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Profit as Allowable Cost when directed to prepare for Acts of God

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There has been much internal discussion between the govt and prime/sub contractors regarding profit being an allowable cost when directed to execute heavy weather plans for hurricanes, snow storms or the like.

If the govt is directing work, why wouldn't profit be an allowable cost?

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You asked: “If the govt is directing work, why wouldn't profit be an allowable cost?”

Your question is unanswerable without more adequate explanation and clarification. 

What kind of contract is it?  Service, construction, etc.? 

Was extra work done? What is or was involved in “executing a heavy weather plan for hurricanes and snow storms or the like” that would be considered an additional cost? 

Is the heavy weather plan part of the contract?  

Please clarify how the government “directed work”? 

If not part of the contract, what clause of the contract is involved or cited,  if any for a price adjustment

 Is the government reimbursing extra costs?

Bottom line unknown is what operative cause or contract term or clause would provide for “profit” . If it is a modification under a clause, then then clause would use the term “equitable adjustment to include profit as part of a price adjustment.

 Does the specific question concern “profit” as part of a subcontract cost to the prime?  It would be considered a cost to the prime contractor. If so, what is the government’s stated reason for not allowing such profit? You said there has been considerable internal discussion.

Profit on a prime’s direct and indirect costs is part of an “equitable adjustment” of the contract price between the prime and the  government.  A prime’s profit isn’t referred to as a “cost”. “Profit” plus “costs” equals “price” to government. If the question concerns prime contractor profit, what is the government’s stated position (reasons) for no profit on costs? 

[Im trying to understand why you referred to “profit (as) an allowable cost”.]

 

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The simple answer to the question is profit is not a cost.  When negotiating a contract, profit is the difference between the anticipated cost of performance and the price negotiated.

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Subcontractor profit is a cost to the prime.  However, the OP did not mention subcontractor profit.  On the other hand, prime profit is not a cost to the prime.

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I knew that people were going to speculate  about what they think the OP is asking...  

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Yes. The answer to the question is definitely yes.

 

If the government doesn't want to pay the contractor a reasonable profit on costs incurred then it should do the work itself.

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12 hours ago, contractsmgr said:

There has been much internal discussion between the govt and prime/sub contractors regarding profit being an allowable cost when directed to execute heavy weather plans for hurricanes, snow storms or the like.

Is there a clause that entitles the contractor to an adjustment when directed to execute a heavy weather plan? If so, what does that clause say?

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13 hours ago, Don Mansfield said:

Is there a clause that entitles the contractor to an adjustment when directed to execute a heavy weather plan? If so, what does that clause say?

For some reason, contractsmgr isn’t clarifying the scenario. “Last visited yesterday at 05:41 AM” [CDT]

contractsmgr,  please clarify per various requests. Thank you. 

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It is a FFP ship repair invoking:

"HQ C-2-0029 HEAVY WEATHER PLAN (SERMC) (JUN 2016)

...In the event SERMC directs the Contractor to implement the HWP pursuant to NSI 009-69, the Contractor may submit to the Contracting Officer a request for reimbursement for costs resulting from such actions together with any documentation that the Contracting Officer may reasonably require. The Government shall reimburse the Contractor for all reasonable, allowable and allocable costs resulting from the Contractor's implementation of the HWP based on such Government direction.

(End of Clause) "

The invoked the HWP, and during the accomplishment of the HWP, required additional precautions be taken. Those additional precautions were directed by the Proj Manager, took additional time and resources and were not included in the accepted HWP. 2 subcontractors were also affected by this weather event.

Prime submitted request for reimbursement came and gov't has stated:

"Neither party controls the weather and neither party is at fault; therefore, it logically follows that neither party should profit at the expense of the other.  

The purpose of the HWP is to ensure the protection of the vessel and provide reasonable compensation to make the contractor whole; not to enrich the contractor."  and additionally, "- Disallowed costs: Profit on material and subcontractor"

 

The gov't has further requested a breakdown of the subcontractor rate to ensure they are also not receiving profit on the HWP implantation, however neither sub has DCAA audited rates, and now has to either provide pay rates of each employee or create a blended rate with the number of people/hrs expended and payments made.  Both subs provided the same rate that they have provided with growth work to the base contract.

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Ok, so the clause only provides for the reimbursement of costs and the Government is willing to reimburse your costs.

But you are saying the Government directed you to do work that was not contained in the Heavy Weather Plan, correct? And you seek a price adjustment for that work, correct? Your argument is that the Government constructively changed the agreed-to Heavy Weather Plan?

If that's the case, then I think you should seek an equitable adjustment under the Changes clause.

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1. I view the subcontractors rate (whatever that is) as a cost to me. therefore they should not have to break down their rate. It should be accepted as it is.

2. because the HWP was modified, it was a constructive change and as such, profit is allowable.

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Some of the work was covered in the HWP.  The contract promised that if the HWP was invoked, the Government would reimburse costs, period. 

  • Any costs that fit within the established HWP are reimbursed at cost, with no additional profit.  That's the agreement of the parties.
  • Some of the "additional precautions were directed by the Proj Manager" might fit within the broad scope of the established HWP, and those should be reimbursed at cost, with no additional profit.  That's the agreement of the parties.
  • If any of the "additional precautions were directed by the Proj Manager" were beyond the scope of the established HWP, then the contractor might need to make a claim under the constructive changes doctrine (and the contracting officer would need to approve the claim) before any costs could be reimbursed, and yes, profit would be negotiable.  The agreement of the parties doesn't reach this far.

But all of the above is premised on a fixed-price contract.  On a cost-reimbursement or time-and-materials contract, we need to look more closely.  If T&M, then there cannot be profit on materials and subcontracts, right?

 

Edited by ji20874
Right -- an earlier posting indicated this is a FFP contract.

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The OP has stated it is a FFP contract.  

I find the contract term and position of the government a little troubling.  If material was also needed would the government be asking for breakdown of cost excluding profit for it.   A subs effort is a cost to the prime and I have trouble extending the exclusion of profit on sub effort.  Seems the subs cost inclusive of profit is allocable.

Poorly written term in my view.

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1 hour ago, contractsmgr said:

during the accomplishment of the HWP, required additional precautions be taken. Those additional precautions were directed by the Proj Manager,

Is the "Proj Manager" a contracting officer?  If not, what authority did (s)he have to issue such directions?  If (s)he did not have the authority to issue such directions, maybe you do not have a claim at all.

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57 minutes ago, contractsmgr said:

1. I view the subcontractors rate (whatever that is) as a cost to me. therefore they should not have to break down their rate. It should be accepted as it is.

2. because the HWP was modified, it was a constructive change and as such, profit is allowable.

1. I think that's reasonable.

2. Makes sense to me.

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I want to agree with Don, but with a few caveats...

1.  However, the price paid by the Government for the contract modification to pay for the HWP has to be fair and reasonable, and there might be a need for certified cost or pricing data for this sole-source modification (depending on dollar amount and commerciality and so forth) -- if so, the profit will need to be visible.

2.  However, the contracting officer has to agree with the contractor's claim alleging a constructive change.  See FAR 1.602-3(b)(5).

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If this is a Navy contract, they usually contain a clause disclaiming any potential liability on the part of the government for costs caused by directions or contract changes issued by someone other than the contracting officer.  Is there such a clause in your contract?

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4 hours ago, ji20874 said:

I want to agree with Don, but with a few caveats...

1.  However, the price paid by the Government for the contract modification to pay for the HWP has to be fair and reasonable, and there might be a need for certified cost or pricing data for this sole-source modification (depending on dollar amount and commerciality and so forth).

2.  However, the contracting officer has to agree with the contractor's claim alleging a constructive change.  See FAR 1.602-3(b)(5).

I want to agree with ji20874, but with a caveats...

1. However, the costs of preparing the REA and proposal, including the cost of preparing cost or pricing data and supporting any fact-finding/audit thereof, are also reimbursable contract costs.

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As a follow-on to Retreadfed's comment,

  • If "additional precautions were directed by the Proj Manager" and the contractor interpreted that direction as a constructive change, and
  • If the contract included the clause at FAR 52.243-7, Notification of Changes,
  • Then the contractor had an affirmative duty to provide notice to the contracting officer of the alleged change.

If the contractor did not provide timely notice, then the contractor may have forfeited its right to an adjustment in the contract price.

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44 minutes ago, ji20874 said:

As a follow-on to Retreadfed's comment,

  • If "additional precautions were directed by the Proj Manager" and the contractor interpreted that direction as a constructive change, and
  • If the contract included the clause at FAR 52.243-7, Notification of Changes,
  • Then the contractor had an affirmative duty to provide notice to the contracting officer of the alleged change.

If the contractor did not provide timely notice, then the contractor may have forfeited its right to an adjustment in the contract price.

The right to an adjustment apparently isn’t in question here. I think the question concerns allowance of subcontractor profit as a cost to the prime in its cost adjustment. 

If the scope of the subcontract already includes possible storm protection AND if the Navy Clause was flowed down to the sub, it might be arguable that the sub is only entitled to additional costs (except as allowed in an equitable adjustment for the changed work portion, if any) , for its efforts. 

If the sub was initially hired to perform the storm prep work, then I’d say that it is clearly entitled to an allowance for profit in its price, which is a COST to the prime contract. 

I am not familiar enough with the Navy clauses to know whether any of the directed work would be considered a constructive change above and beyond the cost of the storm preparation that is covered by cost adjustment per the storm prep clause.

if there was a directed change to the work included in the plan,  then that portion of the effort should be handled separately as an equitable adjustment , which provides for an allowance for profit, assuming that it resulted in additional costs vs what it would have cost for the efforts in the originally required work. If there were no additional costs vs. what it would have cost, then there is no entitlement to an equitable adjustment. 

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3 hours ago, joel hoffman said:

I think the question concerns allowance of subcontractor profit as a cost to the prime in its cost adjustment. 

Joel, I have interpreted the issue as being one of profit at the prime contractor level.  CM has not been clear on exactly what the issue is.  Maybe we can get some clarification.

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5 hours ago, Retreadfed said:

Joel, I have interpreted the issue as being one of profit at the prime contractor level.  CM has not been clear on exactly what the issue is.  Maybe we can get some clarification.

You may be correct, Retreadfed. I just reread contractsmgr’s clarification.  The clause provides for a cost adjustment; CM states that the government required the contractor to perform additional precautions that were not in the approved heavy weather plan .

looks like they will pay costs but no sub or prime profit on any of the work, including the “additional precautions”. 

 

On 11/7/2018 at 12:20 PM, contractsmgr said:

It is a FFP ship repair invoking:

"HQ C-2-0029 HEAVY WEATHER PLAN (SERMC) (JUN 2016)

...In the event SERMC directs the Contractor to implement the HWP pursuant to NSI 009-69, the Contractor may submit to the Contracting Officer a request for reimbursement for costs resulting from such actions together with any documentation that the Contracting Officer may reasonably require. The Government shall reimburse the Contractor for all reasonable, allowable and allocable costs resulting from the Contractor's implementation of the HWP based on such Government direction.

(End of Clause) "

The invoked the HWP, and during the accomplishment of the HWP, required additional precautions be taken. Those additional precautions were directed by the Proj Manager, took additional time and resources and were not included in the accepted HWP. 2 subcontractors were also affected by this weather event.

Prime submitted request for reimbursement came and gov't has stated:

"Neither party controls the weather and neither party is at fault; therefore, it logically follows that neither party should profit at the expense of the other.  

The purpose of the HWP is to ensure the protection of the vessel and provide reasonable compensation to make the contractor whole; not to enrich the contractor."  and additionally, "- Disallowed costs: Profit on material and subcontractor"

 

...The gov't has further requested a breakdown of the subcontractor rate to ensure they are also not receiving profit on the HWP implantation,....

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15 hours ago, joel hoffman said:

You may be correct, Retreadfed. I just reread contractsmgr’s clarification.  The clause provides for a cost adjustment; CM states that the government required the contractor to perform additional precautions that were not in the approved heavy weather plan .

looks like they will pay costs but no sub or prime profit on any of the work, including the “additional precautions”. 

 

Let me get this straight. Are we saying that a prohibition on paying profit that is found in the prime contract would be enforceable in the subcontract between the prime contractor and its supplier(s)? Wouldn't that depend on whether or not the prime flowed the clause down to the subK?

When considering your answer(s), don't forget that the prime contract is FFP.

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3 hours ago, here_2_help said:

Let me get this straight. Are we saying that a prohibition on paying profit that is found in the prime contract would be enforceable in the subcontract between the prime contractor and its supplier(s)? Wouldn't that depend on whether or not the prime flowed the clause down to the subK?

Hypothetically, if there were such a term in the prime contract (i.e., the Government won't pay subcontractor profit), the Government could disallow the amount of subcontractor profit in its dealings with the prime contractor, regardless of whether the prime flowed the clause down to the sub. However, I don't think that would be a reasonable interpretation of "all reasonable, allowable and allocable costs resulting from the Contractor's implementation of the HWP based on such Government direction."

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