here_2_help

Vern, as you are well aware this topic of "what is a subcontract" has been debated to death in this forum. Let's not rehash it again, please. If my posts were helpful to contractadmin, then I'm happy with my position, which I would assert is not based on a "common sense" interpretation. If your posts were helpful to contractadmin, then I'm happy for you (and for contractadmin, too).

My point was, simply, that the subcontract needs to be directly related to the prime contract, so that the clause in the prime contract can be flowed-down to the supplier. In your case, my position would be that your supply contract is no more related to the prime contract than your agreement with your local utility company to supply electricity to the production area. You're not planning to flow the clause to your local utility company, are you? If not, why not? But what is going to control here is not what I say or what I say that the FAR says. What's going to control here is your company's policies and procedures, how they define and treat various agreements from purchase orders to consulting agreements to long-term agreements to major subcontracts. Policies and procedures, when they contain clear definitions and are consistently followed, have great weight. Hope this helps.

I'm unclear regarding how your company is acquiring its "COTS commodity". You say that you are issuing a $10 million subcontract for the commodity that is "used across many contracts across the company." If you have multiple contracts using the commodity, don't you have multiple sets of flow-down clauses? Why does this one clause, in particular, cause you concern -- I would be concerned about dozens of different clauses, if your acquisition vehicle was truly a "subcontract." How is your acquisition vehicle a subcontract? I'm guessing that it is NOT a subcontract. I'm guessing that it is some kind of enterprise-wide, long-term, supplier agreement in which the commodity is acquired for company inventory purposes, and then subsequently released from inventory to contracts as needed. Am I close? If I'm right, that does not meet the definition of a "subcontract" as I understand the term. If I'm right, or even close to being right, then the answer to your question is NO. If I've totally missed the mark, then please provide details regarding the acquisition vehicle being used. Is it FAR-based? If so, was it placed via FAR Part 12? If you are acquiring a COTS commodity, then Part 12 could be appropriate. Hope this helps.

bigred, I feel your pain. The old T&M payment clause is unclear (and there have been several WIFCON threads on that topic, that you should check out). The new rules are somewhat complex and difficult to implement in specific contract situations. Administering a contract with the old clause in the new environment is probably even more confusing. The challenge is exacerbated by poor, or non-existent, training of the acquisition workforce. As a result, there is quite a bit of, shall we say, inconsitency in application--throughout the Federal contracting community. Your situation revolves around whether costs incurred through use of a consultant should be billed at the contract labor hour rates for performing work that meets the labor category qualifications specified in the contract (the "T" in T&M) or as pass-through direct material, ODC, supplies, and incidental services (the "M" in T&M). Subcontractors (and by extension consultants) can be billed on either side. I agree with you that the clause at 52.232-7 (Feb 2007) is pretty clear on how to distinguish between the subcontractor efforts and set up an appropriate contract billing mechanism. But your contract has the old T&M Payment clause, which is much less clear. However, there is case law out there that supports the position (vis-a-vis the old clause language) that if the work being performed by a consultant is indistinguishable from work peformed by a contractor employee, the contractor should bill at the rates established for employees, regardless of profit earned as a result. A good Government contracts attorney can find that case for you. If you don't want to hire an attorney, then you are left with the unappetizing task of negotiating and persuading your C.O. that his/her position is wrong -- which it is. Obviously, profit is permitted on labor hours incurred in performance of the contract SOW. Just because a contractor uses a consultant instead of a full-time employee is no reason for denying it the profit to which it would otherwise be entitled. Now, if you didn't set up an hourly billing rate for the consultant and just passed-through the consultant's cost on the "M" side, there would be a stronger argument to be made about profit -- but it would still fail (see the court case mentioned above). As I said, I feel your pain. Hope this helps.

Leo1102, Joel was diplomatic but I want to be clear to other readers. Your logic is wrong. A consultant may or may not cost more per hour than a full time employee. We don't know. If I had to guess whether bigred's consultant cost the company more than a full-time employee, I would guess no, because bigred was willing to continue billing the consultant at the same rate the employee was being billed at. That suggests to me that the costs likely were not significantly higher for the consultant vs. the employee scenario. But we don't know for sure. Why don't we know for sure whether consultants "regularly cost more per hour than full-time employees"? Consultants usually charge a per hour rate. If charged as a direct cost, that charge is burdened with applicable contractor indirect costs (which will vary by contractor, but will almost certainly NOT include any fringe benefit costs). As a side note, if charged as an indirect cost, it probably receives no burden (or at most a G&A burden), but given the context of the discussion, that's very unlikely to be bigred's situation. A full-time employee, on the other hand, charges a direct labor dollar amount per hour (based on annual salary or hourly wage rate), which is also burdened with applicable contractor indirect costs (which again will vary by contractor, but will almost certainly INCLUDE fringe benefit costs). It's not unheard of for a contractor total burden factor to exceed 100% or even 200% of direct labor dollars, especially if manufacturing is involved. I have personally seen contractors charge 400% or even 500% manufacturing overhead burdens on direct labor. Fringes run in the 30 - 40% range and aren't going down any time soon (because of soaring medical and pension costs). G&A is G&A, no telling what that rate is. So you can see that it is not at all clear which scenario represents the higher contractor costs (but I'd put my money on the full-time employee). Regardless of the foregoing, the Government will NOT experience increased costs under a T&M contract type (all things being equal) because the contractual labor billing rates are fixed, and thus don't change simply because the contractor's costs vary. The only way that the Government would pay more would be to establish a higher labor billing rate for the consultant versus the labor rate that the consultant was billing at when he/she was a full-time contractor employee. And as I noted above, I don't think bigred would expect a significantly higher billing rate for the consultant. Hope this helps.

1. I have seen contract clauses prohibiting use of consultants without C.O. approval. Does your contract contain such a clause? 2. You might expect to use the same labor category at the same rate for the same work -- after all, it's common sense -- but the new DOD T&M payment clause interferes with that common sense approach. The fact is that, as a subcontractor, your new consultant will have a different cost to you than the former employee would have. The Government is concerned that there is a hidden windfall profit to your company if the same rates are used while the costs decreases. Hope this helps.

Shay Assad understands the problems with the DOD acquisition process and knows how to fix them. The following are exact quotes from Government Executive article entitled ?Defense Outlines Change in Acquisition Strategy?: (http://www.govexec.com/story_page.cfm?articleid=41973&sid=60) For too long, Assad said, Defense has assumed too much risk in its procurement procedures, both on programs that might not have been technically ready and on precarious contracting vehicles that failed to hold down costs. To better predict costs and share risks, the department plans to make a ?significant shift? away from cost-plus award-fee contracts. ? Moving forward, Defense will utilize more incentive-based costs-plus and fixed-price contracts and rely on multiple companies for long-term agreements. ?We?ve got to write better contracts that better incentivize industry and get the best deal,? said Assad ? ?The world of cost-plus award-fee contracts is over.? ? Echoing a point frequently made by the new administration, Assad said Defense acquisition employees ?need to keep at arm?s length from industry. This will benefit the warfighter and will benefit the taxpayer.? Defense also will look to increase savings through more contract competition. In 2008, the Pentagon competed 64 percent of it?s [sic] nearly $400 billion in contracts, a record for the agency. But, Assad said, ?It?s still not enough,? because many of those contract awards involved only one bid. ? ?We are going to push contractors real hard for significant savings,? said Assad ?. Leadership in action? Or time for the classic internet "facepalm"? More seriously, does anybody really think that "writing better contracts" and "keeping DCMA folks at 'arm's length' from industry" is going to solve the myriad problems in DOD's acquisition process? Can we also add, "write better solicitations" and "better evaluate proposals" to the list of Big Changes to be implemented? I guess I'm ready for SES status now!

Hi George, I don't have access to the necessary history; this might be a carryover from ASPR or DAR days. It does not appear that the courts have expressly decided what the phrase means. However, Karen Manos's book, Government Contract Costs & Pricing (Thomson-West, 2004) indicates (in context) that the phrase refers to the totality of "the facts and circumstances." (Volume 1, Page 120-121). She cites to Bruce Construction Corp. v. U.S. (1963) and to Data-Design Lab, ASBCA No. 24354, but does not quote anything that appears to be responsive to your question. Given Ms. Manos's use of the phrase, I would interpret it to mean all of the above. The contractor's established practices might include cost accounting practices, GAAP reporting practices, or business practices such as HR, compensation, etc. Hope this helps.

Rod_p & retreadfred, The key point that both of you have missed is that the contractor may have established that certain employee classifications, functions and/or activities never charge direct to contracts. For example, let's say that the contract manager function always charges time to an indirect cost account. That practice might lead to a situation where, even though an individual contract manager supported a single contract on a full-time basis, that manager would never, ever charge time to the contract. And that would be proper and in accordance with the contractor's established practices. A contractor's practices will be disclosed in its Disclosure Statement; it if doesn't have a D/S then it will have policies and/or procedures. Such practices will not be hidden. What would be a problem is if the time-charging practices within a single function and/or activity were treated inconsistently in similar circumstances. That would be a potential violation of CAS 402 (and FAR 31.202(a), as well). Finally, retreadfred states that work that benefits one contract and no other "should be" (which I read in context to be "must be") charged directly to that contract. This is a piece of myth-information because the FAR definition of "direct cost" was revised a couple of years ago to correspond with the CAS definition of "direct cost." If you look closely at the definition of "direct cost" found in FAR 2.101 you will see that a direct cost is one that "IS" identified specifically with a particular final cost objective ... which is different than the old definition, which stated that a direct cost is one that "CAN BE" identified specifically with a particular final cost objective. Hope this helps.

Vern, My understanding from Blitz's original post was that the contractor had an existing CPFF contract. The existing fixed fee was negotiated (presumably via a structured approach) at 6% of estimated costs. Now, the Government wants to modify the contract to have work performed at a new location, one in which the contractor's costs will be demonstrably higher than previously negotiated. The contractor wants an equitable adjustment to compensate it for the additional costs it will incur, and wants the fixed fee pool modified as well. I agree with you that the additional fee is negotiable, and will be based on a structured approach analysis; it will not be a matter of simply adding 6% to the additional costs. That was not Blitz's question, however; Blitz wanted to know if an element of the contractor's cost should be excluded from the fee analysis because it should not be fee-bearing. Now, I may have been semantically "loose" in the language used, but I believe the response was correct -- all of the contractor's costs (less Cost of Money, as retreadfred pointed out) should be included in the fee analysis. From the contractor's perspective, it expects to earn a profit and it proposes (and generally measures) the amount of profit/fee as a percentage of proposed costs. Thus, it proposes a fee "on" its costs. I understand that the Government doesn't analyze proposed profit/fee in that manner, but that's what a contractor does, with few exceptions.

Blitz, I'm glad the WIFCON forum could help you. I have a nagging question, though, as to why you think that salary uplifts are a "tax free allowance" to contractor employees? If that's true, it would be news to me and many, many contractors. Best wishes!

Hi Blitz, I'm not clear on why this is different from any other modification under the Changes clause, for which the contractor would be entitled to an equitable adjustment--including fee on any additional costs. That being said, were I the contractor preparing a price proposal for this work, I would DEFINITELY expect fee on all of my costs, including hazardous duty and danger pay salary uplifts. I would be paying my employees those additional payroll costs (and would be paying payroll withholding taxes on those costs) and I would very likely be paying Defense Base Act insurance premiums -- and I would expect to make a profit on those costs. Hope this helps.

Hi govtacct02, I'm in industry, working at a multi-billion dollar sector of a major defense contractor. DOD is our biggest customer, accounting for more than 90% of sales. We have a mixture of cost-plus and other contract types. We require people to charge time to unallowable cost objectives (charge codes) at the time the activity takes place. Discrete charge numbes are opened, either based on budgeted/forecasted activity (known events) or as needed (unplanned events). Our discipline for opening new charge codes before the activity takes place is good. For certain sensitive areas (e.g., lobbying) we follow-up annually with an additional survey (for those who charged time to sensitive activities as well as those who may have incurred time but not charged it, based on position/title/function/etc.), and make adjustments to unallowable labor (and expense) accounts based on the survey results. For issues such as lobbying, we are aware of differing definitions and reporting requirements based on differing statutes, and work hard to get our reporting right in those areas. (It's quite a time-consuming -- and expensive -- proposition.) Hope this helps.

Hi wayforward, There is a lot you don't know yet. You don't know the pricing instructions, you don't know the contract type of the task orders, you don't know whether you will need to submit subcontractor cost & pricing data as part of your cost & pricing data. But all things considered, you may be better off having each team member develop its own fully loaded labor rates (cost only, no profit) and then come up with the number of hours per team member (anticipated mix, sample task workload, percentage of effort per teaming agreement, whatever works). Handling profit will be tricky. You will want to review the recent changes to the DOD T&M rules in DFARS if you are a DOD contractor; otherwise look at the recent FAR changes. You may be able to modify the subcontractor rates to add profit, but it is not a foregone conclusion. Hope this helps.

Hi wayforward, 1. You say you are a "small company" -- are you a "small business" as that term is used in FAR Part 19? 2. What type of task orders will be awarded under the ID/IQ contract? FFP, cost-plus, T&M, all of the above? 3. Have you identified all of your potential subcontractors & gotten proposals from them? What is the anticipated value of the subcontracts you will be awarding? Any of them expected to meet the FAR Part 15 requirement for submission of cost & pricing data? My advice to you would depend on the answers to those (and perhaps other) questions. In brief, unless the RFP directs otherwise, I would focus on developing your own internal rates and cost buildup, while also creating accurate budgets for your proposed subcontractors based on anticipated costs plus allocation of indirect costs and profit. If you are going to have T&M task orders that are subject to the requirements of the T&M payment clause (52.232-7) then my suggested approach might change. You also might want to keep in mind the recent DFARS changes regarding "excessive pass-through costs." If more than 70% of contract costs are going to be subcontracted, you're likely going to have to justify your company's added-value. Hope this helps.

Not being a lawyer I'm not sure if this case is on point, but didn't SCOTUS rule on a similar issue in 2005 -- in the Cherokee Nation case? Argued November 9, 2004 ? Decided March 1, 2005 Question: 1. Whether the federal government can repudiate, without liability, express contractual commitments for which it has received valuable consideration, either by spending down discretionary agency appropriations otherwise available to pay its contracts, or simply by changing the law and the contracts retroactively. 2. Whether government contract payment rights that are contingent on "the availability of appropriations" vest when an agency receives a lump-sum appropriation that is legally available to pay the contracts ? as is the law of the Federal Circuit under Blackhawk Heating ? or is the government's liability calculated only at the end of the year after the agency has spent its appropriations on other activities, as the Tenth Circuit ruled below. Held: The Government is legally bound to pay the ?contract support costs? at issue. Hope this helps.

Whynot, I think we are getting closer. I'm familiar with the DCAA CAM guidance, which is essentially a verbatim restatement of DOD CAS Working Group guidance (W.G. 78-21, Question #4). That is the infamous W.G. "guidance" that sparked the Ford Aerospace case, which established the rules of the road for CAS 410 and led to the 1981 Amendment 1 to W.G. 78-21. However, when the Working Group amended its position(s) in response to the Ford Aerospace decision, it did not modify its position on including interorganizational transfers in the cost input base used to absorb G&A expense. Arguably, it should have done so. So there is a theory (in my mind at least) that the current CAM guidance is in error. At a minimum, the CAM guidance (like the DOD CAS Working Group guidance) lacks any contractual effect, not being tied to a statute, regulation or contract clause -- and is arguably an unlawful interpretation of a statute (the CAS), which was expressly left to the CAS Board to interpret. When one looks at CAS 410 in light of the Ford Aerospace decision, I can't see how one escapes the conclusion that inter-organizational transfers are to be burdened with G&A (i.e., included in the cost input base) if and only if (a) the activity performed is one that is managed by the receiving business unit/segment, and ( the costs are a significant element of the receiving segment's cost input base (i.e., current period cost of production). More could be said but I think that's sufficient. Hope this helps.

Whynot, it's not my intention to debate folks in this Forum. However, your posts may mislead others so I need to correct you. 1. Contrary to your post, the citation you used (9903.201-1) does not in fact provide "direction to treat an inter-organizational transfer as a subcontract." What it does say is that, in order to determine whether a contract or subcontract is exempt from CAS using the $650,000 monetary exemption at 9903.201-1((2), "For purposes of this paragraph ((2) an order issued by one segment to another segment shall be treated as a subcontract." That's it. That's the entirety of the "direction," which (clearly) does not address cost accounting or pricing treatment of the two cost elements. And (by the way) the CASB statement is consistent with my earlier post. 2. For those interested, the purpose for the language cited by Whynot was explained in Preamble F (Dec. 1974) as follows: "As the [CAS] Board stated ... its contract requirements have been applied to business units, such as a profit center, division, subsidiary, or similar unit of a company, which perform the contract, even in those cases where the contract was entered into on behalf of the overall company rather than the business unit. This application of the Board's requirements to a performing business unit is well established and unchallenged ..." 3. If you look at any Disclosure Statement, Form CASB DS-1, at 4.5.0, you will see that subcontract costs are quite clearly separate and distinct from costs of interorganizational transfers. It is also quite clear that a contractor can burden the two distinct cost elements in different ways. Conflating the two concepts leads to incorrect cost accounting and pricing treatment. 4. An example of an incorrect accounting result would be miscalculating a G&A expense rate when using a value-added cost input base (?VAB?). The definition of VAB is Total Cost Input less Direct Material Dollars less Subcontract dollars. (Ref. CAS 410.) If one were to treat interorganizational transfers ?as subcontracts,? then one would exclude those dollars as well, which would inappropriately reduce the VAB, and thus inflate the G&A expense rate used for cost accounting and pricing contract actions. 5. With respect to you point on Applicability of the Cost Principles, I believe you may not have fully grasped my point. 'Nuff said. Hope this helps.

Hi Whynot, The problem(s) I see with your post include the following: 1. As I've posted before, there is some language in both FAR and CAS that support treating interorganizational transfers like subcontracts. There is nothing that suggests interorganizational transfers are subcontracts. In fact, they are separate elements of cost, subject to differing treatment (particularly application of indirect cost burdens). It is not at all the case that interorganizational transfers automatically "become part of your actual indirect base, just as a subcontractor billing would do." If you look at a Disclosure Statement, it clearly indicates that interorganizational transfers (both in and out) are subject to discretionary indirect cost allocation practices, and might receive full burdens, abated burdens, or even no burdens. 2. Your advice to look at 31.102 ignores the fact that govtacct02's organization is already subject to full application of the cost principles by virtue of receipt of contracts containing the 52.216-7 Allowable Cost & Payment clause. In order for it to claim the interorganizational transfer billings as allowable costs, the billings must comply with 31.205-26(e). I believe that claiming an exemption to the requirements of 52.216-7 based on a lack of cost analysis applied to interorganizational transfer pricing would be a bit of a reach, to say the least. 3. Also, if you look at the language of 31.102, it provides guidance to Federal contracting officers with respect to the "pricing of fixed-price contracts, subcontracts, and modifications ..." but it does not address pricing of interorganizational transfers (see my first point, above). Secondly, by what contract clause does the guidance at 31.102 flow to contractors? Unless you can show me a contract clause that tells a contractor to follow the guidance at 31.102, I cannot understand how it would be applicable. Hope this helps.

Again, not my area but I would assume you would revisit profit calculations via weighted guidelines to see if perhaps the contractor was entitled to a higher profit rate via efficiency and innovation. Wish I could be more helpful.

"... the established system of doing business ... broke down early in the war. ... the civilians, expert and inexpert, who attempted to carry on business which properly belonged to their departments, where they succeeded at all in doing better than the [War] departments themselves, did so usually by violations of the law--the very law which, in large measure, prevented the departments drom doing as well as the civilians did. ... The history of war contracts shows clearly that there were many men in the War and Navy Departments who were entirely competent to foresee the needs of their country in the crisis and to prepare plans adequately to meet them. They were prevented, however, from doing this by the laws or administrative regulations defining the scope of their authority. Therefore, as is usual at a time of heated public opinion, they were accused of incompetence because they did not get results which they were unable to get only because this very public had insisted on tying them hand and foot. ... We have sacrificed and will always sacrifice efficiency and dispatch for what we think is safety. Even when we happen to get a competent public servant for the niggardly pay which the people of the country are willing to give for any public office, we tie his hands in this way and make him bury his talent. There were numerous cases of this kind ... and men suffered in reputation, not because of their inability to measure and provide for enlarged responsibilities in the crisis, but because the public was impatient of their ability to do so under the conditions the public had laid down." -- Government War Contracts, J. Franklin Crowell, 1920 (Editor's Preface) Best holiday wishes to those serving our country, trying each day to do the best they can while being tied hand and foot by the system.

Scenario Unit Cost Fee Fee on unit $ 100.00 15% $ 15.00 $ 90.00 15% $ 13.50 $ 1.50 Credit Savings $ 10.00 75% $ 7.50 Raytheon Share Net $ 6.00 Hi Query, I hesitate to respond because VECP is not my area of particular expertise. So keep that in mind, okay? That being said, I would want to understand (1) the basis on which the original 15% fixed unit "fee" per unit was negotiated and put on contract. Is there a Fixed Price per Unit (fee included)? Is the costing truly per unit or (perhaps) per lot or production run? (2) How did you allow the contractor to participate in the VECP savings? I see that you are saving 10 percent cost per unit. What does the contractor see? Does it see a piece of the 10 percent? What I'm driving at in the above is you use the term "fee" which does not normally apply to vanilla Fixed-price contracts and implies a certain negotiability. If the profit rate was built into the contract price then I can certainly see the contractor balking at giving you a refund on prices already paid for units delivered ... unless you've incentivized said contractor elsewhere. (This is a good example lesson regarding negotiating price deltas at the price level not the cost level ...) I would also ask how come it took so long to negotiate the savings to the taxpayer, but I'm afraid I can already guess the answer to that one. I hope this helps but, as I said, not really my area. Best wishes!

Hi govtacct02, Let me recap my understanding. You are contracting with a sister division -- you are incurring an inter-organizational transfer cost -- never mind the contract type. Because you must comply with 52.216-7 (Allowable Cost and Payment) you must follow the Part 31 Cost Principles. One of the Cost Principles (31.205-26(e)) requires that inter-organizational transfers must be made on the basis of actual allowable costs, unless the transaction qualifies for an exception. This transaction does not qualify. You want to know if the sister (performing) division must adjust the costs it is transferring to the buying (responsible) division, to reflect actual, allowable direct and indirect costs calculated in accordance with Part 31 Cost Principles? You want to know if the performing division must do this even though it doesn't do flexibly priced billings, never calculates allowable costs, and never submits a final indirect cost rate proposal for Government audit? Yes. It must do so. You also want to know what costs should be included in the responsible division's indirect cost allocation base(s)? Should the reponsible division include the original billings or the final, adjusted billings? That is a more complex question. First, what does the Disclosure Statement say? Do inter-organizational costs received get a full, reduced, or zero share of indirect costs? What about inter-organizational costs transferred out from the performing division--do such costs get fully burdened or no? The cost accounting practices you choose, and disclose, will impact the answer to your question. The more burdens that get applied, the more adjustments will need to be made. Second, there is a timing issue involved. The responsible division might not know the performing division's actual, allowable costs for up to six months after the books close for the year. You need to think through what costs qualify for this year's rate calculations (e.g., what is the definition of current period "cost input" for compliance with CAS 410). You could put yourself into a CAS 410 or even 406 noncompliance if you're not careful. Once you have a policy position, make sure it is consistently followed. Finally, the FFP billings can't be the right answer. As indicated above, there is a spectrum of "right" answers, but that one ain't among 'em. The FFP billings are a budgetary answer, not an actual cost answer. Hope this helps.