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  1. The clause 52.216-7 is mandatory for certain contract types, including cost-reimbursement types. See the language at (B)(1)(ii), below.

    52.216-7 Allowable Cost and Payment.

    As prescribed in 16.307(a), insert the following clause:

    Allowable Cost and Payment (Dec 2002)

    (a) Invoicing.

    (1) The Government will make payments to the Contractor when requested as work progresses, but (except for small business concerns) not more often than once every 2 weeks, in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract.

    (2) Contract financing payments are not subject to the interest penalty provisions of the Prompt Payment Act. Interim payments made prior to the final payment under the contract are contract financing payments, except interim payments if this contract contains Alternate I to the clause at 52.232-25.

    (3) The designated payment office will make interim payments for contract financing on the _________ [Contracting Officer insert day as prescribed by agency head; if not prescribed, insert "30th"] day after the designated billing office receives a proper payment request. In the event that the Government requires an audit or other review of a specific payment request to ensure compliance with the terms and conditions of the contract, the designated payment office is not compelled to make payment by the specified due date.

    (B) Reimbursing costs.

    (1) For the purpose of reimbursing allowable costs (except as provided in paragraph (B)(2) of this clause, with respect to pension, deferred profit sharing, and employee stock ownership plan contributions), the term ?costs? includes only?

    (i) 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;

    (ii) When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for?

    (A) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made?

    (1) In accordance with the terms and conditions of a subcontract or invoice; and

    (2) Ordinarily within 30 days of the submission of the Contractor?s payment request to the Government;

    (B) Materials issued from the Contractor?s inventory and placed in the production process for use on the contract;

    © Direct labor;

    (D) Direct travel;

    (E) Other direct in-house costs; and

    (F) Properly allocable and allowable indirect costs, as shown in the records maintained by the Contractor for purposes of obtaining reimbursement under Government contracts; and

    (iii) The amount of financing payments that have been paid by cash, check, or other forms of payment to subcontractors.

    (2) Accrued costs of Contractor contributions under employee pension plans shall be excluded until actually paid unless?

    (i) The Contractor?s practice is to make contributions to the retirement fund quarterly or more frequently; and

    (ii) The contribution does not remain unpaid 30 days after the end of the applicable quarter or shorter payment period (any contribution remaining unpaid shall be excluded from the Contractor?s indirect costs for payment purposes).

    (3) Notwithstanding the audit and adjustment of invoices or vouchers under paragraph (g) of this clause, allowable indirect costs under this contract shall be obtained by applying indirect cost rates established in accordance with paragraph (d) of this clause.

    (4) Any statements in specifications or other documents incorporated in this contract by reference designating performance of services or furnishing of materials at the Contractor?s expense or at no cost to the Government shall be disregarded for purposes of cost-reimbursement under this clause.

    © Small business concerns. A small business concern may receive more frequent payments than every 2 weeks.

    (d) Final indirect cost rates.

    (1) Final annual indirect cost rates and the appropriate bases shall be established in accordance with Subpart 42.7 of the Federal Acquisition Regulation (FAR) in effect for the period covered by the indirect cost rate proposal.

    (2)(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years. Reasonable extensions, for exceptional circumstances only, may be requested in writing by the Contractor and granted in writing by the Contracting Officer. The Contractor shall support its proposal with adequate supporting data.

    (ii) The proposed rates shall be based on the Contractor?s actual cost experience for that period. The appropriate Government representative and the Contractor shall establish the final indirect cost rates as promptly as practical after receipt of the Contractor?s proposal.

    (3) The Contractor and the appropriate Government representative shall execute a written understanding setting forth the final indirect cost rates. The understanding shall specify (i) the agreed-upon final annual indirect cost rates, (ii) the bases to which the rates apply, (iii) the periods for which the rates apply, (iv) any specific indirect cost items treated as direct costs in the settlement, and (v) the affected contract and/or subcontract, identifying any with advance agreements or special terms and the applicable rates. The understanding shall not change any monetary ceiling, contract obligation, or specific cost allowance or disallowance provided for in this contract. The understanding is incorporated into this contract upon execution.

    (4) Failure by the parties to agree on a final annual indirect cost rate shall be a dispute within the meaning of the Disputes clause.

    (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates.

    (6)(i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may?

    (A) Determine the amounts due to the Contractor under the contract; and

    (B) Record this determination in a unilateral modification to the contract.

    (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause.

    (e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates?

    (1) Shall be the anticipated final rates; and

    (2) May be prospectively or retroactively revised by mutual agreement, at either party?s request, to prevent substantial overpayment or underpayment.

    (f) Quick-closeout procedures. Quick-closeout procedures are applicable when the conditions in FAR 42.708(a) are satisfied.

    (g) Audit. At any time or times before final payment, the Contracting Officer may have the Contractor?s invoices or vouchers and statements of cost audited. Any payment may be?

    (1) Reduced by amounts found by the Contracting Officer not to constitute allowable costs; or

    (2) Adjusted for prior overpayments or underpayments.

    (h) Final payment.

    (1) Upon approval of a completion invoice or voucher submitted by the Contractor in accordance with paragraph (d)(5) of this clause, and upon the Contractor?s compliance with all terms of this contract, the Government shall promptly pay any balance of allowable costs and that part of the fee (if any) not previously paid.

    (2) The Contractor shall pay to the Government any refunds, rebates, credits, or other amounts (including interest, if any) accruing to or received by the Contractor or any assignee under this contract, to the extent that those amounts are properly allocable to costs for which the Contractor has been reimbursed by the Government. Reasonable expenses incurred by the Contractor for securing refunds, rebates, credits, or other amounts shall be allowable costs if approved by the Contracting Officer. Before final payment under this contract, the Contractor and each assignee whose assignment is in effect at the time of final payment shall execute and deliver?

    (i) An assignment to the Government, in form and substance satisfactory to the Contracting Officer, of refunds, rebates, credits, or other amounts (including interest, if any) properly allocable to costs for which the Contractor has been reimbursed by the Government under this contract; and

    (ii) A release discharging the Government, its officers, agents, and employees from all liabilities, obligations, and claims arising out of or under this contract, except?

    (A) Specified claims stated in exact amounts, or in estimated amounts when the exact amounts are not known;

    (B) Claims (including reasonable incidental expenses) based upon liabilities of the Contractor to third parties arising out of the performance of this contract; provided, that the claims are not known to the Contractor on the date of the execution of the release, and that the Contractor gives notice of the claims in writing to the Contracting Officer within 6 years following the release date or notice of final payment date, whichever is earlier; and

    © Claims for reimbursement of costs, including reasonable incidental expenses, incurred by the Contractor under the patent clauses of this contract, excluding, however, any expenses arising from the Contractor?s indemnification of the Government against patent liability.

    (End of clause)

  2. I'm doing some research on DCAA's use of real-time "flash" audit reports. My thesis is that flash audit reports historically were issued to warn PCOs of contractor deficiencies that might impact contract pricing actions. That's why flash reports related to estimating system deficiencies are reportable audits in CAFU but other flash audit reports are not (at least, that's how I read DoDI 7640.02). Recently, however, DCAA seems to be issuing flash reports as a matter of routine, using them to document audit leads and other miscellaneous findings that clearly have no impact on current contract pricing actions. The "routine" flash reports have the same distribution as the estimating system reports, as far as I can tell.

    I confess I have little to go on other than gut feel. I can't find any guidance that discusses the reports other than the CAM or the DoDI noted above. So I'm soliciting any input -- anecdotes, reference material, etc. -- that might confirm, or refute, my thesis.


    Thanks for the help.

  3. Orion,

    I assume you have some type of contract in place with the contractor. What does it say about payment terms?

    In my view, this has nothing to do with T4C or the Termination Contracting Officer or the Air Force. This is a private matter solely between you and your client.

    You have plenty of options, including legal ones. Why not pursue them?

    Hope this helps.

    (P.S., my contracts generally call for payment within 15 days. I'm currently awaiting a payment that's now past 60 days due. I feel your pain.)


  4. I'm not sure I follow your question, even as Vern has rephrased it. Are you saying the government has disallowed exec comp because it exceeded the cap established in 1998 or the cap that was in effect in the year in which the services were performed? The cap has been raised every year since 1999. In what year was the contract awarded and in what year was the accomplishment mod issued?


    As I understand the issue, the original contract was effective prior to the date that the executive compensation caps were implemented in 31.205-6. A modification was subsequently executed after the caps became applicable. Somebody has alleged that the contractor has incurred unallowable executive compensation. The contractor is arguing that, since the effective date of the contract was prior to the implementation of the compensation caps, the "excess" compensation costs can not be deemed unallowable with respect to that contract. Somebody else seems to be arguing that, since the modification included 52.216-7, it established a new effectivity date and thus incorporated the modified cost principle.

    The question omits a discussion of the controversy regarding whether the executive compensation caps were retroactive (I believe General Dynamics litigated that point). In any case, Vern is right that one would need to see the entire contract and the entirety of the modification in order to figure out what the parties intended, and I bet there are some extremely pertinent facts/circumstances that would need to be fleshed out ... especially since "pricing" is not the same as cost accounting and/or billing.

  5. I probably would not terminate a contract for default because a contractor failed on one occasion to obtain subcontractor cost or pricing data through ignorance or neglect. However, if a contractor refused to obtain it on grounds of a half-baked theory like Joel's, you can bet that I would issue a cure notice and give T for D serious consideration.


    I await your new thread with interest and anticipation.


    The point I was trying to make was that, if the government did not have a monetary remedy available under TINA, perhaps it would not be treated as TINA matter. We've discussed that point.

    There's no need for another thread.

  6. You don't see it? Really? I think that an argument could be made that refusal to comply with a contract clause that implements a statutorily mandated obligation might be considered sufficiently serious to warrant T for D. Prove I'm wrong. See Inter-Continental Equipment, Inc., ASBCA No. 37422, 96-1 BCA 28048, in which the board upheld a termination for default because the contractor failed to comply with FAR 52.247-64, ?Preference for Privately Owned U.S.-Flag Commercial Vessels, Alternate I (APR 1984).? According to the board:

    Hope this helps you see it.

    Vern, my point was that I would see a TforD as being unwarranted in a situation where the government suffered no harm. I acknowledge it is a possible course of action, but one I would find unlikely, given the circumstances. In the case you cited from, the government could allege actual harm.

    As a counter example, I have been part of multiple CPSR reviews, where several failures to comply with clauses that implemented statutorily mandated obligations were encountered. (E.g., failure to obtain EEO clearance when required, failure to flow down CAS admin. clause when required, etc.) In NONE of those instances did the DCMA reviewers ever recommend, consider, discuss, or even mutter under their breath, a TforD as the government's remedy. I would be surprised if the hypothetical situation I posited would be treated differently.

    Again, it is a possible course of action, but why? Just as a negotiating tactic to bludgeon the contractor into giving some form of consideration?

    I reiterate: I don't see it [happening] -- but I acknowledge that it could happen.

  7. The remedy might be termination for default. See, e.g., FAR 52.249-8(a)(1)(iii) or 52.249-9(a)(1)(iii). In lieu of termination for default the government might accept some other consideration.

    Vern, I'm not seeing it, unless the Government has suffered some substantive harm in the scenario I posted.

    "A default termination is a drastic sanction, which should be imposed and sustained only on ?good grounds and on solid evidence.? E.g., Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987). Government contract provisions authorizing termination of a contract for default are a species of ?forfeiture? and are to be strictly construed. Forfeitures are not favored, and one who asserts that there has been a forfeiture is held to the letter of its authority."

  8. This has been a very helpful discussion. I have a question though.

    Let's say that the contractor in this example -- the one with the FFP contract who's changing subcontractors after award -- does NOT obtain cost or pricing data from its second subcontractor, as Vern and others have asserted must be done. Thus, the contractor has violated contract clause requirements as well as the TINA statute requirements.

    My understanding is that the Government's remedy is a unilateral price reduction for the amount of the costs that were defectively priced, plus interested on any overpayments.

    In this hypothetical example, how would the Government calculate its damages? What would its remedy be?

    If there are no damages, because the Government did not rely on the second subcontractor's cost or pricing data when negotiating the value of the prime contract, and there are no overpayments because the prime contract is FFP, then where do the parties go from here?

    Answering those questions would help me understand better what the dynamics are.

  9. Thanks.

    On a whimsical note, I have to ask you when you think the Working Group guidance should lose its "interim" status? After all, we're talking about the seventies here. The "interim" guidance is, what, roughly 40 years old? At what point do the working group documents ever become "final" guidance papers?

    just wondering ... B)

    And for others, let's be clear that we are talking about DOD-specific guidance issued in the 1970's to help contracting officers and others address issues/concerns with the then newly issued CAS rules and Standards. It is/was internal guidance only and not found in any statute or regulation. The DOD guidance has/had no effect on other agencies, and no effect on contractors, and has not (to my knowledge) been recognized as authorative by any court. The guidance is, however, embedded into current DCAA audit guidance, and thus affects how DCAA views and interprets CAS requirements today.

    Hope this helps.

  10. Couldn't the orders trigger or affect CAS requirements under certain circumstances?

    For instance, assume the contractor is not currently subject to CAS because none of its contracts are greater than $7.5 million in value, but then it receives a single order in excess of $7.5 million. Would not future orders in excess of $650,000 be subject to CAS (assuming no other exemption was available)? Would not those CAS-covered orders need to be tracked and aggregated to determine the level of CAS coverage?

    For instance, assume the contractor was subject to CAS (or became subject to CAS under the above scenario), but was able to claim modified coverage because it did not receive more than $50 million in CAS-covered contracts in a single year. However, in the next year it received a number of orders under the BOA whose aggregated value exceeded $50 million. Would not future orders in excess of $650,000 be subject to full CAS coverage (as opposed to modified coverage)? Would not the contractor then be required to file a CASB DS-1 Disclosure Statement?

  11. Are the DoD CAS Working Group Interim Gudance Papers available on the web?

    I think you can find most of the substance of the CAS Working Group guidance within the DCAA Contract Audit Manual. If you need the exact papers, Lou Rosen collected them -- along with the Standards and preambles -- in a single book published last year. I don't believe they are available on the web outside of CCH or other subscription service.

    Hope this helps.

  12. Hello all-

    I'm a past member of this board, a continual lurker, and have just re-registered after reading this thread. Thank you for this discussion as interdivisional transfers are near and dear to my heart.

    I'm a Contract Manager for an international company with close to 80 separate legal entities performing as one company. Our company, an LLC, was established specifically to do business with the Government and is CAS Compliant (most days). We have moved most of the U.S. based performing resources into the LLC and have, thereby, solved many of the problems we had on this side of the pond. However, one of our selling points is access to the technologies and technologists that we have in other divisions abroad. Currently I am managing six different interdivisional transfers to sister companies performing U.S. contract work in Europe. After six years I can tell you that interdivisional transfers have caused more heartburn then any other issue that I've encountered in my 25+ years of dealing with the government!

    Quickly, here are a couple of points of note:

    Interdivisional transfers at cost are make and not buy (FAR15.407-2) and are not considered as subcontracts. As such you can treat them differently than subcontracts in terms of indirect pools. For us we use a determining factor based if we consider the effort "staff augmentation" and have criteria defined to make the determination.

    FAR 31.205-26(e), "on the basis of cost incurred" can ONLY be interpreted as 52.216-7 if you have a cost type prime. This a really poorly thought out idea IMO. The goal seems to be to remove any opportunity to pyramid fee, but because of the 52.216-7 requirements I have had divisions failing accounting system audits, floor check audits, and have had to require them to submit IC submissions, all for $40k in annual cost. Throwing out the rest of Part 15 (T&M no fee, fixed price no fee, etc.) and with no way to bring materiality (or sanity) in to the equation makes dealing with affiliates much worse than subcontractors.

    6-313, Intercompany Transfers, of the Audit Manual states, "Under these conditions, amounts in excess of actual or estimated cost should be questioned." Has anyone ever gotten DCAA to accept "estimated" costs as part of an incurred cost audit? Our foreign divisions can do an o.k. job of estimating what the Government considers allowable costs but have a hard time accumulating and reporting in a manner that the DCAA will accept. It appears from this guidance that they could accept less than full compliance but they won?t.

    Interdivisional transfers at price are still considered make but are identified separately in in proposal in accordance with FAR 15.2. In our accounting system we treat these the same as subcontracts but I do not treat them as subcontracts for Subcontracting Plans and other reporting. I have pushed hard with my customer to obtain exemptions based on commercial knowing that it's a real stretch for most services but also knowing it's the only way to bring some sanity to the process for smaller efforts.

    One little issue that's been growing with DCAA European are indirect allocations to our affiliates from our parent as part of the affiliate's IC audit. They say that because the affiliate includes those allocations in its indirect calculations then the costs must be supported with an Incurred Cost Submission and audit. DCAA over here has asked for support for indirect allocations from the parent as part of our audits but has never asked for an IC Submission from the parent.

    I am currently in the process of writing a policy for interdivisional transfers to our LLC. If someone out there already has such an animal I would love some insight.

    Thanks again for addressing this issue, and I welcome any input you might have.

    Gwestbury, Thanks for a great post.

    I like the reference to 15.407-2 and am now adding to my ammo belt to be used when discussing subcontracts versus inter-organizational transfers. If you are talking about accounting system audits and floorchecks and etcetera, for $40,000 in work, then that's ridiculous. The only thing I have found that helps companies such as yours is competition. Companies that compete their affiliates against non-affiliated entities stand a better chance of getting out of the mess(es) caused by 31.206-26(e) and 52.216-7.

    In one case we gave up on pricing any corporate allocations into rates just to avoid the associated reviews & audits. In another case, we negotiated a memo of understanding that the ultimate Government customer would accept audit reports/findings from the local country audit agency (not DCAA!). The amusing part is that the audit reports were prepared in the native language, and somebody (not us) had to get the reports translated.

    Other than that, I've got nothing.

    Hope this helps.

  13. ERS,

    Vern's advice is solid (as usual). Although in the past he's called such efforts exercises in "creative writing," he's given you a roadmap to getting a good grade for your efforts, and you should follow it.

    That said, I'm wondering why you and your company need to ask these questions. Not that there's anything wrong with the questions, per se, but they indicate (at least to me) that your company may not be as prepared as it could be to respond to the solicitation. There are a thousand consultants and professional proposal writers who want to help you succeed (and get paid for it, naturally). If your company is not availing itself of their expertise, then you may be missing a trick or two.

    Asking questions on WIFCON is fine. You'll get good advice from people like Vern who've reviewed and evaluated lots and lots of contractor proposals. You might even get some vague advice from people like me, who've written and priced several contractor proposals (some of which were actually successful). In any case, the answer to your particular question is as much a matter of project/program management as it is anything else. As I noted, subcontractor management is not solely the province of the contractor acquisition workforce.

    In fact, I recently argued at a local NCMA meeting that the job of those folks was to place the right contract at the right price in a timely fashion, and then to (mostly) get out of the way and let the program team execute. The expertise needed to create the right contract vehicle at the right price is invaluable; yet I find too many contractor "contract managers" want to own subcontract oversight and management as well, refusing to cede that territory to the program execution team. There are good reasons for Government contracting officers to be the owners of the post-award contract administration processes. I argued that there were far fewer good reasons for contractors' acquisition professionals to own those processes.

    My point is that, no matter how great the answers you get from WIFCON are, on this particular topic I would argue that you are getting only a part of the complete answer. Although Vern gave you a great structure and the right process steps for developing your answer, at the end of the day the content has to be your company's own and, unless you have the particular expertise to answer the mail yourself, you'll need to involve other corporate functions in creating that content.

    Hope this helps.

  14. When the government asks you to describe your ability to control and manage your subcontractor's, besides contract type, can someone provide other examples that the government likes to see or should be in place?



    Interesting question and one whose answer, I would assert, transcends the contract or acquisition management function. I hesitate to get too specific, because I think the answer depends on the type of work being performed. For example, I would expect management of construction subcontractors to be different--at least to some extent--from management of service subcontractors or build-to-print manufacturing subcontractors. So I'm not sure I (or anybody else) can do much more than point you in certain directions.

    It's been clear to me for a while that, where multiple subcontractors and multi-tier supply chains exist, effective management of said subcontractors is the real key to effective program execution. I can point you to a couple of white paper/informercials on that topic, if you like.

    The "iron triangle" or "triple constraint" of program execution is, traditionally: on-budget, on-schedule, and meeting quality and performance specifications. I imagine your government customer might want to understand how you intend to manage and control subcontractors in order to achieve those goals. Generally speaking, Earned Value Management Systems (EVMS) play a key role in that process. (I believe there is an interesting EVMS piece on WIFCON's analysis page. :D ) Integration of subcontractor status, CCDR and variance analysis with prime contractor EVMS data is an interesting topic.

    Another interesting topic is change control and compliance with Limitation of Funds/Limitation of Cost clauses.

    Recently, I have become interested in implementing risk management into both EVMS and supply chain management. DOD has an interesting manual/booklet on integrating EVMS with risk management. but there is not too much on integrating risk management with supply chain management. Such topics as risk-adjusted competitive price analysis need better coverage, in my opinion.

    Your communication protocols and associated IT infrastructure might reasonably be viewed as playing a role in effective management and control of subcontractors, I should think.

    There may be lots of other vectors to approach the subject, but those come immediately to mind.

    Hope this helps.

  15. here 2 help: Thanks for the detailed rebuttal to my e-mail. I learned a lot reading your response, the least of which is that I should not have responded to bigred's initial inquiry without having the knowledge required to do so.


    What dwgerard said. No worries; I've made (more than) my share of missteps. This is a place for sharing and learning.

    I just wanted to clarify for the other readers, so that they would better understand the position that the C.O. and bigred's company is in. I think Joel's response is reasonable and fair. I hope bigred posts a follow-up message to tell us how the issue was handled.

    I just wanted to help.

  16. I don't agree that the subcontract needs to be "directly related" to the prime contract, if by that you mean that the subcontract price must be directly charged to the prime contract. In my opinion, the $10 million contract in question should contain the clause.

    According to the clause, if "any supplier, distributor, vendor, or firm that furnished supplies or services to or for a prime contractor" for "performance of a prime contract or a subcontract," then the clause must be flowed down. I cannot that the clause need not be flowed down to a utility. That is not at all clear to me from the language of the clause. Nor, in my opinion, can it be clear to you. You must be applying some kind of "common sense" rule to the interpretation of the clause. That approach is notoriously unreliable in government contracting.

    I believe that if a prime contractor enters into a contract with another firm for supplies or services and any of part of those supplies or services end up being used in the performance of the prime contract, then the contract with that firm must receive the clause. If you think I'm wrong, prove it from the language in the clause.

    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).

  17. You're reading the wrong definition of subcontract. The one you quoted is from FAR Part 44. The one that counts is the one in FAR 3.1001 and in 52.244-6.

    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.

  18. Hi,

    The Contractor Code of Business Ethics FAR 52.203-13 requires that contractor flowdown the clause to subcontractors who furnish supplies in excess of $5M with a period of performance of greater than 120 days. My question is what if a company issues a subcontract to a supplier of a commodity for $10M. The commodity that is purchased from the subcontractor is used across many contracts across the company, both on commercial and government contracts. Would the contractor still be required to flowdown this clause? The end items that are furnished to the government in the case are COTS if that makes any difference.

    Thank you,

    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.

  19. I have another situation regarding my employee who is now a consultant.

    I am now being told that I am not allowed to charge profit on my cost for this consultuant because this is a T&M contract.

    The basic contract was awarded in late 2006 so it does not have the Feb 2007 version of 52.232-7 incorporated.


    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.

  20. On the other hand, consultants regularly cost more per hour than full-time employees which would increase the cost to the Government under T&M.


    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.

  21. Ladies and Gents of the Forum,

    I have a situation where my organization is the Prime Contractor on a DOD T&M contract and one of my employees has left my company as the result of a move, but I would like to retain her services as a consultant from time to time in support of the same contract.

    When she was my employee she was mapped to an IT Specialist Category at $XX/hour. Now that she is a consultant the CO wants us to provide a new rate for her. Can anyone shed any light on this situation? I was always under the assumption that we could map her to the same category at the same rate?

    Any thoughts would be appreciated.

    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.

  22. 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!

  23. :mellow:I am trying to understand what "established practices" means in this sentence. Does it refer to cost accounting practices, accounting practices, or business processes?


    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.

  24. 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.

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