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here_2_help

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  1. You know, I've been to several "Government Contracting" seminars and classes over the past years, and these posts are absolutely the most clear and direct explanation of contract type vs. delivery type that I've ever experienced.

    It may seem like Contracting 101, but when such a clear explanation is so rarely put forth, one begins to wonder just how fundamental such an understanding is.

    Thanks to all because I learned something useful this week.

    It was helpful.

  2. Thanks here_2_help,

    (2) paragraph ? shall apply only to components and spare parts that are acquired by DoD through a prime contract or a modification to a prime contract, or through a subcontract under a prime contract or modification to a prime contract on which the prime contractor adds no, or negligible, value.

    My reading of the above is that it EXEMPTS from the rules all contractor activities except for those prime contracts where the contractor adds no, or negligable, value (the excessive pass-thru costs contracts).

    I think it's okay to be cautious but -- dang it -- the carrier needs to get built! Why contractors are afraid of commercial item determinations, or determining that contract actions are exempt from TINA requirements, is beyond me.

    H2H

  3. Hi Garth,

    Let me venture into these rough waters with some trepidation. First, I assume you are a contractor and not a Government contracting officer. If I'm wrong, ignore this post.

    1. Revisions to the FAR and DFARS are interesting and worthy of note. But for contractors, there is little if any effect unless a solicitation or contract clause has been revised. The FAR and agency supplements provide guidance to acquisition personnel of the executive branch; contractors agree to comply with clauses including in their contracts.

    2. Regardless of regulatory changes -- or even clause revisions -- contractors must comply with the version of the clauses in effect at the time their contract(s) are executed (the contract effectivity date and execution date need not be the same, but commonly are the same).

    3. As always, unless a specific clause directs otherwise, contractors operate according to their policies and procedures (including when applicable their CASB Disclosure Statements). Periodically, many contractors have their purchasing policies and procedures reviewed by Government officials as part of a Purchasing System Review (CPSR). One can assume that contractor policies and procedures comply with FAR/DFARS requirements but one might also argue that, unless there is a violation of specific statute or contract requirement, the contractor's policies and procedures can be whatever they are, so long as they are disclosed and followed consistently.

    4. Consent to subcontract is a requirement of most contracts.

    So, my position would be that the contractor makes its commercial item determinations in accordance with its policy and procedures. Specific commercial item determinations may be reviewed as part of the consent to subcontract actions. Policies and procedures, as well as a review of a sample of commercial item determinations, are reviewed as part of the CPSR and any findings affect whether the contractor has an adequate purchasing system. Other than that, changes to FAR and DFARS guidance to executive branch acquisition officials would seem to be interesting events viewed somewhat from afar.

    The foregoing is a combination of experience and regulatory guidance. I can provide some citations if necessary but your post indicates you can already read the regulations.

    Hope this helps.

  4. I'd like to point out that a cost estimate is not "defective" or "faulty" just because there is a variance between the estimate and the actual cost outcome. Moreover, although people do it all the time, it makes little sense to refer to an estimate as accurate or inaccurate. One must judge an estimate on the basis of the information available at the time it was made and on the process used to make it.

    An estimate is a deductive inference, and it may be valid even if reality turns out differently.

    Vern, I agree my language was imprecise. I still feel, however, that my questions are valid. It would be nice if we had some continuation.

  5. Vern asked: "...And now the actual cost for those "other" elements will be higher than the government-furnished estimate, which means that the total allowable cost of the contract will be higher than it otherwise would have been. Right??

    Vern, NptAcq said: "The contractor has done a great job of managing costs and this increase will not require an increase to the Target Cost. The contractor will be able to perform within the target cost while absorbing this cost increase."

    here_to_help asked: "I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?"

    here, NptAcq said: "In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP."

    Vern, also noted: "Which means that under the Incentive Fee clause, FAR 52.216-10 (MAR 1997), the contractor's fee payable will be lower than it otherwise would have been. Right? And the contractor is making noises about that. Right?"

    Of course NptAcq hasn't answered, but Vern has probably identified the possible motivation for requesting an adjustment to the target cost base. It appears that the contractor has been able to manage those costs over which it had control of and which it proposed in establish the contract target cost. The contractor may or may not have had control over the amount established for travel and "other" costs, we don't know.

    Contractor has apparently raised the issue 5 years after the contract started. It agreed to the target prices and line item prices when it signed the contract. However, we here don't know how long the Government or Contractor knew that the contract price for this line item was too low.

    How about some feedback to everyone's questions above, NptAcq? You want some advice and we are curious.

    Joel,

    I agree that it would be nice if our interlocutor came back to see what feedback the initial question generated.

    I must say, however, that I can't fully agree with your interpretation of the situation. It's not clear to me when the contractor discovered the faulty government estimate, or when the government knew its estimate was inaccurate. The government could have known anytime between issuance of the RFP and time now, while the contractor could have discovered the problem anytime between price negotiation and time now. The problem is, neither you nor I nor Vern know how "time now" correlates to the contract. Is time now contract year 1, year 5, or sometime in beween? Budgets and EACs get revised frequently; it does not necessarily follow that the contractor would discover the overrun only after it was incurred.

    Hope this helps.

  6. During the RFP stage the Govt provided estimates for travel, material and other costs. I prefer not to elaborate on what the "other" costs represent, but the "other" costs are for a specific item that is necessary for contract performance.

    Contract type is CPIF - cost performance is evaluated. The contractor term has the potential to extend to 15 years (because there are also award term provisions).

    In contract year 5, the "other" costs are actually significantly higher than the estimate provided in the RFP. The contractor has requested that the Target Cost and Incentive fee amount be increased to address this increase. The contractor feels the increase is justified because the Govt. provided the amount in the RFP.

    Any comments on this are appreciated.

    I'm interested in the timing. When did the Government first learn that it had provided a defective estimate to offerors in its RFP?

    If it learned of the defective estimate prior to negotiating the target cost and incentive fee values, did it have an obligation under the "good faith and fair dealing" standard to inform the successful offeror at that time?

    Was the offeror aware that the Government's estimate was subject to some uncertainty but chose to submit a bid anyway, using its known limited knowledge to price as accurately as it could, or could the situation be called a mutual mistake, wherein both parties thought the estimate was accurate, but it turned out not to be?

    I should think the answers to the above questions would help to frame the proper course of action.

    Hope this helps.

  7. Making payment to subs only after receiving payment from the government is typical.

    I must be misinterpreting the payment clauses found in government contracts.

    Excerpts from relevant contract payment clauses:

    -- For fixed-price contracts in which performance-based payments (PBPs) are utilized, the PBP contract clause (52.232-32) states that PBPs may be reduced or suspended by the Contracting Officer when "The Contractor is delinquent in payment to any subcontractor or supplier under this contract, in the ordinary course of business." Each PBP request must have an accompanying certification, which includes the statement "[Except as reported in writing on], all payments to subcontractors and suppliers under this contract have been paid, or will be paid, currently, when due in the ordinary course of business."

    -- For fixed-price contracts in which cost-based progress payments are utilized, the progress-payment clause (52.232-16) states that "The amount of financing and other payments for supplies and services purchased directly for the contract are limited to the amounts that have been paid by cash, check, or other form of payment, or that are determined due and will be paid to subcontractors -- (i) In accordance with the terms and conditions of the subcontract or invoice; and (ii) Ordinarily within 30 days of the submission of the Contractor's payment request to the Government." Moreover, the clause also requires the contractor to exclude from progress payment calculations "Payments made or amounts payable to subcontractors or suppliers, except for -- (i) Completed work, including partial deliveries, to which the Contractor has acquired title; and (ii) Work under cost-reimbursement or time-and-material subcontracts to which the Contractor has acquired title." Similar to PBPs (as noted above), progress payments can be reduced or suspended by the Contracting Officer when "The Contractor is delinquent in payment of the costs of performing this contract in the ordinary course of business."

    -- For cost-type contracts, the Allowable Cost and Payment clause (52.216-7) states that allowable (and billable) costs can only include "Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract. When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business [it may include] costs incurred, but not necessarily paid, for -- Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made (i) In accordance with the terms and conditions of the subcontract or invoice; and (ii) Ordinarily within 30 days of the submission of the Contractor's payment request to the Government."

    -- For T&M contracts, the payment clause (52.232-7) states that "... the Government will reimburse the Contractor for allowable cost of materials provided the Contractor -- (i) Has made payments for materials in accordance with the terms and conditions of the agreement or invoice; and (ii) Ordinarily makes those payments within 30 days of the submission of the Contractor's payment request to the Government and such payment is in accordance with the terms and conditions of the agreement or invoice."

    I'm not getting how paying subs after receipt of payment from the government is compliant with the clause language above. In jeffh's situation, what he is describing was arguably a false claim for which the DCAA auditor should have made a Form 2000 referral to the DOJ.

  8. here_2_help: We're not subject to CAS yet, and I appreciate (and found interesting) your commentary on what the CAS is really about. We don't meet all of the requirements of CAS, because it's not worth it until we have to, BUT, we are held to the core practices because we hold Federal cost reimbursable contracts.

    Okay, I'm getting off the soapbox now. I will just add a final thought: Your company is "held" to the agreement it strikes with its customers. Your agreement (contract) contains clauses and your company must comply with the requirements of those clauses. I would assert that your company does NOT need to comply with clauses that are excluded by statute and/or regulation from your contract.

    In particular, the idea that CAS-compliant practices represent "best" or "core" practices that apply to ALL Federal cost-type contracts is an assertion that is not supported, nor is it supportable. In fact, it's demonstrably false.

    I'm guessing EPA is a customer based on your comment about FMRs. I would advise you to not let them push your company down the road of CAS compliant cost accounting practices before you are required to go there. But I also note that you're not paying me for this advice, so it's probably not worth too much.

    Hope this helps.

  9. Here_2_help: Yeah, I didn't mean I was done, so much as I didn't want to drag this out for others. Your points are good. We are small, but the CAS represents solid accounting strategies, we need to accurately calculate our costs (so we know how cheaply we can do a job), and we don't see the point in operating outside CAS just because we can. You also right about allocation strategies, and we are looking hard at switching our practice to "value added" allocations (for purposes other than described here). Alas, even under Value Add, though, we would allocate indirect costs to all ODCs (including travel). But, I think we all agree that if we make a change to our allocation strategy, it has to be company wide and consistent across the board. So when a particular client wants us to do it differently for them, it poses some challenges. I guess if all of our indirects were allocated only to labor (built into labor rates), that would resolve this, but then another agency would do it's cost comparisons only on labor rates and that would hurt us.

    Contractor 2589,

    Believe me, I'm a big fan of CAS. It provides a good set of "rules of the game" and protects the contractor as much as the government. That said, small businesses are exempt from CAS for a reason. The reason is that CAS is a burdensome set of rules that causes untold headaches between accountants, contract administrators, and management. If you are not required to comply with CAS 410, why volunteer? Seriously, you are handicapping your company when you don't need to. Now, if you are a year away from full CAS-coverage, then of course complying now is the easier course ... but if not, then please erase the thought that "CAS represents solid accounting strategies." No, it doesn't. It represents compromises between lawyers and accountants, driven by DOD politics and interpreted by judges who have never made a journal entry in their lives. CAS is Rickover's revenge on GD and NNS.

    Now that I've roiled the waters, I will also advise you to look at your G&A pool to make sure that what you are calling G&A is truly the cost of managing the business "as a whole." If not, consider moving the costs out of G&A and into an overhead pool. As a small business, you are not bound by the CAS limits on changes to cost accounting practices either ... but watch out for TINA.

    Hope this helps.

  10. I suppose I do understand, then: The Government requires (through DCAA audits triggered by other agencies) that we adhere to proper accounting practices and allocate G&A costs evenly to ODCs (including all travel costs) across all clients and contract, BUT this particular agency insists on controlling how we calculate our proposed costs by requiring that we eat the G&A costs associated with this work.

    I think we are simply seeing an attitude of either A) "G&A isn't a real cost" or B) "its a real cost and everyone EXCEPT ME should pay it."

    I can tell you that (at least at my small business) G&A sure feels like a real cost when I write checks for insurance, accounting software systems, website hosting, phone systems, accounting staff payroll, outside CPA and legal support, travel to Government trade shows, payroll for staff writing proposals, rent for our corporate office, corporate staff health insurance and annual leave, etc.

    (Please excuse the sarcasm here, but to illustrate...) Maybe instead of capping G&A, the agency could consider saying that "labor rates may not include overhead costs associated with office rent" (or copier charges, or electricity, or staff training, or employee health insurance).

    I think I'm done with this topic, and I sincerely appreciate all the input. I think we'll just increase our profit on labor to make up for the G&A loss in this case, but I really believe that the Government should try to find ways to promote open competition and stay out of trying to control internal cost-calculation methods.

    Just in case you're not quite done -- a couple of points.

    1. If you are truly a small business, then you are exempt from CAS.

    2. Depending on the size of the award, consider changing your G&A allocation methodology so as not to allocate G&A on a Total Cost Input (TCI) base. CAS 410 permits several allocation methods, including use of a single cost element, such as direct labor dollars, when appropriate.

    Hope this helps.

  11. If we do not have the expertise in house, can we hire someone to come in to testify on our behalf? I reviewed an older Federal Appropriations Law Course Book and didn't see any mention of this.

    JLchief55,

    The Government frequently uses outside expert witnesses in litigation. I assume the witnesses receive remuneration from appropriated funds--how else would they get paid? But I confess I don't know that for a fact.

    Joel or Vern may have a more definitive answer for you.

  12. Here 2 help,

    I was pleasantly surprised to see Herb Fenster mentioned. I didn't realize that he was involved with the A-12 case.

    The guy is a national resource, much like Vern.

    Well, I guess there's no school like the old school. I've met the man and he is quite impressive.

    With respect to his involvement in A-12 litigation, it appears that, at some point in the past 10 years, his firm's involvement faded away. I see from a Google search, however, that he was involved in the RIM (BlackBerry) patent litigation of a few years ago -- another huge case with millions if not billions riding on the outcome.

    http://www.msnbc.msn.com/id/10989832

    We often tell posters that they should seek the advice of a skilled attorney who has experience and knowledge in government contracting matters. There really aren't that many; it's a fairly exclusive club. Herb is a senior member in good standing of that club, really kind of an elder statesman.

  13. I agree with Vern's comment regarding use of contract type to control cost risk. It's a lesson more people need to learn.

    I thought I would add this link to Herb Fenster's 1999 article on the subject, originally published in USNI's Proceedings. (The litigation hadn't even hit its first decade when the article was written.) Fenster essentially argues that the US Navy had unclean hands to the point where it fraudulently induced General Dynamics and McDonnell Douglas into bidding on the fixed-price contract. I like the title -- "It Wasn't an Airplane, It Was a Trainwreck".

    Enjoy.

    http://www.d-n-i.net/fcs/comments/c235.htm

  14. here_2-help:

    I don't see how it makes any sense to call a credit an allowable cost. Credits are neither allowable nor unallowsable. In the terminology of government contracting credits are not costs, they are offsets to costs, and are either allocable or not allocable. Credits are not comparable to unallowable costs in their effect on billings. Unallowable costs do not reduce billings.

    Vern, you are correct. Credits are neither allowable nor unallowable. I was trying to move NptAcq off the belief that credits are unallowable costs, and in my attempt to communicate with that poster, I erred on the technical side.

    That said, from the contractor's perspective, unallowable costs and credits both do the same thing on a cost-type contract. They both reduce otherwise billable cost amounts. They both reduce project margins from what they would have been, had the costs been otherwise allowable or had the credits not been allocated to the contract.

    Example: Cost plus Fixed Fee contract type. Fixed Fee is 10% of estimated costs, contractor is currently within cost/funding limitations.

    A. Contractor incurs $1,000,000 in total costs, fully allowable, and submits an invoice for $1,100,000 to the Government (total allowable cost plus 10%).

    B. Contractor incurs $1,000,000 in total costs of which $100,000 is unallowable. Contractor submits an invoice for $990.000 (total allowable cost plus 10%). From the contractor's perspective, reduction in billings is equal to $1,100,000 less $990,000 or $110,000.

    C. Contractor incurs $1,000,000 in costs but there is a credit allocated to the contract in the amount of $100,000, so total cost is equal to $900,000. Contractor submits an invoice for $990,000 (total allowable cost plus 10%). From the contractor's perspective, reduction in billings is again $110,000.

  15. Target Fee was calculated at 2.5% of Target Costs. Target Costs included cost recoveries (net). Based on this my initial thought was that I should include cost recoveries in the actual cost amount used in the Incentive Fee Evaluation. However, the incentive fee clause (52.216-10) references the use of total allowable cost and cost recoveries (credits) are not allowable costs.

    Why do you say that the cost recoveries are not allowable costs? What FAR cost principle or contract provision makes those recoveries unallowable?

    Credits, per se, are allowable costs. They act to reduce billings, as do unallowable costs, but they are not the same thing.

    Hope this helps.

  16. Thanks, Here_2_Help.

    However, for some interesting reading, see the below URL. It is a a letter by the head of the Professional Services Council written in 1998 to the CAS board review panel. The writer cites some historical communications from the GAO about the need for disclosed/consistency requirements in accounting practices to help proposal evaluators compare proposals that were submitted under TINA (negotiated procurements).

    http://www.pscouncil.org/pdfs/GAOCostAccou...June16,1998.pdf

    The writer opines

    "...one of the driving concerns which led to the conclusion that cost accounting standards were needed was the large number of negotiated procurements in which prices were based on cost estimates, supported by cost data, in the context of a lack of competition and a lack of market restraints."

    The writer further opines that

    "The CAS Board has no mission with respect to contracts for which cost or pricing data are not required or submitted. Any procurement that does not require cost or pricing data submission must also not require compliance with cost accounting standards."

    Does this provide some further insight ??

    Hi govtacct02,

    The PSC letter was advocating a position. That position was that contracts exempt from TINA should also be exempt from CAS. While I tend to agree with that position from a philosophical point of view, I think time has now passed it by. I don't think that same position would be advocated today with any serious expectation that the CAS Board would modify the CAS exemptions to add "any contract exempt from TINA is also exempt from CAS." To the contrary, in fact, as the CAS Board is currently seeking public input regarding eliminating a current exemption, that being for contracts executed and performed entirely outside the U.S.A.

    Again, linkage between TINA and CAS is tenuous at best. Different public laws, different sections of the FAR, different contract clauses with different language. One is a disclosure requirement with a fixed compliance period that ends on the date of price agreement, while the other may or may not involve disclosure, but definitely includes compliance with specific rules, on-going administration of cost accounting practices, and advance notification of changes to cost accounting practice, with a compliance period extending from the initial proposal preparation through contract close-out. The fact that they are both public laws and require compliance does not mean that there is any "relationship" between the two.

    And as I think about it, there is actually some tension between the two requirements. CAS coverage is determined at the time of contract award, and subsequent modifications do not change whatever CAS coverage was initially determined. Contrast that with TINA, in which a contract might be initially exempt because of competition, but subsequent pricing actions (proposals for equitable adjustments, for example) could be subject to TINA. All in all, I think it's best to keep the two requirements separate.

    Hope this helps to clarify.

  17. Now if you have a link to a site that would clearly explain the relationship between Cost Accounting Standards and Certified Cost and Pricing Data, I would be even more grateful than I am already!!

    Thanks so much -

    There are only two commonalities between CAS and TINA. The first is that they share the same threshold ($650,000). The second is that cost impacts to fixed-price contracts from changes to cost accounting practice are treated in a similar fashion to defective pricing -- i.e., contract price reduction.

    Otherwise, there is no relationship between the two. Different public laws, different sections of the FAR, different issues altogether.

    Hope this helps.

  18. whynot,

    I'm having trouble parsing your language. But let me take a crack at an answer anyway.

    The answer to your question likely depends on the nature of the "pre-award audit". If the audit is in the nature of fact-finding, i.e., reviewing the support for the prime contractor's proposed costs, then I think the answer is "no, the contractor cannot be compelled to supply the requested supporting data." The natural result of failure to support proposed costs will be a large amount of questioned costs, which likely will affect the contracting officer's negotiating position. In other words, contractors who cannot or will not support proposed costs, should not expect to negotiate a price that includes the unsupported costs.

    If what is being negotiated is a commercial item as per FAR 2.101, then my answer above would be different.

    If the pre-award audit is a pre-award accounting system survey to see if the contractor can administratively support a contract award, again I think the answer is "no, the contractor cannot be compelled to support the audit with personnel or with documents." In this situation, however, I would expect the result of this failure to result in the contractor being determined not to be responsible and it likely will not receive the award.

    Hope this helps.

  19. Orion,

    1. Do you have a contract with the entity being terminated? If so, what does it say about payment? If not, how do you (and the terminated entity) establish that you are an independent contractor?

    2. Does your contract contain flow-down and other clauses that establish you to be a subcontractor? If not, why do you think you qualify for treatment as a subcontractor? Could you not simply be a management consultant?

    3. If the terminated entity has included your costs in its Termination Settlement Proposal (TSP) then I believe it needs to pay you in the "ordinary course of business". That term is defined inconsistently among the various FAR payment clauses and, frankly, I'm not 100% clear on how it operates in a T4C environment. But the most common definition I can find is a) in accordance with the terms of your consulting contract, and/or B) within 30 days of submitting a request for payment to the Government. (Paraphrasing significantly here.) Where does your situation stand vis-a-vis the FAR definition of "ordinary course of business"?

    4. In my view, your best course of action lies with an attorney. Depending on your answer to #1, above, you may want to consult with an employment attorney. Appealing to the TCO is not going to avail you much of anything, in my opinion.

    But good luck!

    H2H

  20. I had a case where the actual manufacturer would not sell directly to the government. The contractor did not want to be bothered with govn't source inspection. So we got a quote from a firm that will buy the part, package IAW w/ the specs and then allow the QAR to come in and inspect the material. In this case the distributor was the only offeror. The quote was around $60,000. The buyer had no pricing history, no similar items to compare it with. So the buyer asked the distributor to provide a cost breakdown. Included in the cost breakdown was $1000 for interest. This would be unallowable, right?

    trplyr,

    I'm a bit hesitant to answer your question directly, because I feel that I'm missing some aspects of the situation. For example, you say "The buyer had no pricing history ..." but you don't say whether the seller could have provided information other than cost or pricing data -- e..g, prices at which it had sold this item in comparable quantities and similar terms & conditions. You say "the actual manufacturer ... did not want to be bothered with govn't source inspection" but you don't address whether the item might have (or actually did) qualify as a Part 12 acquisition (commercial item).

    I am pretty clear that (a) if this was a negotiated procurement and not an acquisition of a commercial item or a sealed bid, and (B) if the government used cost analysis, then yes, during negotiations the government should deduct the value of the contractor's proposed unallowable cost (e.g., unallowable interest expense) when establishing the price that the government will pay.

    But this scenario reeks of a commercial manufacturer using a commercial distributor. Let me ask you this: if the manufacturer won't permit government source inspection, and its distributor cannot read the FAR well enough to know that it should not propose interest expense when justifying its proposed price, what makes you think that these two entities are going to be able to comply with any other contract term? (I'm thinking Buy American Act, Trade Agreements Act, Specialty Metals restrictions, etc.) Are you sure that they are presently responsible, including financially viable? Are you sure that Section K was accurately executed -- i.e., does this team even understand what they are executing?

    I don't mean to make a "federal case" out of this. But something (actually more than one something) is raising the hairs on the back of my neck and setting off my mental alarm bells. Do you think you might discuss this with your supervisor?

    Don't mean to get you all freaked-out, hope this helps.

  21. Am I missing the boat here? Doesn't FAR 31.205-20 apply to FFP contracts?

    Of course it does, trplyr, in many (but not all) situations.

    "The cost principles are applicable to the pricing of contracts, subcontracts, and modifications whenever cost analysis is performed. ... The cost principles apply to the determination, negotiation, or allowance of costs whenever required by a contract clause." (Government Contract Costs & Pricing, 1st Ed., Karen Manos, author)

    See FAR 31.102.

    Hope this helps.

  22. Hi trplyr,

    I don't think you are looking at this in the right way. If you'll permit me, the price reduction flows from a change in the proposed profit, and should not be related to any change in proposed costs.

    Look at it this way, if a contractor has to finance contract costs over a significant period, it probably incurs interest, which is an unallowable cost. Unallowable costs reduce the contractor's profit. So if it has to cover the unallowable cost, it needs to receive more profit. If you eliminate the contractor's need to incur the unallowable interest cost, in a competitive situation the logical outcome should be that it will propose a lower profit amount, which will reduce its proposed price to the government.

    Hope this helps.

  23. I see that you can copy and paste from the FAR, but you should probably take some time to understand it before doing so. FAR 3.501 doesn't prohibit the practice of buying-in. Read it. Further, buying-in does not mean that the contractor intends to submit fraudulently priced change orders, either.

    I think my savvy contractor can ward off any legal challenges with a mediocre legal defense team.

    Don, seriously, please re-read my post responding to your post. Your post said "If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?"

    Your plain language indicates that you expect your "savvy contractor" to buy-in with the intention of getting well ["make up for any losses"] through equitable adjustments. That is exactly the practice the FAR terms an improper business practice.

    And if you will take a moment and re-read my post, you will see my position is clearly stated: "I have no problem with the initial buy-in. It's the getting well through fraudulently priced change orders or inflated bids for follow-on contracts that cause my problem."

    When a contractor submits change orders priced to not only cover the costs of performing the changed work, but also to cover losses it would otherwise incur from its initial decision to buy-in, that's what creates the fraud part, or so a prosecutor might well allege.

    My feeling was, and still is, that your original post quoted above was misleading. At a minimum, you failed to address the issue through citation to the appropriate FAR language. I remedied that omission through my honed "cut-n-paste" skillz. Now you might have posted hastily with some ill-chosen phrasing, and consequently perhaps we are on the same page after all. But I felt the need to point out to others, perhaps newbies at the whole "government contracting" thing, that buying-in with the intention of getting well through change orders is officially frowned-upon, and contracting officers need to be vigilant about detecting and reporting such improper practices.

    Hope this helps to clarify.

  24. Also, I sense that you have a problem with a contractor who "buys-in." I don't, and let me explain why.

    *****

    If I'm a savvy contractor who knows these rules and wants to make money on a fixed-price contract where price was going to be a dominant factor in choosing who gets the award (and I anticipated a lot of change orders), wouldn't it make sense to offer a price as low as I could possibly stand (even below cost) in hopes that I could win the award and make up for any losses through equitable adjustments?

    Don,

    I have a problem with your "savvy" contractor's strategy, and let me explain why.

    It's a little thing we call the Federal Acquisition Regulation or FAR. It's got this little piece at 3.501 that discusses "buying-in" and requires a contracting officer to "take appropriate action to ensure that buying-in losses are not recovered by the contractor through the pricing of (1) change orders; or (2) follow-on contracts subject to cost analysis."

    I have no problem with the initial buy-in. It's the getting well through fraudulently priced change orders or inflated bids for follow-on contracts that cause my problem. I would hope that your "savvy" contractor can afford a good legal defense team.

    Hope this helps.

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