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Selling / Bid and Proposal Costs Treatment under Letter Contract


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FAR 31.205-18 Independent research and development and bid and proposal costs defines B&P as:

 Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract .

Small Business with a Small Business Set-Aside award. CAS does not apply to small businesses. No certified cost or pricing applies. Compensation is T&M and within DoD. The effort is for General Services (not construction, not professional services). Contract term is base 5 years with 5 one year option periods, total 10 years. 

A Letter Contract (per FAR 52.215-25 Contract Definitization) has been entered into while the broader contract is being definitized / negotiated (there are some insurance anomalies associated with aircraft services).

Question - the costs (time / hours) associated with contract negotiations on the broader contract - should these hours be charged to as B&P or charged as G&A / Overhead?

Reason asking, B&P excludes costs (time / hours) associated with "performance of a contract." Does a Letter Contract constitute "performance of a contract" and thus because limited performance is taking place under the Letter Contract, therefore, any costs in furtherance of the Letter Contract, which would include negotiations of the broader contract, should be considered other than B&P?

According to DoD, contract negotiations should be considered B&P https://www.acq.osd.mil/dpap/policy/policyvault/usa002866-11-dpap.pdf

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Guest,

How do you charge costs associated with negotiations on contract modifications? 

In other words, is your situation (definitizing a letter contract) analogous to a negotiation for a contract modification, or is your situation analogous to a negotiation for a new contract?  Answering this question might solve your problem.

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1 hour ago, Guest108830 said:

Question - the costs (time / hours) associated with contract negotiations on the broader contract - should these hours be charged to as B&P or charged as G&A / Overhead?

Reason asking, B&P excludes costs (time / hours) associated with "performance of a contract." Does a Letter Contract constitute "performance of a contract" and thus because limited performance is taking place under the Letter Contract, therefore, any costs in furtherance of the Letter Contract, which would include negotiations of the broader contract, should be considered other than B&P?

@Guest108830If you are asking whether the cost of preparing the contract definitization proposal required by 52.215-25(a) is "bid and proposal cost" as addressed in FAR 31.205-18, then the answer is no. Bid and proposal costs as addressed in FAR 31.205-18 are costs associated with "potential contracts." A letter contract is an actual contract.

See the DCAA Guidebook, Ch. 33, which states, in part:

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Contractually required proposal efforts (e.g., a contract requirement to submit a proposal for a follow-on contract) are generally direct contract costs. However, the CASB interpretation of CAS 402, under certain circumstances, permits contractors to accumulate and allocate these contractually required proposal costs to final cost objectives as an indirect cost. The interpretation explains that contractors may treat proposal preparation costs as direct or indirect depending on the circumstances under which the costs are incurred. Contractors may treat proposal preparation costs arising from a specific contract requirement as direct costs, while ordinary B&P effort (i.e., effort that is not required by a contract) is indirect. 48 CFR 9904.402.61, Interpretation, notes that contractors may elect to charge all proposal costs (including B&P costs and those required by contract) indirect, provided that the practice is applied consistently and the practice results in an equitable distribution of the costs to final cost objectives.

https://www.dcaa.mil/Portals/88/Chapter 33 Independent Research and Development and Bid and Proposal Costs (508).pdf

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Perhaps I'm reading 31.205-18 wrong when it says "required in the performance of a contract." When I say performance, I'm saying performing a portion of the PWS. What I believe is being mentioned here, however, is where a proposal is expressly "required" to be submitted once under contract for various things. 

When I look at it this way, it makes more sense. It's not the performance of work that's being referred to, but rather, whether the contract signed has a express clause requiring a proposal to be submitted for some attribute. 

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36 minutes ago, Guest108830 said:

When I say performance, I'm saying performing a portion of the PWS.

Well, okay. But why on earth would you say such a thing?

Under our laws a contract is "a promise or a set of promises...." Restatement, Second, Contracts § 1. Thus, performance of a contract entails doing all the work required to fulfill all of the promises included in the contract, not just the promises in the work statement.

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28 minutes ago, Guest108830 said:

Perhaps I'm reading 31.205-18 wrong when it says "required in the performance of a contract." When I say performance, I'm saying performing a portion of the PWS. What I believe is being mentioned here, however, is where a proposal is expressly "required" to be submitted once under contract for various things. 

When I look at it this way, it makes more sense. It's not the performance of work that's being referred to, but rather, whether the contract signed has a express clause requiring a proposal to be submitted for some attribute. 

If the proposal is required by contract terms, then the contractor may elect (it is not required to) charge proposal preparation costs as direct contract costs. (See CAS 401, Interpretation No. 1.) However, the contractor's choice must be applied consistently to all contracts in similar circumstances.

Note that directly charged proposal preparation expenses are not B&P costs, because they don't meet the definition of B&P found in the cost principle. They are just direct contract costs.

When I explain this to folks, I tell them that it's easy to distinguish required proposals from proposals that are not required. Is the proposal a contract deliverable? Can the contractor be found to be in breach for failing to submit it? Or is the submission discretionary? Answers to those questions generally tell folks what's required, and what's not required.

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3 minutes ago, here_2_help said:

Note that directly charged proposal preparation expenses are not B&P costs, because they don't meet the definition of B&P found in the cost principle. They are just direct contract costs.

@here_2_helpI don't think indirectly charged contractually-required proposal costs are B&P either. They are just contractually-required proposal costs that are allocated to an indirect cost pool. Charging such costs indirectly does not turn them into "bid and proposal costs" as defined by FAR.

Am I wrong about that?

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26 minutes ago, Vern Edwards said:

@here_2_helpI don't think indirectly charged contractually-required proposal costs are B&P either. They are just contractually-required proposal costs that are allocated to an indirect cost pool. Charging such costs indirectly does not turn them into "bid and proposal costs" as defined by FAR.

Am I wrong about that?

No, you're not wrong, though in practice nobody really ever makes that distinction. It's simply a choice between direct contract costs and B&P.  See, for example, the first sentence of Shay Assad's 10 Nov 2011 Memo "Direct and Indirect Charging of Contractor Proposal Preparation and Negotiation Support Costs".

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Proposal preparation and negotiation support costs not funded by a grant or required by a contract are by definition to be indirectly charged to contracts through the Bid and Proposal (B&P) indirect cost pool.

Again, you're not wrong, but it's CAS stuff, so nobody pays much attention to the nuances.

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Thanks.

As you know, I used to negotiate IR&D and B&P cost ceilings for DOD and NASA when ceilings were required. When they were required no one would have wanted to include direct proposal costs in a B&P cost pool. The ceilings were eliminated in 1996. Maybe sloppy use of terminology was the result of the elimination of the ceilings.

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8 minutes ago, here_2_help said:

See, for example, the first sentence of Shay Assad's 10 Nov 2011 Memo "Direct and Indirect Charging of Contractor Proposal Preparation and Negotiation Support Costs".

 

8 minutes ago, here_2_help said:

Proposal preparation and negotiation support costs not funded by a grant or required by a contract are by definition to be indirectly charged to contracts through the Bid and Proposal (B&P) indirect cost pool.

Isn’t Assad saying “Proposal preparation and negotiation support costs…or [not] required by a contract are by definition to be indirectly charged to contracts through the Bid and Proposal (B&P) indirect cost pool.

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39 minutes ago, joel hoffman said:

Isn’t Assad saying “Proposal preparation and negotiation support costs…or [not] required by a contract are by definition to be indirectly charged to contracts through the Bid and Proposal (B&P) indirect cost pool.

Yes. I was replying to Vern's implied point that a contractor who elects not to charge proposal preparation costs as direct contract costs might technically not be permitted to recover such costs as B&P costs, since they are "required" by a contract even if not directly charged to that contract. CAS might require such costs to be excluded from the B&P pool and allocated separately to the (in this case, singular) benefiting contract or other final cost objective. My point to Vern was that he was technically correct; however, in practice, nobody worries about that nuance. I used Mr. Assad's memo as an example of nuance ignored.

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46 minutes ago, Vern Edwards said:

Thanks.

As you know, I used to negotiate IR&D and B&P cost ceilings for DOD and NASA when ceilings were required. When they were required no one would have wanted to include direct proposal costs in a B&P cost pool. The ceilings were eliminated in 1996. Maybe sloppy use of terminology was the result of the elimination of the ceilings.

Yeah, I think it's basically a general ignorance of deep CAS stuff and related accounting issues. The more the KO function mimics the legal profession, the less actual business acumen seems to matter. That's a purely personal opinion, of course. I'm sure there is a myriad of exceptions to my generalization.

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2 hours ago, here_2_help said:

The more the KO function mimics the legal profession, the less actual business acumen seems to matter.

 

1 hour ago, ji20874 said:

That is a profound observation.

I don't think it's profound.

If anyone thinks KOs function like lawyers, they don't know much about the legal profession. If more COs and policy people could think like lawyers there might be considerably less stupidity and litigation in government contracting. And there might be less vague regulation that people think is okay. There might be more creativity. Lawyers have been some of the most creative people I know.

The legal profession exists because there's not as much business acumen in the world as one might think or hope. Lawyers get into the game because business people can't solve their problems themselves and seek court assistance or resolution.

And by the way, we have cost accounting standards because an admiral—an engineer, not a lawyer—pushed Congress to impose them.

 

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1 hour ago, Vern Edwards said:

Lawyers have been some of the most creative people I know.

Somehow, I'm not sure that this thought reflects the lived reality of many players in the federal acquisition process, but I wish it were my lived experience.

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41 minutes ago, ji20874 said:

Somehow, I'm not sure that this thought reflects the lived reality of many players in the federal acquisition process, but I wish it were my lived experience.

If i don't copy and paste to a certain degree what's been done historically i can't get Sh** thru my current lawyer, tho that has not always been the case.

My favorite comment "B-xxxxxx is included in the template so it must be important". No explanation why. 

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8 hours ago, ji20874 said:

Somehow, I'm not sure that this thought reflects the lived reality of many players in the federal acquisition process, but I wish it were my lived experience.

If your experience has been with government lawyers or private sector lawyers in opposition, then I understand why lawyer creativity has not been your experience.

In government procurement the role of lawyers is usually to "review" CO files for "legal sufficiency" or to contest CO decisions. Most CO's don't ask their lawyer to come to a meeting to generate ideas, but "to keep us out of trouble," i.e., to provide oversight. If that's the way you define a person's job, that's how the person will act.

I once had a government lawyer tell me that his job was not to help me, but to protect our commander from my mistakes, and that in order to do that he couldn't participate in the planning, because his job was to review our plans with an objective eye. But in the private sector lawyers are hired principally to solve problems, provide advice, and provide representation.

As a businessman, I go to my lawyer for advice about the best way to handle a complex matter or to proceed with an undertaking. I can't tell you how many times my lawyer has saved me needless work or has expedited a business process.

So I think here_2_help's comment was too broadly stated. Thinking like a lawyer can be a very, very good thing for a CO if you think like a good lawyer. I have found that legal thinking processes, legal reading, and acquaintance with top notch lawyers have made me a much better acquisition practitioner in every way. But most contract specialists start out working with lawyers whose job it is to check their work. Perhaps that's necessary because COs don't mimic lawyers.

BTW, although I am not a lawyer, I am a member of the ABA, because I like being associated in some small way with great analysts and thinkers.

 

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4 hours ago, Vern Edwards said:

So I think here_2_help's comment was too broadly stated. Thinking like a lawyer can be a very, very good thing for a CO if you think like a good lawyer. I have found that legal thinking processes, legal reading, and acquaintance with top notch lawyers have made me a much better acquisition practitioner in every way. But most contract specialists start out working with lawyers whose job it is to check their work. Perhaps that's necessary because COs don't mimic lawyers.

BTW, although I am not a lawyer, I am a member of the ABA, because I like being associated in some small way with great analysts and thinkers.

Vern, I don't know how my comment morphed in your mind from "mimic[king] the legal profession" to "thinking like a lawyer." I don't think those two phrases are equivalent. In my personal experience, the vast majority of lawyers do not focus on cost or accounting issues. The comparatively few that do, and do it well, become legends in their fields. Mel Rische and Karen Manos and Tom Lemmer spring immediately to mind - though of course there are others.

Further, in my personal experience, too many attorneys are risk averse, seeking to eliminate risk rather than to manage it. Again - not all attorneys. But many.

Anyway, I, too, am an Associate Member of the ABA, Section of Public Contract Law. I have been for two decades. In that capacity, I've attended meetings and presented a paper at a Quarterly meeting and contributed to a Section publication. Just so that we're clear that my statement was not an indictment of the legal profession.

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2 hours ago, here_2_help said:

Just so that we're clear that my statement was not an indictment of the legal profession.

Well, I'm glad you said that, even though it leaves me confused about what you meant, since the thrust of your comment seemed to be that mimicking "the legal profession" is not a good thing for COs to do.

What is it about "the legal profession" that makes it bad to mimic?

My question is strictly rhetorical. I don't ask for an answer. I think you just tossed that comment off without thinking it through, which is something that we all do from time to time. It certainly wasn't "profound."

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19 hours ago, Vern Edwards said:

And by the way, we have cost accounting standards because an admiral—an engineer, not a lawyer—pushed Congress to impose them.

Admiral Hyman G. Rickover, father of the Nuclear Navy.
https://www.gao.gov/assets/094464.pdf

 

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3 hours ago, Retreadfed said:

The contractor in question is a small business, so CAS does not apply.

Yes, true. Am I understanding your position as being that, since CAS is not applicable to the contractor, then the permissive cost accounting practices described by CAS are not available to the contractor?

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19 hours ago, here_2_help said:

Am I understanding your position as being that, since CAS is not applicable to the contractor, then the permissive cost accounting practices described by CAS are not available to the contractor?

There is no reason to think that. See FAR 31.202, Direct costs:     

Quote

(a) No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective . Direct costs of the contract shall be charged directly to the contract . All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

(b) For reasons of practicality, the contractor may treat any direct cost of a minor dollar amount as an indirect cost if the accounting treatment-

           (1) Is consistently applied to all final cost objectives; and

           (2) Produces substantially the same results as treating the cost as a direct cost .

This really is simple. There are two kinds of proposal costs. There are (1) the costs of proposals for new work and (2) the costs of proposals required by contract. Both types of proposal costs are allowable, but (1) is allocable only as indirect costs while (2) may be allocated as either direct or indirect under appropriate circumstances, as described in FAR 31.202.

Until 1996 there were ceilings on the costs of proposals for new work that the government would compensate, which are called B&P costs. B&P is defined such that contractually required proposal costs were not included. That's because (a) contractually required proposal costs are direct costs and (b) no one wanted the ceilings to apply to costs that had to be incurred to comply with contracts. Thus, it was important to recognize the distinction between the two kinds of costs.

When the ceilings were eliminated, the FAR councils did not change the definition of B&P. Assad's memo indicated that if the costs of proposals required by contract were to be allocated as indirects, they could both be included in a B&P pool. For many contractors, combining the two types of proposal costs was administratively easier. But Assad's memo was careless, and confusing to those unfamiliar with the cost principles.

True B&P costs, as still defined by FAR 31.205-18, must be allocated indirectly. That is usually done by maintaining a B&P cost pool and including it in the G&A cost pool.

Proposal costs required by contract are direct costs, but for the sake of convenience they may be allocated either directly or indirectly according to a contractor's consistent cost accounting practice. Assad said that could be done by including them in the B&P cost pool, which is usually part of the G&A cost pool, or by including them in their own pool and then including that pool in the G&A pool. But including the costs of proposals required by contract in the B&P pool does not make them B&P costs as defined in FAR.

Also, I have been unable to confirm that Assad's 2011 memo is still active guidance.

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13 hours ago, Vern Edwards said:

This really is simple.

Yes.

And to the OP's original question

Quote

Question - the costs (time / hours) associated with contract negotiations on the broader contract - should these hours be charged to as B&P or charged as G&A / Overhead?

The answer is that the contractor's own policies/procedures should define when costs associated with, but not directly a part of, proposal preparation and submission are charged to the B&P project and when they are not to be so treated. Shay Assad's directive, link provided earlier in the thread, provides that DoD will accept contract negotiation costs as being B&P costs, so long as the contractor treats them that way consistently.

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4 hours ago, here_2_help said:

Shay Assad's directive, link provided earlier in the thread, provides that DoD will accept contract negotiation costs as being B&P costs, so long as the contractor treats them that way consistently.

Emphasis added.

@here_2_helpI consider you an expert in these matters and so am hesitant to disagree with you. But I'm not certain about what you are meant by the quoted sentence. When you say "contract negotiation costs" do you mean the cost of proposals and negotiations required by contract? If so, then I must disagree with you. I wonder if I have misinterpreted you.

48 CFR 31.205-18 defines "bid and proposal costs" as follows:

Quote

Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract.

48 CFR 9904.420-30(a)(2) (CAS 420) defines "bid and proposal cost" as follows:

Quote

Bid and proposal (B&P) cost means the cost incurred in preparing, submitting, or supporting any bid or proposal which effort is neither sponsored by a grant, nor required in the performance of a contract.

Those regulations appear in the current Code of Federal Regulations (CFR) and have the force and effect of law.

I am holding Shay Assad's November 10, 2011 memorandum, the one you cited last Friday at 9:00 a.m. and this morning. It is entitled, "Memorandum." The word "directive" does not appear therein, neither does the word "shall."  The word that I see is "guidance." It contains six paragraphs. Nowhere therein do I see any sentence that says  DOD will accept the costs of proposals and negotiations required by a contract "as being B&P costs."

My point is that while the costs of preparing and negotiating a proposal that is required by contract may be charged as indirect costs under certain circumstances, as provided by FAR 31.202, charging them as such does not make them "bid and proposal costs" as defined by FAR and CAS.

That is my only point. It's a narrow point, but I think it is an important one. COs should understand the different purposes and roles of the two kinds of proposal costs.

Do you take issue with my point? Do you think that Assad said that proposal and negotiation costs required by contract can be treated "as being B&P costs" as defined by FAR and CAS? If so, would you point out the paragraph and sentence in which Assad said that? If I missed it and he did say it, do you think it was sound guidance.

I apologize if I'm just being a blockhead in the way I read and am reacting to your last post. 

 

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