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Lukevan

Intra-Company Transfers/Pricing

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Question: My company was recently acquired by a much larger entity with many affiliates and divisions.  We are bidding primarily on CPFF contracts and want to offer the services of our parent/affiliates as part of our proposals.  My company has an accounting system that has been approved as adequate for cost reimbursement contracts by DCAA, but our parent and affiliates are not government contracting entities and everything they sell appears to be based on commercial, market prices (not catalog prices).  They have a practice of providing a % discount in pricing to affiliates and the services charged to affiliates are based on price, not cost (meaning we are getting a proposed fully loaded price with profit from our parent, as well as the % discount for being an affiliate). 

 

I have three initial questions to see if others in this community could help confirm my thoughts or poke holes in them.  I greatly appreciate an thoughts:

 

  1. I’ve read the DCAA Guidance on Inter-Organizational Transfers (PSP 730.5.1/2010-009), FAR 31.205-26(e), FAR 15-403-1, and FAR 52-216-7.  As I read 31.205-26(e), if our parent has a practice of transferring services to affiliates based on “price” rather than “cost”, then it should be okay to include their fully loaded price within our proposal.  At the time of invoicing, I believe we should be able to treat their price as our direct cost (akin to a direct subcontract cost), and would not need to include certified cost or pricing data for them provided the service being transferred fits the exceptions in 15.403-1(b) (e.g., there was adequate price competition or we’re acquiring a commercial item) and the price has not been determined by the KO to be unreasonable. 

  2. We’d certainly like to avoid having to compete our parent’s pricing against other non-related parties every time we want to submit a proposal and assuming we can appropriately establish their services represent a commercial item, is there any reason we’d need to seek two or more competitive quotes each time?  As I understand the DCAA guidance related to Inter-Organizational Transfers, their pricing would be included within our own (as opposed to a subcontractor’s pricing).  Also, under 15.407-2 Make or Buy Programs, the definition of “Make item” means an item or work effort to be produced or performed by the prime contractor or its affiliates, subsidiaries, or divisions. These references lead me to believe that when we include their services within our offerings in a proposal, we would not be forced to effectively compete against ourselves (by seeking competitor quotes for those services our parents would perform) because we aren’t actually “subcontracting” to them.  I think there may be disagreement about this point, but if they are not technically a subcontractor then it seems that multiple quotes wouldn’t be needed. 

  3. Assuming we are using our parent’s “price” as part of our proposed costs under 31.205-26, I cannot find anything definitive on the issue of how we pass the costs through to the Government in this situation.  Under normal circumstances, if these were subcontract costs from an un-related 3rd party, we would apply our G&A rate when invoicing for subcontract costs (this is our standard practice on all subcontractor costs), and could apply Fixed Fee to subcontract costs in our proposal (we might choose not to apply FF to subcontractor costs for strategic reasons, but normally nothing prevents us from making profit on subcontractor costs).  Is there any rule or guidance that stops us from applying (a) our G&A and (2) some level of profit to our Parent’s price to us?  Our accounting system is completely segregated from our parent/affiliates and there are no parent/affiliate costs contained in our cost pools?  I've talked with several resources that indicate there should not be profit on profit with relation to affiliate invoicing, but I haven’t seen anything definitive in the rules.  One consultant I spoke with indicated we could not apply G&A but we could apply profit.

 

Thank you very much.

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1. You are almost correct. The part where you need work is your statement that you won't need certified cost or pricing data. See FAR 15.401 definition of "subcontract".

2. You need to establish price reasonableness, so the normal method is to compete against third parties. How often? Depends on the volatility of the item's price in the marketplace.

3. Most accounting systems have a G/L account for intercompany transfers (IOTs) and a procedure for how they are costed. Also the Disclosure Statement wants to you disclose your IOT practices (if you are subject to full CAS). You can add profit (if you are bold) but expect your customer to balk. You can apply G&A if that is your practice. If you are on a TCI allocation base then DCAA expects the cost to be in the G&A base (See DCAA CAM Chapter 8 regarding CAS 410.)

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Here_2_Help: Thanks much for your responses.  Those are helpful. 

1. You are almost correct. The part where you need work is your statement that you won't need certified cost or pricing data. See FAR 15.401 definition of "subcontract".

Follow-up: I read the referenced clause and understand our parent costs would be considered subcontract costs.  That's helpful.  Does that fact undercut my understanding that if they provide services to us based on Price, we still would not have to provide certified cost and pricing data for them if we can establish if we can establish there was adequate price competition or that we are acquiring a commercial service from them (per 15.403-1(b))?  I feel like maybe I'm missing something. 

2. You need to establish price reasonableness, so the normal method is to compete against third parties. How often? Depends on the volatility of the item's price in the marketplace.

Follow-up: I understand in general that we nearly always have to show how our proposal prices are reasonable and that competition is the primary way.  Presumably we could also do it by showing they have a commercial practice of charging the proposed prices (or higher prices) to commercial customers, so that the Government is assured it is receiving commercial items at or below normal commercial prices charged by our parent? 

3. Most accounting systems have a G/L account for intercompany transfers (IOTs) and a procedure for how they are costed. Also the Disclosure Statement wants to you disclose your IOT practices (if you are subject to full CAS). You can add profit (if you are bold) but expect your customer to balk. You can apply G&A if that is your practice. If you are on a TCI allocation base then DCAA expects the cost to be in the G&A base (See DCAA CAM Chapter 8 regarding CAS 410.)

Follow-up: We are not yet subject to full CAS, but the day is coming.  By TCI I think you mean Total Cost Input?  Because we haven't prepared a CAS yet, is it appropriate to establish a practice by developing a cost policy on this issue?  The very few times we've bid with their costs, we have not applied G&A in our proposal as we didn't understand we could.

Again, thanks very much for your responses.

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10 hours ago, Lukevan said:

Here_2_Help: Thanks much for your responses.  Those are helpful. 

1. You are almost correct. The part where you need work is your statement that you won't need certified cost or pricing data. See FAR 15.401 definition of "subcontract".

Follow-up: I read the referenced clause and understand our parent costs would be considered subcontract costs.  That's helpful.  Does that fact undercut my understanding that if they provide services to us based on Price, we still would not have to provide certified cost and pricing data for them if we can establish if we can establish there was adequate price competition or that we are acquiring a commercial service from them (per 15.403-1(b))?  I feel like maybe I'm missing something. 

2. You need to establish price reasonableness, so the normal method is to compete against third parties. How often? Depends on the volatility of the item's price in the marketplace.

Follow-up: I understand in general that we nearly always have to show how our proposal prices are reasonable and that competition is the primary way.  Presumably we could also do it by showing they have a commercial practice of charging the proposed prices (or higher prices) to commercial customers, so that the Government is assured it is receiving commercial items at or below normal commercial prices charged by our parent? 

3. Most accounting systems have a G/L account for intercompany transfers (IOTs) and a procedure for how they are costed. Also the Disclosure Statement wants to you disclose your IOT practices (if you are subject to full CAS). You can add profit (if you are bold) but expect your customer to balk. You can apply G&A if that is your practice. If you are on a TCI allocation base then DCAA expects the cost to be in the G&A base (See DCAA CAM Chapter 8 regarding CAS 410.)

Follow-up: We are not yet subject to full CAS, but the day is coming.  By TCI I think you mean Total Cost Input?  Because we haven't prepared a CAS yet, is it appropriate to establish a practice by developing a cost policy on this issue?  The very few times we've bid with their costs, we have not applied G&A in our proposal as we didn't understand we could.

Again, thanks very much for your responses.

1. The point is that when a contractor uses the exception within 31.305-26(e) and transfers at price, that converts the transaction from "make" to "buy". Thus you are subject to TINA and the rest of FAR Part 15 that implements TINA. If you have an exception to obtaining certified cost/price data, so be it. But if you can't find an exception then you have to comply.

2. Not exactly. When you take advantage of the exception within 31.205-26(e) then you must establish price reasonableness (though the way it's worded is odd). You have to convince a CO that your price is reasonable, using one of the techniques available for doing so. Simply asserting that your affiliated company is selling the items to your division at its established commercial price (or less) won't be sufficient (in my opinion). You have to have data. Perhaps historical price data will be good enough, but if your affiliated division offers unrecorded discounts (e.g., trial offers, loaners, etc.) then that won't do it.

3. Yes, TCI = Total Cost Input. Yes, now is the time to establish your transfer pricing and burdening practices for your IOT transactions.

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1 hour ago, here_2_help said:

1. The point is that when a contractor uses the exception within 31.305-26(e) and transfers at price, that converts the transaction from "make" to "buy".

H2H: Are you sure about that? FAR 15.407-2(b):

Quote

(b) Definition. “Make item,” as used in this subsection, means an item or work effort to be produced or performed by the prime contractor or its affiliates, subsidiaries, or divisions.

That does not seem to link the definition of "make item" to 31.205-26, which makes no mention of make or buy.

I'm not contesting what you said, just asking for clarification and confirmation.

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I agree with Vern.  Isn't the real question in regard to certified cost or pricing data whether the IOT is a subcontract that requires truthful cost or pricing data unless an exception applies?

The definition of subcontract in 15.401 says a subcontract includes IOT of commercial items.  It does not mention IOTs in general.

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Busy today so I'll summarize.

1. There are three conditions that must be met in order to use the 31.205-26(e) exception:

(1) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate of the contractor under a common control; and (2) The item being transferred qualifies for an exception under 15.403-1(b) and (3) The contracting officer has not determined the price to be unreasonable.

All three conditions must be met.

 

2. If those circumstances apply, then 15.401 says "“Subcontract” (except as used in 15.407-2) also includes a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractor or a subcontractor (10 U.S.C. 2306a(h)(2) and 41 U.S.C. 3501(a)(3))."

 

3. My view is that normally intercompany work is a make, as per 15.407-2(b) but transferring commercial items activates the overriding definition quoted above, making the transfer a buy. I may have overreach in stating that the arms-length buy requires certified cost or pricing data so I withdraw that assertion.

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H2H:

I thought you were going to point to DCAAM 9-405.2a, for which I can find no rationale. The definition of subcontract in FAR 15.401 does not appear to be based on whether a transfer is at cost or at other than cost.

If an item from an affiliate is treated as a make by the prime, and if the prospective prime must submit certified cost or pricing data, then the affiliate's data is submitted as part of the prime's. If an item from an affiliate is treated as a subcontract, then the rules about subcontractor submission apply.

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1 hour ago, Vern Edwards said:

H2H:

I thought you were going to point to DCAAM 9-405.2a, for which I can find no rationale. The definition of subcontract in FAR 15.401 does not appear to be based on whether a transfer is at cost or at other than cost.

If an item from an affiliate is treated as a make by the prime, and if the prospective prime must submit certified cost or pricing data, then the affiliate's data is submitted as part of the prime's. If an item from an affiliate is treated as a subcontract, then the rules about subcontractor submission apply.

I'm honestly confused by how one would transfer a commercial item at cost, unless the costs were compliant with FAR. At least, I've never seen it.

The DCAA CAM position you cited to is what I have historically believed to be the case and it's what I was stating before you challenged me. However, I would never ever cite to a DCAA CAM position to support any argument I would make (I know better than that). If I can't find support for my position in the FAR or agency supplements then I am forced to admit I cannot support my position.

All things considered, I think you articulated my (supportable) position much better than I did. Unsurprisingly.

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