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Hi

I'm looking at a proposal under the following scenario:

Single Source Award/Certified C&P Data required

Contract Type FFP (one T&M CLIN)

Offeror:

CAS covered (submits D/S).

IAW Disclosed Practices G&A base is TCI.

Offeror has a pool for material handling (M&H) (base - direct materials).

Direct materials and the expenses on the M&H pool are part of the G&A base.

1. Here's the way the offeror is burdening materials in the proposal:

Lets assume the M&H rate is 5% and G&A is 50%

Direct Materials is $100,000

Materials 100,000

M&H 5,000

Subtotal 105,000

G&A 52,500 (subtotal x G&A)

Total Material Cost 157,000

2. Here's the way I believe it materials should be burdened when the offeror has an M&H pool (value added G&A):

Materials 100,000

M&H 5,000

Subtotal 105,000

G&A 2,500 ( M&H expense x G&A)

Total Material Cost 107,500

3. Or if offeror has a TCI base:

Materials 100,000

G&A 50,000

Total Material Cost 150,000

So basically they are applying G&A on top of M&H and materials. believe that if the offeror applies an M&H to materials it can apply G&A to the handling expense only and not to the direct material cost. If the offeror has a TCI allocation base for G&A, then it should only apply G&A to direct materials with no M&H.

Are they doing this correctly or am I wrong?

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You did not say that the DS has been approved. If it has, have you discussed this issue with the auditor and ACO? If it has not, and this is a disclosed accounting practice, why do you not bring this up with the auditor and ACO so they can specifically address it in their review of the DS?

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Neurotic,

You give a scenario, one showing $157,000 as the outcome and the other showing $150,000 as the outcome. But you don't tell us if you're working under a firm-fixed-price (FFP) CLIN or the time-and-materials (T&M) CLIN.

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Retreadfed

We reached out to the ACO and they are looking into their D/S. ACO said that last 2 D/S revisions have not been reviewed. DCMA has worked with this contractor before and has seen their rate structure. That doesn't necessarily mean the cost buildup is correct.

ji20874

Not sure why it would make a difference but ...materials are in FFP CLINs. T&M will be used for field service/repairs. Scenario 1 (157,000) is the way the vendor is proposing.

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Neurotic, we still do not know if this accounting practice has been approved by the ACO as compliant with the CAS. However, if we assume it has been, can you explain what authority you have to require the contractor to propose in a way that would be inconsistent with its DS in light of FAR 52.230-2 and CAS 401? Also, can you tell us if you believe you have the authority to ignore the ACO's approval of the DS and require the contractor to propose in a manner that is inconsistent with its approved DS?

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Alright. Assuming their disclosed and approved accounting practice is a TCI G&A base.

with that assumption...can they burden the direct materials with a M&H rate and then burden the sum of direct materials and burden with G&A (TCI)?

(materials + MH burden+ G&A)

have you seen a contractor with a TCI G&A who also has a M&H pool?

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I have not seen such an accounting structure, but that does not mean that it is not an acceptable accounting practice. We don't know what costs are in the MH pool and what costs are in the G&A pool. Presumably, there is not an overlap, which would be a problem if the contractor included the same cost in two pools. Further, we don't know if the contractor has contracts that consistently have a relatively uniform amount of material in relation to labor, or if the amount of material can vary significantly from contract to contract. Using this accounting method may be the contractor's way of allocating the costs in the MH pool to those contracts that benefit from them and not burdening the contracts that do not benefit from them (allocation of costs on a causal or beneficial basis). In sum, there are a lot of considerations that go into determining whether this accounting practice is CAS compliant and results in an equitable allocation of costs to contracts. No one in this forum can answer those questions. You have to rely upon the auditor and ACO for assistance in this regard.

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Neurotic,

Your scenario #1, where a contractor has both a material handling pool and a TCI-based G&A expense rate is correct. Your scenario #2, where a contractor has both a material handling pool and a Value-Added Base G&A expense rate, is also correct. Your scenario #3, where a contractor has both a material handling pool and a TCI-based G&A expense rate, is wrong.

Look at it this way:

1. The contractor can choose any cost allocation structure that is CAS-compliant. For example, the contractor can choose whether or not to have a material handling pool. The contractor can also choose which G&A allocation base it can use, so long as the allocation base is one of the three permitted by CAS 410 (assuming CAS is applicable). Yes, the allocation bases chosen have to comply with the requirement to have a logical beneficial or causal relationship between pool and base -- but aside from that, the contractor has lattitude to choose its structure and allocation practices.

2. In your scenario #1, the contractor has both a material handling pool and a G&A expense pool. That is fine. There is nothing noncompliant and such a choice is fully permissible.

3. The contractor has chosen a TCI base for G&A expense allocation. Also fine. That is one of the three permissible G&A allocation bases, per CAS 410.

4. CAS 410 defines the TCI allocation base. It is simple: all cost input before G&A. "All" means all. No exclusions. In particular, neither the material handling pool nor the direct material can be excluded. If the contractor were to exclude any costs, it would be "fragmenting" the base and would be in noncompliance with CAS 410. Thus, scenario #1 is fine and scenario #3 is wrong.

5. Similarly, in your scenario #2, the contractor has a material handling pool and a Value-Added Base (VAB) for allocating G&A expense. CAS 410 defines the VAB and it is a mathematical formula: TCI minus Direct Material dollars minus Subcontractor Dollars. So the direct material is excluded but not the material handling pool -- because the CAS 410 VAB formula does not prescribe it to be excluded. (I dealt with a CAS 410 noncompliance matter back in the late 80's where the contractor excluded the material handling pool in its VAB calculations, which increased the G&A expense rate. No bueno.)

To sum up, you seem to be under the impression that a contractor must use a VAB when it has a material handling pool. That is not the case.

Hope this helps.

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Wow! here_2_help wrote an answer worth paying for. A model answer. It should be studied for both content and structure. Clear as glass and succinct. My compliments. The best answer I've ever read at Wifcon.

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Thank you all for your input. Very thorough explanation from h2h. For what it's worth, scenario 3 assumed a TCI base without a M&H pool but I didn't not make that clear.

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