Company wants to change indirect rates just for our contracts and not company wide

[lacylu]

Hello,

I need anyones thoughts on the below...The story is too long , I will attempt to abbreviate

Due to financial issues my prime ( small business) who initially bid with G&A rate of 11% now wants to change thier subk billing rate to 0% ( to use the subs as a pass thru) the issue is : when I asked was it a corporate wide change they just say they can apply it to our contracts only not the other contracts they have with other agencies.... that doesn't seem right? any thoughts

They claim they are trying to help us by reducing the G&A rate... their subs have agreed to reduce their T&M rates by 3%

[joel hoffman]

Hello,

I need anyones thoughts on the below...The story is too long , I will attempt to abbreviate

Due to financial issues my prime ( small business) who initially bid with G&A rate of 11% now wants to change thier subk billing rate to 0% ( to use the subs as a pass thru) the issue is : when I asked was it a corporate wide change they just say they can apply it to our contracts only not the other contracts they have with other agencies.... that doesn't seem right? any thoughts

They claim they are trying to help us by reducing the G&A rate... their subs have agreed to reduce their T&M rates by 3%

Why is it a problem? First of all, it is a myth that companies would charge the same rate across the board. For one thing, there are perfectly legal elements of cost that either not allowable for a certain federal contract or are not allocable to a certain federal contract that may be perfectly legitimate to charge other commercial contracts due to various FAR restrictions or types of contracts.

And why can't a contractor decide to lower the rate it charges on a contract as a business decision?

And what was the basis for the original rate anyway?

[August]

Is it a cost-reimbursable type contract?

[joel hoffman]

Is it a cost-reimbursable type contract?

August, does it matter with respect to lacylu's question? What if this is a FFP contract and modifications are being priced or the contractor is willing or offering to renegotiate down option prices, citing a willingness to lower its overhead rates, pass through or subs' rates?

Is lacylu is wondering if the contractor must "overcharge" other contracts, to make up for the "undercharging" on the instant contract? There would be no legitimate accounting basis to raise rates charged on other contracts, to make up the difference, if the contract is being negotiated and the rates have to be substantiated. But, of course, the firm can set rates on competitively bid contracts as market conditions allow.

[August]

If the contractor is offering a billing rate rather than a final rate on a cost-reimbursable contract, it wouldn't have any impact on the actual cost to the government in the end would it?

[joel hoffman]

If the contractor is offering a billing rate rather than a final rate on a cost-reimbursable contract, it wouldn't have any impact on the actual cost to the government in the end would it?

Ahh, now I understand your point.

If this is a billing rate, subject to adjustment for actuals and/or audited rates, then my above posts do not address that situation.

[lacylu]

Ahh, now I understand your point.

If this is a billing rate, subject to adjustment for actuals and/or audited rates, then my above posts do not address that situation.

So, a comapny can reduce the g&a rate for once government contract and not apply that to other contracts,

It is a CPFF contract, we are two years into the contract , to go from a 11% G&A rate to 0% to use the subs as a pass thru just seems funny

What about when there is time to do an audit for close-out, seems like it would raise questions.

[joel hoffman]

So, a comapny can reduce the g&a rate for once government contract and not apply that to other contracts,

It is a CPFF contract, we are two years into the contract , to go from a 11% G&A rate to 0% to use the subs as a pass thru just seems funny

What about when there is time to do an audit for close-out, seems like it would raise questions.

Is this a billing rate or a formal mod to the contract?

[joel hoffman]

Is this a billing rate or a formal mod to the contract?

Forgive me if I sound harsh but you are dribbling out information. Is this something that the contractor has formally proposed or is it for billing purposes? You mentioned that there are "financial reasons" for this action but didn't explain what they are.

If this is a formal change to entitlement, then the contract needs to be modified to reflect this. There should never be a question later as to what the contractor is due or will ask for.

I would have a big problem if the contractor just wants to postpone the same entitlement to some later date.

There could be some motive to lower the billing rate and perform more work within the current funds limitation, then come back asking for or expecting more funding once everything is audited - I don't know from the information provided.

You also mentioned the contractor proposing to be a pass through for subs. What did you mean by that?

[lacylu]

Forgive me if I sound harsh but you are dribbling out information. Is this something that the contractor has formally proposed or is it for billing purposes? You mentioned that there are "financial reasons" for this action but didn't explain what they are.

If this is a formal change to entitlement, then the contract needs to be modified to reflect this. There should never be a question later as to what the contractor is due or will ask for.

I would have a big problem if the contractor just wants to postpone the same entitlement to some later date.

There could be some motive to lower the billing rate and perform more work within the current funds limitation, then come back asking for or expecting more funding once everything is audited - I don't know from the information provided.

You also mentioned the contractor proposing to be a pass through for subs. What did you mean by that?

well, I apologize for not being clear... I will attempt to answer your questions.

the contractor is proposing this change to accomodate their books. They are not getting the work as anticipated so it looks like they are not meeting their internal numbers; thats the financial reason

THey do want to reflect this in a mod

The Pass thru term is something they do internally in Costpoint in order to deviate from their proposed rate of 11%.

Thats my question, how are they allowed to reduce the rate like that...If DCAA or an ACO has negotiated rates with a company how can they deviate from that.

[joel hoffman]

well, I apologize for not being clear... I will attempt to answer your questions.

the contractor is proposing this change to accomodate their books. They are not getting the work as anticipated so it looks like they are not meeting their internal numbers; thats the financial reason

THey do want to reflect this in a mod

The Pass thru term is something they do internally in Costpoint in order to deviate from their proposed rate of 11%.

Thats my question, how are they allowed to reduce the rate like that...If DCAA or an ACO has negotiated rates with a company how can they deviate from that.

Thanks for the additional information, lacylu. I'm still assuming that this is an action that will reduce the ultimate cost to the Government. If so, why not? The firm appears to be willing change to a "pass through" in a way in their books that reduces the markup and which is consistent with their accounting system software for such arrangements. It shouldn't pose any problems that I can see. Why not ask DCAA?

[lacylu]

Yes, I will ask DCAA, my issues is that is it really consistent with their approved accounting structure ,they are doing some manual change, I guess it seems to good to be true. Thanks alot for hanging in there with my cryptic messages. I will contact DCAA

[here_2_help]

Hi all,

Sorry to come late to the party.

Anyway, my take on this is that the small business prime contractor wants to stop burdening its subcontract costs with G&A for this particular contract and no others. They can certainly do that and, as Joel pointed out, the result will be to reduce the amount of G&A charged to the government customer--so long as the overall G&A rate does not increase.

Mathematically, the G&A expense pool is the numerator and the G&A allocation base is the denominator. If you reduce the denominator by eliminating subcontract dollars--if only for this contract--then the overall rate goes up. If I were the KO I would be wary of the current 11% rate going up to, say, 15% as a result of the change.

Also, the rationale makes no sense to me, unless the prime is saying that its allocation of G&A to subcontractors makes it noncompetitive in the marketplace. That raises the question of excessive pass-through costs, of course. I hope the KO has a nice file on the percentage of subcontracting dollars being awarded and justification from the contractor on why it adds value to the overall contract effort.

Finally, let me say that, as a small business, the prime contractor is exempt from CAS. All the CAS stuff about consistency and appropriate G&A allocation bases is irrelevant to this situation. The only regulatory guidance here is FAR, applicable agency supplements, and whatever the contract says.

Hope this helps.

[joel hoffman]

Hi all,

Sorry to come late to the party.

Anyway, my take on this is that the small business prime contractor wants to stop burdening its subcontract costs with G&A for this particular contract and no others. They can certainly do that and, as Joel pointed out, the result will be to reduce the amount of G&A charged to the government customer--so long as the overall G&A rate does not increase.

Mathematically, the G&A expense pool is the numerator and the G&A allocation base is the denominator. If you reduce the denominator by eliminating subcontract dollars--if only for this contract--then the overall rate goes up. If I were the KO I would be wary of the current 11% rate going up to, say, 15% as a result of the change.

Also, the rationale makes no sense to me, unless the prime is saying that its allocation of G&A to subcontractors makes it noncompetitive in the marketplace. That raises the question of excessive pass-through costs, of course. I hope the KO has a nice file on the percentage of subcontracting dollars being awarded and justification from the contractor on why it adds value to the overall contract effort.

Finally, let me say that, as a small business, the prime contractor is exempt from CAS. All the CAS stuff about consistency and appropriate G&A allocation bases is irrelevant to this situation. The only regulatory guidance here is FAR, applicable agency supplements, and whatever the contract says.

Hope this helps.

Thanks, "here". It may be wise to check on the effect of this change upon the G&A rate and its affect on this and other contracts. I hadn't thought of that. If the contract is under audit, then I'd recommend that you check with the auditor.