G&A on Travel (Again)

[Vern Edwards]

1 hour ago, Corduroy Frog said:

Vern, my name is Ron Jordan - I live in ----------------.  Ask anyone in town and they can tell you where I live.  I work for money as an accountant, not a contracts consultant.

And of course, the example is not real.  Hypothetical.

Thanks for letting me know. Now, delete your address. Very unwise to post it on the internet.

Crummy example.

[Vern Edwards]

2 hours ago, General.Zhukov said:

Ultimately, the contractor proposed that travel should just be FFP.   We crunched numbers and came to something like $1,500 per "travel event." 

Perfectly legal, if both parties can agree to the nature and amount of travel.

[Vern Edwards]

I wonder: Does everyone understand how 52.212-4, Alt. I, paragraph (i)(1)(ii)(D)(2) is supposed to work? Does everyone understand:

Quote

The Government will reimburse the Contractor for indirect costs on a pro-rata basis over the period of contract performance at the following fixed price: [Insert a fixed amount for the indirect costs and payment schedule... ]

Emphasis added.

If the contractor's G&A rate is 10 percent and it wants to recover that amount on materials costs under a commercial T&M contract, what "fixed price" schedule does the contractor insert in the blank?

Ron Jordan (CorduroyFrog), what do you say?

[C Culham]

15 hours ago, Vern Edwards said:

Does everyone understand how 52.212-4, Alt. I

I think I do.

The contractor would insert any fixed price amount that he/she thought would keep them competitive with regard to consideration for award of the contract, the he/she believes covers the indirect cost (G&A)  they are missing out on, and if necessary negotiate it.  Along with proposing the fixed price the contractor would also submit a proposed pro-rata payment schedule of the amount. Lots of options but by example a known 3 month period of the contract and payments will be made monthly.  The contractor might propose payment in 3 monthly equal  payments.  (Another contractor might propose two-thirds at first payment and one third in the last payment.)  If necessary the pro-rata basis would be negotiated as well.

[Vern Edwards]

@C CulhamThis was my question:

17 hours ago, Vern Edwards said:

If the contractor's G&A rate is 10 percent and it wants to recover that amount on materials costs under a commercial T&M contract, what "fixed price" schedule does the contractor insert in the blank?

You did not answer it.

Maybe I wasn't clear. What amount does the contractor insert?

If there are many possibilities, choose one. Remember, it must provide for pro rata payment. Your answer need not come with a lot of palaver (explanation). One short sentence will do.

If you like, assume a one-year T&M contract and that the estimate of materials costs at the time of award is $20,000.

[C Culham]

12 hours ago, Vern Edwards said:

@C CulhamThis was my question:

You did not answer it.

Maybe I wasn't clear. What amount does the contractor insert?

If there are many possibilities, choose one. Remember, it must provide for pro rata payment. Your answer need not come with a lot of palaver (explanation). One short sentence will do.

If you like, assume a one-year T&M contract and that the estimate of materials costs at the time of award is $20,000.

Thanks for the additional detail.   Here is my response.

The contractor inserts no amount they propose an amount if they so choose, the Government inserts the amount, and the amount is negotiated if the contractor does not indicate acceptance to what the government inserted (i.e. contractor proposes an amount different than that which the government inserted). 

Edited October 31, 2021 by C Culham
To correct wording

[formerfed]

The answer seems pretty clear to me.  Insert $2,000 and include a pro rated payment schedule 

[Vern Edwards]

@formerfed Two questions:

1. Must the "fixed amount" be a single lump sum?

2. What would a "pro rated payment schedule" look like—to what would payment be proportional?

 

[formerfed]

4 hours ago, Vern Edwards said:

@formerfed Two questions:

1. Must the "fixed amount" be a single lump sum?

2. What would a "pro rated payment schedule" look like—to what would payment be proportional?

 

1. I don’t see why it has to be a single lump sum

2.  To me, the most logical schedule coincides with purchase of materials.  If materials are equally purchased over three months, the payment schedule is $6,667 per month.  If purchased all at once, payment is a single amount of $2,000.

[Vern Edwards]

@formerfedWhat worries me about a single fixed amount of $2,000—based on a materials cost estimate of $20,000 and a 10 percent G&A rate—is that we'd be using a T&M contract because we would not be sure of what work would have to be done and what the costs would be.

What if it turns out that the contractor actually needs only $5,000 in materials? A "reimbursement" of $2,000 for indirect costs would be too much. In fact, it wouldn't really be a "reimbursement." What if the contractor actually spends $30,000 for materials? The $2,000 "reimbursement" would be too small.

So why not fill in the blank with something like "$250 for materials costs up to $2,500; $500 for anything up to $5,000; $1,000 for anything up to $10,000," et cetera? In other words, why not provide for the possibility that actual materials costs might be less or more than estimated and thereby minimize any over or under payment?

Another thought is to fill the blank with something like "$0.10 for every dollar of actual materials costs." That would be a fixed amount per materials dollar, which would provide for perfectly proportionate reimbursement of the 10 percent G&A rate with little or no risk of over or under reimbursement.

But I suspect that scheme might be considered cost-plus-a-percentage-of-cost?

[Don Mansfield]

4 hours ago, Vern Edwards said:

But I suspect that scheme might be considered cost-plus-a-percentage-of-cost?

That was my thought. However, I think it would be ok if there was a maximum stated. So, "$0.10 for every dollar of actual material costs up to $10,000." 

[C Culham]

The latest exchange in this thread demonstrates that the view of Alt. I clause with regard to payment is perceived in many ways and that there is no one consistent interpretation.  I have concluded as well that the Alt. I is poorly supported by further guidance in the FAR and its supplements.   The adage of "the eye of the beholder" applies in that what the government and contractor believe is a beautiful (agreed to) with regard to what has been termed the "fill-ins" in (i) Payments of Alt. I is what counts.   And I have concluded it should be that way.

As I followed and responded to this thread I attempted to dig, especially with regard to replies directed at me.   I turned up some interesting stuff.   Not saying what I found was current but overall supported to me that there is a very wide view of the Alt. I Payments paragraph at (i) and the effort to determine price reasonableness of any amount put in any of the fill-ins of the paragraph.  I was drawn to DoD most often as I looked around as it seems DoD gets used as the benchmark view most often.

https://www.acq.osd.mil/dpap/dars/pgi/attachments/2006d030_overview.pdf

DFARS 212.209 and through in .207 as well.

[Vern Edwards]

7 hours ago, Don Mansfield said:

That was my thought. However, I think it would be ok if there was a maximum stated. So, "$0.10 for every dollar of actual material costs up to $10,000." 

@Don MansfieldI had considered the use of a maximum, and that may be a solution. In any case, I think the idea of a single lump sum amount is problematical if there is a large degree of uncertainty about materials cost. The idea is to "reimburse" the contractor for indirect costs, or at least to approximate those costs. In my opinion, an amount that might be significantly disproportionate to the amount of actual materials costs cannot be fair and reasonable.

I must point out that CorduroyFrog's opening post descried what he saw as a tendency to refuse any compensation for G&A on travel. This discussion about what to put in the blank of 52.212-4, Alt. I, (i)(1)(ii)(D)(2) does not address that issue.

I don't know whether the problem is that COs are refusing to pay indirect costs specifically on travel or more generally.

Thanks to Formerfed for his response to my question.

One last thought about the clause. It says: "The Government will reimburse the Contractor for indirect costs on a pro-rata basis over the period of contract performance at the following fixed price..."

I think that is ambiguous. The term "pro-rata" could be read as referring to the method for measuring the amount to be reimbursed, rather than the method of paying the reimbursement. Such a method would be a rate. But use of the phrase "fixed price" is contradictory. 

The entry "$0.10 for every dollar of actual materials cost" could a way to resolve that ambiguity, since $0.10 is a fixed amount. But a CO would have to be aware of the GAO's interpretation of the cost-plus-a-percentage-of-cost (CPPC) prohibition in order to avoid a prospective problem.

For a description and analysis of the GAO's interpretation of CPPC as applied to indirect costs, See Mr. James White, Assistant General Counsel for Finance and Litigation, Office of the General Counsel, Department of Commerce, GAO decision B-252378, Sept. 21, 1993.  In that case the rate applied was a percentage: "54 percent". Would GAO consider "$0.10 per dollar" to be a percentage?

[Vern Edwards]

Duplicate post deleted.

[joel hoffman]

Thanks for the references, Carl. I didn’t review the DFARS but did read the OSD reference.  It provides policy on when T&M can be used for commercial items/services. 

It also provides some policy guidance on ODC’s for commercial item T&M , including indirect costs: 

“D. Indirect Costs

(1) Noncommercial T&M/LH Contracts. Indirect costs are reimbursed at the contractor’s actual costs.

(2) Commercial T&M/LH Contracts

(a) Indirect costs are not paid based on the contractor’s actual costs. Instead, a fixed amount for indirect costs is negotiated in the contract (FAR 52.212-4, Alternate I (i)(1)(ii)(D)(2)) and paid on a pro-rata basis over the period of contract performance. The CO must insert the fixed amount and the payment schedule in the contract clause. If no reimbursement of indirect costs will be provided, the CO should insert “$-0-” in the contract clause.

(b) The fixed amount is the total amount of indirect costs that is paid on the contract.

(c) The fixed amount will be determined for each contract through the competitive negotiation process. Offerors will propose an amount in their offer, the negotiation process will proceed, and the contract will include the amount that results from negotiation.

(d) For indefinite-delivery contracts, the CO awarding the contract may specify “None” for the fixed amount of indirect costs or provide for each order to separately fix the amount and payment schedule.

* References to “All T&M/LH Contracts” means that the rule applies to both commercial and noncommercial T&M/LH contracts.
  
Example: The contract provides for reimbursement of $60,000 of indirect costs. The contract period is 12 months. The expenditure of materials is expected to be spread evenly over the contract period. Thus, the contract states that the contractor is reimbursed $5,000 per month ($60,000 divided by 12) for indirect costs under this contract. In Month 12, the contractor submits a bill for an additional $8,000 of indirect costs, claiming that the actual indirect costs applicable to this contract were higher than anticipated. Payment for this additional $8,000 is not permitted, since the indirect costs are limited to the $60,000 specified in the contract.”

While the policy says that the CO inserts the fixed amount and the payment schedule, it also says that the offerors submit an amount in their offers and the amount will be negotiated.

An initial commercial T&M ID/IQ award is competitive. I assume that there can be a single or multiple award.

 

[Vern Edwards]

50 minutes ago, joel hoffman said:

Example: The contract provides for reimbursement of $60,000 of indirect costs. The contract period is 12 months. The expenditure of materials is expected to be spread evenly over the contract period. Thus, the contract states that the contractor is reimbursed $5,000 per month ($60,000 divided by 12) for indirect costs under this contract. In Month 12, the contractor submits a bill for an additional $8,000 of indirect costs, claiming that the actual indirect costs applicable to this contract were higher than anticipated. Payment for this additional $8,000 is not permitted, since the indirect costs are limited to the $60,000 specified in the contract.”

What's interesting is that in the same document DOD says:

Quote

Time-and-materials and labor-hour (T&M/LH) contracts are the least preferred contract types, but they may play an important role in helping the Government meet its needs in certain situations -- namely, when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.

So the policy is that the parties must negotiate a fixed price to "reimburse" the contractor for indirect costs, even though they cannot anticipate costs with any reasonable degree of confidence.

They came up with that policy because, as stated in the Federal Register, they didn't want to reimburse commercial item contractors for actual costs, since that would have imposed the cost principles in FAR Part 31, which wouldn't be very commercial. But they couldn't use a rate-based policy, because that would violate CPPC.

If the prospect of an excessive or unfairly low "reimbursement" bothers you, one obvious solution is to negotiate a schedule of fixed prices for varying ranges in the amount of materials costs.

Are there any other solutions?

[formerfed]

Quote

one obvious solution is to negotiate a schedule of fixed prices for varying ranges in the amount of materials costs.

Are there any other solutions?

This seems like the most practical approach - other than just a single rate for smaller value actions.  It should be simple and not administratively burdensome so the administrative effort of managing isn’t excessive. 

[C Culham]

59 minutes ago, Vern Edwards said:

If the prospect of an excessive or unfairly low "reimbursement" bothers you, one obvious solution is to negotiate a schedule of fixed prices for varying ranges in the amount of materials costs.

Are there any other solutions?

Minor twist - and possibly anticipated time of need for the materials and when the contractor acquired them?  The latter being the biggest question.    Noting my Jakes Lumber Yard example again when they have the materials already.

I put it as question with regard to the wording for payment for materials which is different than hourly rate.  Hourly rate is clearly for "hours performed".  For materials it is a little less finite even though "(i) Payments (1)Work Performed" is the lead in to all of the payment verbiage.     But then you have (ii)(A)(1) "Quantities being acquired" not Quantities Acquired, quantities incorporated into the work, or....?.  

A very wonky Alt. I!