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DCAA's Strange Interpretation of the Fee Withhold Requirement on CPFF Contracts

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Our consultant (who's a former DCAA auditor) is telling us that DCAA's interpretation of 52.216-8 Fixed Fee (Jun 2011) is that the contractor is required to withhold 15% of the fixed fee, that the 15% is mandatory, and if contractors don't do this, they'll be cited with an accounting system deficiency. She's consulted for several other contractors and said that one of them was recently cited with an accounting system deficiency for this very reason, which was fully supported by the DCMA ACO. 

My interpretation of this clause is that it does not impose any kind of obligation on the contractor. The clause does contain a requirement for the Contracting Officer to withhold a certain amount/percentage of the fee, and to release a certain amount/percentage as stated in the clause, but there’s no obligation for the contractor to withhold any of the fixed fee (i.e. underbill the Government on the fee). I think the contractor should bill the full amount of the fee and the Contracting Officer is responsible for withholding the required amount of fee from payment. If the contractor were to underbill the fee, there would be nothing for the Contracting Officer to withhold. If the Contracting Officer doesn’t do any withholding of the fee, that should be on the Contracting Officer, not the contractor.

Our auditor then told me that DCAA pamphlet 7641.90 ("Information for Contractors") also states that it's the contractor's responsibility to withhold 15% of the fixed fee. I reviewed the manual and it doesn't actually state that, but rather refers back to FAR 52.216-8 and provides a sample voucher where the Contracting Officer has designated a 15% reserve for the fixed fee. I certainly don't view this sample voucher as direction or a requirement for the contractor to withhold/underbill 15% of the fee. While a withhold amount less than 15% is apparently almost unheard of, the FAR does state that the amount of the withhold is a subjective "not to exceed 15%, or $100,000, whichever is less, to protect the Government's interest", so the reserve technically could be a lower percentage, based on what the Contracting Officer feels is adequate to protect the Government’s interest. 

That DCAA could cite a contractor for not doing something that isn’t required by contract is very frustrating and concerning to me. The clause/regulation states as clear as day that the Contracting Officer is to withhold a reserve not-to-exceed (discretionary amount) 15 percent of the total fixed fee, which is why I’m surprised that DCAA could expect contractors to interpret that to mean that the contractor must voluntarily underbill the fixed fee by exactly 15% (a non-discretionary amount). And apparently if contractors don't do the mental gymnastics required to arrive at this same bizarre interpretation of the clause, DCAA will cite the accounting system as deficient and may even require repayment of the fee reserve that "should have been withheld". 

I should also mention that our company has had several CPFF contracts with both the DoD and EPA over the years and we've never been required to withhold a percentage of our fixed fee from billings and have also never had any portion of fee withheld by the Gov't. I'm not saying it shouldn't have been withheld (it should have), but it just hasn't happened.

Am I missing something here?? Has anyone else had to deal with this?

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Our dim-witted automated systems might contribute to the problem — it might be impossible for a contracting officer to approve a payment for less than the invoiced amount.

My instruction in that case was for the contractor to show the withholding in its invoice.  For example, if the earned fee was $100 and the withhold amount was 15%, I told the contractor to show this in the invoice with a payable amount of $85 and $15 shown as earned but withheld and added to the cumulative withheld amount.

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Insofar as DCMA is concerned, DCMA Inst. 106 states the following:

3.3.10.4.1. In accordance with FAR 52.216-8(b), (Reference (v)), fixed fee shall be paid as specified in the contract schedule and the ACO shall withhold no more than 15 percent of the contract total fixed fee or $100,000, whichever is less, to protect the Government’s interest. The ACO shall review the payment instructions and schedule for fee withhold instructions that may have been included in the contract by the PCO. If there are no instructions in the contract, the ACO has two options:

3.3.10.4.1.1. The ACO may withhold 15 percent of each fixed fee payment starting with the first payment (or no more than $100,000 of the total fixed fee). All fixed fee amounts withheld should be paid after the contractor has completed all administrative requirements in addition to contract performance.

3.3.10.4.1.2. As an alternative, the ACO may elect to pay the contractor the full fixed fee requested at the beginning until the contractor has received 85 percent of the total fixed fee. All remaining fixed fee payment request amounts are withheld to retain 15 percent or no more than $100,000 of the total fixed fee in compliance with FAR 52.216-8 (b) (Reference (v)).

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DCAA asked about this during a billing system audit years ago.  I told the auditor that is was up to the contracting officer to do the withhold, not the contractor.  They didn't bring it up again. 

But yes, DCAA still expects the contractor to do the government's job.  Here's the audit step from the current accounting system audit program:

Quote

5. Fixed Fees and Cost Withholds: Test that selected public vouchers contain the appropriate fixed fees/cost withholds by comparing the fixed fees and cost withholds shown on voucher to the contract terms and the applicable FAR 52.216-8, 52.232-7, 52.216-9 and -10. (DFARS 252.242-7006(c)(16)).

And they even tie it to a DFARS accounting system criterion.  So DCAA would (try to) say that not withholding fixed fee is a deficiency.  I'd love to see that go before the ASBCA.

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This discussion has focused on the post-award aspect of this issue.  However, in reality, it is a contract formation issue.  Contractors need to ensure that the contract terms regarding payment of fixed fee are consistent with 52.216-8. 

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