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Mary D

Removal of Fee on Contractor Acquired Property

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It has come to my attention that the government is trying to amend the Federal Acquisition Regulations to remove the ability of contractors to charge fee on materials purchased under a CPFF contract. See the latest proposed changes:

FAR 15.404-4(a)(3) as follows-- ``Unless the

contractor acquired property is a deliverable under the contract, no

profit or fee shall be permitted on the cost of the property.''

Reference website:

http://www.regulations.gov/search/Regs/hom...900006480a0279f

Has anyone else heard anything about this change or seen any commentaries on it? This has HUGE implications for CPFF contracts.

I don't see how this can practically be applied without incurring a huge expense tracking every resistor etc that goes into a deliverable. And then you would not be able to assess fee until after delivery.

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It has come to my attention that the government is trying to amend the Federal Acquisition Regulations to remove the ability of contractors to charge fee on materials purchased under a CPFF contract. See the latest proposed changes:

FAR 15.404-4(a)(3) as follows-- ``Unless the

contractor acquired property is a deliverable under the contract, no

profit or fee shall be permitted on the cost of the property.''

Reference website:

http://www.regulations.gov/search/Regs/hom...900006480a0279f

Has anyone else heard anything about this change or seen any commentaries on it? This has HUGE implications for CPFF contracts.

I don't see how this can practically be applied without incurring a huge expense tracking every resistor etc that goes into a deliverable. And then you would not be able to assess fee until after delivery.

I hadn't seen it before and frankly do not understand it. I just sent a comment to the FAR councils to the effect that the meaning of the new sentence is obscure. I suspect it means that the government cannot include the cost of such property in its cost base for the purposes of developing a prenegotiation profit objective.

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Mary_D,

You need to read the rule again. It says:

"Unless the contractor acquired property is a deliverable under the contract, no profit or fee shall be permitted on the cost of the property."

A similar rule used to be in the pre-FAR 45 rewrite at FAR Part 45.302-3( c ):

( c ) No profit or fee shall be allowed on the cost of the facilities when purchased for the account of the Government under other than a facilities contract. General purpose components of special tooling or special test equipment are not facilities.

When FAR Part 45 was rewritten, this limitation was removed. Now it looks like they want to re-establish the rule.

I also didn't like the way the proposed rule was written and submitted a comment suggesting that they remove the "profit or fee on..." business and just say to exclude the cost of contractor-acquired property from pre-negotiation cost objectives when developing a prenegotiation profit/fee objective (similar to what it says about excluding FCCM from prenegotiation cost objectives).

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When FAR Part 45 was rewritten, this limitation was removed. Now it looks like they want to re-establish the rule.

This looks to me like a much broader exclusion than the previous rule. This looks to me like a serious attempt to reduce profits.

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This seems to be a case where:

Unless the contractor acquired property is a deliverable under the contract, = benefit of ownership to the contractor, not the government

no profit or fee shall be permitted on the cost of the property = no benefit to the government means no profit or fee will be paid. We will pay for the article, but not the profit or fee.

I can imagine cases where the contractor purchases property such as special tooling, and passes the cost including profit or fee to the government. The contractor then keeps the equipment after the contract has concluded, and uses it on other contracts.

This seems on the face to be unfair to the government, but I have not seriously looked at this scenario before now. The wording of the new regulation does seem to be a bit broad, because I can see a number of interpretations other than the one I posted above. Sloppy regulations do not benefit either the government or the contractor. They only benefit the lawyers that end up arguing in court about the sloppy regulation.

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"Contractor-acquired property" means property acquired, fabricated, or otherwise provided by the contractor for performing a contract, and to which the Government has title. (Ref: FAR 45.101, Definitions.) Don, it is not the same as facilties, as the definition encompasses all items acquired by the contractor to perform the contract to which title passes to the Government, such as directly charged equipment, personal protective gear, etc. There's quite a bit to be said about title passage and contract type, but this probably isn't the place for such a discussion.

So in other words, this proposed rule intends to eliminate proposed profit/fee on contractor-acquired items that are necessary to perform a contract. I agree with Vern's take on this -- it is a serious attempt to reduce profits. I hope the correct interpretation is that this affects only prenegotiation objectives, allowing room for the contractor to negotiate a fair return on its expenditures.

Hope this helps.

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I spoke with Professor Douglas Goetz, an true expert on Government Property, of Defense Acquisition University and asked him the very question about the FAR case excluding profit on contractor-acquired property that is not part of the delivered product to the Govt.

He mentioned that the FAR Case was intended to address the matter (i.e. no fee/profit) with regards to facilities contracts and it does. That concept was inadvertently extended to apply to non-facilities contracts.

Many, many, many times prime contractors buy materials from different vendors to test in their development & manufacturing process to determine which material is most suitable for meeting the Govt.'s requirements. Then, the prime selects the best material and the remainder does not end up in the delivered product to the Govt. This common risk reduction practices requires time, effort, and material necessary to provide a compliant, cost-effective deliverable and should be fee/profit bearing. The Govt. benefits greatly from this practice.

Even if this FAR case language did pass "as is", I think the parties would find it nearly impossible to determine how much, and especially which, material would end up in the final deliverable product. Negotiating that would be a futile exercise. Nonetheless, let's hope the FAR Case is clarified and this idea of no fee on material not delivered as part of a completion type supply item deliverable goes no where.

By the way, Professor Goetz wrote an excellent article in the Summer 2008 NCMA Journal dealing with the subtleties of when title of contractor-acquired-property transfers to the Govt., when contractor-acquired-property needs to be tracked IAW Government Property clauses, and how conflicting FAR language can lead to tax implications on such contractor-acquired-property. Even if you are not interested in the tax implication aspect, it provides a good summary of handling contractor-acquired-property.

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Incentivize Me wrote:

I spoke with Professor Douglas Goetz, an true expert on Government Property, of Defense Acquisition University and asked him the very question about the FAR case excluding profit on contractor-acquired property that is not part of the delivered product to the Govt.

The rule says that no profit will be allowed on property that is not itself "a deliverable." It does not say "property that is not part of the delivered product." What does "deliverable" mean? I have always understood it to mean a specified item. I have not understood the word "deliverable" to include stuff that becomes part of a deliverable, but is not separately identified or priced.

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"Contractor-acquired property" means property acquired, fabricated, or otherwise provided by the contractor for performing a contract, and to which the Government has title. (Ref: FAR 45.101, Definitions.) Don, it is not the same as facilties, as the definition encompasses all items acquired by the contractor to perform the contract to which title passes to the Government, such as directly charged equipment, personal protective gear, etc. There's quite a bit to be said about title passage and contract type, but this probably isn't the place for such a discussion.

here_2_help,

I agree that the current definition of contractor-acquired property is broader than the old definition of facilities.

Having said that, are you suggesting that equipment did not fall under the old definition of facilities?

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From FAR Case 2008-11....." Language was added to FAR 15.404?4(a)(3) as follows? ??Unless the contractor acquired property is a deliverable under the contract, no profit or fee shall be permitted on the cost of the property.?? "

I see the distinction you are trying to make interpreting the language as a deliverable itself vice being material that comprised part of the final delivered product.

It may be a bad assumption on my part to assume this proposed language deals with contractor acquired property that is part of a deliverable (a broader interpretation) vice it being in and of itself a deliverable (a more strict interpretation). However, if it's the later interpretation, I'm lost as to what the intent of the proposed language would be. In that scenario, the contractor would only get profit on an item it acquires as a whole from its subcontractor and delivers "as is" to the Government. The majority of Government dollars spent on supplies involve the contractor acquiring material that is that bent, shaped, modified, configured (or otherwise twisted, turned, etc.) into a whole that is greater than the sum of its parts. The stricter interpretation would mean the Govt. is advocating (i.e. rewarding via profit) effort that is basically buying COTS "as is" and never rewarding innovation or using Govt. unique requirements. Maybe that's what Uncle Sam meant but as a taxpayer wanting my tax dollars spent wisely to support our troops and enhance our national security, I hope not.

Regardless, either interpretation is bad for both the Contractor and the Government. Hopefully, the FAR Case language will be clarified.

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I know what the language says, but I have no idea what it means. Your analysis makes sense, but who knows?

I am not an admirer of the work of the FAR councils, but the language used in the proposed change is stunningly bad.

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I know what the language says, but I have no idea what it means. Your analysis makes sense, but who knows?

I am not an admirer of the work of the FAR councils, but the language used in the proposed change is stunningly bad.

Well, I posted a comment accordingly to the openregs.com website under this FAR Case. Surprised how user friendly the site is. First time I've submitted a comment on a FAR Case. We'll see if/how it gets addressed.

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here_2_help,

I agree that the current definition of contractor-acquired property is broader than the old definition of facilities.

Having said that, are you suggesting that equipment did not fall under the old definition of facilities?

Don, I know better than to discuss property issues without the FAR and DCMA guidance close at hand. I have neither at the moment, so I pass.

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