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marcfgov

Overhead vs. Business Development

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Where do we draw the line between what is Business Development and what is Overhead when it comes to potential new work. I have a program manager working on a question from the customer, it's an ECP, so that can go as bid/proposal work against the existing contract. For the 'information' that is being requested for another system, I'm not sure exactly what will come of it (as in New Contract, CLIN, Delivery Order or nothing). Typically, we get a request for proposal, not a request for information. My suspicion is that it will end up being an ECP, but what if they change their mind and don't go through with it? At this point, it seemed more like a Business Development activity than an actual technical / contractual activity. But, perhaps I'm wrong.

Where is that lne between support of the contract and working towards additional work? And is working towards that additional work (on the same contract) just OH or BD?

Thanks,

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Your post is a babble. If what you want to know is the distinction between a direct cost of a contract and an indirect cost, see FAR 31.202 and 31.203.

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Where do we draw the line between what is Business Development and what is Overhead when it comes to potential new work.

Where is that lne between support of the contract and working towards additional work? And is working towards that additional work (on the same contract) just OH or BD?

Thanks,

Hi marcfgov,

B&P (what I believe you are calling "Business Development") is defined and discussed at the cost principle 31.205-18. Loosely paraphrased, B&P is defined as proposal preparation activities that are not required by a contract, grant, or cooperative agreement. If proposal preparation efforts ARE required by a contract (such as an ECP or definitization of a UCA), then those efforts are direct costs of the contract that requires them and are NOT B&P. Generally speaking, "required by" or "required in the performance of" is the test for determining whether the costs should be charged as direct contract costs, or as B&P.

CAS 402 requires that, generally speaking, the same costs in similar circumstances must be treated consistently as either direct or indirect costs. However, CAS 402, Interpretation No. 1 permits proposal preparation efforts required to bid on follow-on contract work (such as follow-on production contracts) to be bid as direct costs because circumstances are deemed to be different than other "business development" efforts.

Hope this helps.

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Be careful. Depending on the nature of the activity for which costs were incurred, "business development" cost might be bid and proposal costs, but it also might be selling costs or independent research and development costs or manufacturing and production engineering costs or research and development costs.

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Be careful. Depending on the nature of the activity for which costs were incurred, "business development" cost might be bid and proposal costs, but it also might be selling costs or independent research and development costs or manufacturing and production engineering costs or research and development costs.

Vern, you are absolutely correct. "Business development" is an ambiguous phrase. I was responding more to the description of the situation than to the exact words used, because I don't believe marcfgov had a deep understanding of FAR definitions.

To marcfgov, not all business development costs are B&P. You can incur direct selling expenses unrelated to a particular proposal that might be treated differently than your normal proposal preparation costs.

H2H

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Thank you gang!

I know it was a little unclear "babble", so to speak!, but you got me focused!

I have a program manager on-site, the customer asked him a question not specifically related to the current cost objective, a little out of the scope, but in the same area (program for one system vs another system). The answer took him considerably longer than he anticipated (20hours) and he wanted to know where to charge his time. From my perspective, PM overhead, he didn't want to charge his contract and change a bid & proposal charge number (not really potential new work). He just needs to be careful on what tasks he takes up that are not on the statement of work. A little scope creep is OK, a lot (on a FFP) eats into the margin.

Thanks again.

Best Regards,

Mark

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The work was directed by the Customer, why would you charge this to your overhead? I'd RFC the 20 hours and tell your PM not to start projects (or answer questions) out of scope without prior approval.

I would also inquire into what was done in those 20 hours and ask if the PM provided written interpretation or clarification of some kind to the Customer for a few reasons: 1.) I'd use it to justify my RFC and 2.) I'd like to review it to see if there is any liability assumed by answering the Customer's question.

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If the work was out of scope, then it could not have been "directed" (actually, I read "asked"). It was unauthorized. How do you charge it to the contract?

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If the work was out of scope, then it could not have been "directed" (actually, I read "asked"). It was unauthorized. How do you charge it to the contract?

Good point, sounds like it's going to go to overhead.

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Good point, sounds like it's going to go to overhead.

Actually, no. At least, it's not going to _allowable_ overhead. You're not going to want the other customers to pay for that work, which clearly benefited only that one customer.

Best answer is to charge it to the FFP contract as unauthorized work. Even if it was a cost-reimbursable contract, you would still want to charge it to the contract -- but it would not be an allowable, reimbursable cost because, as Vern noted, it was unauthorized and in any case not required in the performance of the contract. The contractor "eats" the burdened cost of the 20 labor hours in any possible scenario I can think of.

H2H

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Every time I ask a question here, I realize that what I don't know is encyclopedic! How do you know all this stuff!

In any case, thank you all for your insight and taking time to answer.

We'll eat the burdended costs. Charge it to a nonbillable, unallowable charge number against the profit on this contract. I'll talk to the PM's an make sure that we discuss the issues that are brought up here.

Thanks again,

Mark

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If the proposal preparation is being charged direct to the contract how much fee should be applied to the costs?

Hi marcfgov,

B&P (what I believe you are calling "Business Development") is defined and discussed at the cost principle 31.205-18. Loosely paraphrased, B&P is defined as proposal preparation activities that are not required by a contract, grant, or cooperative agreement. If proposal preparation efforts ARE required by a contract (such as an ECP or definitization of a UCA), then those efforts are direct costs of the contract that requires them and are NOT B&P. Generally speaking, "required by" or "required in the performance of" is the test for determining whether the costs should be charged as direct contract costs, or as B&P.

CAS 402 requires that, generally speaking, the same costs in similar circumstances must be treated consistently as either direct or indirect costs. However, CAS 402, Interpretation No. 1 permits proposal preparation efforts required to bid on follow-on contract work (such as follow-on production contracts) to be bid as direct costs because circumstances are deemed to be different than other "business development" efforts.

Hope this helps.

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Noob CO,

If proposal prep is being charged direct to the contract, I trust that proposal preparation is an express requirement of an existing contract. Consider my earlier post that didn't seem to get much traction. The fee associated with that proposal preparation was either explicitly or implicitly established at the time of requirement for the proposal was imposed.

(I'm not trying to be a broken record or to pick a fight, I'm curious how those that do regularly pay proposal prep in the absence of a literal requirement of an existing requirement justify it under the rules.)

Of course, if you're initially negotiating that requirement for a future proposal, I've been, as usual, no help at all. However, when the same question was posed on "Ask a Professor," the response wasn't much more helpful. Should you run weighted guidelines separately for the proposal prep, or should it be the same profit rate as for the primary effort? If you run it separately, how do you assess risk? What is the most appropriate contract type? All fair questions. I just hope that, where the proposal is not required by the terms of a standard clause, the question is preceded with, "Would this be better handled as an indirect charge?"

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In my company anyone working at the PM level, or any level that allows them to estimate pricing, is salaried, and time spent pricing additional or modified in-scope performance doesn't add to contract cost. If the undertaking is complex enough to require back office pricing support or review, that support is built into the G&A rate.

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In my company anyone working at the PM level, or any level that allows them to estimate pricing, is salaried, and time spent pricing additional or modified in-scope performance doesn't add to contract cost. If the undertaking is complex enough to require back office pricing support or review, that support is built into the G&A rate.

Hi Heretalearn!

I'm sorry, but I can't agree with your point(s) above, because I think your logic is flawed. Using your logic, no contract would ever have any costs if the personnel were salaried, because the company already incurs salary costs.

In fact, salary costs are distributed based on hours recorded by the employee. Employees typically work a number of tasks, from executing projects to attending training, to filling out annual performance reviews, to working on new business proposals. The cost of each of those tasks is calculated by first distributing salary based on hours incurred, and then burdening the distributed labor costs in accorance with the contractor's standard practices.

Now if you had a situation where no employee ever charged direct to a contract, and thus you never had any direct labor costs whatsoever, then you point(s) would have some validity. But I don't know of any contractor where that is the case; indeed, the majority look to make as many folks direct-charging as possible.

In a related note, "back office support" may or may not be built into the G&A rate, depending on which employees charge direct and which are solely indirect. Note that there is a fundamental difference between pricing REAs pursuant to an existing contract's Changes clause, and pricing new business proposals in pursuit of new contracts.

Hope this helps.

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Many thanks for your observations.

I apologize that I wasn't clear. I wasn't suggesting that our clients wouldn't be charged directly for salaried direct labor hours, but rather that since the burdened annual salary, though spread across a finite quantity of annual hours, doesn't increase even if the hours worked increase (the nature of "salary" as opposed to "wages"), increased hours don't result in increased cost. I also didn't mean to imply that this is the best or the only way to handle "additional" hours worked by salaried employees.

Generally speaking, in our accounting system administrative support costs which are allocated to one specified contract only are overhead expenses. Support costs which share multiple costs objectives are G&A expenses. I'm not intimately familiar with our disclosure statement, but I think our G&A expense is always an indirect cost whereas OH is sometimes charged directly, depending on contract requirements. I suppose that how another company would address these costs would depend on their disclosure statements.

Anyway, my probably oblique point, right or wrong, was that if it is a salaried employee who expends "unprogrammed" time fulfilling a client's request, it's possible that the contractor's cost of performance isn't necessarily increased commensurately, and nobody has to "eat" the cost.

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Many thanks for your observations.

I apologize that I wasn't clear. I wasn't suggesting that our clients wouldn't be charged directly for salaried direct labor hours, but rather that since the burdened annual salary, though spread across a finite quantity of annual hours, doesn't increase even if the hours worked increase (the nature of "salary" as opposed to "wages"), increased hours don't result in increased cost. I also didn't mean to imply that this is the best or the only way to handle "additional" hours worked by salaried employees.

Generally speaking, in our accounting system administrative support costs which are allocated to one specified contract only are overhead expenses. Support costs which share multiple costs objectives are G&A expenses. I'm not intimately familiar with our disclosure statement, but I think our G&A expense is always an indirect cost whereas OH is sometimes charged directly, depending on contract requirements. I suppose that how another company would address these costs would depend on their disclosure statements.

Anyway, my probably oblique point, right or wrong, was that if it is a salaried employee who expends "unprogrammed" time fulfilling a client's request, it's possible that the contractor's cost of performance isn't necessarily increased commensurately, and nobody has to "eat" the cost.

I'm not going to debate with you. But I will note that your response raises further problems, including potential issues with cost allocability.

I don't know if you're technical, contracts, accounting, or whatever. I don't know if your company is a DOD contractor or GSA contractor or Part 12 contractor. But it seems to me that (a) your understanding of the accounting used by your company is flawed, or (B) your company is skating on thin ice if it is subject to FAR Part 31 requirements.

If you do have a strong grasp of your company's accounting practices, and you have accurately recited them here, and your company is required to comply with FAR Part 31, then I urge you to find a really strong government cost accountant to evaluate your practices in light of your contractual requirements.

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Here_2_help, for the benefit of a cost principles layman, would you be willing to elaborate? She made a lot of statements about what she is doing, and I would like to better understand your comment. If I'm understanding, Heretalearn's company may not be allocating salary costs in reasonable proportion to the benefits received, contrary to FAR 31.201-4. Is that the heart of your concern?

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If the proposal preparation is being charged direct to the contract how much fee should be applied to the costs?

Noob, please understand the difference between the Contractor charging a cost to a contract (in this case a FFP contract) and the cost being considered compensable. The discussion concerns a request by a government PM for information outside the scope of the contract, which the Contractor's on-site PM voluntarily fulfilled, but ended up spending 20 hours of effort.

The basic discussion here concerns how the PM should charge its time within the firm's accounting system.

In this case, it appears that the customer wouldn't be charged for the out-of-scope cost (the Contractor won't request an equitable adjustment), because it isn't allocable to the authorized scope of work for the contract and it was requested, not directed.

As another example, assume that the Government had a new, out of scope requirement that it had approval to add to one or more existing contracts, using an exception from full and open competition in FAR Part 6.

Depending upon the circumstances, we'd might ask one firm for a proposal, to which it could voluntarily agree to prepare and provide the proposal for the new, negotiated work or decline. The work would probably be added to the contract for administrative convenience but is not a "change", because the Government could not direct it under the Changes clause.

Another option might be a compete the new work among a few firms with existing contracts, perhaps to add to their existing contracts. The Government could ask for competitive proposals and the firms would have the option of competing or not.

You wouldn't allow the firm or firms to directly charge the Government for their proposal prep costs against their existing contracts would you?

Here, the discussion concerns how the Contractor should charge its cost for the PM's efforts within its accounting system. I think that there was a consensus here that the Government wouldn't be charged the cost for the PM's 20 hour effort. Does that make it clearer to you?

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A company pays an employee a salary. In order to stay in business the company must recover that cosf from its customers. It does so by allocating the cost to them on the basis of some causal-beneficial relationship. The time spent working on a customer's contract is allocated to that contract. If the cost is not directly allocable to any particular customer, it is allocated to overhead. It is not a matter of incurring additional cost, but a matter of recovering the cost of the salary on the basis of sound cost accounting principles. I think that is what here_2_help is saying.

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Here_2_help, for the benefit of a cost principles layman, would you be willing to elaborate? She made a lot of statements about what she is doing, and I would like to better understand your comment. If I'm understanding, Heretalearn's company may not be allocating salary costs in reasonable proportion to the benefits received, contrary to FAR 31.201-4. Is that the heart of your concern?

Jacques,

Between FAR and CAS, there are fairly specific definitions of what is a direct cost, what is "overhead" and what is "G&A expense". You correctly cited to 31.201-4 for the general allocability requirements. 31.201-4(a) establishes the basis for charging costs directly to a contract, 31.204(B) establishes the class of indirect costs commonly known as "overhead", and 31.204© defines what is commonly known as "G&A expense."

In addition, 31.203 discusses indirect costs. Also see the definition of indirect cost pools at 31.001.

Essentially, an indirect cost benefits more than one "cost objective" or "final cost objective" in a cost accounting system. If any cost benefits only one specific final cost objective, the bias is that it should be a direct cost. (There is a series of not-so-great cases on this issue, including Caldera v. Northrop Worldwide Aircraft Svcs, 192 F.3d 962 (Fed.Cir. 1999) and Boeing North American (ASBCA No. 49994, 283 F.3d 1320 (Fed. Cir. 2002), 298 F.3d 1274 (Fed. Cir. 2002))

If any cost benefits more than one final cost objective or an intermediate cost objective then the bias is that it is an indirect cost. Only those indirect costs that benefit the business (or segment) as a whole are properly classified as G&A expenses.

The posts by heretalearn indicated to me some confusion on those concepts.

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The posts by heretalearn indicated to me some confusion on those concepts.

My confusion was actually about the question being asked. Until some of the later posts I though the discussion was about charging the client, not charging the time. Sorry. I'll sit back and absorb more before trying to stick my two cents in again. Mr. Edwards' last post is, as always, as lucid, logical and I'm sure accurate a description as can be had.

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