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Profit on Other Direct Costs

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Cost Plus Fixed Fee Procurement. Contractor's proposing a fee on their other direct costs (ODCs), and the government is negotiating to remove the fee from the ODCs.

The contractor says it's their "standard practice."

Is this an unreasonable negotiation tactic?

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Cost Plus Fixed Fee Procurement. Contractor's proposing a fee on their other direct costs (ODCs), and the government is negotiating to remove the fee from the ODCs.

The contractor says it's their "standard practice."

Is this an unreasonable negotiation tactic?

No.

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Cost Plus Fixed Fee Procurement. Contractor's proposing a fee on their other direct costs (ODCs), and the government is negotiating to remove the fee from the ODCs.

The contractor says it's their "standard practice."

Is this an unreasonable negotiation tactic?

No, I don't think it's an unreasonable tactic. The Government uses it all the time.

However, if I were you I would stop arguing about "allowing" fee on this cost, but not that cost. Figure out a range of fees you are willing to pay (in dollars) and negotiate from there.

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I knew I wasn't going bonkers, asking the CS to engage in negotiations. What makes this rich, is the contractor contacted the customer and complained that contracting proposed removing profit from the ODCs. The customer's Director complained to the Head of Contracting, that the KO is negotiating this, this b/c it's "standard practice" to pay profit on ODCs.

And the KO is having to explain and defend the decision to negotiate on the ODCs.

Guess we could've went for the motherlode, and questioned why we're paying profit AND G&A on the the ODCs.

And some wonder why 1102s are ejecting from the Series, or can't wait to retire.

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Cost Plus Fixed Fee Procurement. Contractor's proposing a fee on their other direct costs (ODCs), and the government is negotiating to remove the fee from the ODCs.

The contractor says it's their "standard practice."

Is this an unreasonable negotiation tactic?

In a CPFF contract, the contractor doesn't get fee "on" any individual element of cost. The contractor gets a fee that is fixed. I expect that in your situation, the offeror has proposed a fixed fee, and someone (the offeror? you? both of you?) has characterized the fee as some percent of something, such as, for example, "XX percent of cost, not including cost of money." Mathematically, that may be an accurate statement, but it isn't what you're going to negotiate. You're going to negotiate a fixed amount that you agree to pay, as fee, for the work.

The offeror may use any number of tactics to get you to agree to the fixed amount he wants. In my opinion, any tactic short of lying/deception/fraud is a reasonable tactic. You should focus your efforts on determining how much money you believe is a reasonable amount to pay as a fixed fee, and proceed to negotiate on that basis. Ultimately, someone will do the division and may refer to the fixed fee amount as a percent of something, but at that point, what difference does it make? Consider the following:

Direct Labor cost.........$400,000

Indirect (Overhead).......$320,000

ODCs..........................$ 20,000

G&A............................$ 70,000

Cost of money (FCCM)...$ 5,000

Fixed Fee....................$ 64,800

Total...........................$879,800

The fixed fee amount of $64,800 may be characterized as:

8.2% of cost, not including ODCs or cost of money,

8.0% of cost, not including cost of money,

7.95% of cost, including cost of money,

7.36% of sales, or even

16.2% of direct labor cost

All of those statements would be accurate, but the significant fact, contractually, is that the fixed fee is $64,800 no matter how you may choose to characterize it.

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What is it about "other direct costs" that makes COs talk nonsense and make fools of themselves? The DOD Contract Pricing Reference Guides, Vol. 3, Ch. 8, says this about other direct costs:

Identifying Other Direct Costs (FAR Table 15-2). FAR describes other direct costs as costs not previously identified as a direct material cost, direct labor cost, or indirect cost. In other words, an other direct cost is a cost that can be identified specifically with a final cost objective that the offeror does not treat as a direct material cost or a direct labor cost. Examples of the types of cost that are commonly proposed as other direct costs include:

  • Special tooling and test equipment:
  • Computer services;
  • Consultant services;
  • Travel;
  • Federal excise taxes;
  • Royalties;
  • Preservation, packaging, and packing costs; and
  • Preproduction costs.

Reasons for Other Direct Cost Identification and Treatment. Costs are identified and treated as other direct costs to assure proper allocation and treatment. Cost allocation. An other direct cost is often the type of cost that the firm would normally charge as an indirect cost, but the proposed contract requires a large, unusual, or one-time expenditure (e.g., special tooling) that will benefit only the proposed contract. It would be unreasonable to expect the rest of the firm's products to share these unique costs.

Depending on the nature of the contract work, some of those things, like special tooling and test equipment, preservation, packaging, and packing, and preproduction setup, can entail significant effort by the contractor and significant cost risk. Why shouldn't a contractor receive profit recognition for it? Any CO who takes the position that the contractor shouldn't receive profit recognition for significant effort associated with such work should be prepared to explain himself or herself. If he or she can't, they should find other work. The sooner the better.

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What is it about "other direct costs" that makes COs talk nonsense and make fools of themselves? The DOD Contract Pricing Reference Guides, Vol. 3, Ch. 8, says this about other direct costs:

Depending on the nature of the contract work, some of those things, like special tooling and test equipment, preservation, packaging, and packing, and preproduction setup, can entail significant effort by the contractor and significant cost risk. Why shouldn't a contractor receive profit recognition for it? Any CO who takes the position that the contractor shouldn't receive profit recognition for significant effort associated with such work should be prepared to explain himself or herself. If he or she can't, they should find other work. The sooner the better.

If the ODCs require significant effort, and involve a significant cost risk, the contractor would receive profit recognition. The proposed ODCs are travel, supplies, teleconferencing (the connection and the hourly rate), duplicating (making copies), computer services (number of hours using a PC, times hourly/rate), and postage. Was easy to explain and justify.

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To WENO2

As a contractor, I cringe at your comment that "the contractor wants profit and G&A as well." Why is it that the Government does not understand that these two elements are different. G&A is actually part of your cost of doing business. It is not a made up fee or profit that increases the bottom line but an actual element of the costs incurred in running a business and is as much a necessary element of the cost as are overhead costs. Fee/profit is the money above cost that a contractor receives as a return on his investmnent and to encourage companies to go into business and offer their services.

Sorry for the rant but as a contractor, it burns me when the Governemnt tells me that G&A is profit.

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I don't allow profit on travel period. I had a case when I worked at a different agency where the PMs were in the Contractor's back pocket so to speak and ALWAYS gave them profit. Why should the Contractor get profit on those things? Anyway, I got pulled into a meeting because another CS was out that day. It was for negotiations on a project. I was looking at their costs and was like wait a minute. These are not allowable here here and here. Oh BTW no profit on travel. G&A yes. Not profit. According to the FAR, they only get profit if they have a separate CAS for that as a business. MOST businesses do not have a separate CAS for travel. Huge uproar ensued between PMs, contractor, and Contracting. Went all the way through legal & contractin chains for decision. Legal and chief of contracting found in my favor. Profit was stopped on things like travel. Now they have a new chief of contracting who wants to be everybody's buddy and has given them everything they want and then some. Whole nother story and one of the reasons I left.

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I don't allow profit on travel period. I had a case when I worked at a different agency where the PMs were in the Contractor's back pocket so to speak and ALWAYS gave them profit. Why should the Contractor get profit on those things? Anyway, I got pulled into a meeting because another CS was out that day. It was for negotiations on a project. I was looking at their costs and was like wait a minute. These are not allowable here here and here. Oh BTW no profit on travel. G&A yes. Not profit. According to the FAR, they only get profit if they have a separate CAS for that as a business. MOST businesses do not have a separate CAS for travel. Huge uproar ensued between PMs, contractor, and Contracting. Went all the way through legal & contractin chains for decision. Legal and chief of contracting found in my favor. Profit was stopped on things like travel. Now they have a new chief of contracting who wants to be everybody's buddy and has given them everything they want and then some. Whole nother story and one of the reasons I left.

Your statements: "According to the FAR, they only get profit if they have a separate CAS for that as a business. MOST businesses do not have a separate CAS for travel" show that you don't know what you're talking about. You would do well to limit your positive assertions to things you know something about. The word "travel" does not appear anywhere in FAR 15.404-4, which is the statement of policy about profit. In fact, it appears only once in all of FAR Subpart 15.4. There is no such thing as a "CAS for travel."

Travel is an "other direct cost." As for profit "on" travel, there might be good reasons to "allow" it. Travel is not necessarily a trivial matter. In a major program, travel can run into the millions of dollars and entail a lot of work. A contractor should receive profit recognition for all of its inputs to the contract.

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I completely agree with Vern's post in every respect.

I would add that, as missgamecock noted in passing, contractors' travel costs are subject to a number of allowability limitations. (See 31.205-46.) For many if not most contractors, travel is the number one source of unallowable costs. For example, many times it is impossible for a contractor on travel to find lodging within the FTR locality limits, which causes unallowable costs to be incurred. Those unallowable costs come out of contractor profit. If a CO says "no profit on travel" then the government is essentially asking the contractor to take a loss on its travel costs.

Moreover, complying with the FAR cost principle related to travel is hard to do, and expensive as well. The recent change in air fare allowability rules, for example, has significantly impacted companies' ability to determine allowable air fares. Policies and procedures are being rewritten, employee training is being rolled out, and travel agency reporting is being revised.

My point being that to treat travel costs as some kind of unworthy "pass through" cost, for which the contractor adds no real value, betrays ignorance of the true situation (as Vern correctly pointed out). But it also does the contractor, and its administrative/compliance staff, a real disservice.

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