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Hello,

I need some help from the FAR and pricing experts. This has been an old topic on this forum and I found other threads on it - about how much G&A can be applied on subcontractor costs and not seem "excessive". This post I found is the most detailed and on-point in my mind - https://graniteleadershipstrategies.com/government-contracting-when-to-add-a-subcontract-handling-pool/

So, here is a situation. Lets say we are a small business prime with a significant G&A rate (we are in our growth phase). Can we apply a lower G&A on our subcontractors to be competitive on a Cost-plus bid? But we still have to collect costs in the accounting system by applying all G&A on subs keeping the "Total cost input" method, right? We do not have a subcontractor handling pool and that would bring its own set of challenges by increasing our G&A further and am trying to avoid that.

Are we breaking any rules and upsetting procurement Gods by reducing G&A in the bid but in turn apply all of it in execution when we collect the costs? If we discount the G&A on a bid, do we have to discount it consistently in every bid?

Thank you for your guidance. 

 

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2 hours ago, xanadu said:

Hello,

I need some help from the FAR and pricing experts. This has been an old topic on this forum and I found other threads on it - about how much G&A can be applied on subcontractor costs and not seem "excessive". This post I found is the most detailed and on-point in my mind - https://graniteleadershipstrategies.com/government-contracting-when-to-add-a-subcontract-handling-pool/

So, here is a situation. Lets say we are a small business prime with a significant G&A rate (we are in our growth phase). Can we apply a lower G&A on our subcontractors to be competitive on a Cost-plus bid? But we still have to collect costs in the accounting system by applying all G&A on subs keeping the "Total cost input" method, right? We do not have a subcontractor handling pool and that would bring its own set of challenges by increasing our G&A further and am trying to avoid that.

Are we breaking any rules and upsetting procurement Gods by reducing G&A in the bid but in turn apply all of it in execution when we collect the costs? If we discount the G&A on a bid, do we have to discount it consistently in every bid?

Thank you for your guidance. 

 

1. There is a difference between "excessive pass-through" costs and G&A expenses allocated to subcontractors. If the prime adds value (and/or the amount of subcontracting is less than 70%) then there can be no excessive pass through costs regardless of the G&A rate being applied.

2. Yes, you can apply a lower G&A rate to your subcontractors. That's a fairly complicated endeavor, though. Instead, you can adopt a value-added G&A allocation base which exempts subcontractors from any/all G&A expense allocations. You can change from the Total Cost Input base to the Value-Added Base. On the other hand, (a) if you don't burden your subcontractors (or apply a lower burden) then all your G&A expense is going to be allocated to your other costs, which is going to jack up your G&A rate even more!

3. You cannot cherry-pick which subcontractors get G&A and which do not. Google "fragmenting the base." If you reduce or eliminate G&A on subcontractors, that new approach must apply to ALL subcontractors.

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Question:  Why would you WANT to reduce G&A?

If the answer is that you want your price to be competitive with other bidders, then simply reduce your fee.  Avoid screwing around with how you collect and report your costs.  G&A costs are real dollars.  Reducing the G&A rate means those costs have to be covered somewhere else.

Also, if this Prime is eligible for cost-reimbursable work, it likely means that they have an accounting system that has been determined adequate.  You don't want to mess that up by playing games with costs.

 

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21 hours ago, xanadu said:

Are we breaking any rules and upsetting procurement Gods by reducing G&A in the bid but in turn apply all of it in execution when we collect the costs?

I'm not sure what you mean when you say "apply all of it in execution."  If you mean can you propose an estimated cost that excludes certain G&A but then include that excluded G&A in billings to the government, I think you can have major problems.  You can be accused of procuring the contract through fraud based on a "bait and switch" theory.  Further, if you do this, there is a good possibility that you will have an overrun on the contract.  This can have a negative impact on your CPARS.

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  • 4 weeks later...

You can bid capped but you will be losing out on being able to bill the government anything over the cap amount.  Since you're on a TCI base those costs will still get burdened with G&A but it will hit how profitable the contract is. 

Having a material handling pool won't increase G&A.  The purpose of having a material handling pool is to keep the costs out of the G&A pool.  You allocate the cost of the material handling pool to the subcontracts and procurements made by the folks in the pool.  Granted the material handling costs would be burdened with G&A in a TCI situation.  It all depends on how many contracts your company has and the size of those contracts.

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1 hour ago, UseTheFARLuke said:

The purpose of having a material handling pool is to keep the costs out of the G&A pool.

1 hour ago, UseTheFARLuke said:

It all depends on how many contracts your company has and the size of those contracts.

 

Yeah, I gotta disagree with these two points. The first point is wrong because it ignores the definition of G&A found in CAS 410 and the discussion of pools and bases found in CAS 418. The second point is wrong because it ignores the Ford Aeronutronics decision regarding the appropriate allocation base to use for G&A.

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  • 2 months later...

Yes, you can cap the G&A rate that you charge the Government.  As part of your proposal state something along the line of we expect our G&A rate to be 25% but will cap the rate used to charge the Government at 15%.    No change to your accounting system is needed.  Your job cost reports from your accounting system likely will show a loss (no revenue for the 10% not charged and your fee is unlikely to fully cover those costs), but you can do that.

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On 6/4/2020 at 5:51 PM, UseTheFARLuke said:

Having a material handling pool won't increase G&A.  The purpose of having a material handling pool is to keep the costs out of the G&A pool.  You allocate the cost of the material handling pool to the subcontracts and procurements made by the folks in the pool.  Granted the material handling costs would be burdened with G&A in a TCI situation.  It all depends on how many contracts your company has and the size of those contracts.

Actually, it probably will increase your G&A rate.   If materials costs are substantial, and they are or this would be a non-issue, then pulling them from the G&A base means the same G&A costs are allocated over a smaller base, meaning labor will carry a higher rate.

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  • 1 year later...

I have a similar question.  We are also a small company that primarily had labor initially so our rate base was single element.  Then we won some larger contracts where we had to subcontract significantly and the auditors said it was no longer appropriate so we were to convert to TCI base.  However, during this time we bid several contracts using the old method all of which we won.  Is it appropriate to have two sets of bid pools one using the old single element applied to the contracts bid & won with another using TCI to bid new work?

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8 hours ago, alpyn2000 said:

I have a similar question.  We are also a small company that primarily had labor initially so our rate base was single element.  Then we won some larger contracts where we had to subcontract significantly and the auditors said it was no longer appropriate so we were to convert to TCI base.  However, during this time we bid several contracts using the old method all of which we won.  Is it appropriate to have two sets of bid pools one using the old single element applied to the contracts bid & won with another using TCI to bid new work?

First point is that I don't know your costs well enough to form an opinion regarding the appropriate G&A allocation base.

Second point is that the Ford Aeronutronics decision established that the contractor has an affirmative responsibility to choose the correct G&A allocation base that best represents the activity being managed. Further, if the contract mix is such that a TCI base is distortive, then the TCI base should not be used. What is the correct allocation base for your company? See my first point.

Third point is that you can't have two sets of bid rates, one using the single element G&A base and the other using the TCI G&A base. You have to have one bid rate. HOWEVER, the contracts you won will have the current G&A base used to calculate the G&A rate to be applied to those contracts; the bid rate is now irrelevant. Further, since you have changed your G&A base (and resulting rate) from the one used to price those contracts, you may be entitled to an equitable adjustment in contract price (assuming that the DCAA required you to change your base).

I could go on and on. Bottom line is that you need to hire some good government accounting folks, or consultants, ASAP to help you with your issue(s). This is a very complex accounting topic involving CAS and FAR and you won't be able to logic your way through it, in my opinion.

Hope this helps.

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