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Cost Reimbursement Contracting


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Indirect rates are submitted via incurred cost submission to DCAA annually within six months of the end of fiscal year. At what point is the contractor obligated to extend the 'actual', which is contractor-calculated-but-not-audited, rates to the govt, when the contractor has received no endorsement of the rates from the government. Are they obligated to submit a true up bill to the government annually? If they do not is there a consequence? This assumes allowable cost and payment clause as a prime. Is the answer different if you are a sub.

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Retread in reading it again I see in absence of audited rates that billing rates shall be anticipated final rates i.e. the rates not yet deemed final but reflective of the submitted incurred cost submission. So I suppose the answer is yes, when you submit your ICS your Billings should be updated to reflect those rates. When rates are actually audited they’d become the ‘final’ rates. Is that close? As for the subcontract, in the absence of specific guidance for this process and the failure of the ACP to be incorporated in the agreement, it could be anyone’s guess right? 

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11 hours ago, Michael11 said:

So I suppose the answer is yes, when you submit your ICS your Billings should be updated to reflect those rates. When rates are actually audited they’d become the ‘final’ rates.

If your prime awarded you a cost-type subcontract without including Allowable Cost and Payment clause -- or equivalent language -- then it made a huge mistake. What other clauses are in the contract? Are there any FAR clauses? In other words, is the prime a Federal contract? If so, ACP flowdown should have been mandatory. In fact, though I'm not a fan of the Christian Doctrine, I suspect it's a strong argument that the clause should be read in whether it's there or not. I mean, if there's no ACP clause what even requires you to prepare and submit a proposal to establish final billing rates?

In any case, yes. Submit a "period 13" adjustment voucher when the books close. Submit another adjustment voucher when you submit certified final indirect cost rates in your annual proposal. Submit another adjustment voucher when you receive negotiated final billing rates. Make every effort to avoid significant over- or under-payment and to incorporate your updated rates into your LOC/LOF program cost monitoring.

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Thanks help! Your overemphasis of the submission frequency is exactly what I was hoping to hear. You are right that my initial Q referred to a CR prime that includes the ACP.

Separately in a cost reimbursement subcontract where no ACP was flowed down, that sounds like a problem right? 

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If a company has an acceptable accounting system, risks should be limited. See for example, DOD 252.242-7006. If DCAA exerts cognizance over it, rates and so forth should be taken care of in that interaction. A prime should not be awarding a cost type subcontract unless the subcontractor has such an acceptable accounting system.

Edited by Neil Roberts
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Neil let’s suppose the subcontract was identified as ‘cost’ but the agreement was largely silent on what that meant (are rate adjustments required at actuals and at what frequency, etc). The ACP was not there. In a commercial agreement I am not aware of a set of regs that would alone define what a commercial ‘cost’ agreement means.

Is it fair to say that absent language in a commercial agreement that says what cost plus means between the two parties that it’s plain ambiguous 

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The advice H2H gave you reflects a common practice, and one some DCAA offices expect contractors to follow.   However, there are some drawbacks to that practice.  Primarily from the government's perspective, if the proposed  final rates are higher than the billing rates, the government may not be willing to accept the proposed final rates  until after an audit has been performed and new billing rates established.  Also, if the proposed final rates are lower than the billing rates, they may not be reflective of what the rates for the following year may be.  Thus, we cannot automatically say that the proposed final rates should be the billing rates for the next year or that they should be used to do a true-up of previous billings.  Moreover, that practice is not what the ACP clause requires.  Subsection (e) of that clause states in part "Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor)."  Thus, under the language of the clause, you are to continue to use billing rates that were previously established until the government establishes new billing rates.  See, FAR 42.704.  Under this scenario, you would only do a true-up after final rates are established.

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3 hours ago, Michael11 said:

Neil let’s suppose the subcontract was identified as ‘cost’ but the agreement was largely silent on what that meant (are rate adjustments required at actuals and at what frequency, etc). T

Michael, I think you need to bone up on what is a cost plus percentage of cost contract.  If the sub does not have to adjust its indirect cost rates to actuals, you have a CPPC subcontract.  If you look at FAR 52.244-2, you will see that primes are not permitted to enter into CPPC subcontracts.  If they do, I would suspect that the entire subcontract cost could be challenged as unallowable.

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Retread, if you are going to quote 52.216-7(e) please quote the entirety.

 

Quote

(e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates-

(1) Shall be the anticipated final rates; and

(2) May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment.

(Emphasis obviously added.)

What to you make of that word "shall" in (e)(1) above. Do you think it gives the contracting officer discretion to not adjust provisional billing rates when the contractor requests an adjustment?

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On 5/4/2019 at 6:31 AM, Michael11 said:

Neil let’s suppose the subcontract was identified as ‘cost’ but the agreement was largely silent on what that meant (are rate adjustments required at actuals and at what frequency, etc). The ACP was not there. In a commercial agreement I am not aware of a set of regs that would alone define what a commercial ‘cost’ agreement means.

Is it fair to say that absent language in a commercial agreement that says what cost plus means between the two parties that it’s plain ambiguous 

Not sure what is contractually involved in your scenario, Michael11. What is a "commercial agreement?" Do you mean commercial agreement or commercial item under a government prime contract? A commercial agreement to me is a contract not subject to federal regulations. There would not normally be actuals, rates or adjustments to discuss as in federal regulations. If you mean commercial item under a government contract, I find it difficult to understand how a prime contractor qualified the item as a commercial item and I would like it if you filled that in with details. if it is a cost reimbursement contract, I don't yet understand how it has previously been offered/sold, leased or licensed to the general public to qualify as a commercial item.   

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19 hours ago, here_2_help said:

What to you make of that word "shall" in (e)(1) above. Do you think it gives the contracting officer discretion to not adjust provisional billing rates when the contractor requests an adjustment?

"Shall" in (e)(1) describes what the billing rates are to reflect, i.e., the anticipated final rates at the end of the accounting period.  This is the contractual implementation of the policy stated at FAR 42.704(b), which states in part "In establishing billing rates, the contracting officer (or cognizant Federal agency official) or auditor should ensure that the billing rates are as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal period, as adjusted for any unallowable costs." 

As for the adjustment of billing rates, note the (e)(2) uses the term "may" not shall.  Thus, (e)(2) does not require the government to adjust billing rates when the contractor requests such an adjustment.  Instead, if the contractor requests an adjustment, the government is to make an independent assessment of what the billing rates should be.  Based on that assessment, the government may or may not adjust the billing rates.

On the other hand, if the government believes that the rates need to be adjusted, but the contractor balks, in accordance with FAR 42.704(c) the government can make a unilateral determination as to what the rates should be.

Bottom line, nothing in 52.216-7 or FAR 42.704 gives the contractor the unilateral right to change billing rates.

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1 hour ago, Retreadfed said:

Bottom line, nothing in 52.216-7 or FAR 42.704 gives the contractor the unilateral right to change billing rates.

Agreed. Nobody ever said it did.

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