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Robert Tibbitts

Negotiated indired rate agreement with DFAS in subcontract

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Hi all,

I have the following clause in a proposed subcontract:

G.6.     INDIRECT COST RATES

 

  1. In no event shall the final amount reimbursable for fringe benefits exceed a ceiling of forty percent (40.00%) of direct labor costs for the entire duration of this Subcontract.  In no event shall the final amount reimbursable for overhead exceed a ceiling of thirty-two percent (32.00%) of the total of direct labor plus fringe benefits for the entire duration of this Subcontract.  In no event shall the final amount reimbursable for general and administrative (“G&A”) expense exceed a ceiling of twenty (20%) percent of the total of direct labor plus fringe benefits plus overhead for entire duration of this Subcontract. 

     

Indirect Rate

Ceiling / Percent (%)

Cost Pool

Fringe Benefits

40.00

Direct Labor

Overhead

32.00

Direct Labor + Fringe Benefits

General and Administrative (G&A)

20.00

Direct Labor + Fringe Benefits

+ Overhead

 

Subcontractor agrees these rates shall be ceiling rates in effect for the duration of the Subcontract (Base Period plus all Option Periods).  Subcontractor acknowledges and agrees that no indirect or G&A burden shall be applied to travel, other direct costs (“ODCs”), or lower-tier subcontract costs.  Subcontractor agrees that all indirect cost rates shall be in accordance with FAR 52.216-7, ALLOWABLE COST AND PAYMENT.

 

b.Subcontractor may be requested by the Division of Financial Advisory Services (“DFAS”) of the Office of Acquisition Management and Policy of the NIH, to establish an negotiated indirect rate agreement for this Subcontract, and if so requested, then Subcontractor shall negotiate with DFAS for such agreement.  The cognizant Government Contracting Officer shall be:
 

c. If Subcontractor establishes a negotiated indirect rate agreement with DFAS, and if any such negotiated final indirect cost rates exceed the negotiated ceiling rates stated above in Section G.6.a, then the Government and/or Contractor shall only be obligated to pay the negotiated ceiling rates stated above in Section G.6.a. for the duration of the Period of Performance of this Subcontract.  In the event that the rates established by DFAS are lower than the negotiated ceiling rates stated in Section G.6.a, then Subcontractor shall submit an adjustment invoice for any overpayment. (emphasis added)
 

d. Any costs over and above the amount resulting from the negotiated ceiling rates stated in Section G.6.a shall not be reimbursed under this Subcontract or by any other Government contract, grant or cooperative agreement.

 

My main concerns are section b and c. The Prime says subsection b and c are mandatory flow-downs from its contract with the government and that it doesn't have any choice in the matter and must flow-down this language. The Prime reassures us that they believe our rates are reasonable and it will do its best to help in any discussions with DFAS. My understanding is that one of the principles behind a subcontract is that the Sub does not interact directly with the Government. By accepting this clause, it seems we are agreeing to adjust our indirect rates at the request of the Government. We would then have to possibly decrease the rates on the subcontract, which seems unreasonable to me. Any advice on how to respond back to the Prime and not have this clause in the contract? Thanks.

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I wouldn't agree to paragraph a. It flies in the face of cost reimbursement allowable costs per FAR 52.216-7. Not sure why you are having a problem with paragraphs  b. and c., as they seem consistent with FAR 52.216-7, which I would expect be flowed to your firm with alterations of the parties such that you the subcontractor shall comply with submitting rates to the Government for its determination. I would verify the exact prime contract wording of paragraph a. Pay close attention to analyzing the wording, including any language that substitutes parties, whether the wording makes it a mandatory flowdown or whether it applied only to the prime contractor. Even if it clearly applied to a subcontractor with the given rates, it seems to be over reaching by the Government. You may wish to complain to your representatives in Congress and or the Small Business Office or decide whether to walk away from the work or accept the business risk. 

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I tend to agree with Neil. First, capping indirect rates is not a mandatory requirement, as far as I know. If your prime has its rates capped, it's because the government customer thinks the bid rates were artificially low. Just because your prime has capped rates doesn't mean you have to.

Second, the bit about finalizing rates is poorly worded. 52.216-7 already tells the parties how to do so; and it even addresses subcontracts. If you have a NICRA, then well and good. But if this is your only cost-type contract then you and your prime are free to establish close-out billing rates without interference from the government. This was established by the Court of Federal Claims (to some extent anyway) in the US Enrichment Corp. case (July 28, 2014).

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18 hours ago, Robert Tibbitts said:

Hi all,

I have the following clause in a proposed subcontract:

G.6.     INDIRECT COST RATES

 

  1. In no event shall the final amount reimbursable for fringe benefits exceed a ceiling of forty percent (40.00%) of direct labor costs for the entire duration of this Subcontract.  In no event shall the final amount reimbursable for overhead exceed a ceiling of thirty-two percent (32.00%) of the total of direct labor plus fringe benefits for the entire duration of this Subcontract.  In no event shall the final amount reimbursable for general and administrative (“G&A”) expense exceed a ceiling of twenty (20%) percent of the total of direct labor plus fringe benefits plus overhead for entire duration of this Subcontract. 

     

Indirect Rate

Ceiling / Percent (%)

Cost Pool

Fringe Benefits

40.00

Direct Labor

Overhead

32.00

Direct Labor + Fringe Benefits

General and Administrative (G&A)

20.00

Direct Labor + Fringe Benefits

+ Overhead

 

Subcontractor agrees these rates shall be ceiling rates in effect for the duration of the Subcontract (Base Period plus all Option Periods).  Subcontractor acknowledges and agrees that no indirect or G&A burden shall be applied to travel, other direct costs (“ODCs”), or lower-tier subcontract costs.  Subcontractor agrees that all indirect cost rates shall be in accordance with FAR 52.216-7, ALLOWABLE COST AND PAYMENT.

 

b.Subcontractor may be requested by the Division of Financial Advisory Services (“DFAS”) of the Office of Acquisition Management and Policy of the NIH, to establish an negotiated indirect rate agreement for this Subcontract, and if so requested, then Subcontractor shall negotiate with DFAS for such agreement.  The cognizant Government Contracting Officer shall be:
 

c. If Subcontractor establishes a negotiated indirect rate agreement with DFAS, and if any such negotiated final indirect cost rates exceed the negotiated ceiling rates stated above in Section G.6.a, then the Government and/or Contractor shall only be obligated to pay the negotiated ceiling rates stated above in Section G.6.a. for the duration of the Period of Performance of this Subcontract.  In the event that the rates established by DFAS are lower than the negotiated ceiling rates stated in Section G.6.a, then Subcontractor shall submit an adjustment invoice for any overpayment. (emphasis added)
 

d. Any costs over and above the amount resulting from the negotiated ceiling rates stated in Section G.6.a shall not be reimbursed under this Subcontract or by any other Government contract, grant or cooperative agreement.

 

My main concerns are section b and c. The Prime says subsection b and c are mandatory flow-downs from its contract with the government and that it doesn't have any choice in the matter and must flow-down this language. The Prime reassures us that they believe our rates are reasonable and it will do its best to help in any discussions with DFAS. My understanding is that one of the principles behind a subcontract is that the Sub does not interact directly with the Government. By accepting this clause, it seems we are agreeing to adjust our indirect rates at the request of the Government. We would then have to possibly decrease the rates on the subcontract, which seems unreasonable to me. Any advice on how to respond back to the Prime and not have this clause in the contract? Thanks.

 

16 hours ago, Neil Roberts said:

I wouldn't agree to paragraph a. It flies in the face of cost reimbursement allowable costs per FAR 52.216-7. Not sure why you are having a problem with paragraphs  b. and c., as they seem consistent with FAR 52.216-7, which I would expect be flowed to your firm with alterations of the parties such that you the subcontractor shall comply with submitting rates to the Government for its determination. I would verify the exact prime contract wording of paragraph a. Pay close attention to analyzing the wording, including any language that substitutes parties, whether the wording makes it a mandatory flowdown or whether it applied only to the prime contractor. Even if it clearly applied to a subcontractor with the given rates, it seems to be over reaching by the Government. You may wish to complain to your representatives in Congress and or the Small Business Office or decide whether to walk away from the work or accept the business risk. 

I disagree that paragraph (a) "flies in the face of cost reimbursement allowable costs per FAR 52.216-7." See FAR 42.707(a), the reference to ceilings in 52.216-7(d)(3), and several agency FAR supplements.

Agencies and prime contractors have negotiated such indirect cost rate ceilings, or "caps," for decades, and competing offerors have offered such ceilings. See e.g.,  To Dunlap and Associates, Inc., B-165938, May 16, 1969 and Social Solutions International, Inc. B-411944.4, May 18, 2017. I cannot see any reason why a prime cannot request or require ceilings from subs. Whether the particular percentages are reasonable is a matter for negotiation.

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