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Contractor annually submits proposed rates to DCAA under CPAF (for upcoming FY) and DCAA subsequently approves the FY indirect rates as provisional. Contractor then bills provisional rates for the relevant period (FY) and subsequently submits ICE for that same period (following close out of the FY) to DCAA to establish Interim rates (for that same relevant period). Contractor then invoices the difference between provisional and interim for prior year as "catch up" for incurred costs. Government rejects "catch up" invoice stating that contractor may only bill provisional rates until contract close out when it can then invoice at Final rates once determined.

For small businesses this amounts to true costs being "carried" for many years (for as much as seven if it is a 5-year contract and then DCAA takes up to two years to complete close-out audit). Contractor believes the FAR specifically allows contractor to invoice interim rates for prior years as the interim rates are determined via their accepted ICE submission and acknowledges that the Final cost determination does not occur until contract completion audit.

What specific authority does the government have to either allow payment of the interim costs or to reject them until contract close following DCAA audit and final costs determination? Can we make the contractor wait until contract close out audit and final costs determination on a multi-year contract for what may be many hundreds of thousands of dollars of actual costs not yet reimbursed (over many contract years)? Also, must the government allow a cost-of-money addition where the "carry" costs could amount to tens of thousands in contractor lost cost of money? Finally, are there publically available cases that detail the approach logic?

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Guest Vern Edwards

See FAR 42.704( c):

Once established, billing rates may be prospectively or retroactively revised by mutual agreement of the contracting officer (or cognizant Federal agency official) or auditor and the contractor at either party?s request, to prevent substantial overpayment or underpayment. When agreement cannot be reached, the billing rates may be unilaterally determined by the contracting officer (or cognizant Federal agency official).

Note: That paragraph applies to billing rates. You need not wait until final rates are established. See also, DCAA Contract Audit Manual at 6-705.1a:

(Before final rates are established, the billing rates may be prospectively or retroactively revised by mutual agreement, at either the Government?s or contractor?s request, to prevent substantial over- payment or underpayment.)

Rate adjustments are subject to the cost principles in FAR Subpart 31.2.

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AF - Does the Govt in your example ahve same issue when the big guys do this? Because there's a least on big guy out there whose latest set of final rates is currently from 2002. When they get their 2003 rates and submit the invoice, I'm hoping it's a credit because otherwise the hunt is on for current year funds to pay it.

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AF - Does the Govt in your example ahve same issue when the big guys do this? Because there's a least on big guy out there whose latest set of final rates is currently from 2002. When they get their 2003 rates and submit the invoice, I'm hoping it's a credit because otherwise the hunt is on for current year funds to pay it.

Woops - My understanding is that the government (in this specific case) "has never heard of" the idea of billing any costs other than those based on provisional rates that were determined at (or before) the beginning of any given contract year up until final contract close out when costs are reconciled using final rates... Frankly, I'm not sure if this is a lack of experience or intentional desire to cause contractors to bear the burden of any deviations throughout the life of the contract and final audit period... Certainly I'd hope that whatever policy they choose to adopt that they exercise it equally among the various contractors (large or small)...

It's worth noting that while it shouldn't be a material fact in determining how to proceed here, withholding the reimbursement of these costs wouldn't likely cause an extreme financial distress to the LB but certainly could to an SB depending on the size of the contract, rate deviations, and proportion of their revenue that the contract represents... I could see it even causing them to close their doors altogether in some circumstances over my career...

BTW, I think I would prefer to work to find current year funds to pay the annual discrepancy amounts instead of trying to find 3-5 times (or more) that much all at once at closeout. Right?

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See FAR 42.704( c):

Note: That paragraph applies to billing rates. You need not wait until final rates are established. See also, DCAA Contract Audit Manual at 6-705.1a:

Rate adjustments are subject to the cost principles in FAR Subpart 31.2.

Vern - thanks for the feedback. For whatever reason the government (in this case) has chosen to read the applicable regulations to limit the exposure to only billings using initial provisional rates during each contract year and to never adjust them again until after contract close out and overall contract final rate determination. As I mentioned in my earlier post to Woops, this could be financially devasting to a small business who ends up forced to carry substantial costs year-over-year for a multi-year CP contract. We believe the regs were specifically written to allow for such cases where the contractor can bill for prior years when their ICE is accepted (interim rates) as this represents actual (pre-audit) rates and the provisional applications were merely budgeted expectations.

What would be very useful is reference to specific cases where a contractor fought to get paid their costs based on rates from their annual ICE submissions instead of being forced to carry these costs for the life of the contract and through a DCAA audit period to determine contract overall final rates. Any suggestions?

Thanks

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Guest Vern Edwards

No suggestions. Why do you need a case? Your contract is CPAF. It should contain the clause at FAR 52.216-7, Allowable Cost and Payment. See paragraph (e):

(e) Billing rates. Until final annual indirect cost rates areestablished for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor),

subject to adjustment when the final rates are established. These billing rates?

(1) Shall be the anticipated final rates; and

(2) May be prospectively or retroactively revised by mutual agreement, at either party?s request, to prevent substantial

overpayment or underpayment.

Submit a request for retroactive revision of the rates. If the contracting officer refuses, submit a claim seeking relief in the form of an adjustment. Demand a final decision. The CO cannot arbitrarily refuse to make an adjustment. He or she must give you a reasonable explanation for refusing to do so.

Don't fool around. Do it now. Don't complain about the government if you are not willing to exercise your contractual rights.

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No suggestions. Why do you need a case? Your contract is CPAF. It should contain the clause at FAR 52.216-7, Allowable Cost and Payment. See paragraph (e):

Submit a request for retroactive revision of the rates. If the contracting officer refuses, submit a claim seeking relief in the form of an adjustment. Demand a final decision. The CO cannot arbitrarily refuse to make an adjustment. He or she must give you a reasonable explanation for refusing to do so.

Don't fool around. Do it now. Don't complain about the government if you are not willing to exercise your contractual rights.

Thanks Vern - rest assured we're not complaining and just sitting around. We've had extensive conversations with the CO and their financial representation as well as solicited specific help from both DCAA and DCMA on many occassions on the subject but it seems to always fall back to the completely resistent customer financial management team.

I can provide many months of dialog between all of the parties to reflect a very aggressive attempt to simply recover actual costs on this CP contract (specifically, the delta between provisional and interim rates determination after the ICE submission). In fact, I have asked our CFO to summarize and excerpt them for potential use later. Bottom line is that as a small business we have to reach out to experts such as yourself to find out what our next recourse is for such critical things because on one hand the government reserves the right to approve (or reject) provisional rates prior to costs being incurred and then (in this case) also rejects our invoices following the much more accurate rates determination following the contract performance and accepted ICE submission. It's unclear what further options we have when we've pleaded with the CO and their finance team, as well as our cognizant DCAA representation and our cognizant DCMA representation (both of whom say that our interpretation is correct but fail to provide any guidance/feedback of that nature to the customer organization to get the bills paid). While surely there must be a better answer that doesn't cause our customer to dislike us for trying to get paid we feel that the government is the prosecutor, judge, and jury here and leaves us no recourse but to try to standby for many years to recover legitimate costs... That's the reason we're asking for cases/examples where contractors had to fight and eventually were paid for these much more accurate costs without having to wait for the contract to close and DCAA to do a final audit...

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P.S. If the amount of the adjustment will be $100,000 or less, demand a decision within 60 days.

I believe each year's adjustment is indeed less than that but am not certain. Once we understand what a "demand" looks like and how to do it (tactfully) I'd hope we can get paid much sooner than 60 days... I guess that begs the question of how we recoup the cost-of-money for these costs which could be many years in the "hold cycle" when it isn't currently a part of the contract...?

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Guest Vern Edwards
I believe each year's adjustment is indeed less than that but am not certain. Once we understand what a "demand" looks like and how to do it (tactfully) I'd hope we can get paid much sooner than 60 days... I guess that begs the question of how we recoup the cost-of-money for these costs which could be many years in the "hold cycle" when it isn't currently a part of the contract...?

In legal terms, a "demand" is merely a request based on right. A demand need not be vehement. Here is sample language:

Dear Contracting Officer:

Pursuant to the terms of the Allowable Cost and Payment clause of our contract, FAR 52.216-7, paragraph (e), we hereby request that you retroactively revise the indirect cost billing rates in effect from MM-DD-YYYY to MM-DD-YYYY in order to compensate for substantial underpayment during that time. We request that the rate be adjusted from ---% to ---%. We also request an immediate reimbursement to us of $ -------, which amount reflects the amount of underpayment during the period in which the standing rate was in effect.

We request that you make a final decision on this claim pursuant to the terms of the Disputes clause in our contract, FAR 52.233-1, paragraph (e). Since the amount of the claim is less that $100,000, we request that you make your final decision within 60 days of your receipt of this request.

Documentation is support of this claim is attached. If you have any questions, please contact XXXXXXXX at NNN-NNN-NNNN.

Sincerely, etc.

Keep it short, clear, and to the point. Send it by USPS certified mail, return receipt requested. If the CO does not respond or denies your claim, you can appeal to a board of contract appeals or the the Court of Federal Claims.

Instead of asking for payment of a sum certain, you can submit a nonmonetary claim asking only that the CO interpret the Allowable Cost and Payment clause as to your right to a retroactive adjustment prior to final indirect cost rate settlement, asking for a yes or no answer. State that you believe that you are entitled to a retroactive adjustment in order to prevent substantial underpayment.

I can't give legal advice, so if you are serious you should consult an attorney. My main point is this: A contract is an agreement between equals, but some contracting officers like to lord it over contractors. They sometimes will delay action, hoping that the contractor will just go away. That is not right and, in my opinion, contractors are too often reluctant to insist upon their rights and fair treatment. While I believe in good customer relations, I do not believe in screwing around when money is at stake, unless you are really rich and can afford to take the hit for the government's convenience. Contractors should insist upon their rights. A claim need not be stated in vehement or angry terms. That's not what "demand" means in the context of contractual relations. Say what you think you are entitled to and what you want and ask for a final decision to which you are entitled pursuant to clauses that the government wrote and insisted be inserted into your contract. If you make progress, you can always withdraw the claim and pursue negotiations.

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