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Intercompany transfer of cost


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My company is a gov contractor that falls under full CAS and is also a wholly-owned subsidiary of our commercial, parent company. The parent company sells a commercial product and transfers it to us at standard cost when we sell the product via a government opportunity; however, does not pass thru (or allocate) the variances to standard cost to us. All variances are held at the corporate level. Is this not a violation of CAS 407, or does the parent company get a pass on the variance requirement because the product being sold is commercial in nature?

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Contracts are FFP for the products sold.  Yes, we claim commerciality and the Government has accepted this.  The decision to transfer was made at our corporate level despite our suggest to transfer at cost. 

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Yes, 31.205-26(e) was reviewed and hence my question.  I wanted to make certain I'm not drinking my own koolaid and this is a transfer at Standard cost.  Doe 

FAR 31.205-26(e) - Material costs states:

(e) Allowance for all materials, supplies and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this sub-part. However, allowance may be at price  when -

 (1) It is the established practice of the transferring organization to price inter-organizational 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 the contracting officer has not determined the price to be unreasonable.

I realize that both #1 & #2 must be met.  Does the transfer at "standard cost"  qualify as something "other than cost" for commercial work?  I am assuming the intent of #1 is actual cost, not standard or other.  #2 has been met through the claim of commerciality and no contracting officer has deemed the cost of the item, nor its ultimate price to be unreasonable. 
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17 hours ago, Barb F said:

Does the transfer at "standard cost"  qualify as something "other than cost" for commercial work?  I am assuming the intent of #1 is actual cost, not standard or other.  #2 has been met through the claim of commerciality and no contracting officer has deemed the cost of the item, nor its ultimate price to be unreasonable. 

I don't like your stated assumption. It's usually a mistake to assume much, if anything, in this environment.

I don't know if anybody has ever asked, or thought about, or addressed your question before. Therefore, without any support whatsoever I'm going with "Sure. Why not?" The phrase "other than cost" means exactly what it says--something other than actual, allowable, cost. A standard cost without variance may well fit into that phrase.

Make the auditors prove you wrong. I'm fairly confident they will not be able to do so.

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Barb, I'm confused, if the product is a commercial item, why would the CAS be applicable to it since contracts for commercial items are exempt from the CAS?  Also, the cost principles in FAR Part 31 do not apply to contracts for commercial items nor do they limit what a contractor can receive under a firm fixed price contract once the price is agreed upon.  Therefore, I do not understand your concern.

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