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Michael11

Costs to solicit vendor quotes

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Interested in others’ thoughts.

The labor costs to solicit competitive quotes from subcontractors...drafting an RFP; reviewing quotes; selecting a vendor....direct costs? 

I can’t recall ever seeing a sub charging for this and in the govt I never saw a prime do it either. 

I think of this as an administrative indirect function. 

In an environment where something like overhead is not an overly defined thing, is there a circumstance where you could justify these costs as direct, billable costs?

 

 

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Your question is too general to provide an answer. Please frame the scenario.  Who is billing for what costs under what type of contract and/or subcontract; what type of contract action is involved; what is the pricing type of the contract, etc.?

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well, there are Bid & Proposal Cost and there are Cost Accounting Disclosure Statements applicable to many contractors and subcontractors. An answer should be found somewhere in there. Whoever is proposing these costs should be requested to justify them as allowable, allocable and reasonable with references provided to each of the above if they are applicable to the contractor or subcontractor business.     

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This would be under a T&M contract.

Contractor, in the administration of the prime award, is charging as a direct project cost the labor associated with vetting and selecting competitive proposals for subcontracts.

I equate this to purchasing which I generally think of as an indirect administrative function.

Argument is that agency receives direct benefit (best value or LPTA), contractor wouldn’t be doing this work otherwise (no award, no need to solicit vendors), and no other contracts receive a benefit from the work.

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I agree with Joel - in certain circumstances this makes sense.  Specifically, when the contract includes a direct requirement, then these can be direct charges (think FFP follow-on contracts, for example).  See FAR 31.205-18(a) and CAS 9904.402-61(c) for more info.

However, your post (and response) actually deal with the purchasing function, not proposal prep.

In that case, as Neil notes, you REALLY have to understand the supplier's accounting practices.  If they are organized such that purchasing is a direct charge function, there's nothing wrong with that if it's done properly.  If they have a Disclosure Statement, start there.  If not, run an audit program focused on allocability.  I know that at least one of the top 5 defense contractors is organized this way.

In general, this isn't an "unallowable" method of collecting and charging for Purchasing labor.

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Joel's question was right.  As a result, the original poster clarified that this is a T&M contract.  Based on that answer, I don't think it is necessary to look at disclosure statements and so forth.

Under a T&M contract, the contractor may invoice for (and the Government may pay for) only two categories of cost:  

  • hourly rate (see FAR 52.232-7(a) for non-commercial contracts or 52.212-4/Alt I(i)(1)(i) for commercial contracts) and
  • materials (see FAR 52.232-7(b) for non-commercial contracts or FAR 52.212-4/Alt I(i)(1)(ii) for commercial contracts).

If the purchasing cost doesn't fit into one of these categories, the cost isn't payable, period.  Oh, and by the way, if it is a commercial T&M contract, and if the purchasing cost isn't listed in the fill-in for para. (i)(1)(ii)(D)(1) or of FAR 52.212-4 Alt I, it cannot be payable as an Other Direct Cost (ODC).  

We must not turn a T&M contract into a cost-reimbursement contract.  If the purchasing cost doesn't fit under hourly rate or materials, as those terms are understood in the context of T&M contracts, it isn't payable, period.  No discussion of disclosure statements will make it payable directly under the T&M contract.

To answer the original poster's question:  is there a circumstance where you could justify these costs as direct, billable costs?  Yes -- propose establish a labor category and hourly rate and specify this in the T&M contract.  If the contracting officer doesn't laugh at you, who knows, you might get it -- all sorts of strange things happen under T&M contracts.  But it would seem to me that FAR 31.205-18(c) ought to be considered before adopting this approach.

Edited by ji20874
change "or" to "of"

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14 hours ago, Michael11 said:

In an environment where something like overhead is not an overly defined thing, is there a circumstance where you could justify these costs as direct, billable costs?

First, make the distinction between costs and billings. Something can be (or should be or oftentimes must be) a direct cost even if it is not billable or reimbursable under the terms of the contract.

With respect to costs, direct costs are defined at 2.101 as being "any cost that is identified specifically with a particular final cost objective. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives." (Emphasis added.) The part I bolded matters because the FAR definition used to be that a direct cost was one that could be identified. So now it's very clear that the contractor's decision whether or not to make a cost direct is the controlling decision. In other words, a direct cost is one that the contractor has recorded as being a direct cost. Period.

Thus, to answer your question: YES. The contractor could very well define such costs as being direct costs.

Next you have to ask whether the contractor is complying with FAR Part 31, specifically 31.202(a). ("No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. ...") That's really at the heart of your inquiry. Does the contractor charge such costs as direct costs on a consistent basis? If not, then the contractor has violated the requirements of 31.202(a) and the costs are unallowable. If yes, then the contractor is on safe ground.

Finally you have to look at the contract terms to see if those direct costs are recoverable through billings. ji2078 pointed out that they very well may not be recoverable on a T&M contract if there is no hourly billing category that covers them. To answer that question, I would suggest asking the contractor where, in its proposal, did it map those direct costs to an hourly billing rate? Ask for backup showing how the proposed hourly billing rate was calculated, if the contractor wasn't required to furnish that information already. If the contractor can't show you that the hours were mapped to one or more hourly billing rates, then that's going to be a problem for the contractor. If the contractor can show you the mapping, then I don't see how you can ethically object to paying for the costs (assuming the hourly billing rates and resulting contract price were found to be fair and reasonable).

Hope this helps.

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46 minutes ago, ji20874 said:

Under a T&M contract, the contractor may invoice for (and the Government may pay for) only two categories of cost:  

  • hourly rate (see FAR 52.232-7(a) for non-commercial contracts or 52.212-4/Alt I(i)(1)(i) for commercial contracts) and
  • materials (see FAR 52.232-7(b) for non-commercial contracts or FAR 52.212-4/Alt I(i)(1)(ii) for commercial contracts).

If the purchasing cost doesn't fit into one of these categories, the cost isn't payable, period.  Oh, and by the way, if it is a commercial T&M contract, and if the purchasing cost isn't listed in the fill-in for para. (i)(1)(ii)(D)(1) or FAR 52.212-4 Alt I, it cannot be payable as an Other Direct Cost (ODC).  

Emphasis added.

Under both clauses, materials includes "Other direct costs (e.g., incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.)...." Why wouldn't the work of soliciting competitive quotes from subcontractors...drafting an RFP; reviewing quotes; selecting a vendor.... be incidental services?

If the contract is commercial IDIQ, the incidental services could be itemized in the task order proposal.

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Vern,

I agree that ODCs are part of the definition of materials.  I didn't opine on whether the purchasing cost is or is not an ODC -- I have to leave that to the original poster to decide, as he or she is far closer to the facts than I am.  My point was that for the purchasing cost to be directly payable under the T&M contract, it will have to fit under either the heading of hourly rate or materials, one or the other -- a discussion about whether the costs are directly chargeable without invoking this T&M context is a fruitless discussion. 

And as you and I both pointed out, even assuming the purchasing cost does fit as an ODC under materials, the cost still will not be payable unless listed in para. (i)(1)(ii)(D)(1) of FAR 52.212-4 Alt I if we're talking about a commercial T&M contract. 

I think we're in agreement.

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46 minutes ago, here_2_help said:

If the contractor can't show you that the hours were mapped to one or more hourly billing rates, then that's going to be a problem for the contractor. If the contractor can show you the mapping, then I don't see how you can ethically object to paying for the costs (assuming the hourly billing rates and resulting contract price were found to be fair and reasonable).

For hourly rate charges, what about the requirement that the labor category and hourly rate be specified1 or prescribed2in the contract?  If it's not specified or prescribed in the contract, then it's not payable -- it's the contract that establishes entitlement to payment, not the contractor's working papers.  Or are you introducing an error-discovered-after-award scenario? 

1FAR 16.601(b)(1).
2FAR 52.232-7(a)(1) and 52.212-4/Alt I (i)(1)(i)(A).

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Quick clarification - i was using 'costs' to mean direct billable project labor. The folks who conduct these 'competitions' for lack of a better word are the same ones doing the project work. At various levels, all of which are approved labor categories in the award.

40 minutes ago, here_2_help said:

Next you have to ask whether the contractor is complying with FAR Part 31, specifically 31.202(a). ("No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. ...") That's really at the heart of your inquiry. Does the contractor charge such costs as direct costs on a consistent basis? If not, then the contractor has violated the requirements of 31.202(a) and the costs are unallowable. If yes, then the contractor is on safe ground.

I agree that this was sort of the heart of my inquiry.

As these staff recording their time will be doing so to the billable project code there is no duplication of cost recovery. There is no other indirect cost pool that would recover the labor incurred for this purpose. (If there were, there'd be a problem right?) If, say, an indirect subcontract administration unit existed (with their own G&A percentage) and that G&A percentage was tacked onto, lets say...the costs for the vendors selected for the aforementioned competition, that'd be an issue. (purely hypothetical)

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21 minutes ago, ji20874 said:

For hourly rate charges, what about the requirement that the labor category and hourly rate be specified1 or prescribed2in the contract?  If it's not specified or prescribed in the contract, then it's not payable -- it's the contract that establishes entitlement to payment, not the contractor's working papers.  Or are you introducing an error-discovered-after-award scenario? 

1FAR 16.601(b)(1).
2FAR 52.232-7(a)(1) and 52.212-4/Alt I (i)(1)(i)(A).

You miss the point. The hourly rate categories are what they are. How the contractor maps its labor to those categories is what matters. The proof of the mapping is how the contractor calculated its proposed hourly labor rates for those categories.

For example, suppose the contract contains four labor rate categories, as follows--

1. Junior Engineer

2. Mid-Level Engineer

3. Senior Engineer

4. Program Management

But the contractor doesn't have those labor categories in its compensation system. Instead, it has software engineers, electrical engineers, mechanical engineers, program managers, program office support (finance, contracts, etc.), and many others. Thus, it has to map its labor categories to the contract-specified labor categories. How it has done that mapping is critical to determining what functional labor costs can be billed under the contract's terms.

Okay?

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26 minutes ago, Michael11 said:

As these staff recording their time will be doing so to the billable project code there is no duplication of cost recovery. There is no other indirect cost pool that would recover the labor incurred for this purpose. (If there were, there'd be a problem right?) If, say, an indirect subcontract administration unit existed (with their own G&A percentage) and that G&A percentage was tacked onto, lets say...the costs for the vendors selected for the aforementioned competition, that'd be an issue. (purely hypothetical)

You need to look by function, not by individual. Does the contractor charge its customers the same way, on a consistent basis, for the same function? Does it consistently treat that function as direct labor?

Your hypothetical isn't very clear but ... if the subcontract administration was budgeted 100% in the G&A rate and subsequently the contractor wanted to charge some of that function to a couple of customers as a direct charge, then that would violate the FAR requirement I quoted. The only exception would be if the contractor could show that those "special contracts" were incurring those subcontract administration costs in different circumstances from all the others. Even so, I would expect the contractor to show a lower G&A rate as the result of its "special charging."

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30 minutes ago, here_2_help said:

But the contractor doesn't have those labor categories in its compensation system. Instead, it has software engineers, electrical engineers, mechanical engineers, program managers, program office support (finance, contracts, etc.), and many others. Thus, it has to map its labor categories to the contract-specified labor categories.

I understand better now.  Thanks.  Yes, where a contractor's labor categories don't match a contract's labor categories, a contractor will do the mapping you describe.  Even so, the contractor's pre-contract mapping isn't dispositive in a post-award inquiry -- the question will be whether the electrical engineer being charged actually meets the qualification requirements prescribed in the contract for the mid-level engineer, for example, at the time the work was performed.

52 minutes ago, Michael11 said:

The folks who conduct these 'competitions' for lack of a better word are the same ones doing the project work.

Okay.  In addition to here-to-help's good advice, there is also another perspective to consider.  Let me ask you -- if a T&M contract allows for a master at $100/hour, a journeyman at $75/hour, and an apprentice at $10/hour, is there any expectation that the contractor will bill the master rate only for work requiring the master's expertise or credentials or so forth, and will bill journeyman or apprentice rates for the less-skilled work?  For the two hours spent sweeping the shop floor, should the Government expect to pay $10/hour or $100/hour?  In other words, do you pay the master rate for apprentice work?  It seems to me that when the contractor is doing apprentice work, it should be charging the apprentice rate, regardless of whether the master or the apprentice actually does the work.  In your case, does the purchasing work done by the contractor require the labor category qualifications of the labor categories prescribed in the contract?  Maybe it does.  Is your organization applying appropriate surveillance over the contractor to protect its interests in these sort of situations?

I like to think of the purchasing work you describe as indirect expense work.  If a contractor voluntarily elects to seek a subcontractor for a portion of the work, why should the Government pay 100% for the costs of implementing that decision?  Shouldn't the hourly rate portion of the T&M payment cover work required by the contract?  Elective work, such as seeking a subcontractor or re-painting the work space, should generally be covered indirectly.  Does your contract require (not merely allow, but affirmatively require) the contractor to select subcontractors for specified portions of the work?

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ji, if the contract contains FAR 52.219-14, would you consider the subcontracting work required by the contract if it is directed toward meeting the small business goals in the required plan?

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Retreadfed,

The clause at FAR 52.219-14 does not require any subcontracting -- but if any occurs, at the contractor's election, then the clause may apply.  

The clause at FAR 52.219-9 does not require any subcontracting -- but if any occurs, at the contractor's election, then the clause may apply.

Where subcontracting is allowed, the contractor must follow any rules established by the contract.  But I think it is rare for a contract to require (not merely allow, but require) subcontracting, even rarer for a contract to require competitive subcontracting, and even rarer still for a contract to require that the subcontracting selection be performed by particular contractor employees.  I have awarded and administered contracts where we required the contractor to obtain certain test reports from independent third-party laboratories, for example, and in a T&M situation, those testing services could be seen as incidental services under materials, but I would generally expect the back office administrative work of setting up and administering those subcontracts to be covered as indirect expenses.

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ji, I don't understand your answer.  We are talking about a contractor allocating the cost of awarding subcontracts as a direct cost of a contract.  While I misidentified FAR 52.219-14 as a relevant clause for this discussion, it seems clear to me that when the pertinent clauses, i.e., 52.219-8, 52.219-9, 52.219-16 and 52.244-5, are read together, it is clear that a prime contractor is required to make a good faith effort to meet the subcontracting goals expressed in the mandatory subcontracting plan which is a material term of the contract.  That means that the expectation is that the contract requires the contractor to take certain steps listed in 52.219-9 to award subcontracts to small business concerns.  The cost of doing so can be charged as a direct cost of the contract because they are a specific requirement of the contract.

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Okay, if you say so.  

But you fail to recognize that the contractor writes its own subcontracting plan, and that all subcontracting in that plan is at the contractor's own voluntary election.  Any by the way, none of the clauses you listed REQUIRE any subcontracting -- a contractor could comply with all of those clauses with zero subcontracting.

I wonder -- is it your position that EVERY specific requirement of a contract may or should be direct-charged to the contract?  Every requirement in every clause?  I think some specific requirements are best handled as indirect expenses.

For a T&M contract, I would wonder if the purchasing work done by the contractor requires the labor category qualifications of the labor categories prescribed in the contract -- if so, okay, it might make sense.  But even if the contract allows for a senior engineer at an hourly rate of $150/hr, I wouldn't want the contractor to charge that labor category for sweeping the floors at night (let's assume that maintaining a tidy workplace is a specific requirement of the contract), because sweeping the floors does not require the labor category qualifications of a senior engineer.  The original poster has not averred that the purchasing work requires the labor category qualifications of the labor categories prescribed in the contract -- he or she has only said that that the contractor is using those people for that work.  He or she apparently wants to challenge that approach.  I'm trying to be helpful to the original poster.

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FAR 52.219-8, 9, 14, 16 are all in the award. Neither the award document nor SOW as you may expect makes any specific mention of competing subcontracts. 

Company policy is to the max extent practical seek competitive quotes from subs over the micro purchase threshold. 

I think myself and others have all said we generally consider that an indirect function. But from an accounting perspective there is nothing that prohibits charging it as direct. Is the question now whether that is proper should the SOW and contract be otherwise silent on the issue.

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2 hours ago, ji20874 said:

But even if the contract allows for a senior engineer at an hourly rate of $150/hr, I wouldn't want the contractor to charge that labor category for sweeping the floors at night (let's assume that maintaining a tidy workplace is a specific requirement of the contract), because sweeping the floors does not require the labor category qualifications of a senior engineer.

How ironic. Just 4 years ago I was dealing with DCAA questioning "idle time" charged by engineers to overhead (while awaiting clearances to be issued, among other things). The basis of the questioning of the costs was that the contractor should have put those engineers to work doing something else -- anything else. Sweeping the floors was an example of what DCAA considered to be a better use of the engineers' time. That was in the audit report.

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here_2_help,

I understand -- differing interests.  The DCAA auditors want to reduce the overhead pools, and contracting officers want reasonable prices and mission-focused performance.  If I was administering a T&M contract and the contractor was burning labor hours sweeping floors and so forth instead of productive work accomplishing the mission, I would want to redirect the contractor's focus.  Let them sweep floors and charge those hours to someone else's contract.

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1 hour ago, Michael11 said:

But from an accounting perspective there is nothing that prohibits charging it as direct.

Well, the costs have to be reasonable in order to be allowable.  In your case, does the purchasing work require the labor category qualifications (and therefore the prices) of the labor categories prescribed in the contract?  If so, more power to you.

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H2H, I think you had a more reasonable class of auditors than those I had to deal with on a similar issue.  DCAA wanted to put an arbitrary tie limit on how long an employee could wait for a clearance to come through.  DCAA's time limit was less than half the average amount of time it was taking the government to grant clearances.   If the clearance did not come through within that time period, the employees should be terminated.

22 hours ago, ji20874 said:

the contractor writes its own subcontracting plan, and that all subcontracting in that plan is at the contractor's own voluntary election.

This may be theoretically true, but in practice in a great many cases it is not so.  Many contracting offices are specifying the "goals" that contractors must include in their plans.  If a contractor does not use those minimum goals, the contractor is thrown out of the competition.  Thus, in effect, the goals become requirements.

22 hours ago, ji20874 said:

is it your position that EVERY specific requirement of a contract may or should be direct-charged to the contract?  Every requirement in every clause?  I think some specific requirements are best handled as indirect expenses.

May is the operative word in your question.  The test for how a cost is to be allocated to a non-CAS covered contract is stated in 31.201-4.  The overarching test is what contract or contracts benefit from the cost.  Similarly, the definition of "direct cost" in FAR 2.101 states that a cost "identified specifically with a contract [is a] direct cost[] of that contract."  Thus, if a requirement is in only one contract, the cost of complying with that requirement should be charged to only that one contract because only that contract will benefit from the cost.  For example, if a contract requires the contractor to have a facility within 30 miles of a government facility, but the contractor is located 200 miles away so that the contractor has to rent space near the facility, that rental cost would be a direct cost of that one contract while the contractor charges other rental costs as an indirect cost.  On the other hand, if a cost benefits more than one contract, that cost should be allocated to the benefitted contracts as an indirect cost.  An example of this is a contractor having several classified contracts each of which requires the contractor to have a secured facility.  Although having a secured facility is a requirement of each of the classified contracts, the cost of maintaining and operating that facility benefits several contracts.  Thus, those costs should be apportioned among all classified contracts as an indirect cost.

 

23 hours ago, ji20874 said:

The original poster has not averred that the purchasing work requires the labor category qualifications of the labor categories prescribed in the contract -- he or she has only said that that the contractor is using those people for that work.

I agree.  If purchasing is required by the contract and there is no labor category specified in the contract for purchasing, that function should be considered as the rendition of incidental services.  In that case, the cost principles from FAR Part 31 would be applicable if FAR 52.232-7 is the appropriate payment clause.  However, the OP said that this work was under a GSA contract.  It is not clear whether he meant a GSA schedule contract or otherwise.  This opens the possibility that Alt I to FAR 52.212-4 is the appropriate payment clause which opens up a different line of inquiry.

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