here_2_help

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

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

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

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

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

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