the costs must be charged to the requiring contract. See CAS 402, Interpretation No. 1 and CAS 420. Note that CAS 420 is invoked by 31.205-18 as a condition of cost allowability.

Now none of that addresses recoverability. If the proposal prep costs were properly charged as direct costs of the FFP contract then regardless of whether the proposal was accepted and the contract was ultimately modified, the government must make the contractor whole from its unplanned and unpriced additional scope (i.e., the request to submit a proposal). That's just my opinion, of course. (And I see it's Navy's opinion as well.) I see it as a matter of fundamental fairness. The contractor was performing IAW the contract SOW and all was going fine, then the customer asked for a proposal to change scope. That additional effort had a cost, and I think the contractor is due an equitable adjustment to contract price for that additional cost. Your mileage may vary.

Hope this helps.

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What if the staff that prepare the change proposal were already assigned full time to the FFP contract , part of their duties include preparing change proposalss and the effort doesn't increase or decrease fixed (time related) cost to the contractor - i.e., it doesn't affect the amount of time that the employees will charge to the contract ?

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Joel,

I would say that's a pretty unlikely scenario, or should be. First, nobody should be assigned "full time" to anything. People get paid a salary and that salary is distributed through hours charged to contracts. If somebody is assigned full time then they never get sick or take vacations or go to training or do any administrative work. I don't think so.

Second, if you do have individuals assigned full time to a job, that assumes they are actually working 100% on that job. They don't have time when they sit around with nothing to do, still charging the job. If you assume that they have enough time to work a Change Order proposal without impacting schedule (at least) then they weren't really 100% full time in the first place. How cool to have priced in "full time" employees who were not really working 100% of the time, and had sufficient hours left in the workday to prepare unplanned Change Order proposals! Somebody might call that "defective pricing" but I'm not going to call it that.

Third, while the cost of preparing Change Order proposals varies, if somebody needs to comply with FAR Table 15-2, that is not going to be a cheap proposal. I remember one that cost $5 million and many others that were in the $500,000 to $1 million range. That's not even counting fact-finding and audit support and negotiation support and TINA sweeps and stuff like that.

To sum up, yes I suppose you are correct that if individuals are already priced in to an FFP contract and they can prepare and support a proposal in their spare time, the contractor's equitable adjustment would not be all that large. In my experience, however, that's an unlikely scenario.

H2H

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Here,

The scenario in the OP is of the magnitude of $5k in labor costs. You won't generally see the on-site team preparing change order proposals that cost $500k to $1m to prepare along with their other duties. Actually, the scenario that I envisioned above was typical for construction projects where the on-site office engineer or project controls staff would prepare proposals for typical smaller changes. Larger or more complex proposals would be done by the home office staff not by the onsite staff.

The OP indicated that the Government later decided they "no longer needed the additional items". This may well not be a construction project with dedicated staff. But if it were and the government decided to cancel the change, there could well be liability for proposal costs. The government has been known to go on fishing expeditions, without having a clue as to what cost is involved, then discovers that it cant afford the work. In such cases, I believe that the government has been found to be liable for proposal prep costs. However, on one large civil works contract awhile back - with one of the BIGGIES (top 20 in the Engineering News Record's top 400 contractor list at the time) - our first change request was to build a small garage for the QA/QC staffs to perform concrete cylinder testing. The Contractor was apparently testing us and submitted a jacked-up, gold plated proposal for about 10 times the normal cost for such a structure, including significant proposal prep costs. We rejected thye proposal outright, cancelled the change and sat the project manager and his office engineer down for a heart-to-heart talk on how to cooperate and graduate on the project. We told them to get real in estimating costs and also in their proposal pricing. As part of the agreements reached, unless they could show real additional field overhead costs for proposal prep, we would only pay $50 (about $150 in today's costs) for miscellaneous expenses involved in their on-site staff preparing change proposals, such as variable costs for office supplies, phone calls, mailing, etc.

They actually bought off on that and we had a mutually satisfying relationship for the rest of the contract. In fact, it was one of my favorite projects. I used the same approach concerning proposal prep and field overhead expenses with the rest of my construction contractors and it generally worked.

My point here is that, even though costs may be chargeable to a FFP contract, that doesn't necessarily make them reimbursable on (allocable to) changes. It depends upon the specifics of the situation, the nature of the costs and also how well one can negotiate. From the government's perspective, don't roll over simply because a contractor says that a cost is chargeable to the contract. And DO negotiate logic as well as reasonableness.

I didn't say earlier that we wouldn't pay anything for proposal prep costs. However, it would be negotiable, but not necessarily all reimbursable. And I have dealt with several of the top 10 US construction contractors (as listed by ENR) as well as medium and small firms. The big guys bark loud but that doesn't guarantee anything. Be firm but fair.

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See the following guidance, issued by the Office of the Under Secretary of Defense, AT&L, in September 2011:

http://www.acq.osd.mil/dpap/policy/policyvault/USA002866-11-DPAP.pdf

Then see this commentary on the guidance by a prominent attorney:

http://www.governmentcontractslawblog.com/2011/12/articles/cost-accounting/dod-issues-new-guidance-on-bp-but-is-it-right/

See also ATK Thiokol, Inc. v. U.S., 598 F.3d 1329 (Fed. Cir. 2010).

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I had read Assad's guidance regarding charging proposal costs to contracts or to B&P costs. One must consider how that general guidance applies to a specific situation. In the above scenario, we don't know what type of contract is involved or if the proposal was for a change or for additional scope. We know that the government requested a proposal to its contractor on an unknown type of FFP contract " to purchase some additional items" , then later "...determined they no longer needed the additional items to be procured."

If this is a supply contract, the changes clause at FAR 52.243-1 doesn't address purchasing some additional items does it?

As for Assad's memo, even though costs may be directly chargeable to a FFP contract in the contractor's accounting system, that alone doesn't necessarily make them reimbursable.

If this is a proposal for "some additional items" outsdoutside the scope of the existing contract, it might be chargeable to B&P costs and/or otherwise to the cost of the items, had they been purchased.

There is a danger in generalizing an answer to a specific scenario, especially when the OP only provides some of the information. I'm not specifically referring to any one post herein.

I understand why our lawyers refused to provide an opinion without knowing all of the specifics .

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If we assume that the contractor will be proposing and performing on multiple FFP contract awards over the life of a program, we get an interesting scenario. (Well, it's interesting to me, anyway.)

Contract 1 is awarded for a fixed quantity of widgets. Call it quantity 100. During performance, the CO requests a change order proposal to increase the quantity to 110. Contractor prepares proposal and charges the prep labor direct to the existing contract. CO decides the proposed price is unreasonable and does not mod the existing contract. Contractor requests equitable adjustment to Contract 1 for unplanned proposal prep costs. CO denies REA. Contractor frowns but shrugs.

Contract 2 is awarded sole source. Contractor proposes labor based on actual labor hours incurred for Contract 1. Those actual labor hours include the unrecovered proposal prep hours. Contract 2 price is negotiated inclusive of all proposed direct labor hours. There is no change activity during performance of Contract 2. Good news for the contractor!

Or:

Given the same scenario with respect to Contract 1, in its sole source Contract 2 proposal, the contractor includes a contingency for change order proposal preparation (citing 31.205-7). The contractor asserts that it is a historical fact that there is a certain amount of change order proposal preparation labor involved in the performance of each contract. Looking at existing DoD guidance regarding pricing of contingencies, the CO concludes the contractor has a good case and agrees to include the contingency in the Contract 2 price.

Sorry for the long post -- but my point is that if the contractor cannot recover its costs in the first contract, then prices (with respect to future awards) will tend to increase over time.

As I said, intereresting (to me).

H2H

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