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Profit on SubK pass through (warranties)

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Is profit (and other OH's) allowed on subcontractor pass through charges.

I am working an effort where the sub is charging for warranties on their supplies.  These are critical supplies to success of the mission. The prime is then charging all OH's and Profit on the warranties.  I'm ok with with the G&A and Material OH, but the profit seems excessive. (profit on profit).

I am aware of FAR 52-215-23 (and 22).  But it can be a little gray and fuzzy...

 

Thanks

 

 

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ARF,

If the subcontractor is not a related/affiliated entity to the prime contractor, then there is no "profit on profit" in the situation you describe. The price charged by the subcontractor becomes the prime's costs, on which it is allowed to make a profit (unless the contract dictates otherwise).

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44 minutes ago, ARF said:

I am working an effort where the sub is charging for warranties on their supplies. 

"Effort" is not at all clear.

Are you government or industry?

Are you preparing to negotiate a contract price? Is the negotiation the "effort" or is the "effort" something else?

What is the contract type?

When you say "Is profit (and other OH's) allowed..." are you asking whether it is an allowable cost under a contract in which costs are to be reimbursed or whether a contractor or subcontractor can include it in a proposal for a fixed price?

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19 minutes ago, Vern Edwards said:

"Effort" is not at all clear.

Are you government or industry?

Are you preparing to negotiate a contract price? Is the negotiation the "effort" or is the "effort" something else?

What is the contract type?

When you say "Is profit (and other OH's) allowed..." are you asking whether it is an allowable cost under a contract in which costs are to be reimbursed or whether a contractor or subcontractor can include it in a proposal for a fixed price?

Sir,  when I said effort I meant the acquisition/procurement/mod...etc.  Yes I am Fed Gov.  Yes I am doing a price eval for FFP but in a sole source environment.

The sub should already have profit built into their warranty price. So why should I allow additional profit to the prime on a warranty provided by the subk?  I can see the G&A for management of the subK but not profit.  Seem excessive to be paying profit on profit.

 

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9 minutes ago, ARF said:

So why should I allow additional profit to the prime on a warranty?

Who said you should? I agree that you shouldn't. I wouldn't.

I disagree with here_2_help when he says that a contractor is allowed to make a profit on costs. That is wrong. There is no such statute, regulation, or policy. A contractor is entitled to a profit for its work effort and the risks that it takes in undertaking that effort. In some structured approaches to calculating a prenegotiation profit objective costs are used as a measure of contractor work effort, but that is not a policy saying that a contractor is entitled to profit on its costs.

The contractor in your case is making no work effort with respect to the subcontractor's profit on its warranty, other than agreeing to pay it. When developing your prenegotiation profit objective, exclude the proposed profit on the sub's profit on the warranty. But don't do it because of your concern about profit on profit. Do it because it does not reflect any work on the part of the contractor. Do it as a matter of business judgment, not because of FAR 52.215-23.

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4 hours ago, Vern Edwards said:

Who said you should? I agree that you shouldn't. I wouldn't.

I disagree with here_2_help when he says that a contractor is allowed to make a profit on costs. That is wrong. There is no such statute, regulation, or policy. A contractor is entitled to a profit for its work effort and the risks that it takes in undertaking that effort. In some structured approaches to calculating a prenegotiation profit objective costs are used as a measure of contractor work effort, but that is not a policy saying that a contractor is entitled to profit on its costs.

The contractor in your case is making no work effort with respect to the subcontractor's profit on its warranty, other than agreeing to pay it. When developing your prenegotiation profit objective, exclude the proposed profit on the sub's profit on the warranty. But don't do it because of your concern about profit on profit. Do it because it does not reflect any work on the part of the contractor. Do it as a matter of business judgment, not because of FAR 52.215-23.

The prime contractor is responsible for execution risk on the contract. If the subcontractor doesn't perform the warranty work, who does the government hold accountable? Not the subcontractor ...

When costs are incurred, they are recorded into allowable and unallowable categories. The contractor uses profit on allowable work to pay for its unallowable costs. When you deny the contractor profit on its costs then you are not allowing the contractor to cover its unallowable costs. I'm not in favor of such a situation.

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1 hour ago, here_2_help said:

The prime contractor is responsible for execution risk on the contract. If the subcontractor doesn't perform the warranty work, who does the government hold accountable? Not the subcontractor ...

When costs are incurred, they are recorded into allowable and unallowable categories. The contractor uses profit on allowable work to pay for its unallowable costs. When you deny the contractor profit on its costs then you are not allowing the contractor to cover its unallowable costs. I'm not in favor of such a situation.

Interesting, but it doesn't persuade me to change a word I wrote.

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6 hours ago, here_2_help said:

The prime contractor is responsible for execution risk on the contract. If the subcontractor doesn't perform the warranty work, who does the government hold accountable? Not the subcontractor ...

When costs are incurred, they are recorded into allowable and unallowable categories. The contractor uses profit on allowable work to pay for its unallowable costs. When you deny the contractor profit on its costs then you are not allowing the contractor to cover its unallowable costs. I'm not in favor of such a situation.

I thought that if subcontractors do not perform the warranty work (or work generally), prime contractors have some sort of recourse to hold the subcontractor(s) accountable...

Why wouldn’t it just be a case of “accountability” rolling downhill?

I’m not persuaded either.

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I agree with H2H. A dubs profit is part of the prime’s direct costs. The prime is responsible for the work including that of its subs. 

My organization allows profit on direct and indirect costs. We do look at the amount of subcontracting vs self performed work as part of the overall risk. We factor it into our profit objective using an alternative weighted guidelines profit algorithm.  

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ARF, you may wish to focus instead on subcontractor and prime warranty cost itself, which I am guessing may be more money than profit on  subcontractor's warranty costs. Will the government contract include a warranty provision? Does the prime's financial accounting system already include warranty for the end item? If so, the prime could be asked whether it is including warranty requirements in purchase solicitations and to delete such a requirement and all associated separate charges by subcontractors for that.

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