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Hi everyone!  We currently have an FFP contract (only have 1) that had a VERY LARGE ODC purchase this year and now this purchase is throwing off my indirect rates for the year.  Is there any way to exclude it from rate calculations?  I appreciate and help or guidance!!

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Could you clarify a bit?  What is the real issue here?  At first glance, I don't understand why "having an FFP contract" and "large ODC expense" necessarily have impact on one another.  Are you saying the large ODC expense was in support of the FFP and you have other Cost Reimbursable contracts this will affect?

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Forgive me!  We are new to DCAA audits and indirect rate calcs so I may be a little behind.  We currently have 3 rates.  G&A, Fringe, and OH. Most of our contracts are T&M with a few CP contracts and the one FFP contract discussed above.  Currently, the total ODC of all contracts is used in the rate calculations and the FFP was not something we anticipated when we submitted our provisional rates to DCAA for the year and thus it is now drastically affecting the rates.  

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If I understand the situation correctly, you are a small service provider with several T&M and cost-type contracts. You have one FFP contract. For some reason, the FFP contract incurred a larger-than-expected ODC, which is skewing your G&A rate -- i.e., the actual G&A rate is lower than expected because the G&A base is higher than expected. As a result, revenue is lower than expected on the cost-type contracts as well as the "M" part of the T&M contracts. Do I have that right?

Assuming I've got it close to right, then of course you are picking up margin from the lower G&A applied to the "T" part of the T&M contracts as well as to the FFP contract. So although revenue may be lower than expected, profits should actually be higher than expected. That's not necessarily a bad thing.

What can you do about it? Well ...

1. Since you are not a CAS-covered contractor, you can change your G&A allocation base anytime you want to. So go ahead and change the G&A allocation base from Total Cost Input (TCI) to single element (labor dollars) and now your G&A rate is allocated more evenly across your contracts. You don't even have to notify the government that you are making such a change, but it might be courteous to let your contracting officer(s) know.

2. Or you can create a special G&A allocation for your single FFP contract, using the procedures discussed at CAS 410-50(j). You don't have to be CAS-covered to create a special allocation, but it will help to follow the CAS rules if you choose to do so.

Here's a link to Karen Manos' article on the topic: http://www.gibsondunn.com/publications/Documents/Manos-SpecialAllocationsUnderCostPricingStandards-CostsPricingAccountingReport-9-2011.pdf

3. Or you can acknowledge that projected rates and actual rates are rarely the same thing, no matter how hard we try to make them that way. Take your lumps and learn from them.

Finally, you might want to hire a good consultant to help you with these types of matters, as they are sure to crop up again.

Hope this helps.

 

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For a specific FAR section that possibly addresses this situation see FAR 31.203(e) which says "The method of allocating indirect costs may require revision when there is a significant change in the nature of the business, the extent of subcontracting, fixed-asset improvement programs, inventories, the volume of sales and production, manufacturing processes, the contractor’s products, or other relevant circumstances." 

While H2H is technically correct that you do not need government approval to make a change described in this section, that does not mean that the government cannot challenge the change.  The basic objective underlying such a change is that it results in a more equitable allocation of costs.  You need to be prepared to make such a demonstration if the government challenges the change. 

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Retreadfed,

Assuming the contractor was unaware that it would make the change when it priced the contracts, upon what basis would the government be able to challenge the change in G&A base? What contract clause would give the government that basis?

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H2H, FAR 52.216-7, Allowable Cost and Payment,  requires the government to reimburse the contractor for costs determined to be allowable in accordance with FAR Subpart 31.2.  This includes the general cost principles as well as the enumerated cost principles.  There are several cost principles that could be implicated starting with 31.203, 31.201-4 and 31.201-3.  Also, if billing rates have been established, and the contractor starts billing using unapproved rates, the government could question the costs.  Thus, what basis the government has for questioning the change would depend on the circumstances of the particular situation. 

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Well, I suppose the customer could challenge a change using any pretext it could come up with, simply because it didn't like the result.

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There have been a couple of old ASBCA cases on this issue that I know of.  The government won one and lost one.  The take away from those decisions as I remember them was that there had to be change in circumstances so that the old allocation method resulted in an inequitable allocation of costs. 

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