What is a ‘Division’

[dtonated]

Question: A company has 2 Profit/Loss (PL) Centers (Center A & Center and both centers are within the same CAS 410. Center B produces commercial products as defined in Part 2.  Center A is proposing on a govt contract and wants to use products from Center B as part of its offering. The transfer from Center B will be at established pricing, qualifies for an exception under 15.403-1(b), and pricing was previously determined to be fair and reasonable. The decision was made that Center A will subcontract for Center B’s commercial item. Center A will apply profit on Center B since Center B’s price will be Center A’s cost. 

 

The question is can you subcontract between the Centers when they are part of the same CAS 410? The FAR doesn’t define ‘division’ or ‘subdivision’ but I’m having a difficult time making the distinction that a P/L Center within the same CAS 410 is either. Is ‘division’ a term that’s up for interpretation? 

 

[here_2_help]

Hi dtonated,

You are using terms in a way that causes confusion. There is no such thing as "part of" or "within" the "same CAS 410."

CAS uses the terms "segment" and "business unit" which are very closely aligned in terms of definitions. There is also "home office" that may be relevant here. If I understand you correctly (and I may not), Center A and Center B are two separate segments/business units reporting to the same home office. Each has its own P&L and, most importantly, each has its own G&A rate. That is to say, Center A has its own G&A expense pool for its own management and Center B has its own G&A expense pool for its own management. If Center A and Center B share the same G&A expense pool, then you have a problem because, under CAS, they are not separate business units or segments.

If each has its own G&A expense pool and otherwise meets the CAS definitions for individual business units/segments, then YES you can subcontract between the two separate segments. If Center B has a commercial item and meets the requirements for exemption to 31.205-25(e), then YES you can transfer at price and Center A can apply profit to the transfer price received from Center B. Note that, although you can call it a subcontract, it is technically an inter-organizational transfer between two entities under a common control. But that's a technical point and, as you have described the situation (and as I have interpreted your description) then Center A can "buy" the commercial items at price from Center B.

Hope this helps.

 

 

[Retreadfed]

6 hours ago, dtonated said:

Is ‘division’ a term that’s up for interpretation?

The CAS uses terms to describe corporate organizations such as segment or home office as H2H noted.  However, the CAS do not dictate the corporate structure of a company.  Corporations sometimes structure themselves so that they have what the corporations call a division.  For example, what is now Electric Boat Corp. was once General Dynamics Electric Boat Division.  For CAS purposes, EB was a segment of GD.

[dtonated]

2 hours ago, here_2_help said:

CAS uses the terms "segment" and "business unit" which are very closely aligned in terms of definitions. There is also "home office" that may be relevant here. If I understand you correctly (and I may not), Center A and Center B are two separate segments/business units reporting to the same home office. Each has its own P&L and, most importantly, each has its own G&A rate. That is to say, Center A has its own G&A expense pool for its own management and Center B has its own G&A expense pool for its own management. If Center A and Center B share the same G&A expense pool, then you have a problem because, under CAS, they are not separate business units or segments.

Thanks for the response. I think you answered my question but to clarify, Center A & Center B are part of the same Business Unit reporting to the same Home Office and share the same G&A expense pool.

I think we have a problem but cannot get others to agree with me  

 

[Retreadfed]

dtonated, when you say Centers A and B share the same G&A pool, do you mean that costs are allocated to A and B from a common pool using the procedure in CAS 403 for inclusion in the G&A pool of each Center, or are you saying that the Centers do not have separate G&A pools?

[Neil Roberts]

I  have never taken into account the details in the above posts when it came to a "Division." Divisions of a Company are not legal entities and can not be successfully sued or contract with one another in a legally enforceable manner. The parent company of the Divisions is the actual legal entity to be sued and contracted with. Divisions can not contract with one another because you can't contract with yourself (the parent company would in essence be contracting with itself). Hoping this helps you but I am not sure it does because I don't grasp the focus of the posts above as being relevant to your question about subcontracts between divisions.

[here_2_help]

3 hours ago, dtonated said:

Thanks for the response. I think you answered my question but to clarify, Center A & Center B are part of the same Business Unit reporting to the same Home Office and share the same G&A expense pool.

I think we have a problem but cannot get others to agree with me  

 

If Center A and Center B share the same G&A expense pool and therefore have the same G&A rate, then yes. You absolutely do have a problem.

[here_2_help]

28 minutes ago, Neil Roberts said:

I  have never taken into account the details in the above posts when it came to a "Division." Divisions of a Company are not legal entities and can not be successfully sued or contract with one another in a legally enforceable manner. The parent company of the Divisions is the actual legal entity to be sued and contracted with. Divisions can not contract with one another because you can't contract with yourself (the parent company would in essence be contracting with itself). Hoping this helps you but I am not sure it does because I don't grasp the focus of the posts above as being relevant to your question about subcontracts between divisions.

Neil, frequently buyers are directed to treat orders between affiliated entities under a common control as if they are "arms-length" purchases. Doing so presents a number of problems, but that doesn't seem to be stopping that direction from being issued.

[Neil Roberts]

Hi here_2_help. In my experience, that is usually the right thing to do in cases of a subcontract between affiliates. If not, for example, there could be some serious tax consequences. It would look like both affiliates are actually one company. In the case of two Divisions, they actually are one company, so "arms-length" would not be appropriate and can be counterproductive. For example, having the Division "proposal" audited for rates, obtaining a current cost or pricing data certificate, etc.    

[Retreadfed]

On ‎3‎/‎23‎/‎2019 at 11:31 AM, here_2_help said:

If Center B has a commercial item and meets the requirements for exemption to 31.205-25(e), then YES you can transfer at price and Center A can apply profit to the transfer price received from Center B. Note that, although you can call it a subcontract, it is technically an inter-organizational transfer between two entities under a common control.

I think H2H answered the question concerning subcontracting.

[joel hoffman]

So, are they, in essence, buying a commercial item from themselves, if under the same G&A expense pool? I would then have a problem buying an item at full sales price, then paying additional markup for G&A and profit.

[here_2_help]

1 hour ago, joel hoffman said:

So, are they, in essence, buying a commercial item from themselves, if under the same G&A expense pool? I would then have a problem buying an item at full sales price, then paying additional markup for G&A and profit.

Indeed, that would seem to be the primary issue with the proposed approach.