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Interorganizational Transfers


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#1 Rob

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Posted 26 January 2012 - 09:01 AM

This question is regard to the application of FAR Cost principle 31.205-26 Material Costs on an FFP contract. The CO has cited that an affiliate (subcontractor) under common control proposed efforts to the prime contractor (sister company) must be at cost. The prime contract was an award based on an IFB response and is not subject to the FAR Cost principles. The prime contract does contain both 52.215-13 Subcontractor Certified Cost or Pricing Data?Modifications, and 52.215-21 Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data?Modifications. However, the affiliates proposed price is less than the Simplified Acquisition threshold and the prime's proposed price including the affiliates proposed price is less than $700,000.

Question 1 - In the negotiation of this UCA is the CO correct (what is their justification) in citing 31.205-26(e) as a basis for arbitrarily reducing the affiliates proposed by price by 10% for disallowance of profit?

Further background for Question 2 - There is an established practice recognized by the CO, of the affiliate to price their commercial efforts at other than cost, thus meeting the first test under 31.205-26(e), however under this circumstance the UCA did not warrant competition and thus the CO asserts that "adequate price competition" did not occur in accordance with FAR 15.403-1. Because the second test under 31.205-26(e) was not met, the affiliates proposed efforts must be at the affiliates cost so goes the logic.

Question 2 - If we are stuck with having to comply with 31.205-26, could we not look to FAR 15.403-1©(1)(iii) to demonstrate "adequate price competition?"

Thanks in advance for your views here

#2 Vern Edwards

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Posted 26 January 2012 - 09:22 AM

The cost principles are in FAR Part 31. See FAR 31.102:

The applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs. However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.

That passage is usually implemented by including in the contract a clause such as the following, which is from the DOD FAR Supplement:

PRICING OF CONTRACT MODIFICATIONS (DEC 1991)

When costs are a factor in any price adjustment under this contract, the contract cost principles and procedures in FAR Part 31 and DFARS Part 231, in effect on the date of this contract, apply.

As stated in FAR 31.102, the cost principles establish the basis for the government's negotiating position. The parties reach agreement on the bottom line, not on individual costs. The CO has staked out his or her position on profit for the subcontractor. Acknowledge the position, but do not agree to it. Focus on agreement at the bottom line for the price adjustment.

FAR 15.403-1 has nothing to do with this.

I had to edit this a couple of times to correct stupid mistakes. Sorry if that caused any confusion.

#3 TAP

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Posted 26 January 2012 - 09:35 AM

Sure, as a negotiating tactic the CO is correct to cite 31.205-26(e) or anything else for that matter as a basis for wanting to reduce the affiliates proposed by price by 10% for disallowance of profit. But technically speaking, no, the cost principles really don't apply. You only need to come to agreement on a fair and reasonable price overall and not necessarily on each element of cost.

#4 Vern Edwards

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Posted 26 January 2012 - 10:39 AM

The cost principles apply only in the sense that the CO is supposed to take them into consideration when developing a prenegotiation position. It is especially important that when talking to the CO you neither agree nor disagree with the CO's position. Just acknowledge that you understand his or her position. If pressed, cite FAR 31.102 and say that while you are willing to listen to the CO you are negotiating at the bottom line.

#5 Rob

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Posted 26 January 2012 - 10:50 AM

The cost principles apply only in the sense that the CO is supposed to take them into consideration when developing a prenegotiation position. It is especially important that when talking to the CO you neither agree nor disagree with the CO's position. Just acknowledge that you understand his or her position. If pressed, cite FAR 31.102 and say that while you are willing to listen to the CO you are negotiating at the bottom line.

Outstanding and thanks for the insights...




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