Needforspeed

😂 Thank you for your service WifWaf

Having worked with consultants/subcontractors over the years - some brand new to government contracting - I always felt some folks just compared themselves to their competitors - through GSA schedules or other means - tried to decide if they were more or less valuable than these other companies, then picked labor rates for their services that were comparable and went with it, regardless of their expenses or cost rate structure. Then figured out this whole indirect cost rate stuff later 😀.

Thanks all the for the discussion and making some citations which I will continue to peruse.

Vern the overarching themes between the article Don provided and the CPA article are the same to me. My only hangup is "business development". The explanation that overhead includes the indirect costs of managing contracts makes sense to me and that is an easy visualization. But I generally see that going hand in hand with capture managers growing a business line - finding partners, keeping tabs on agency spending and RFP release, business strategy, whatever. So, I would consider business development overhead rather than G&A. The CPA article says: The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting... I think what we have agreed is that business development can be either, so long as the contractor is consistent in its treatment of the cost as it goes into the expense pool. From a perspective of explaining it to the staff managing these lines of business, I would rather say "capture manager, VP business development, business strategy, whatever, all of your time is overhead, no matter what." I also do not think business development has to or necessarily will serve the greater benefit of the company, not like an accounting department would anyway. Your capture team selling to client A serves no benefit to client B and except for maybe someday (maybe not) bringing in revenue to your company, does not benefit the company as a whole.

Fantastic article Don. Thank you!!

Hey Don - I guess that is part of my question. I can recall seeing the same or similar type expenses classified in one company as overhead and another G&A. Like HR for example, IT, security, Finance and accounting. Is it up to the contractor to decide what they classify as such and treat that consistently? If anyone has any good, reliable literature to read up I’d be thankful

Are there any recommended readings for how and why a contractor assigns corporate or operating expenses to overhead versus G&A? Does this factor into the strategy of how one designs their indirect cost rate structure?

Thanks Help I will review that when I get some time. Without going into an elaborate proposal, I’m sure someday soon if not already, there is an artificial intelligence program out there that could pick up on these “unreasonable” irregularities incurred during performance of a cost reimbursement contract. Maybe an audit software is out there already. Following completion of a contract, the contractor agrees to let DCAA drop their contract in their software, and the software generates a bill to the contractor for anything they charged that was out of bounds. If the contractor takes exception, they decide if it is worth the effort to defend and if not they cut a check to the government. I think that is ultimately what the system is designed to do. But, it takes years and millions of dollars to do it…badly…the government is bad at this. Is this so far fetched? That would seem like real accountability to me. And efficiency. If it takes everyone 30 years of their career to get good at this the system is doomed. Focus on the pre award evaluation of the contractor and their price. Emphasize that if they mischarge the government, they will be caught, and quickly. Not five, ten, or twenty years later, enough time for any bad actors to move on to the next govcon down the road or have taken their golden parachute. If the general public knew the IRS wouldn’t get around to their tax return for a decade they may find it more tempting to play fast and loose. The acquisition system all but advertises to contractors that they will not get around to holding them accountable for a while.

Thank you help, retread and rea’n for the added context and experiences. Even having read the sections Retread quoted a couple times already I’m realizing there are more protections afforded to the government than I first convinced myself. I agree as everyone has stated these are complicated, complex issues. I don’t know that it has to be. If we can imagine a contracting industry without fraudsters where not every contractor is out to squeeze every penny from the government, aren’t the evaluations of the contractors themselves and their policies and procedures, and the work solicited, designed to burden the contractor with the risk and assumption they are doing the right thing. For example, if I filed my income taxes and claimed some big credit for a donation to charity that was never made, I know that is fraud, and the IRS will find me and penalize me monetarily or criminally. A government contractor should know similarly that if they charge for something unreasonable as defined in this thread, there is a risk they get caught. By accepting the contract they know as discussed here the burden of proof is on them. Isn’t that..good enough? Going back to Vern’s point that a CO had better be clued in on such a rate change, to Maker’s example, individuals put on a project aren’t walking around with a margin on their forehead. Is surveilling a contractor’s direct labor so closely post award really a job of the CO and is it a good use of their time to do it to such a micro level? If we can’t trust the contractor to do the right thing, why are they getting a cost reimbursement contract award in the first place?

Thanks Help. So, against my better judgement, I am going to suggest there is more meat left on this thread. Mainly looking to draw on experiences from other posters in this similar situation. So, without putting words in anyone's mouth, we have established that, absent an advance agreement, or specific language that the government inserted into a contract (preaward) that addresses the issue, and assuming it does not result in an increase to the overall cost of the contract, nothing in a customary negotiated cost reimbursement contract prohibits charging $50 per hour for someone that was bid in your proposal, initially, at $30 per hour. Except -- reasonableness. Which, for the non-layperson is a principle not to be trifled with. I am interested in knowing: has a Contracting Officer ever disallowed your direct labor charges because they were much, much higher than initially bid (like more than 50% higher, as in this example.) If so, what happened? Were you successful in demonstrating reasonableness, or was it escalated to a higher court? As a Contracting Officer, have you ever disallowed direct labor charges because you felt they were too high? If so, what was your rationale in doing so? Were you successful in inhibiting such direct labor cost increase, or did you compromise with the contractor? Or, to industry, is this just commonplace, to charge the government at the hourly rate the market will bear, regardless of the rates used in the cost proposal?

Unfortunately no, Joel. I am the resource, albeit not at the expert level. Much to Vern’s chagrin.

Thanks, Vern, for your response. I think what I have learned today, in jest, is that in government contracting there are two habits of highly successful people: 1) Be reasonable at all times, and 2) Always do as a prudent businessperson would do. If you do those things, you are likely not to stray off into a land of mismanagement or fraud. It is bound to keep you out of trouble. And if you are really reasonable, any time that a suspecting, conscientious, CO asks for your proof - like being audited into the stone age - there is no need to fret because you are really reasonable, prudent and you can prove it.

Vern, thank you for your time and thoughts on this. I had not thought to consider FAR 52.232-20 or FAR 52.232-22. Although I am not sure that charging someone's time at an hourly rate higher than was bid is guaranteed to "increase the estimated cost of performance". Maybe it will, maybe it won't. Maybe no one charged labor costs at this engineer category for the several months we were busy trying to hire someone. Or other employees were recruited and retained at hourly rates lower than initially bid, generating cost savings. If staffing this engineer at $50 per hour does not increase the cost of the contract (it may not) we are back to reasonableness as our guiding allowable cost compass. (For now.) We have not identified a contract requirement that would prohibit charging $50 per hour without CO notification or consent. Just the threat of an unhappy CO that feels we tried to pull a fast one. Or the threat that the cost will be disallowed, leading to what sounds like a miserable time trying to justify it in court. You have said now in three separate occasions that I am not educated enough to be asking these questions. You, of course, are correct. Just trying to learn. Thanks for the reminder to open C&N Cost Reimbursement Contracting it is a very pleasant read and has not been opened in more than a decade. Thanks for the other study materials, as well. Good luck on the publication.

Vern and Help. Thank you both. Very enlightening. Vern - let's go back to my example for a second. Let's assume as a contractor, you said to heck with checking with the CO to put the $50 engineer on the job, you just did it. Except, that engineer is only one of 25 other employees direct charging the project each month. You did not think twice because you had been working day and night for months to find someone that could do the job at a rate the budget could bear. At that point you are certain any challenges of reasonableness would be in your favor. That thought may have not even crossed your mind; you knew you had been a good steward of the contract's money. And until this point, you have done nothing wrong, because the contract has no such requirement to notify a CO of the price increase, there are no stated pay caps, etc. You know it is reasonable because it is using the market forces of supply and demand to determine the "should cost" salary. Only we (I) now know that the risk is, the government CO may point to a locality pay, CPI chart, or some other data point that lacks relevance to question the cost reasonableness (which, besides reviewing the direct labor rates on an invoice, how else would the CO surveil this cost to form their argument?). And if the CO cannot be convinced, the contractor can choose to absorb the added cost or lawyer up. Seems a little unfair. The takeaway for the contractor being if you are going to charge the government for something, as a prudent person in the conduct of competitive business, have a great paper trail to demonstrate its allowability, and be ready to go the distance to justify it. Do we agree that, until questioned, the contractor did nothing wrong in charging the government $50 per hour for this engineer's time? Correct. Although I have found that occasionally after reading things over and over that don't make sense, you eventually learn something that can be applicable.

Help, would you extend this to job application data, as well? For example, you have a job posting for said engineer. You priced this engineer in your cost reimbursement proposal that was accepted for award at $30 per hour. Two years go by. Now present day you absolutely need to fill the position to complete the work, due to turnover. Job applications to the vacancy are few and far between. It is a fantasy to think you can retain someone now at $30 per hour. All qualified candidates are $60 plus per hour. You end up hiring someone at $50 and put that person on the contract. The gov't "may" disallow some or all of the cost - but would that be reasonable? If people are recruited and retained for what the market will bear, that is what the market will bear. The cost of labor is more expensive. That makes the cost to perform the contract...more expensive. I don't necessarily see anything wrong with this, to pass this increased labor cost to the government. Does the government want the contractor to perform the work or not? The contractor shall not be burdened with the increased cost, that is why they accepted a cost-plus contract in the first place. Vern, you already cautioned talking about a topic of extraordinary depth and complexity; hope that doesn't make my hypothetical too reckless. just trying to frame this in a way using lay terms.