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Hi All,

I work for a small federal contractor (90% of our work is gov't contracts) that does not have a purchasing department. Rather, our engineers do their own purchasing. Needless to say, this is a nightmare for me from a compliance standpoint, and the President of the company (also an engineer) is resistant to change. I've recently discovered that we are issuing POs for direct charge parts and materials where multiple contracts are charged to one PO. However, rather than noting the allocated amount being charged to each contract's project number, we are assigning a percentage value of the cost of each line item that is to be charged. Here's an example:

Widget   qty 10   unit price $1    total $10

Contract #A 20% Contract #B 35% Contract #C 42.5% IR&D Project 2.5%

I've never seen a company do this before. Is this ok, or do we need to show the exact dollar amount allocable to the contract or project to which the items are charged?

Thanks in advance for your thoughts!

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jdb2k,

There are a number of problems associated with your company's approach to procurement (as I'm sure you know) but I'll limit myself to addressing your question. I have seen, many times, a single P.O. that aggregates requirements from many cost objectives. It's frequently done for efficiency and, sometimes, to achieve volume discounts. As invoices are processed, the costs are allocated to the benefiting cost objectives based on requirements identified on the P.R./P.O. That said, normally the percentages relate to the quantity of items. To use your example, I wouldn't expect to see 35% of a quantity of 10, because that's 3.5 units and nobody is buying or selling less than a full unit.

This approach carries its own problems, including proper flow-down of prime contract clauses and DPAS ratings, but I've seen it done many times. So long as the percentages used relate to full units rather than partials, I don't think you'll have a cost accounting problem (assuming you are not buying to inventory as well as to all the other cost objectives in your example).

Hope this helps.

P.S. One day your company President is going to learn about segregation of duties and why the requester does not also identify the source and determine the price and approve invoices. That will be a bad day for your company President. H2H

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H2H - Thanks very much for the insight! It makes sense that the percentage method is ok when applied to quantity. However, we are applying it to the dollar amount, which I think could be an issue. Let me know if you disagree.

Regarding your other comments - I will likely be bald by the end of this FY!

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jcb2k,

I don't think I would go with the percentage method applied to dollars, unless the percentages were backed-up with actual quantities. How many units -- exactly -- do you need for IRAD? Ditto for each customer contract. Anything else just seems like corner-cutting.

H2H

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jcb2k,

There is nothing inherently wrong with using percentages, but the percentages must be in reasonable proportion to the benefits received by each respective contract/project.  Also, FAR 31.201-2(d) states:

Quote

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

Do  you have documentation adequate to demonstrate that, for example, 42.5% of the cost for the 10 widgets is allocable to Contract C?  If not, you run the risk of the contracting officer disallowing those costs.

Worse than that, though, is if your company's accounting system doesn't maintain such documentation, there's a risk that you may be considered ineligible for award of cost-reimbursement contracts for failure to meet one of the limitations for award, i.e. FAR 16.301-3(a)3), which says:

Quote

(a)  A cost-reimbursement contract may be used only when 

...

     (3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order;

 

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Oh Navy -- there you go, scaring the small businesses!

Just to keep you on your toes, would you care to provide support for your assertion that a split-out of a Purchase Order to various contracts (and other cost objectives) must be "in reasonable proportion to the benefits received"? Where does that requirement come from and how does it get applied to direct material costs?

H2H

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On 5/15/2016 at 9:52 PM, here_2_help said:

Oh Navy -- there you go, scaring the small businesses!

Just to keep you on your toes, would you care to provide support for your assertion that a split-out of a Purchase Order to various contracts (and other cost objectives) must be "in reasonable proportion to the benefits received"? Where does that requirement come from and how does it get applied to direct material costs?

H2H

H2H,

Apologies for the delayed response.  I refer you to FAR 31.201-4(b).

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Navy,

I suspected you were going to go there. You may not accept this answer, but you are conflating rules for allocation of indirect costs with rules for allocation of direct costs. I recommend you review the DOD Indirect-Cost Management Guide, Chapter 2.

"Simply stated, costs are designated as direct costs because they are traceable to, and identified with, a specific contract."

You are properly quoting the rule for allocability of overhead expenses to contracts, but not direct expense (nor for that matter G&A expense).

H2H

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Navy,

I'm saying that the three types of allocation discussed in 31.201-4 correlate to; (a) direct costs, (b) overhead costs, and (c) G&A costs. You are conflating (a) allocations with (b) allocations.

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H2H,

I understand that that's how they generally are seen, although it doesn't say as much, but how about 31.201-4 (which applies to (a), (b) and (c))?

Quote

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. [Emphasis added.]

All I'm saying is that for the costs to be allowable, they must be distributed in a way that reflects the relative benefits received by each contract.

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Navy,

No and you're wrong. Sorry, not trying to be a jerk about this. In addition to being wrong, you are ignoring the phrase "OR OTHER EQUITABLE RELATIONSHIP
 which clearly identifies that "relative benefits received" is not the only acceptable criterion that identifies an acceptable cost allocation.

*Shrug* Don't know what else to say. I wouldn't argue with you about a Part 15 best value trade-off analysis ... I would hope you'd give me some of the same respect in return.

H2H

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Navy, have you looked at the definition of a direct cost in 2.101?  In order to be a direct cost, the cost must be identified specifically with a particular contract.  The definition of a direct cost in the FAR is taken directly from CAS 418.  Allocating costs on an equitable or beneficial basis is not a specific identification as is required to be a direct cost.

If you then look at CAS 403, 410, 418 and 420 all talk about allocation of indirect costs on the basis of the causal or beneficial relationship that exists between the indirect cost and a contract.  I agree with H2H, that there is no doubt that FAR 31.201-4 (b) and (c) refer to indirect costs.

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H2H and Retreadfed,

I'm good with everything you're saying, but I was trying to make sense of the OP's situation, where the company was "issuing POs for direct charge parts and materials where multiple contracts are charged to one PO. However, rather than noting the allocated amount being charged to each contract's project number, we are assigning a percentage value of the cost of each line item that is to be charged."

There may have been some valid reasons for the allocation scheme in the example, and my only point was that there had better be a good explanation for why the percentages are what they are.

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