31.205-26(e) clarification

[pat]

I would appreciate your input on 31.205-26(E) which 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 subpart. However, allowance may be price when--

(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 the contracting officer has not determined the price to be unreasonable.

Does the term services mean only services associated with transfer of materials and supplies such as material handling or does it mean profit is not allowed between subsidiaries for any element of direct cost even on services type contracts.  I am being told that any subcontract between subsidiary companies cannot include profit.  I question that since this language is under a clause titled material.  If this is the case then the only subcontracts that could be issued to sister companies is a cost reimbursable without fee.  I would like to get your interpretation of the intent of this clause.

[Retreadfed]

The first thing we need to recognize is that 31.205-26 is not a clause, but a subsection.  The general purpose of this cost principle is to prevent pyramiding of profit on profit when the transaction is between entitles under common control.  However, the rule against profit on profit has some exceptions.  That is, if a commercial item is transferred between entities under common control, the item can be transferred at price.  Also, if it is the practice of the transferring entity to provide services to an affiliate at price for commercial contracts, the same services can be provided at price for government contracts. 

As for the statement that subcontracts between subsidiary companies cannot include profit is not true.  As discussed above, they clearly can.  Further, you need to remember, that the cost principles do not apply to all contracts.  In this regard, also see, FAR 52.232-7(a)(1) for another example of transfer of labor (services) between entities under common control at an hourly rate that includes profit.

[Guest Vern Edwards]

Isn't every clause a subsection?

[here_2_help]

On ‎10‎/‎17‎/‎2018 at 6:59 AM, pat said:

Does the term services mean only services associated with transfer of materials and supplies such as material handling or does it mean profit is not allowed between subsidiaries for any element of direct cost even on services type contracts.

The cost principle applies to any transfer of goods or services between affiliated entities under a common control.

On ‎10‎/‎17‎/‎2018 at 6:59 AM, pat said:

I am being told that any subcontract between subsidiary companies cannot include profit.

As Retreadfed correctly noted, the cost principle contains a general rule and an exception to that rule. You are stating the general rule. Further, it is possible for a performing entity to bill profit if the responsible entity does not apply profit to the transaction. In addition, the "cannot include profit" general rule applies to government contract costing and billing. It is possible for profit to be billed and then treated as an unallowable cost for government contract costing and billing purposes. Note, however, that any profit between affiliated entities under a common control would be "eliminated" during consolidation of the books for financial reporting purposes.

On ‎10‎/‎17‎/‎2018 at 6:59 AM, pat said:

I question that since this language is under a clause titled material.

Using the title of something to interpret the substance of the language below the title is not typically the way you want to go. Instead, I suggest looking at the language itself.

[Guest Vern Edwards]

On 10/17/2018 at 6:59 AM, pat said:

Does the term services mean only services associated with transfer of materials and supplies such as material handling or does it mean profit is not allowed between subsidiaries for any element of direct cost even on services type contracts.  I am being told that any subcontract between subsidiary companies cannot include profit.  I question that since this language is under a clause titled material.  If this is the case then the only subcontracts that could be issued to sister companies is a cost reimbursable without fee.  I would like to get your interpretation of the intent of this clause.

58 minutes ago, here_2_help said:

Using the title of something to interpret the substance of the language below the title is not typically the way you want to go. Instead, I suggest looking at the language itself.

See Bain, DETERMINING THE PREEMPTIVE EFFECT OF FEDERAL LAW ON STATE STATUTES OF REPOSE, University of Baltimore Law Review (Spring 2014):

Quote

The “title and heading” canon [of interpretation] allows courts, in certain circumstances, to use titles or headings as interpretive aids. In 1947, the Supreme Court stated: “For interpretative purposes, they are of use only when they shed light on some ambiguous word or phrase. They are but tools available for the resolution of a doubt. But they cannot undo or limit that which the text makes plain.” Thus, if there is ambiguity regarding whether a provision preempts statutes of repose, a court may consider the heading of the provision.

.

Footnote omitted.

[here_2_help]

1 hour ago, Vern Edwards said:

See Bain, DETERMINING THE PREEMPTIVE EFFECT OF FEDERAL LAW ON STATE STATUTES OF REPOSE, University of Baltimore Law Review (Spring 2014):

.

Footnote omitted. 

 I honestly cannot tell whether your quote supports, or refutes, my suggestion to the OP.

[Guest Vern Edwards]

It supports it.