Extended Overhead Costs for subcontractors

[Velhammer]

I have a FPAF construction contract where performance is going to be delayed by the Gov't. The prime contractor uses the percentage method to recover field overhead costs, while some of the subcontractors use the daily rate method. FAR 31.105(d)(3) requires consistency with established accounting practices in treating field overhead costs as direct or indirect. 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.

[joel hoffman]

I have a FPAF construction contract where performance is going to be delayed by the Gov't. The prime contractor uses the percentage method to recover field overhead costs, while some of the subcontractors use the daily rate method. FAR 31.105(d)(3) requires consistency with established accounting practices in treating field overhead costs as direct or indirect. 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.

Vel, I don't see where this situation would violate the consistency rules, because subcontractor costs are treated as a direct cost to the prime, regardless of how various subs account for their fixed (time related) overhead costs. Then, each firm should treat their costs consistently.

I know that there was a (court?) decision a few years ago which, in effect, ruled that a contractor had to treat field overhead consistently, whether or not a extended overhead was involved, but I always thought that the Court missed the mark on that one. That decision is inconsistent with the general rule that the impact on the cost of the change or delay to the contractor forms the basis of the price or equitable price adjustment.

For instance, I don't agree that a fixed percentage is always applicable any more than a fixed daily rate is always applicable, regardless of whether or not there is a time extension involved. To me, one can "fairly" easily classify most field office costs as to the nature of the situation. There are variable costs (related to amount of work), fixed costs (time related) or semi-variable costs (some combination thereof). It may take some judgement (oh Gee - having to analyze something) and perhaps some give and take on some points (Geeze, do we have to negotiate?). But I never got stuck on settling field overhead issues to the point where the solution devised by the Court would be necessary or even make sense to me. In classifying the components of field overhead, we can be in harmony with the consistency rule.

The case I'm referring to involved Caddell Construction Company and Kansas City District of the USACE, but I will have to look up the citation and get back to you.

Regardless of the method used to calculate field overhead, I think that the answer to your question is that the sub can calculate one way and the prime can use another method, because we are dealing with the individual accounting systems of each firm. Ultimately, the sub cost is treated as a direct project cost to the prime contractor, right?

[Velhammer]

Hi Joel. Thanks for the response. I'm familiar with the case law on consistency for prime contractors [ASBCA No 40750 Appeal of M.A. Mortenson, Co. (Oct 16, 1996); and ASBCA No 49333 Appeal of Caddell Construction Co (Dec 20, 1999)]. I'll send you a message because I don't want to reveal too much info.

[joel hoffman]

Hi Joel. Thanks for the response. I'm familiar with the case law on consistency for prime contractors [ASBCA No 40750 Appeal of M.A. Mortenson, Co. (Oct 16, 1996); and ASBCA No 49333 Appeal of Caddell Construction Co (Dec 20, 1999)]. I'll send you a message because I don't want to reveal too much info.

Vel, Actually, I was referring yesterday to the Mortenson Decision, wherein reconsideration by the ASBCA’s Senior Deciding Group went down an entirely new path. Thanks for providing the references so I could go back and refresh my memory. That decision essentially turned over long standing practice of many contractors of charging a flat percentage for changes without time extensions and charging a daily rate for those involving time extensions. There is a good summary at http://www.constructioninst.org/files/pdf/...3newsletter.pdf. The Caddell decision was a later decision that referred to the Mortenson precedent.

However, your original question simply related to whether the prime and subs have to charge using the same method and I said no. Each firm would charge using its methodology, which should represent their delay costs.

[joel hoffman]

Vel, with regard to the Mortensen and Caddell decisions, they were fairly controversial. But I hadn't been a fan of allowing simple, fixed percentage for field overhead on non-time related changes anyway. They essentially represented the same thing as a daily rate, only expressed as a percentage. Contractors would seek and be paid the field overhead as a percentage of direct costs as though all those costs were variable, when most of them were fixed (time related). Then when there was a time extension, they would repackage the same thing and ask for them as a daily cost. So, the contractor was probably getting paid two different ways for the same type costs, regardless of whether or not additional cost was actually involved/incurred.

So, rather than allow a flat proposed percentage markup, I would ask the Contractor to identify its FOH costs. Then I'd look at those costs that were variable and we'd adjust the percentage on a case by case basis,. Sometimes we would agree to such a percentage to use on all routine, non-time related changes. If the Contractor could show other field office impacts such as some fixed cost affected by the change , we'd also allow that (e.g., a change required continued employment of staff that otherwise would have been released to other contracts).

I dont like the Senior Deciding Groups approach because I think that the Senior Board got mixed up between contractors' cost accounting practices and their billing practices, but I don't know. Seems to me that all jobsite "indirect costs" are usually directly charged to the project. But they generally aren't charged to the various direct WBS type activities, such as "footings", "walls", superstructure", earthwork" or the like that many construction contractors track internally for earned value and estimating purposes. They are tracked in accounts such as "general conditions", although I belioeve that one can usually look into the accounts and come up with good estimates of variable and fixed type costs. Then, one must really analyze the behavior of field overhead costs to understand what is reasonable to pay in modifications. I don't know - it just didn't seem to be that hard to me. We were even successful at using similar methods on some huge construction contracts. I think that the ASBCA saw where the Contractor's were charging essentially the same costs two different ways rather than using the system that others and I were using. There was no consistency across our overall organization. But, back in the late 80's to early 90's, I taught a cost analysis course that used the method I described above. I never saw a dispute over its use in the Districts I worked in.