here_2_help

Not too much to add to Vern's reply, except with respect to item/question number 5. I have a bit of a problem with the terminology used by sakowitzm in the original question, which I think was vague and ambiguous in any case. I think we need to distinguish between "bid rates" and "billing rates". And "actual costs," as well. In this scenario, Company X has agreed to T&M billing rates that are lower than its total costs would have normally led it to accept. So what? Company X's T&M contract still absorbed all costs allocated to it; it just agreed not to bill all of those costs in its billing rates. In other words, after contract award bid rates are irrelevant (except perhaps in a defective pricing dispute), and what matters are the billing rates that the parties agreed-to. Actual costs are always going to be actual costs regardless of what gets billed, in every situation. In other words, there is no underabsorption in any case. Contract type has nothing at all to do with cost absorption. The Navy contract always absorbed its fair share of direct and indirect costs, and continues to do so. A year later, after "a great deal of success," 50% of the company's revenue now comes from its Navy T&M contract. I would speculate that as Company X generates more and more revenue, the delta difference between its Navy contract total cost and the amount of revenue it generates through T&M bilings (i.e., "negative gross margin") would decrease, since I would expect actual indirect cost rates to trend down as the business base increases, thus approaching the agreed-to T&M billing rates. To be clear, Company X's Army contracts do not now, nor have they ever, "subsidized" the Navy T&M contract.

1. Yes. 2. Did the contractor propose full-up GSA pricing, or did the contractor propose bare direct labor rates plus allocable indirect costs to facilitate your cost analysis of the REA? Hope this helps.

I'd like to know why the original question referred to the statute and not to the implementing regulation(s). I believe that both the (now defunct) DFARS rule and the current FAR rule refers to "indirect costs" and does not make any further distinctions. Is somebody looking for a rule nullification because of a conflict with statute? If not, I think it's clear that all indirect costs allocated to the subcontractor (except for those associated with subcontract management functions) are subject to disallowance. Hope this helps.

Hi ThePunk, Let me restate Vern's post. Do you believe that the contractor knew it would negotiate lower vendor pricing at the time it excuted the CCPD? Or, do you believe that the contractor had a history of negotiating lower vendor pricing that it should have disclosed as certified cost or pricing data? If the answer to both of those questions is "no" then there is no defective pricing. And to your other point, DCAA has not focused on post-award "defective pricing" audits for a couple of years now. That's not to say they don't perform any such audits -- because they do -- but that's not where the agency focus is at the moment. Hope this helps.

It is most certainly not "all or nothing". The government has the right to reimburse the contractor only for "reasonable" costs (see 31.201-3). When I type "see 31.201-3" I really mean go read it carefully, especially ((1) through ((4). Other factors that may impact the determination of reasonableness might include: whether the contractor has an approved compensation system, whether the contractor proposed escalation factors that included salary increases of such magnitude, and whether the contractor has written compensation plans that have been shared with the ACO. (Also see 31.205-6(a)(1) through (a)(5).) Hope this helps.

Obviously I was wrong, Vern is quite capable of providing definitive answers to Retreadfed's questions. Good answers, too. The only quibble I have with the 1:24 AM post is the use of the term "capital equipment". Technically, capital equipment (or capitalized equipment) is distinguished from expensed equipment. If the cost of a tangible asset is charged as a direct contract expense, it is not considered to be a capital asset. A contractor's capital assets are shown as assets on the balance sheet and depreciated over time. The depreciation costs are recovered (generally) as part of indirect cost rates. Sorry to be pedantic; I figured some folks might find the addendum helpful.

Hi Retreadfed, You do ask some good questions. I'm not so sure that anybody, even Vern, can give you definitive answers. I will direct you to a January 2006 Federal Circuit Decision (Jacobs Engineering Group Inc. v. United States) regarding the termination of a cost-sharing contract. If you are not familiar with it, I think it may open your eyes or at least get you thinking in a new direction. Wish I could be more help.

CPA1012, Where you choose to allocate the costs of foreign commissions is a matter of your cost accounting practices (established or disclosed) and compliance with any CAS clauses in your contracts. The fact that the costs are called "DIRECT SELLING COSTS" does NOT mean that they must be charged as direct costs. Direct selling costs are distinguished from general marketing and sales costs. It's a form thing and should not affect your direct/indirect charging decision. Hope this helps.

Did anybody other than me read Jacques Gansler's testimony before the CWC and before the Senate Armed Services Committee (Subcommitte on blah blah)?? WIFCON posted the links.... Oh how I wish the PWACs and others in DOD policy-making positions would listen to, and implement, his recommendations. H2H

In the 1960's, H. Peam Piper wrote a classic SF novel, "Little Fuzzy". Award-winning SF novelist John Scalzi has "rebooted" the novel and (with the permission of the Piper estate) just published it as "Fuzzy Nation". That's what I'm reading now.

That is correct. It's the team designation. You need the FAO Org Chart to link the A/R to the Supervisory Auditor who oversaw the work.

Don, I've never seen one. I wish I had! It would solve some problems for me.... I very much hope somebody gives you a positive reply. H2H

Yes, I'm starting to believe that is the right interpretation. Though it still baffles me how the disallowance process could work if there is no reporting and no determination of no/negligible value being added. H2H -- standing corrected

Ipod24-- The exemptions from CAS coverage are provided at 9903.201-1( in the FAR Appendix (Chapter 99). Last time I checked, there were 10 listed exemptions, including a. awards made by sealed bidding, b. awards made to small businesses, c. awards valued at less than $650,000, d. awards made via FFP contract types where no cost or pricing data was submitted, e. awards for acquisition of commercial items, etc. There is no listed exemption for awards made pursuant to the Randolph-Shappard Act. However, there is an exemption for contracts/subcontracts whose price is set by the operation of law or regulation. Hope this helps.

As has been posted by Joel and Vern, you can compare cost elements between offerors. But what is your purpose in doing so? 1. What do you mean by the phrase, "allows the evaluator to see which is more, or less reasonable"? A cost is reasonable or it isn't. There is no "more or less" gradation of reasonableness. If you think there is, provide a FAR citation in support. 2. The phrase, "All direct cost being equal, why would I want to choose a contractor with higher indirect rates ...?" grates on my nerves. It appears to be such a simplistic approach. To answer your rhetorical question, how about because one contractor has a quality assurance function, and a safety function, and a subcontractor management function, and an adequate accounting system, and an adequate billing system, and an adequate purchasing system, and an adequate government property control system, the cost of which is included in its indirect rates, whereas the other contractor has none of those functions/control systems, and thus has a lower indirect cost rate. Which contractor do you think would be more likely to perform the work effectively and efficiently? Which contractor would you expect to be better positioned to comply with contract terms and conditions? Which contractor would you want to select--the one with lower rates? Really? 3. Is the quality of the engineers something that can be judged by the rates paid to employees, or the fringe benefits provided? I would say (from my experience) that the correlation is doubtful. Some engineers--perhaps many--enjoy the challenge of technical work and will work where they get that satisfaction, and do not necessarily work for the employer who will pay them the most. These points underlie my concern with your question (which I articulated poorly in my first post). It seems one could get carried away with this cost comparison by cost element analysis and end up at a really unreasonable answer. Vern noted that such comparisons should be reasonable, and Joel noted that you have to understand what you're looking at. Based on what you posted I am concerned that your approach does neither. H2H

I can't see why you would want to do that. Each contractor stands alone in terms of its cost accounting practices. For example, assume a G&A expense pool of $1,000. One contractor has a direct labor dollar base of $10,000 and so has a G&A rate of 10%. Another contractor uses a total cost input base of $100,000 and so has a G&A rate of 1%. Same G&A expense, two different and compliant practices, two wildly different rates. Seems to me like somebody is conflating price and cost analysis, but perhaps I'm simply being naive. Hope this helps.

whynot, I don't think you are analyzing the situation correctly. As I interpret clause requirements, a contractor cannot have excess pass-through costs unless it subcontracts at least 70% of the work. If it does, then it needs to demonstrate how it adds value. If the contracting officer determines that no or negligible value is being added, then the contractor is incurring unallowable costs and the clause tells me how to calculate the value of those unallowable costs. I don't know why you think each category and each hour stands alone when the clause refers to the contract as a whole. The clause makes no sense only if you approach it from your point of view -- i.e., assuming that the 70% threshold applies to each labor hour. I don't believe that it does, so the clause works for me. H2H

whynot, I'm struggling to understand your issue(s). According to the requirements of 52.215-23, if the value of subcontracted work exceeds 70% of the total contract cost, then the contractor must report that fact and verify that it is adding value, as that term is defined in the contract clause. If the contracting officer determines that the prime is not adding value ("no or negligable value") then any indirect costs and associated profit/fee allocated by the prime contractor to its subcontractors' costs will be unallowable. Please notice that costs that are billed to a customer pursuant to a contract's payment clause may or may not be the same as costs that are allocated to a contract in a contractor's accounting system. Hope this helps.

Hi Sysyphus, The cost principle at 31.205-26(e) generally requires that inter-organizational transfers be at actual cost (not price), unless certain exceptions apply. So, generally, yes, your understanding is correct that the performing segment transfers its cost fully burdened through G&A, exclusive of fee. The responsible or requesting segment may or may not add G&A to the incoming transfer ... and this may be a point of contention, depending on whether the contractor is subject to full CAS coverage and what its Disclosure Statement says. DCAA's point of view is that the intent of CAS 410 "is that all actions which represent the total productive activity of the segment should be included in the total cost input" used to allocate G&A expenses to contracts. (Ref. DCAA Contract Audit Manual at 8-410.2 (a).) Thus, DCAA would assert that a failure to add the second G&A burden would be a violation of CAS 410. I'm not so sure and I think DCAA's interpretation ignores the Board's decision in Ford Aeronutronic (ASBCA No. 238833, 1983). In that decision, the Board "rejected the argument that in order for an alloation base to represent total activity, it must include the costs of all the activities of the business unit." (Quoting Karen Manos, emphasis in original.) Basically (and now in my own words) the Board found that determining what costs must be included in the G&A allocation base is reached by analyzing the beneficial or causal relationship between the G&A expenses incurred and those costs. Plainly, that analysis will vary business by business and is wholly circumstance-based. Presumably a mature contractor has performed that analysis and concluded that incoming transfers either (a) receive a benefit from the requesting segment's G&A functions/activities, or ( do not receive a benefit. That conclusion should drive the accounting treatment and be disclosed in policy or in the Disclosure Statement. Sorry to pontificate ... this is a pet issue of mine. Hope this helps.

What about CAS coverage? Should CAS coverage be determined at the contract level? If so, what's the contract price for purposes of determining whether the contract is valued in excess of $650,000? Is the contract value the ceiling or the minimum amount? Clearly it makes much more sense to identify CAS coverage at the task order level, but that's not how DCAA sees it.

Retreadfed, Yes you are correct. And you are pointing out what frustrates many contractors, which is that they are held to a stricter standard than the Federal government applies to its own employees.

Cajuncharlie, if by "everybody" you mean "everybody but Here_2_Help" then I agree with your assessment. If I were the contractor, during negotiations with my government customer, I would accept DCAA's recommended reduction in my air fare budget only if the government accepted an increase in my proposed direct labor hours to account for travelling only during normal business hours.

You might want to check out the promulgating comments found in FAC 2005-038. In my view, the rule is ambiguous. That said, one way to measure the value of the unallowable air fare would be to compare the actual fare paid to the cost of the lowest-cost ticket available to the contractor, assuming reasonable routing during normal business hours. The difference would seem to be unallowable. There are some mitigating circumstances that might be argued. One is to show avoidable labor cost if the traveller was a direct-charging employee and travel over night resulted in less hours charged to a contract. Another might be to compare the contractor's actual travel policies for upgrades to premium fares against what's permitted in the FTR/JTR (e.g., 301-10.125) to determine reasonableness. Hope this helps.

Jacques, Thanks for that "random thought." That's great except for the fact that the customer would rather have all the other customers pay for the cost of pricing out the multiple specification changes related to the UCA, so there's zero chance of getting an advance agreement. But your input was helpful and I'll remember that citation for the future. H2H

Vern, when the CO asks the contractor for a quote or offer and negotiates a supplemental agreement under the parties' general power to change their contract "by mutual agreement," is the contractor required by a provision of the contract to prepare and submit that quote or offer? That's the crux of my dilemma. Thanks H2H