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I am currently a CPFF subcontractor under a Government prime contract.  My company cycles on a calendar year and each January we update our provisional indirect rates for the upcoming year as well as calculate our final rates for the previous year.  These rates are then provided to DCAA for review/approval and used for billing purposes under any CR contracts.  This year, DCAA has stated that since we do not have a CPFF or T&M prime contract ourselves, we do not have a requirement to submit our PBR and they will NOT review our 2017 provisional rates.

Our Prime contractor will not accept our updated rates for the CPFF subcontract since we do not have approved rates.  As a small business, if we continue to bill using the provisional rates of 2016 (which were approved), we will be operating at a loss for 2017.  In accordance with FAR 42.704 (c), billing rates may be prospectively or retroactively revised by mutual agreement between DCAA and the contractor. 

Without DCAA agreement, how is a subcontractor able to invoice for rate adjustments?

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1 minute ago, Don Mansfield said:

By negotiating such a term in your subcontract?

The terms of the subcontract state that we will provide DCAA approval letter.  Based on FAR 42.704, I was not aware that DCAA would not review/approve our rates, which leaves us in this bind.

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It's unfortunate that the contracting parties tied update of provisional billing rates to a DCAA approval letter, since it's (relatively) settled that the government does not have privity of contract with respect to subcontractors' billing rates. The citation to FAR Part 42 will not help you, since the FAR is not a contract term. On the other hand, if the contract also contains 52.216-7 or equivalent then you may have some leverage, since that FAR clause requires that provisional billing rates "shall be" the anticipated final billing rates.

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The strength of your leverage may depend on FAR 52.216-7(a) alterations in your subcontract regarding who is "Government", "Contractor" and "Contracting Officer" therein, if you care to go over that.... 

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It is DCAA's opinion that the prime is responsible for auditing the subcontractors.  See FAR 52.216-7(d)(5), "The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request."  But you're probably not going to allow the prime to audit your books and the prime is highly unlikely to have the auditing staff to audit your FPRP.  DCAA is reluctant to audit your rates because the government does not have any privity of contract with you.  So what's a subcontractor to do?  The prime contractor would have to send its CACO/DACO/whatever a request to have your indirect rates audited.  The CACO/DACO would then forward that request to your CACO/DACO who would then send it to your cognizant DCAA office.  (Don't you just love the chain of command?) 

Is your overall accounting system, which includes the accounting and billing subsystems approved?  I'd imagine so with a CPFF subcontract vehicle.  What about the prime's overall accounting system (and subsystems)?  Part of DCAA billing system audit program is to verify that the correct indirect rates are used and that primes monitor the adequacy of the subcontractor's accounting and billing systems. 

Did your company have any adjustments to the rates after the end of last year?  Did you process any retroactive rate adjustments for the end of year rates? 

A CPFF subcontract type comes with lots of headaches for the prime.  I'm surprised that they issued a cost-type subcontract in the first place.

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5 hours ago, overclock said:

It is DCAA's opinion that the prime is responsible for auditing the subcontractors.  See FAR 52.216-7(d)(5), "The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request." 

I'm confused. Where is a requirement in the quoted text, above, that states or implies or infers that a prime is responsible for auditing its subcontractors? The prime's duty is to "settle" subcontractor prices, including rates, and to provide status of subcontractor audits upon request. Period. The prime can settle its subcontractors' prices via a variety of methods, which may (but need not) include DCAA-like audits.

The method I normally advocate is called "negotiation."

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Overclock said "DCAA is reluctant to audit your rates because the government does not have any privity of contract with you."  Privity of contract has nothing to do with the government's ability to audit subcontractor costs, including indirect costs.  The audit clause, FAR 52.215-2, gives the government this right in regard to cost reimbursement subcontracts, such as the one in this situation, if the prime contract is other than a firm fixed price contract or a contract for commercial items.

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My company has an approved accounting system and for the last few years have received approval letters (with no adjustments) to our provisional rates.  We also submit our Incurred Cost proposal each year.  Our DCAA has a backlog and they are currently reviewing 2013!  This is another issue that is detrimental to us as a small business.  If we need to wait until rates are approved for this particular contract (which ends in Sept 2017), we could be waiting many, many years. Our normal practice is to bill provisionals for the upcoming year and do a "true up" at the end of the year.  This helps us get as close as possible to what we believe will be our final rates.

The prime contractor is an extremely large business. We met with them earlier this week and I requested that they just call an audit on us (Government or 3rd party as we will not provide any proprietary information directly to them).

Thank you for all the feedback.

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