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Cost Reimbursement Contracts - Labor Rates


doc4243

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I currently administer a CPFF IDIQ contract in which has an established ceiling for indirect rates, but not for direct labor rates. It's a 5 year contract with 4 one year option periods. The SCA applies and the appropriate clauses are incorporated for labor adjustments. The out years have an agreed upon escalation rate of 3.3%. Each year I have incorporated the new wage determination and the escalated Schedule B rates. The contractor provided Schedule B rates for each labor category identified in the staffing guide as provided by the Government in the original solicitation. The contractor has been using the schedule B rates for estimating purposes instead of actual rates. This was only discovered after the Government began reviewing their invoices and requested payroll documentation. All of the employees are being paid well above the wage determination rate for each labor category. So a labor adjustment is not an issue.

Also, it was discovered that the company provides annual raises to selected employees. I guess you could consider these performance bonuses.

Another fact discovered is that certain employees were given a 5% salary increase a couple of years ago in lieu of them forming a union on this contract. This was in addition to the 3.3% escalation rate increase and possibly the annual performance raise?

Question: Does the C.O. have any recourse at this point to negotiate these rates down to a fair and reasonable level? Or does the C.O. have no choice but to pay their actual rates since it's a cost reimbursement contract and is allowable under FAR 52/216-7?

Thanks!!

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Note first that I know NOTHING about cost reimbursement.

That said,

I would think that the Government is only on the hook for allowable, allocable and reasonable costs. Those costs are specified in the Bid Schedule. Any premium paid by the Contractor over "costs" are a voluntary distribution of profits, aren't they ? The Government is not obliged to reimburse distributed profits.

You've apparently got a bunch of fraudulent claims to deal with.

Why would you negotiate down the rates you are being billed ? Ignore them. Refer to the rates in the contract, and reject any invoices that use higher rates.

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Guest Vern Edwards

Under a cost-reimbursement contract, the government must reimburse the contractor for its allowable incurred costs. Assuming that the contractor is a commercial firm, allowability is to be based on the cost principles in FAR Subpart 31.2. The general standard for allowability is stated in FAR 31.201-2. In the case of labor costs, the most important cost principle is FAR 31.205-6, Compensation for Personal Services.

The fact that the company pays above the SCA wage determination rates or that it gives bonuses does not strike me as wrong, in and of itself. I don't know what the significance is of the agreed upon escalation rates. If the contract establishes that as a ceiling on escalation, then it might limit allowability. The use of "Schedule B" rates for estimating may be a misunderstanding. In any case, it should not affect the allowability of labor costs.

Bonuses are not illegal or inherently unallowable. (I'm not sure about the legality of paying employees not to form a union.) Here is FAR 31.205-6(f):

(f) Bonuses and incentive compensation. (1) Bonuses and incentive compensation are allowable provided the?

(i) Awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment; and

(ii) Basis for the award is supported.

(2) When the bonus and incentive compensation payments are deferred, the costs are subject to the requirements of paragraphs (f)(1) and (k) of this subsection.

Does the CO have to reimburse the contractor for the costs? Based on what you have told us, I think the answer is probably yes unless he or she can establish some basis for determining them to be unallowable under the cost principles.

As for fraudulent claims: People at Wifcon are awfully quick to use the word fraud. I see no indication of fraud in what has been described.

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