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Assume a contractor is performing a cost-reimbursement contract that has a period of performance that ends on Sep. 30. The contractor is required to secure a venue for a conference that will take place in November. To secure the venue, the contractor must enter into a subcontract with the venue prior to Sep. 30. Assuming the cost of the venue is otherwise allowable, would the fact that the conference took place after the period of performance ended affect the allowability of the cost? Assume the contractor uses the accrual accounting method.

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Don, is the contractor required to do something else in regard to the conference other than obtain the venue?  Also, will payment for the venue take place after the conference?  This seems a strange way of conducting a conference if the contractor is not required to manage the conference.

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1 hour ago, Retreadfed said:

Don, is the contractor required to do something else in regard to the conference other than obtain the venue?

Maybe, but I'm only asking about the cost of the venue. I'm not asking about costs incurred after the PoP end date.

1 hour ago, Retreadfed said:

Also, will payment for the venue take place after the conference?

Assume yes.

1 hour ago, Retreadfed said:

This seems a strange way of conducting a conference if the contractor is not required to manage the conference.

A contractor will be required to manage the conference. However, the incumbent may not win the follow-on.

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I’m not an accountant. However, is there a problem with using an accrual accounting method if the contractor doesn’t record the expense until the “project” (conference) is held? Would that be after the period of performance, in the next fiscal year? Would it affect if and when the contractor can be paid?

Can the current year funds be used to pay for an event that won’t occur until the next fiscal year?

“The Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. For example, you would record revenue when a project is complete, rather than when you get paid. This method is more commonly used than the cash method.”

https://bench.co/blog/accounting/cash-vs-accrual-accounting/

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7 hours ago, Don Mansfield said:

Assume a contractor is performing a cost-reimbursement contract that has a period of performance that ends on Sep. 30. The contractor is required to secure a venue for a conference that will take place in November. To secure the venue, the contractor must enter into a subcontract with the venue prior to Sep. 30. Assuming the cost of the venue is otherwise allowable, would the fact that the conference took place after the period of performance ended affect the allowability of the cost? Assume the contractor uses the accrual accounting method.

No. The transaction occurred prior to Sept 30.

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20 hours ago, Don Mansfield said:

Assume a contractor is performing a cost-reimbursement contract that has a period of performance that ends on Sep. 30. The contractor is required to secure a venue for a conference that will take place in November. To secure the venue, the contractor must enter into a subcontract with the venue prior to Sep. 30. Assuming the cost of the venue is otherwise allowable, would the fact that the conference took place after the period of performance ended affect the allowability of the cost? Assume the contractor uses the accrual accounting method.

First, we need to understand the contractor's accounting practices for recording costs, either as disclosed in the Disclosure Statement or as established via consistent historical practice. Certainly, under GAAP the contractor can accrue for a known future liability that is both probable and estimable, but (a) does it normally make accruals for direct costs, and (b) does it normally bill the government for such accruals, if it makes them.

Next we need to understand what practices the contract permits. We need to look at 52.216-7 (Allowable Cost and Payment), which is a mandatory clause for all cost-reimbursement contracts.

Quote

(b) Reimbursing costs. 

(1) For the purpose of reimbursing allowable costs (except as provided in paragraph (b)(2) of this clause, with respect to pension, deferred profit sharing, and employee stock ownership plan contributions), the term “costs” includes only—

                (i) Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract;

                (ii) When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for-

                     (A) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made–

                          (1) In accordance with the terms and conditions of a subcontract or invoice; and

                          (2) Ordinarily within 30 days of the submission of the Contractor’s payment request to the Government;

                     (B) Materials issued from the Contractor’s inventory and placed in the production process for use on the contract;

                     (C) Direct labor;

                     (D) Direct travel;

                     (E) Other direct in-house costs; and

                     (F) Properly allocable and allowable indirect costs, as shown in the records maintained by the Contractor for purposes of obtaining reimbursement under Government contracts; and

                (iii) The amount of financing payments that have been paid by cash, check, or other forms of payment to subcontractors.

Thus, IAW 52.216-7(b)(1)(ii)(A) the contractor may invoice the government for its accrued costs if they will be actually paid within 30 days of the date of the contractor's invoice to the government; however, note the use of the word "Ordinarily" in (A)(2). I can envision a contract H clause or other memorandum of understanding between the parties where the scenario described is deemed "extraordinary" and the contractor is permitted to invoice, and receive reimbursement, when the cost is accrued--even though payment to the vendor will be made more than 30 days after invoice submission. That would make sense to me.

Finally, DCAA audit guidance states that, unless the contract is a Cost-Reimbursement Term contract, the PoP is not to be dispositive for purposes of cost disallowance. In other words, if the contract is a completion type, the contractor must finish the work regardless of the Period of Performance, so costs incurred after the expiration of the PoP are subject to cost/funding limitations rather than PoP limitations.

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Under 52.216-7, except for imputed costs such as cost or money, contractors are generally allowed to be reimbursed allowable costs they have incurred, subject to the LOC clause.  Thus, the question is did the contractor incur the cost of the venue?  For these purposes, a cost is incurred when it has actually been paid or the contractor has a legal obligation to pay the cost.  I would argue that the contractor should not have an obligation to pay for the venue until the conference has  been held and the subcontractor has performed the subcontract.  I agree with H2H, that unless there is something in the contract that requires reimbursable costs  to be incurred during the POP, the contractor should be able to recover the cost of the venue, assuming that cost is within the estimated cost of the contract.  Further, including such a clause limiting reimbursable costs to costs incurred during the POP raises the question as to whether a deviation would be required because such a requirement is not a FAR requirement, particularly in regard to indirect costs.

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30 minutes ago, Retreadfed said:

Under 52.216-7, except for imputed costs such as cost or money, contractors are generally allowed to be reimbursed allowable costs they have incurred, subject to the LOC clause.  

No, that's wrong. Did you read the language I quoted? There's a difference between recording a cost and incurring or paying a cost.

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17 minutes ago, Don Mansfield said:

Allow me to change an assumption. The contractor will make full payment for the venue prior to 30 Sep. The venue requires advance payment in full.

When will the contractor seek reimbursement? When will the customer pay?

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The contractor will seek reimbursement from the Govt. after making payment to the venue. If by "customer" you mean the Government, they will pay after receiving the contractor's invoice. 

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If the cost is incurred within the PoP and the contractor will invoice before the end of the PoP, I'm not seeing the issue. Won't the invoice simply be paid as usual?

Apologies if I'm being dense.

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Yes, paid as usual. The catch was that the conference was going to take place outside the PoP. I don't think that's relevant if the cost is incurred during the PoP, but wasn't sure.

You're not being dense. You're being helpful (true to your handle). Thanks.

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Thank you, sir. 

I think the point here (for others who may be reading) is that cost-type contract invoices are based on costs incurred (or recorded). Deliveries are not particularly relevant to invoice payments, unlike FFP contracts and their DD-250 submissions.

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23 hours ago, here_2_help said:

No, that's wrong. Did you read the language I quoted? There's a difference between recording a cost and incurring or paying a cost.

What's wrong?  The extract form ACP clause you quoted does not use the term accrued costs or recorded costs, it uses the term incurred costs.

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50 minutes ago, Retreadfed said:

What's wrong?  The extract form ACP clause you quoted does not use the term accrued costs or recorded costs, it uses the term incurred costs.

Quote

(1) For the purpose of reimbursing allowable costs (except as provided in paragraph (b)(2) of this clause, with respect to pension, deferred profit sharing, and employee stock ownership plan contributions), the term “costs” includes only—

                (i) Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract;

                (ii) When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for-

 

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H2H, in accordance with this provision, not all recorded costs are reimbursable.  Instead, it is those recorded costs that have been paid that are reimbursable.  Further, costs that have not been paid are reimbursable if they have been incurred.  For these purposes, an incurred cost is one that the contractor has a legal obligation to pay.  Thus, my statement that contractors are generally entitled to be reimbursed costs they have paid or have a legal obligation to pay is correct. 

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On 7/22/2020 at 12:51 PM, Don Mansfield said:

Assume a contractor is performing a cost-reimbursement contract that has a period of performance that ends on Sep. 30. The contractor is required to secure a venue for a conference that will take place in November. To secure the venue, the contractor must enter into a subcontract with the venue prior to Sep. 30. Assuming the cost of the venue is otherwise allowable, would the fact that the conference took place after the period of performance ended affect the allowability of the cost? Assume the contractor uses the accrual accounting method.

It would appear that, even though the conference won’t occur until the second month of the subsequent fiscal year, if the conference space must be secured and paid for early, I’m guessing that the Cost is a bonafide need of the current fiscal year.

The cost is allowable because it was a requirement. The only question might be whether it is a bonafide need of the current fiscal year for funding.  If it was going to be held in December or January, the answer might be different.

Bonafide needs rule application for a function that will occur in a subsequent fiscal year needs to be determined. 

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On 7/23/2020 at 1:08 PM, Don Mansfield said:

Allow me to change an assumption. The contractor will make full payment for the venue prior to 30 Sep. The venue requires advance payment in full.

Don, your original question asked about the allowability of the cost.  Looking at the criteria for the allowability of a cost contained in FAR 31.201-1, I don't see where any of these criteria have not been met in regard to this scenario.  Therefore, I see no reason why the cost of the venue would not be an allowable cost.

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51 minutes ago, joel hoffman said:

The cost is allowable because it was a requirement. The only question might be whether it is a bonafide need of the current fiscal year for funding.  If it was going to be held in December or January, the answer might be different.

Bonafide needs rule application for a function that will occur in a subsequent fiscal year needs to be determined. 

Joel, my view is that absent relevant funding restriction in the contract, the above is not applicable as a basis to deny payment to the contractor. If you do not see it that way, would appreciate your view.   Thanks.

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1 hour ago, joel hoffman said:

The cost is allowable because it was a requirement. The only question might be whether it is a bonafide need of the current fiscal year for funding.  If it was going to be held in December or January, the answer might be different.

Joel, I am a little confused by this paragraph.  Maybe you can clarify it.  Are you linking the allowability of a cost incurred by a contractor to government compliance with the bona fide needs rule?  In other words, are you saying that the allowability of a cost depends on whether the government complied with the bona fide needs rule in awarding a contract?

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17 minutes ago, joel hoffman said:

Bonafide needs rule application for a function that will occur in a subsequent fiscal year needs to be determined.

Joel, the question has to do with a contractor making a purchase under a contract--not the Government making the purchase. Funds were obligated when the original contract was awarded.

48 minutes ago, Retreadfed said:

Don, your original question asked about the allowability of the cost.  Looking at the criteria for the allowability of a cost contained in FAR 31.201-1, I don't see where any of these criteria have not been met in regard to this scenario.  Therefore, I see no reason why the cost of the venue would not be an allowable cost.

Thanks.

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1 hour ago, Neil Roberts said:

Joel, my view is that absent relevant funding restriction in the contract, the above is not applicable as a basis to deny payment to the contractor. If you do not see it that way, would appreciate your view.   Thanks.

As I said, Doesn’t affect allowability, correct.

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2 hours ago, Retreadfed said:

Joel, I am a little confused by this paragraph.  Maybe you can clarify it.  Are you linking the allowability of a cost incurred by a contractor to government compliance with the bona fide needs rule?  In other words, are you saying that the allowability of a cost depends on whether the government complied with the bona fide needs rule in awarding a contract?

Nope. It might be the government’s  funding problem but is not an allowability problem. 

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