Jump to content

Cost of Superintendence on a construction contract


Vel

Recommended Posts

17 hours ago, joel hoffman said:

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.

Sounds as if our OP has received the advice they were looking for. So this post is not aimed at Vel; it's aimed at Joel, since he called me out and invited me to correct him.

Joel, notice the part I bolded in your post (above). You yourself used the word "generally." That word implies exceptions, doesn't it?

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

I've been doing this thing I do for nearly 40 years now, and I will assert that, based on my experience, the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe. Allowable vs. unallowable is an easier call to make.

So, no. I don't know how the costs in question are treated and I don't believe you do either. You can't -- because you are not the contractor.

Link to comment
Share on other sites

  • Replies 51
  • Created
  • Last Reply

Top Posters In This Topic

Top Posters In This Topic

Posted Images

28 minutes ago, here_2_help said:

...the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe.

Anyone who reads the ASBCA's Mortenson decision, the ASBCA's reconsideration decision, and the three write-ups of those decisions in The Nash & 'Cibinic Report, one of which  includes remarks from Mortenson's attorney, will confirm the truth of the above quote.

Link to comment
Share on other sites

1 hour ago, here_2_help said:

Sounds as if our OP has received the advice they were looking for. So this post is not aimed at Vel; it's aimed at Joel, since he called me out and invited me to correct him.

Joel, notice the part I bolded in your post (above). You yourself used the word "generally." That word implies exceptions, doesn't it?

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

I've been doing this thing I do for nearly 40 years now, and I will assert that, based on my experience, the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe. Allowable vs. unallowable is an easier call to make.

So, no. I don't know how the costs in question are treated and I don't believe you do either. You can't -- because you are not the contractor.

H2H I don’t disagree that some of the field OH costs might be indirectly accounted for by some contractors. But they were generally itemized under the direct cost of proposals for new contracts that I negotiated over a couple of decades and were definitely itemized as direct costs in REA’s and claims. I wouldn’t negotiate FOH  as a set “rate”  in change orders when some companies would tack a flat percentage on top of all the material, labor, equipment and subcontract costs.  
Additional costs on mods and claims had to be itemized and justified. No contractor ever insisted to me that they were not charged as direct costs. Bechtel, Raytheon Constructors, BE&K, Granite, Peter Keiwit and some others that I had contractual relationships with told  me or showed that they direct charged all site costs in their accounting systems. Off-site support for the project might be charged one way or the other.

When I started out in the 70’s in the Air Force, the standard markups proposed were almost always “15% overhead and 10% profit”. It wasn’t  until I went work for the Corps and learned quite a bit more about cost analysis, technical analysis,  and other proposal preparation and evaluation techniques, schedule delays and impacts, etc. and had the benefit of Corps auditors and DCAA auditors to provide input to developing pre-negotiation objectives that I was able to dig more deeply into the detailed costs. I’m certainly not an accountant but became familiar with contractor estimating systems and where they itemized detailed cost breakdowns, including cost pools for G&A etc. 

For the ten years before I retired, as the chief of Contract Administration Division for the construction phases of the Chemical Demilitarization Program for seven active construction sites, I had project controls personnel working for me who were experts in complex project scheduling, former field engineers on TVA nuclear and fossil fuel plants who supervised contractor construction crews. I had cost analysts and schedulers who sat with some of our contractors in the field on both fixed price and cost reimbursement contracts. We also worked closely with our field office staffs who also negotiated mods and administered the contracts. 

Edited by joel hoffman
Link to comment
Share on other sites

1 hour ago, here_2_help said:

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

On 12/7/2021 at 12:28 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.

I was intrigued by the OP's statement above and watched intently as the thread unfolded.   We found out FFP competitively awarded.  "(M)y agency" "contractors choose" and "my agency calls" it "field office".   Made me wonder if the OP has not shared a specific solicitation instruction that might possibly evolve into a contract term/condition telling how a contractor is formulate their FFP?   If so it might be very important language to the ensuing question posed by the OP.  For me the nuance in this thread is something might be missing that has not been said and might actually be demanded by the contract.

Link to comment
Share on other sites

47 minutes ago, joel hoffman said:

H2H I don’t disagree that some of the field OH costs might be indirectly accounted for by some contractors. But they were generally itemized under the direct cost of proposals for new contracts that I negotiated over a couple of decades and were definitely itemized as direct costs in REA’s and claims.

There's that pesky word again.

Link to comment
Share on other sites

Quote

12-802.4 Indirect Costs – General**

a. General. Indirect costs allocable to direct costs incurred as a result of the delay are allowable when computed in accordance with the contractor's established accounting practices (see 6-600). Any indirect cost (including unabsorbed overhead) that was submitted as direct cost must be excluded from the computation of rates allocable to the delay/suspension proposal or claim. In addition, for purposes of determining overhead rates for flexibly priced contracts, the applicable indirect cost pool should be reduced by the amount of indirect costs charged as direct costs under this delay/disruption proposal or claim. Failure to make these adjustments will result in a duplicate recovery of costs.

b. Construction Job Site/Field Overhead. Job site/field overhead consists of expenses required to support a construction contract that are not identifiable with any specific work or task within the contract. Job site/field overhead includes salaries for project managers, superintendents, guards, mechanics, and engineers; rental or ownership costs for offices, storage trailers, office equipment and supplies; temporary utilities (electricity and water); trucks; and automobiles. Contractors propose or claim recovery of job site/field overhead on change orders that increase work and/or extend the performance period of a contract. When the Pricing of Contract Modifications clause (DFARS 252.243-7001) is contained in the contract, evaluate the costs per FAR 31 cost principles. Evaluate the proposed or claimed job site/field overhead costs to ensure that costs associated with the overall operation of the business (home office overhead) are not included. Job site/field overhead costs are allowable as direct or indirect costs provided the costs are charged in accordance with the contractor’s established accounting system and consistently applied for all contracts (FAR 31.105(d)(3)). In M. A. Mortenson Co., ASBCA Nos. 40750, 40751, 40752, 98-1 BCA ¶29,658, the Senior Deciding Group of the board ruled that FAR 31.203, when applicable, prohibits a contractor from using more than one allocation method for Page 75 of 104 recovery of job site/field overhead. In this case, the contractor used a per diem method (daily field overhead rate) when claiming job site overhead for changes and delays that increased the contract performance period but used a percentage markup method for changes that did not affect contract performance period. The latter approach was rejected since it was a departure from the contractor’s normal per diem method and violated the FAR requirement for a single distribution base for allocating a given overhead pool. In Caddell Construction Co, ASBCA No. 49333, 99-1 BCA, the board found irrelevant a contractor’s assertion that by deducting field overhead received as a percentage markup from the field overhead pool used to calculate the per diem rate, recovery of excess field overhead would be avoided. Despite this assurance, the contractor would have been in violation of FAR 31.203(b) as interpreted in Mortenson

From DCAA Contract Audit Manual (CAM) Chapter 12. (Emphasis added.)

Link to comment
Share on other sites

I fear we have conflated a lot of different things in this thread.

The contract is FFP.  Therefore, any notions of direct versus indirect costs are wholly irrelevant to the Government -- they might have been relevant for purposes of agreeing on a reasonable price, but that is over and done with and are irrelevant during contract administration.  These are matters for the contractor's internal bookkeeping.

The Government does not care about FOH rate after award.  Payment to the contractor should be made as directed in the contract clause at FAR 52.232-5.  That clause does not provide for any payment to the contractor based on FOH rates or anything else.  The Government makes payment to the contractor based on percent complete.  Making payments according to cost incurred by the contractor is a violation of the clause [that said, I know some agencies, including the Corps of Engineers, does this -- maybe the Corps as a deviation to the 52.232-5 clause?].

The quote from the above comment ("Job site/field overhead costs are allowable as direct or indirect costs provided the costs are charged in accordance with the contractor’s established accounting system and consistently applied for all contracts") refers to charges in the contractor's internal books, not charges to the Government via invoice for payment -- these are direct or indirect costs in the contractor's bookkeeping, not direct or indirect costs on an invoice in a FFP construction contract.

Now that there is a need for a contract change for defective specifications, there might also be a need for an equitable adjustment.  The contractor might apply a FOH rate in its proposal for a contract price adjustment -- but the parties need to come to agreement on the bottom-line price adjustment for the modification -- they do not need to agree on any element of cost.  See FAR 31.102.  

 

 

Link to comment
Share on other sites

20 hours ago, joel hoffman said:

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.

Joel, DFARS 252.243-7000 is reserved.  I don't see any reference to the cost principles in 252.243-7002.  However, 252.243-7001 does seem to incorporate FAR 31.1.

Link to comment
Share on other sites

1 hour ago, Retreadfed said:

Joel, DFARS 252.243-7000 is reserved.  I don't see any reference to the cost principles in 252.243-7002.  However, 252.243-7001 does seem to incorporate FAR 31.1.

Retreadfed, I should have said DFARS clause 252.231-7000 not 252.243-7000. Sorry!  I found it  from the link at the prescription in DFARS 231-100.70.

252.231-7000  are supplemental cost principles, stating: “When the allowability of costs under this contract is determined in accordance with Part 31 of the Federal Acquisition Regulation (FAR), allowability shall also be determined in accordance with Part 231 of the Defense FAR Supplement, in effect on the date of this contract.”

252.243-7001 incorporates the FAR cost principles and procedures in FAR Part 31 and DFARS Part 231. 

253.243-7002 concerns Requests for Equitable Adjustments and doesn’t address your specific question.

 

Link to comment
Share on other sites

11 hours ago, Vel said:

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.

Vel seems to have gotten the information he wanted.

What topic is now under discussion? What question is being answered? What confusion is being eliminated?

 

download-1.jpg

Link to comment
Share on other sites

On 12/8/2021 at 11:49 AM, here_2_help said:

From DCAA Contract Audit Manual (CAM) Chapter 12. (Emphasis added.)

H2H, I do understand what it says. But regardless of where it is accounted for, the use of a flat percentage for job site overhead , calculated by dividing all estimated or actual FOH costs by all estimated construction costs when no time extension is involved is improper in my opinion.

Such a flat rate doesn’t reflect the specific FOH cost impacts of such a change/mod. For example the percentage would be based upon all fixed (time related) and all one time costs, that were estimated or incurred for the job. The former bears little relevance to a  non-time extension mod and the latter is irrelevant to any mod.

EDIT ADD explanation: “Field overhead” and its costs are commonly referred to as “overhead”  because - with some possible exceptions - the management, supervision, admin, field engineering, subcontract management, scheduling, project controls, temporary facilities on the job site, plus some other activities (e.g.,material storage, guards, fences, temporary construction road construction, maintenance, dust control, safety and health, tool issue and control, site vehicles, etc. are not associated with individual work breakdown structure construction activities. Some projects have huge on-site staffs while others have small staffs with off-site support hired for a project or part of the off-site office for numerous contracts. These costs are spread over the CLIN or  CLINs and WBS activities under the CLIN(s).

Fab shops might be charged to specific activities or spread.

In my experience through the CAB processes, they have  been direct charged to the contract. The project manager(s) and/or top site supervision have generally been accountable for execution and controlling their budget for the contract.

Offsite project managers and other support such as estimating and proposal prep, legal, admin, payroll, benefits, purchasing, etc. might be direct charged to the project or part of some overhead pool (e.g., G&A, Division, etc.) 

Thus most field office “overhead” are likely be direct costs to the company’s project. They are composed of one time, fixed (time related), variable (direct correlation with dollar or amount of work) or semi-variable (both fixed and variable components).

Of course, for small construction projects, contract administration and support may well be handled at a home office and direct or indirectly charged to the contract. I agree that that happens. 

 

 

Link to comment
Share on other sites

18 hours ago, ji20874 said:

The contract is FFP.  Therefore, any notions of direct versus indirect costs are wholly irrelevant to the Government -- they might have been relevant for purposes of agreeing on a reasonable price, but that is over and done with and are irrelevant during contract administration.  These are matters for the contractor's internal bookkeeping.

@ji20874Have you read the Mortenson decision mentioned and cited above? The contract in that case was fixed-price, and "notions" of direct versus indirect costs were relevant in that case. I think you're wrong to say that the distinction between direct and indirect costs is wholly irrelevant to the Government.

Quote

The issue in these three appeals is the same and concerns the calculation of field office overhead in change orders that do not increase the time of contract performance. Appellant contends that once the direct costs of the changed work are determined, the field office overhead is automatically calculated by multiplying the direct costs of the change by a predetermined percentage. The Government, on the other hand, contends that costs of field overhead such as salaried positions, rent, housing allowance and the like which are fixed do not incur additional costs on change orders that do not extend contract performance and, therefore, should not be included in the field office overhead.

The court quoted a well-known passage from Cibinic and Nash:

Quote

Professors Cibinic and Nash have recognized the problem of the treatment of fixed costs in overhead:

The normal cost allocability rules will determine the method of computing the overhead rate and the types and amounts of costs included in the overhead. However, one problem associated with overhead in price adjustments is the treatment of fixed costs in overhead. Since such costs by definition do not vary with changes in the volume of work, they will be neither increased nor decreased by a change that can be accomplished with the same facilities and within the same time period as the initial contract work. Thus, should an allocation for such fixed costs be included in the adjustment, the amount would not be for costs, since such expenditures would be neither increased nor decreased by the adjustment. This problem has not been resolved through litigation. John Cibinic, Jr. & Ralph C. Nash, Jr., Administration of Government Contracts at 749 (3d ed. 1995).

The court ruled that the fixed cost component of the field office indirect costs could not be included in the price adjustment.

Quote

Since change orders/modifications are reimbursed on the basis of an increase in cost, it follows that there must be some showing that an increase in cost has actually occurred. If fixed costs in a contractor's overhead have not increased because of a change order/modification, the contractor is not entitled to include the fixed costs in its overhead rate.

I think your statement, which I quoted above, is wrong. I think that in the settlement of adjustments to FFP contracts the distinction between direct and indirect costs can be highly relevant.

 If you think I am wrong, or that I misunderstood you, or that I took you out of context, please straighten me out.

Link to comment
Share on other sites

On 12/8/2021 at 1:01 PM, ji20874 said:

Making payments according to cost incurred by the contractor is a violation of the clause [that said, I know some agencies, including the Corps of Engineers, does this -- maybe the Corps as a deviation to the 52.232-5 clause?].

Not sure what you mean here, ji. The clause provides for reimbursement of the amount paid for bonds and for documented cost of stored materials, both of which aren’t counted as “progress”. We don’t need to re-debate the methodologies here in this thread. 

Otherwise I tend to agree with much of what you said in your post, including the above quote:

“Since change orders/modifications are reimbursed on the basis of an increase in cost, it follows that there must be some showing that an increase in cost has actually occurred. If fixed costs in a contractor's overhead have not increased because of a change order/modification, the contractor is not entitled to include the fixed costs in its overhead rate.”

You can read the Caddell Construction Appeals referenced earlier where the GAO apparently agreed that the contractor was paid for non-incurred fixed costs. Caddell even offered to deduct those payments from its per diem claim. Then the GAO referenced the Senior Panel decision which has confused the whole matter. 

Link to comment
Share on other sites

Vern, I don’t think that Vels’ organization and contractors’ methodology is consistent with the Mortensen Decision, based upon how he described the calculation.

My gripe is with the calculation of a fixed formula that would include fixed costs as well as one time costs. In addition, it seems to assume all variable costs are affected .

Link to comment
Share on other sites

11 minutes ago, joel hoffman said:

Vern, I don’t think that Vels’ organization and contractors’ methodology is consistent with the Mortensen Decision, based upon how he described the calculation.

Joel, I don't know the details of the methodology, and I don't see any point in speculating or inquiring further. Vel came with a question and has since said that he got helpful information. If anyone else has helpful information they should offer it. Otherwise, I don't see much that is useful to anyone in what is being said, and I see a lot that seems confused and confusing.

Link to comment
Share on other sites

16 hours ago, Vern Edwards said:

@ji20874Have you read the Mortenson decision mentioned and cited above? The contract in that case was fixed-price, and "notions" of direct versus indirect costs were relevant in that case. I think you're wrong to say that the distinction between direct and indirect costs is wholly irrelevant to the Government.

The court quoted a well-known passage from Cibinic and Nash:

The court ruled that the fixed cost component of the field office indirect costs could not be included in the price adjustment.

I think your statement, which I quoted above, is wrong. I think that in the settlement of adjustments to FFP contracts the distinction between direct and indirect costs can be highly relevant.

 If you think I am wrong, or that I misunderstood you, or that I took you out of context, please straighten me out.

Why did you have to bring facts into this?

Link to comment
Share on other sites

Just now, Vern Edwards said:

Not the same question.

No it wasn’t but it evolved to the same question with the same answer as here.

Link to comment
Share on other sites

@joel hoffmanHere is the question that started this thread:

On 12/7/2021 at 12:28 AM, 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).

Here is the question from 10 years ago:

Quote

My question is: Does the prime contractor's established practice of treating field overhead costs as indirect costs preclude the subcontractors (that treat field overhead costs as direct) from recovering extended overhead costs as a result of Government delay.

What kind of evolution do you see there? 

The two questions are entirely different.

Sometimes, I wonder.

Link to comment
Share on other sites

1 hour ago, Vern Edwards said:

@joel hoffmanHere is the question that started this thread:

Here is the question from 10 years ago:

What kind of evolution do you see there? 

The two questions are entirely different.

Sometimes, I wonder.

If you read the discussion, after answering the question, we discussed the requirement for consistency of the prime contractor’s approach for field overhead on mods with or without time extensions, Mortensen, Caddell, etc. We also had a private discussion but that is no longer available. What caught my attention was the name of the questioners “Velhammer” then and “Vel” now.

Vern, you seemed to think that the question here involved unabsorbed home office overhead which had No relevance at all to questions concerning field office overhead. Just because there is “delay” on part of a job which extends the performance time doesn’t mean that there is unabsorbed overhead.

 

Link to comment
Share on other sites

2 hours ago, joel hoffman said:

Vern, you seemed to think that the question here involved unabsorbed home office overhead which had No relevance at all to questions concerning field office overhead. Just because there is “delay” on part of a job which extends the performance time doesn’t mean that there is unabsorbed overhead.

Yes, I originally thought that Vel was referring to home office overhead, but he sorted me out. As for unabsorbed overhead and delay, I don't think I've mentioned unabsorbed overhead in this thread. Why are you talking to me about it? I think I understand it. So please spare me an educational story about your long ago experiences with the Corps of Engineers. Instead, why not write an article about the topic for Wifcon? Share what you think you know.

Link to comment
Share on other sites

On 12/7/2021 at 7:28 AM, 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.

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

Unaborbed Home Office Overhead, http://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/

 

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.

×
×
  • Create New...