Are cost-reimbursement contract types supposed to include "profit"? I read in the JAG Deskbook that the answer is no. It says that, for cost-reimbursement contract types, if it is just a cost contract, no award fee/incentive fee, then "The government pays the contractor's allowable costs plus a fee (often erroneously called profit) as prescribed in the contract.

What does that mean? If a contract is just a cost-reimbursement contract, no award fee/incentive fee, then it looks to me like only the "allowable costs" are allowed. And those allowable costs DO NOT include profit.

Can anybody explain this to make sense?

Profit is not a cost. Fee and profit are not the same thing. If you look at FAR Part 16, you will see the types of cost reimbursement contracts where the contractor is paid a fee. There, you will see one of the contract types discussed is a cost reimbursement contract. Under this contract type, the contractor receives no fee. See FAR 16.302.

To expand on this question: this question has come up for my folks in the past regarding other direct costs (ODCs). When we have seen ODCs in the past, like Travel Costs, someone always asks the question, do these ODCs turn this contract type into a Cost-Reimbursement Contract Type? I don't think they do.

When we have Travel Costs in a solicitation, there is a boilerplate narrative we use and other agencies use that says that the Travel Costs cannot include profit, that they are true ODCs. We cite to FAR 31.205-46, which talks about only reimbursing for "actual costs."

As ODCs are technically "cost-reimbursement" type of CLINs, this makes me believe that "profit" should not be allowed in cost-reimbursement contract types. But I want to make sure.

31.205-46 addresses costs only. Remember, profit and fee are not costs. Because they are not cosgts, they are not reimbursed to a contractor. Theoretically, they are amounts paid to contractors in addition to costs. See 15.404-4. There is no prohibition in the FAR against including ODCs in the computation of the amount of profit or fee, although it is a frequent practice of some contracting offices not to do so. This is a matter of negotiation.

With respect to your initial question, profit and fee are similar but there are some distinctions. Profit is the amount realized by a contractor after the costs of performance (both direct and indirect) are deducted from the amount to be paid under the terms of the contract.

On a fixed price contract, profit would be whats left over from contract proceeds after the contractor's costs are deducted.

A "fee" is often an amount negotiated or otherwise established in many types of cost reimbursement contracts separately from allowable costs. The fee is intended to cover costs that are not reimbursable (e.g., "unallowable" costs, "nonallocable" costs, costs in excess of established ceilings, etc.) plus an allowance for profit. In US Government contracting, there are various statutory limitations on some types of fees. An unallowable cost isn't necessarily improper or illegal - it just isnt allowable under the Government's cost rules and/or by statute. One example is interest paid on loans or various other types of finance charges. Another is certain types of advertising expenses. Theoretically, these would be paid out of fees. So what's left over if anything from the "fees" after subtracting unreimbursed costs would be "profit".

That's a pretty basic outline of profit vs. fee.

To complicate the concept of "fees", the business world often uses the term to mean the amount of a charge for various services. For example, companies often charge a "late fee" if a payment to that company is received after a payment deadline. These fees theoretically cover both expenses and profit, if any, after expenses. In the architect and engineering business world, the term "fee" generally means the total amount to be paid the firm for its professional services.

govt2310, don't they teach a lot of this stuff in Business classes in college and in the training for the Contracting career field and for other various acquisition career fields ?

govt2310, in FAR 16.3, you know, of course that there is such a thing as a cost reimbursement contract with no fee (cost contracts, cost sharing); There are also various incentive type cost reimbursement contracts that include incentive fees or other incentive arrangements to encourage effective or higher levels of performance and/or to discourage ineffective or poor performance.

There are also fixed-price contracts with various incentive type arrasngements. So a fee make take various forms. Sometimes firms will spend more to earn an incentive fee for reasons other than to maximize profit on the instant contract.

[T\his question has come up for my folks in the past regarding other direct costs (ODCs). When we have seen ODCs in the past, like Travel Costs, someone always asks the question, do these ODCs turn this contract type into a Cost-Reimbursement Contract Type? I don't think they do.

When we have Travel Costs in a solicitation, there is a boilerplate narrative we use and other agencies use that says that the Travel Costs cannot include profit, that they are true ODCs. We cite to FAR 31.205-46, which talks about only reimbursing for "actual costs."

As ODCs are technically "cost-reimbursement" type of CLINs, this makes me believe that "profit" should not be allowed in cost-reimbursement contract types. But I want to make sure.

That post is a perfect illustration of the confusion that exists concerning "other direct costs" (ODCs). ODC is are not a pricing arrangement. It is a category of costs. Once upon a time the Government used a form entitled SF 1411, "Contract Pricing Proposal Cover Sheet", which replaced earlier forms such as DD Form 633, and which was to be used by contractors as a cover sheet for submitting cost or pricing data and a "cost element breakdown". The instructions for submitting pricing proposals were in FAR 15.804-6, which categorized costs as follows:

Materials

Subcontracted items

Standard commercial items

Interdivisional transfers (at other than cost)

Raw material

Purchased parts

Interdivisional transfers at cost

Direct labor

Indirect costs

Other costs

Royalties

Facilities capital cost of money

In common parlance, "other costs" were referred to as "other direct costs" or ODCs, indicating that they were not indirect costs. Think of ODCs as miscellaneous direct costs.

SF 1411 is no longer in use, but the instructions, somewhat revised, are still around in FAR 15.408, Table 15-2, II.D. Other costs.

ODCs could be a fixed amount in fixed-price contracts or a reimbursable amount in cost-reimbursement contracts. Sometimes on a fixed-price contract an ODC like travel might be hard to estimate and the parties would agree to a cost-reimbursement line item for that ODC. Today, that has become a common fixture and some people think that ODCs by their nature are cost-reimbursable items, but that is not the case. ODC is just a cost breakdown category. If it's not materials, labor, or indirect cost it's ODC. Whether an ODC item is to be an amount included in a fixed-price or is to be reimbursable depends on the way the parties decide to handle it.

The inclusion of a cost-reimbursement line item for one or more ODCs in a contract that has fixed-price line items does not make the contract a cost-reimbursement contract. It makes the contract a combination of types, fixed-price and cost-reimbursement, and appropriate contract clauses should be applied to each line item. So the answer to the question "[D]o these ODCs turn this contract type into a Cost-Reimbursement Contract Type?" is no, they do not.

The use of "ODCs" in orders placed against GSA FSS/MAS contracts creates further confusion.

Confusion reigns supreme in government contracting, such as in the way some people use the word "narrative". But that's another story for another day.

Hmm. Let's say a solicitation is supposed to have a fixed-price contract type. It also has travel cost CLINs. The agency decides to make those ODC travel cost CLINs as cost-reimbursement CLINs. So now the solicitation's overall contract type is a "combination" of both some fixed-price CLINs and some cost-reimbursement CLINs.

Because of the ODC travel cost CLINs, according to Vern, the agency must also include in the solicitation the appropriate FAR clauses for cost-reimbursement contract type (see FAR 15.408(n); and it looks like this means including FAR clauses 52.232-20 or 52.232-22, also FAR 52.216-11, and also FAR 52.215-22, and FAR 52.215-23). Also, the agency would have to conduct a Cost Realism Analysis for these ODC travel cost CLINs.

Now, both FAR clause 52.215-22 and 52.215-23 address "Limitations on Pass-Through Charges." They both say that "excessive" pass-through charges are not allowed. Logically, then, it appears that NOT excessive pass-through charges, meaning reasonable pass-through charges, are possible and are "allowed." FAR 52.215-22©(2) appears to imply that it is possible for an offeror to have "profit/fee" on "work performed by a subcontractor." Then at FAR 52.215-23(d), it appears to say that "excessive pass-through charges" are possibly "allowable" on contracts that are "fixed-price contracts."

So, are the ODC travel cost CLINs in my hypothetical the same as the "pass-through charges" talked about in FAR 52.215-22 and -23? If so, would they be considered "reasonable" and "allowable"? Or would they be considered "excessive" and "not "allowable"?

1. Do you expect the total estimated cost of travel will exceed $150,000 (for civilian agencies) or $700,000 (for DOD)? If not, why are you going to include the provision at 52.215-22 and the clause at 52.215-23?

2. Are you going to allow fee on travel?

3. Are you going to allow the contractor to add indirect costs to travel?

4. Would you consider airlines, hotels, rental car companies, and restaurants to be subcontractors? Consider this last question carefully.

Excessive "pass through charge" as contemplated by the clauses focuses on layers of markups for direct/indirect handling cost and profits for work that is subcontracted one or two layers or more.

Reimbursible travel costs - in general - should not be marked up for profit, especially with layered/tiered markups. As Vern mentioned, the trend is to only provide for reimbursement of actual costs or for some type of per diem arrangement. Thus, there should be little or no pass through charges for travel costs.

EDIT - Vern posted the above while I was writing here. Good questions.

Reply to post #10:

1. No, I don't. However, I believe you are asking me this question b/c of what it says at FAR 15.408(n), which states that, for civilian agencies (yes, assume my hypo is about a civilian agency), the agency must include FAR clause 52.215-23, Limitations on Pass-Through Charges, in solicitations when: 1) the total estimated contract or order value exceeds the SAT, AND 2) the contemplated contract type is expected to be a cost reimbursement type. For my hypo, let's say the "total estimated contract" value DOES exceed the SAT, in fact, let's say the value is $50 million. So that is why the hypo says we are going to include FAR clauses 52.215-22 and 52.215-23.

2. No, we don't intend to allow "fee" on travel.

3. No, we don't intend to allow the KTR to add "indirect costs" to travel.

Do you intend to allow direct handling costs for processing travel arrangements, billing, etc?

Reply to post #13:

Hmm. I don't think so. That sounds like stuff that should be covered by overhead.

Reply to post #13:

Hmm. I don't think so. That sounds like stuff that should be covered by overhead.

Not necessarily. If you want to limit reimbursement to the travel costs alone, you should clearly state that.

I am assuming also that you meant that if that stuff is part of overhead and if overhead isn't allowed, then, no - you don't intend to allow handling costs for processing travel arrangements, billing, etc

So - no fee, no overhead or other indirect costs no direct handling costs will be allowed - Then, what "pass through charges" would be added under a travel reimbursement CLIN that would include subcontractor travel costs?

EDIT - No answer required. Please continue your conversation with Vern.

Reply to post #10:

1. No, I don't. However, I believe you are asking me this question b/c of what it says at FAR 15.408(n), which states that, for civilian agencies (yes, assume my hypo is about a civilian agency), the agency must include FAR clause 52.215-23, Limitations on Pass-Through Charges, in solicitations when: 1) the total estimated contract or order value exceeds the SAT, AND 2) the contemplated contract type is expected to be a cost reimbursement type. For my hypo, let's say the "total estimated contract" value DOES exceed the SAT, in fact, let's say the value is $50 million. So that is why the hypo says we are going to include FAR clauses 52.215-22 and 52.215-23.

2. No, we don't intend to allow "fee" on travel.

3. No, we don't intend to allow the KTR to add "indirect costs" to travel.

1. You have to read the word "contract" in context. In context it refers to the cost-reimbursement line item. Why would you apply it to the fixed-price line item? It wouldn't make sense.

2 and 3. So even if you included 52.215-22 and 52.215-23, they wouldn't raise an issue, would they, since the "subcontractors" charge fixed rates for their services (airfares, hotel rates, rental car rates, and meal prices) and do not separately charge for indirect costs, profit or fee and the contractor cannot charge for indirect costs and fee.

Now, do you consider airlines, hotels, rental car companies, and restaurants to be subcontractors?

Reply to #17:

That's a good question. I used to believe that airlines and such were NOT subcontractors.

But when I read FAR 52.215-23(a), which sets forth "Definitions," it defines "Subcontractor" to mean "any supplier, distributor ,vendor, or firm that furnishes supplies or services to or for a prime Contractor or another subcontractor." It does not provide any exemption or exclusion of airline carriers, travel vendors, etc.

But maybe it is just understood in the government contracting community that travel vendors are NOT subcontractors?

Do airlines, hotels, rental car companies, and restaurants provide services to the contractor or to a traveler, who then seeks reimbursement from his or her employer?

I don't think that those kinds of businesses are subcontractors in any meaningful sense of the word, except in those (rare?) circumstances in which a contractor actually hires them itself.

Reply to #19:

Ok, that's a good point.

It's more than just a good point. Contractors might strike deals with airlines, hotels, etc. for special rates, but, except perhaps in the case of very large companies, most bookings are made by employees. The companies usually have no idea who the traveler works for or why he or she is traveling. Even if they do, I suspect that the transaction is between the traveler and the airline, hotel, etc., not between the airline or hotel and the traveler's employer, again except, perhaps, in the case of very large contractors.

Let's change the hypothetical. Let's say an agency has ODCs that are not for travel. Let's say the ODCs are "pass through expenses" for repairing a vandalized property. Like a solicitation for services to maintain a government property, or rather, a whole bunch of government properties. It is unknown what condition these properties will be in by the time the contractor takes them over to maintain and repair them. It is possible a property could have vandalism. So the solicitation provides a CLIN in Section B for "pass through expenses" to cover that potential situation. Say the agency provides a NTE ceiling on these "pass through expenses" that are considered ODCs of $5 million. Say the ODC CLINs here are again cost-reimbursement type.

If a contractor has to hire another contractor to repair the vandalism, I would consider that second contractor a "subcontractor." So in this scenario, would you say FAR clauses 52.215-22 and -23 would apply right? And how does profit factor into this? Or doesn't it?

I don't have time for any more hypotheticals. I'm just pointing stuff out to you that I already know. I still work for a living.

At this point in my career, if I'm going to have a conversation like this at length, then somebody has to buy drinks. At an expensive bar. Preferably in Manhattan or San Francisco. Or Paris.

Maybe one of the other Wifconers will take over. Don? Help? Navy? Retread? Joel? Where the heck are you guys?

Thank you. I understand. Cheers!

Vern I don't have much to add to what has been posted. So let me vent a little.

The government acquisition corps. (speaking in the general sense) is confused between the concepts of "pass-through charges," "other direct costs," and "Materials". Pass-through charges are defined in the DFARS clauses. "Materials" as I'm thinking of the term is defined in 16.601(a). Vern has nicely defined "Other direct costs". Everybody has been so concerned about profit/fee on "Materials" in the T&M contract type that the concern has bled over into other contract types.

Stop it.

A contractor is entitled to a reasonable fee/profit for work performed. That's the fundamental policy of the U.S. Government and contractors expect COs to adhere to that policy. One of the few exceptions is the "M" part of the T&M contract type -- but even there a contractor is entitled to bill for normal indirect costs allocated to such direct costs.

The original poster wants the contractor to travel but not bill for normal indirect costs that may be allocated to direct travel costs. And don't bill for any unallowable travel costs, even though very very few contractors can travel under the GSA/FTR/JTR per diem limits, and thus they generate huge unallowable costs as a result. And forget asking for any fee on that travel. Essentially, then, the contractor is supposed to incur a loss on its travel expenses, according to the scenario. Sure, you can start there in negotiations, but be prepared for the contractor to ask for higher profit on the other items because (a) FFP type on the other stuff, and ( it needs to cover the loss on travel expenses.

You all are making this way harder than it needs to be. Just let the contractor propose costs in accordance with its normal business practices. Let the contractor propose a fee. Negotiate that fee. Et voila. All the overwrought pearl-clutching concern about "pass-through charges" and profit on same is just costing you time and the contractor money.

Thanks for letting me vent.

H2H