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I’ll apologize up front for the long post, but I’m trying to follow the spirit of ji20874’s tag line:  A problem clearly stated is a problem half solved.

FAR 31.105(d)(3) allows contractors to treat the cost of managing (“superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc.”) a construction contract as either a direct or indirect cost; provided the practice is in accordance with the contractor’s established and consistently followed cost accounting practices.

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract. In cases where the contract time is not extended, the contractor is essentially banking the field overhead costs.  When a change does require an extension of time, but no self-performed cost, the contractor receives no additional compensation for its management costs (except for previous/future banked costs).

In this particular case, some of the drawings under a design bid build contract were defective.  The project was not suspended, as other work was able to continue, but the critical path and completion date were impacted and an extension of time would be due just because of the delay in providing the revised drawings.  There will be a cost to implement the corrected drawings, and the change will require additional time to complete. The contractor realizes that their field overhead percentage will not cover their management cost for the entire extension that will be required and now wants to charge these costs as direct.  

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

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5 hours ago, Vel said:

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

I think (I'm not sure) that the problem you are asking about is the problem of unabsorbed overhead in connection with a delay. If so, see if you can find a copy of Administration of Government Contracts, 5th ed., by Cibinic, Nagle, and Nash, and read the discussion of "unabsorbed overhead" in pages 647-53.

Also, if you have access to The Nash & Cibinic Report via Westlaw, the authors have written several articles about how to handle fixed field office overhead costs when pricing equitable adjustments.

Other resources include:

GOVERNMENT CONTRACTING AND TREATING EXTENDED FIELD OVERHEAD AS A DIRECT OR INDIRECT COSThttps://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/

Extended field overhead/delayhttp://www.delaydamages.com/delay-damages/extended-field-overhead/

Recovery of Unabsorbed Overheadhttp://kendall-dinielliconsulting.com/services/unabsorbed-overhead-eichleay-formula#:~:text=When the government%2C by direction,contract but for the delay.

Unaborbed Home Office Overheadhttp://www.delaydamages.com/delay-damages/unabsorbed-home-office-overhead/

Project time extensions and the relational impact on unabsorbed home office overheadhttps://www.hka.com/project-time-extensions-and-the-relational-impact-on-unabsorbed-home-office-overhead/

Calculation and recovery of home office overheadhttps://www.pmi.org/learning/library/calculation-recovery-home-office-overhead-8913

Understanding unabsorbed home office overheadhttps://www.ctconstructionlaw.com/understanding-unabsorbed-home-office-overhead/

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7 minutes ago, Vern Edwards said:

I think (I'm not sure) that the problem you are asking about is the problem of unabsorbed overhead in connection with a delay. If so, see if you can find a copy of Administration of Government Contracts, 5th ed., by Cibinic, Nagle, and Nash, and read the discussion of unabsorbed overhead in pages 647-53.

Good morning Vern and thanks for the feedback.  I'm in a forward deployed scenario, so I don't have my copy of Administration of Government Contracts with me.  But if that section discusses the Eichleay formula, this case is not about unabsorbed home office overhead.  These are cost that have only one single cost objective, which is the contract in question.

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Vel,

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My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay.

It depends.

Is this a fixed-price construction contract (see FAR 31.102), or a cost-reimbursement contract?

Was it awarded competitively, or sole-source?

Quote

I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

I am thinking the contractor should make its own decisions, and submit its own request for whatever adjustment it thinks is appropriate based on whatever the reason is (is it change, government delay, or something else?).  Rather than potentially giving away the store, so to speak, it seems to me that you should make sure your act is together.  Have you issued the change order to correct your defective specifications?  If NO, have you issued a stop work order for the affected work?  You want these to be YES.  Only with a YES are you ready to even start talking about a REA, which the contractor will submit based on its own understandings.  If you agree with the REA, then you formalize the modification to implement the adjustment.  If you don't agree, then you try to understand more about where the contractor is coming from.  But please be careful that you do not  become overly concerned with the contractor's business and the contractor's bookkeeping.  

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There was a Board of Appeals Decision perhaps 15-20 years ago that covered a field office overhead scenario similar to that described here. I don’t remember the specific circumstances or the  title of the Decision.

I believe that field office overhead was being charged as a percentage of the direct costs of changes without time extensions.   However, the Government or the contractor wanted to price extended field overhead based upon estimated or actual additional costs. The scenario may have been slightly different.  But I do recall the ruling was that the contractor could choose one or the other method for field office overhead on modifications but then had to charge consistently for changes involving both time or no time.

Perhaps the Nash and Cibinic Report addressed that case at some point. 

I disagreed with the rationale of charging flat percentage for field overhead on either time or no time changes because it bore little or no relation to the basis for an equitable adjustment under the Changes clause at 52.243-4: “(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing.”

I never negotiated field overhead as a percentage of the net increase (or net decrease) nor accepted a contractor’s proposal based upon straight percentages.

We would generally base charges for additional field overhead primarily upon demonstrable changes in the field overhead costs, at least for personnel, additional rent, estimated additional utilities, supplies, etc. Most of the field office supervisory and senior administrative staff were salaried personnel.

We considered the various field office supervision and other overhead cost, such as vehicles, rent, office type costs, etc. , based upon the nature of the costs, e.g., fixed (time related), variable and semi-variable, etc. Yes, there was some room for negotiation if a contractor could make a case for less efficiency (e.g.,  “dilution of supervision”) or other intangible effects of a change or other situation, delay, etc.

I once had a superior in a field office who insisted that we should pay it as a percentage on all non time extension mods because it was a “fair share of costs” or some similar BS reasoning that made no sense. That was long before the appeal decision. Since I was the office engineer and the office’s negotiator, I ignored his method.

Luckily, I was never personally challenged by a contractor either before or after that Decision. But I know that at least some USACE Districts adopted the methodology and wrote special contract requirements (SCR’s) to that effect in their construction contracts after the Decision. 

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ji20874 It is a competitively awarded fixed price contract.  I sent them a request for proposal for the time and cost impacts to incorporate the revised drawings into the contract and have received their proposal; which now attempts to charge the full delay as a daily rate (per diem basis), vice the percentage method previously used on this (and other) contracts.

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7 hours ago, Vel said:

I’ll apologize up front for the long post, but I’m trying to follow the spirit of ji20874’s tag line:  A problem clearly stated is a problem half solved.

FAR 31.105(d)(3) allows contractors to treat the cost of managing (“superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc.”) a construction contract as either a direct or indirect cost; provided the practice is in accordance with the contractor’s established and consistently followed cost accounting practices.

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract. In cases where the contract time is not extended, the contractor is essentially banking the field overhead costs.  When a change does require an extension of time, but no self-performed cost, the contractor receives no additional compensation for its management costs (except for previous/future banked costs).

In this particular case, some of the drawings under a design bid build contract were defective.  The project was not suspended, as other work was able to continue, but the critical path and completion date were impacted and an extension of time would be due just because of the delay in providing the revised drawings.  There will be a cost to implement the corrected drawings, and the change will require additional time to complete. The contractor realizes that their field overhead percentage will not cover their management cost for the entire extension that will be required and now wants to charge these costs as direct.  

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

In response to the specific scenario and question, I think that the information that Vern can provide may support requiring the contractor to charge consistently for changes involving time or no time but more recent case law may have changed.

I can certainly see where a time extension for a delay may involve little additional direct trade labor, equipment and material costs but considerable fixed (time related costs) for the field office overhead staff and rent, etc.

However, using a flat percentage rate for changes without time doesn’t bear much realism or correlation to the fixed or semi variable nature of many field overhead costs either.

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1 hour ago, Vel said:

ji20874 It is a competitively awarded fixed price contract.  I sent them a request for proposal for the time and cost impacts to incorporate the revised drawings into the contract and have received their proposal; which now attempts to charge the full delay as a daily rate (per diem basis), vice the percentage method previously used on this (and other) contracts.

Maybe I'm missing something (as usual) ... but we're not talking about the original contract award any more, right? We're talking about a non-competitive contract price adjustment based on government-caused delay (defective drawings).

If I'm right then I agree a new cost analysis and price reasonableness determination must be made. 

To the original question, the consistency requirements pertains solely to cost accounting practices and not to how prices are determined and billed. The latter is a matter for negotiation. Or so it seems to me.

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1 hour ago, here_2_help said:

If I'm right then I agree a new cost analysis and price reasonableness determination must be made. 

The original poster has not shared the dollar value of either the original contract or the proposed modification, so I do not assume that any cost analysis is needed.  FAR 31.102 plays, and I recommend that text to the original poster.

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2 hours ago, here_2_help said:

Maybe I'm missing something (as usual) ... but we're not talking about the original contract award any more, right? We're talking about a non-competitive contract price adjustment based on government-caused delay (defective drawings).

If I'm right then I agree a new cost analysis and price reasonableness determination must be made. 

To the original question, the consistency requirements pertains solely to cost accounting practices and not to how prices are determined and billed. The latter is a matter for negotiation. Or so it seems to me.

H2H, I agree in principle with you. The question appears to concern the methodology used to propose and price field overhead in a mod. The contractor chose to use a percentage of the direct costs for FOH for changes not involving a time extension that would extend field overhead costs.

The percentage method actually provides for additional costs for fixed type costs or semi variable cost portions of FOH like General conditions, rent or office and storage facilities, salaried supervisory and admin costs, etc. whether or not there are any such extended costs. In theory those are not directly variable with the cost of the work.

Thus, the percentage method is very generous in my opinion when no additional time is involved.

It also isn’t very reflective of a delay that doesn’t necessarily involve much if any additional  direct costs but may involve significant fixed - extended overhead.

But some case law has developed the concept that once the contractor selects a method to charge field/site overhead costs on mods, it must consistently use that method.

To me the percentage method doesn’t make sense in either case.

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3 minutes ago, Vern Edwards said:

Maybe M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623.

I’m out on road but will check that one out. Thanks.

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The question in this thread concerns billing or charging practices, not cost accounting practices, for what is commonly referred to as “field overhead” or “site overhead” costs.

In my experience with contractors, these costs are generally included/accounted for as a portion of the direct costs of a project. H2H can confirm or correct me. Pardon my layman’s usage of accounting terms. 

Although direct project costs, they are indirect or job site overhead because they are costs that are spread over all the individual itemized work costs.

I don’t think that the problem here concerns accounting for costs.

The commonly encountered problem is how to determine or estimate and charge for additional site overhead costs on changes or other mods with or without extended performance time.

Contractors can certainly determine a percentage of job site overhead to total project costs. But simply charging a fixed percentage for each mod doesn’t reflect the actual or approximate increase or decrease in the contractor’s cost, which is the basis for a cost adjustment or an equitable adjustment under a contract clause providing for an adjustment to the contract price.

Charging a flat percentage would, in addition to variable costs, reflect one time costs, fixed (time related) costs, whether or not affected/impacted,  as well as semi-variable costs, e.g. costs that don’t directly vary with the amount of work.

 

5 hours ago, Retreadfed said:

Is FAR 31.105(d)(3) incorporated into the contract?

For fixed price, DoD contracts including construction, yes-the contract cost principles and procedures in FAR Part 31 and DFARS Part 231, including FAR 31.105(d)(3) apply.

DFARS Clauses 252.243-7000 “Supplemental Cost Principles”, 252.243-7001 “Pricing of contract modifications” and 252.243-7002 “Requests for equitable adjustment” are prescribed at 231.100-70,  243.205-70 and 243.205-71, respectively.

In fact, see FAR 31.105(c) which requires the contracting officer, regardless of agency, to incorporate the cost principles and procedures in Subpart 31.2, as modified by 31.105(d) in applicable contracts as the basis for pricing changes and other modifications. I’m assuming that other agencies use clauses similar to those DoD clauses.

Those government WIFCON readers and members in DoD and other agencies that contract for construction - and especially those who work with policy and procedures and/or administer and negotiate contract prices and modifications - should be aware of this.


 

 

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The fact that the appeals courts have even dictated or acknowledged how to charge for field office overhead using a flat percentage formula indicates to me their ignorance of the nature of such costs and that it doesn’t necessarily reflect the basis for an equitable adjustment or other price adjustment.

I read through several Caddell Construction cases that reference the Mortensen Construction cases. I haven’t had time to dig into Mortensen in detail but it’s refreshing my memory. The Mortensen case might have addressed the difficulty of accurately accounting for and segregating change order FOH costs. Seems like I remember some such discussion but I need more time to review the cases.

I noticed in one appeal that Caddell confused the Eichleay Formula method for unabsorbed overhead with ordinary H.O.O. as a counter argument to the idea of charging consistently for field office overhead. That sent the Appeals Court down a rabbit hole. I knew the Caddell folks of that time period, as they are a Montgomery, Alabama based firm with long standing business relations with my USACE organizations. They could have certainly been confused… 

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Before pressing too hard on 31.105, it is important to read 31.102 -- a careful understanding 31.102 may obviate all the problems everyone seems to be imagining.  I have to think the original poster should negotiate a FFP for the change and resulting delay, preferably after the contractor submits its own proposal.  So long as there is no dispute, there is no need to reach for or impose judicial remedies.  Just do what 31.102 says, and negotiate an equitable FFP adjustment.

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14 minutes ago, ji20874 said:

Before pressing too hard on 31.105, it is important to read 31.102 -- a careful understanding 31.102 may obviate all the problems everyone seems to be imagining.  I have to think the original poster should negotiate a FFP for the change and resulting delay, preferably after the contractor submits its own proposal.  So long as there is no dispute, there is no need to reach for or impose judicial remedies.  Just do what 31.102 says, and negotiate an equitable FFP adjustment.

JI, it is important to remember that the basis of an equitable price adjustment or other price adjustment under the changes clause or other clauses providing for such pricing adjustment are based upon the impact on the contractors costs,  not market pricing, etc. etc. 

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The parties certainly can come to agreement on a total price for the modification using market pricing and without resorting to cost analysis if the modification amount is less than the threshold for certified cost or pricing data -- and even if cost analysis is used, they can come to agreement on total price without agreeing on cost elements and without letting cost analysis get in the way.  FAR 31.102.

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I disagree. Then you aren’t complying with the contract requirements for an equitable adjustment of the price under the changes clause.  It’s a cost based adjustment.

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I wanted to say thanks to those who provided their input.  The info that Vern provided regarding M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623 and the link he provided that led to a discussion of Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/) were helpful in formulating my planned approach.  Perhaps, once the issue is resolved, I'll post the results in the "what happened" forum.

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On 12/7/2021 at 2:28 AM, Vel said:

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract. In cases where the contract time is not extended, the contractor is essentially banking the field overhead costs.  When a change does require an extension of time, but no self-performed cost, the contractor receives no additional compensation for its management costs (except for previous/future banked costs).

Unless I’m reading this wrong, what you described here is not an “indirect cost” as defined in FAR or in the discussion of the Watts Decision.

The contractor is (apparently) dividing the estimated management cost for the contract (within the contract cost) by the estimated cost of the construction within the total direct costs before marking up for G&A/other overhead if any*/profit/bond.

*for construction companies , other overhead may typically be the Division of the company holding and performing the contract, e.g., Keiwit Eastern, Keiwit Western, etc.

I’m quoting from the article that Vel linked to the discussion of the Mortensen case:

”F.A.R. 2.101 defines both direct costs and indirect costs as follows:

Direct cost means any cost that is identified specifically with a particular final cost objective [e.g., contract]. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives.” See also F.A.R. 31.202.

 ***

Indirect cost means any cost not directly identified with a single final cost objective [e.g., contract], but identified with two or more final cost objectives or with at least one intermediate cost objective.”

The estimated management and supervision costs, including general conditions, office trailers, storage, safety, etc. are WITHIN the contract amount of estimated total costs or (estimated) “total direct costs” before markups are applied to obtain the total contract price. They are commonly referred to as field office overhead. The term “field overhead” or “field office overhead” here means that those job costs are generally distributed or spread over all the construction activities. 

There may be some  other support from the Division or Home Office that may be directly charged to the contract like estimating (or sometimes a project manager) but let’s not complicate it here.

Thus, in the contractor’s accounting system, essentially all of the costs directly associated with the construction contract that aren’t charged to Division or Branch Office overhead, G&A, etc. are direct costs.

SO - while field office overhead is an indirect cost on the site, it is actually a direct cost of the contract.

I don’t think that the author of the article understood that and I wonder whether the Appeals Courts understood that either.

When a contractor adds a percentage for estimated  (or actual) field office overhead to the estimated (or incurred) direct costs for a mod, the government is paying additional fixed (time related - such as salaried personnel already on-site, rent on office facilities, utilities, additional guard time, site safety, etc.), semi-variable (costs that include both fixed and variable - perhaps extension an assignment of specific supervisory personnel that would otherwise be reassigned to another contract or overtime for hourly office employees, etc. ) costs and variable (costs that are directly related to additional work or costs).

An extended daily overhead rate, would generally be incurred for mods covering extended time to perform due to a delay in the critical path of the project. For example, additional time caused by partial or full stoppage, differing site condition, additional work that can’t be worked into a current activity without delaying following or other concurrent activities, etc.

Per diem (extended overhead) theoretically would be composed of additional fixed costs and perhaps the fixed portion of semi-variable costs per day. This  would probably consist of the current daily cost of maintaining the field overhead during a time extension.

BOTH the percentage method and the per diem method are direct costs to the contract.

My problem with the percentage method is that the contractor is charging some additional fixed costs that are already part of the contract costs and contract price, aren’t related to the dollar amount of the work and usually aren’t additional incurred costs when no additional contract performance period is necessary. 

Bottom line is that the Courts are saying once the contractor uses a method, the contractor can’t switch.

I think the courts are screwed up in their reasoning and I think that paying a direct percentage for field overhead based upon the amount of additional costs is also screwed up as it treats all FOH costs as variable costs.  To say that it is “generous” would be an understatement.

 

 

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