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lacylu

Company Restructuring Adversely Impacts Contract

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Hello Everyone, 

 I have a contract with a large company. We have been informed of a "company restructure" .This restructure ,of course includes rate increases ( indirect & direct) which adversely impacts the existing rates in the contract. The contract type is a mix of CPFF, T&M & FP.  What recourse do I have regarding the acceptance of these increases. I have not accepted anything at this point based on limitation of funds clause and the fact they did not inform us 60 days prior in accordance with CAS clause in the contract. 

Also, they stated their new labor categories (with much higher rates )have been allocated against my contract hours based  on "all" of the contracts within this new organization and not specific to my contract. That seems like it would conflict will allocability required under cost type contracts . I would think they would consider the existing effort it takes to get the job done and not against "all " of the contracts under this new organization.

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lacylu,

The term "company restructure" is ambiguous. Can you tell us what is actually happening? Is a restructure the same as a "reorganization" or does it mean something else?

You say that the contract's CAS clause requires the company to inform you 60 days prior to its restructure. If the restructure resulted in changes to cost accounting practice (as that term is defined by the CAS regulations), then you have a good point. But if there were no changes to cost accounting practice, then there is no requirement to make a prior notification.

You say that the limitation of funds clause is being used to reject the contractor's cost increases that stem from the reorganization. That seems to be a valid approach, except at some point the contractor will stop work, right?

You say that the contractor's new labor categories have much higher rates and ask whether that conflicts with allocability requirements. Again, I'm not sure what you are saying. The labor categories are fixed hourly rates, correct? The relate to the T&M portion of your contract, I presume. If so, cost increases experienced by the contractor (for whatever reason) would seem to be irrelevant to the billing rates.

To sum up, I'm pretty confused about what your are asking about. If the contractor did a reorg with no changes to cost accounting practice, then you may not have a lot of support for your positions. But if the contractor did make changes to cost accounting practice, then not only will you have a lot of support, but the contractor is required to submit a cost impact analysis to show the impacts to all CAS-covered contracts.

Hope this helps

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Yes, the company did a reorganization. Yes the company change its accounting practices due to a new division. You are correct about the billing rates for T&M , however, we also have cost type clins and FP. There are established T&M rates for billing purposes and we provided additional value on the contract when we receive change proposals. When there are change proposals, and we have a bunch of them, the change proposals reflect the new rates. They have also adjusted the FP clins to reflect the new labor categories without prior discussions as to the new skill mix conversion. Again, for the purpose of adding value.

 I've just been on the contract for a few months so I'm still gathering information. As for the change proposals the new rates with the new labor categories and skill mix have been adjusted on these change proposals in process and thats how I can  determine its an adverse impact to the contract.

Your right about the  stop work ... 

I sent a letter asking for the cost impact analysis also, waiting on that.

In the meantime , just wanted to hear what people had to say about whats going on. 

Thanks for your information

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"the company change its cost accounting practices due to a new division."

Well ... again, I don't know what you are describing. Just adding a new division doesn't mean that cost accounting practices have changed. "Cost accounting practice" is a term of art with a very specific meaning, and there are some key court cases that stand for the proposition that a reorganization is not a change in cost accounting practice (see Perry v. Martin Marietta Corp, 47 F.3d. 1134).

Creation of new labor categories and skill mixes are not necessarily indicative of changes in cost accounting practice -- but they might be. Maybe one or more cost accounting practices did change -- but which ones? Did the contractor submit a revised Disclosure Statement? If so, there should be an accompanying matrix that identifies all changes. Where were the changes? What -- specifically -- changed?

I'm sensing you are a bit overwhelmed here (forgive me if I'm wrong about that). Have you gotten DCAA involved? What do the auditors say?

H2H

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Yes, just a little overwhelmed. I will have to get the answers to your questions, being fairly new to the contract , just unsure about your questions. But you have given me something to think about. I believe new disclosures were submitted. 

Also, due to  the 2016 National Defense Authorization Act, signed by President Obama on November 25, 2015, Congress prohibited DCAA from providing audit support for non-Defense Agencies  . I still plan to call them to ask questions. 

 

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Good luck, lacylu.

I believe DCAA will be happy to answer your questions. The most recent audit agency interpretation of the NDAA audit prohibition is that it only prohibits actual audits, and even then audits of mixed (DoD and non-DoD) contracts are not prohibited. Since your question is not an audit, I believe they will be willing and able to respond.

H2H

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Lacylu, you might want to talk to the ACO from the cognizant Federal agency who is responsible for all CAS matters at the contractor.  (Look at FAR 42.302(a) which makes only one contracting officer responsible for all CAS matters for the entire government.) The ACO will be able to tell you if a cost accounting practice change has occurred and what the cost impact of that change is on the contractor's contracts or what is being done to determine the cost impact.  Also, look at FAR 52.230-6 for guidance on administration of the CAS, which is to be done by a single ACO for the entire executive branch.

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Thanks for the info .  I did have a discussion with DCMA after I posted the last message.They are in the process of accessing the overall govt impact and that's if  there is a change  to the cost accounting practices 

 

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update : there is no change in their cost accounting practices according to the company .  My plan is to try to negotiate these rates as to not adversely impact the contract.

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they contend it will take a few months to determine if there is a change to cost accounting practices. In the meantime the company plans to update all future change proposals with the new rates

 

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lacylu,

You didn't answer Retreadfed's pointed and very relevant question.

The contractor may assert that no changes have taken place, but it is the ACO's responsibility to make that determination on behalf of the government. Moreover, it does *not* take "a few months" to determine whether or not a change in cost accounting practice has taken place; the contractor is required by the CAS regulations to notify the ACO 60 days before any such changes take effect. (Is it possible that you are confusing the advance notification with the submission of cost impact analyses, which are not the same thing?) A comparison of the two Disclosure Statements -- the pre- and the post-change versions -- identifies the exact changes that have taken place, or confirms that no changes have taken place.

Finally, the contractor is required to prepare its cost estimates using the same cost accounting practices it will use for accumulating costs during performance. That may be the rationale for using "the new rates" in all future change proposals ... but please be advised that the government does not have to accept those new rates if they result from changes to cost accounting practice and the contractor failed to properly notify the government of those changes as CAS requires. (The government may not be required to accept the new rates for other reasons, but the one I mentioned seems most applicable to your situation.)

Hope this helps.

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the ACO has not come to a determination as of yet , and a few months is what was stated to review the information.

I was told by the contractor since it was not a change in the accounting practices, no cost impact analysis would be provided to us (which I asked for as soon as I was informed of the realignment)  

Can you expand on your last statement, .."that the government may not be required to accept the new rates for other reasons..." I'm concerned about the new work coming down the pike. 

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Retreadfed, I believe it was implied that lacylu was with a non-DoD agency (see the 2/27 post). Why an ACO -- ANY ACO -- would need auditors to compare two Disclosure Statements is, quite frankly, a mystery to me. You compare one to the other and identify any differences.

lacylu, I'm not going to answer your question. I feel it just would raise more questions than I would feel comfortable answering in this forum. You have governmental resources and I suggest you use them instead of some internet poster who won't even post under his/her real name. I feel frustrated (on your behalf) that you can't get clear answers to your questions in a reasonable timeframe, but I also suspect you may not be asking the right questions using the correct language to get what you want.

People want to make CAS administration hard. It can be -- especially down in the weeds trying to interpret deliberately obtuse language mostly written more than 40 years ago in a completely different acquisition environment. But the basics are quite straightforward and need not be hard. The contractor must use the cost accounting practices it used to prepare its winning offer, or give the government advance notice of any changes and show the pluses and minuses of how contract costs will be impacted. The Disclosure Statement is the map that shows exactly what changed. It's a government form and government folks should (in my estimation) be able to follow it. It's not particularly hard, though it does address certain accounting topics. But there are no numbers involved, just words.

H2H

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H2H, if the contractor believes there has been no accounting practice change, it very well may not have prepared a revised DS.  We don't know this.  If DCMA is looking into whether there has been an accounting practice change, that is an indication that DoD is the cognizant Federal agency for CAS administration.  If the contractor has not filed a revised DS, the ACO may have asked DCAA to look at the impact of the restructuring and see if DCAA believes an accounting practice change has occurred.  If DCAA renders this audit opinion, the ACO would ask for a revised DS and cost impact.  There is simply too much information that we do not know that would be helpful in providing any suggestions other than keep bugging DCMA and DCAA over whether there has been an accounting practice change.

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Thanks for your feedback here_2_help. It is  very frustrating because the company is basically throwing stuff over the fence and expects us to accept the increases. I am not one to just accept anything

I have appointments set up with my procurement attorney , management etc... 

I have reviewed the CAS disclosures and provided my comments to the company, however, their position is, because there is no change in "cost accounting practices" they do not have to provide an impact analysis. Although , they do plan to provide information pertaining to the changes, I guess similar to cost impact

 And due to this "realignment" costs will increase for future anticipated work as it stands for now. 

They even went on to quote a 2002 memo from the Director of Defense Procurement at the time. Smoke and Mirrors

 

 

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in response to Retreatfed, there was a revision submitted , adding some new segments , shifting some indirect charges now to direct and creating new labor rates, all to an existing CAS disclosure

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35 minutes ago, lacylu said:

shifting some indirect charges now to direct

Well, there you go. A classic change to a cost accounting practice

H2H

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48 minutes ago, lacylu said:

They even went on to quote a 2002 memo from the Director of Defense Procurement at the time. Smoke and Mirrors

Ah, the infamous Dave Capitano memo. It's worth reading but it's not gospel. Karen Manos eviscerated the illustrations used in that memo in an article that I can no longer find on the internet. I think it was called "There You Go Again" in reference to an old Ronald Reagan quote. See if you can find it; it's also good reading.

H2H

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Lacylu:

If you're still around, I'd like to ask you something. Your original question was:

Quote

What recourse do I have regarding the acceptance of these increases[?]

Did you get an answer to that question? Did you learn anything new?

The reason I'm asking is that I'm writing something about questioning and answering and the communicative effectiveness of website dialogue, and I found this thread interesting in those regards. You don't need to explain. Yes or no will do. Thanks.

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