here_2_help

Retreadfred, 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.

Vern, 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.

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.

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."

General Electric had a similar issue, when valuing depreciation costs denominated in Turkish lira into U.S. dollars. http://www.ll.georgetown.edu/FEDERAL/judic...ns/00-1401.html Hope this helps.

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.

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 ... 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.

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?

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.

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.

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.

ERS, 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. ) 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.

Leo1102, 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.

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.