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SBIR Contracts and Class Deviation Memorandum 2018-O0009


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Assumptions: (1) Contractor has only one contract; (2) Contract is a SBIR contract valued at less than $7.5M and is the CPFF type; (3) SBIR contract contains the clauses at at FAR 52.216-7 and 52.215-2.  Class Deviation Memorandum 2018-O0009 labeled “Pilot Program for Streamlining Awards for Innovative Technology Projects” states the following: "In addition, contracts, subcontracts, and modifications of contracts or subcontracts valued at less than $7.5 million awarded to a small business concern ... pursuant to ... the Small Business Innovation Research Program are exempt from the requirements for audit and records examination under the clause at FAR 52.215-2, Audit and Records-Negotiations."

Question 1: What takes precedence?  (A) If the SBIR contract contains the clause at FAR 52.215-2, does the contract term take precedence and apply? OR (B) If the SBIR contract contains the clause at FAR 52.215-2, does the class deviation memo take precedence and exempt them from the contact clause?

Question 2: At year end, does the contractor have to submit an incurred cost submission (ICS) related to this contract? If so, would that ICS be auditable by DCAA (i.e., could the contractor claim that the ICS is not auditable by DCAA because they are exempt from FAR 52.215-2)?

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Bob Antonio, I respectfully suggest that you move this OP to another Forum topic area, as it doesn’t concern Contracting Workforce issues. Thanks

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4 minutes ago, joel hoffman said:

Bob Antonio, I respectfully suggest that you move this OP to another Forum topic area, as it doesn’t concern Contracting Workforce issues. Thanks

Thanks Mr. Hoffman and I agree. I meant to select "Contract Administration" but mistakenly selected "Contracting Workforce".  Thanks,

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1 hour ago, HitTheNutz said:

 Class Deviation Memorandum 2018-O0009 labeled “Pilot Program for Streamlining Awards for Innovative Technology Projects” states the following: "In addition, contracts, subcontracts, and modifications of contracts or subcontracts valued at less than $7.5 million awarded to a small business concern ... pursuant to ... the Small Business Innovation Research Program are exempt from the requirements for audit and records examination under the clause at FAR 52.215-2, Audit and Records-Negotiations."

That class deviation expired on October 1, 2020. I don't know the status of the pilot program for streamlining awards of innovative technology projects. 

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14 minutes ago, Vern Edwards said:

That class deviation expired on October 1, 2020. I don't know the status of the pilot program for streamlining awards of innovative technology projects. 

Hi Mr. Edwards.  It is my understanding that each class deviation memorandum expires October of the current fiscal year; and that for the last five years, the DoD has extended the memorandum another year.  Class Deviation Memorandum No. 2022-O0005 is the current extension which expires October 1, 2022.

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@HitTheNutz

4 hours ago, HitTheNutz said:

DoD has extended the memorandum another year.  Class Deviation Memorandum No. 2022-O0005 is the current extension which expires October 1, 2022.

Well, then, the way I read it:

5 hours ago, HitTheNutz said:

Question 1: What takes precedence?  (A) If the SBIR contract contains the clause at FAR 52.215-2, does the contract term take precedence and apply? OR (B) If the SBIR contract contains the clause at FAR 52.215-2, does the class deviation memo take precedence and exempt them from the contact clause?

Here's what the current class deviation says:

Quote

[C]ontracts, subcontracts, and modifications of contracts or subcontracts valued at less than $7.5 million awarded to a small business concern or nontraditional defense contractor pursuant to a technical, merit-based selection procedure or the Small Business Innovation Research Program are exempt from the requirements for audit and records examination under the clause at FAR 52.215-2, Audit and Records—Negotiations. This exemption is not extended to covered contracts, subcontracts, or modifications under the Small Business Technology Transfer Program.

Emphasis added.

Based on that language I'd say that the class deviation is expressly overriding that clause, 52.215-2, which it calls out specifically.

However:

5 hours ago, HitTheNutz said:

Question 2: At year end, does the contractor have to submit an incurred cost submission (ICS) related to this contract? If so, would that ICS be auditable by DCAA (i.e., could the contractor claim that the ICS is not auditable by DCAA because they are exempt from FAR 52.215-2)?

You said your contract is CPFF. That means it should include the clause at FAR 52.216-7, Allowable Cost and Payment.  Incurred cost submissions and audits are required by that clause, not the clause at FAR 52.215-2. The class deviation does not exempt the contractor from the requirements of 52.216-7. So, yes to the incurred cost submission. Yes to auditable. No to a contractor "claim" of exemption.

 

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On 7/25/2022 at 11:27 AM, Vern Edwards said:

Yes to auditable. No to a contractor "claim" of exemption.

Thank you Mr. Edwards for your reply.  The reason I posted this topic is that there is interpretation that the subject class deviation memorandum, and specifically the language regarding FAR 52.215-2, exempts a SBIR contract < $7.5M from ALL audit activity (e.g., pre-award audits, provisional billing rate reviews, labor floor checks, incurred cost audits, post-award accounting system audits, labor floor checks, etc.) regardless of the clauses actually included in the contract.  In the hypothetical above, there is interpretation that even if the contractor submits an incurred cost submission per FAR 52.216-7, it would not be auditable based on the class deviation memorandum expressly overriding the clause at FAR 52.215-2.

I interpreted the class deviation memorandum as geared towards forward pricing (i.e., streamlining awards), in that contractor’s are not required to submit CCPD for SBIR pricing actions valued at less than $7.5M and contractor’s proposals for SBIR contracts valued at less than $7.5M are not auditable.  However, as stated above, some are interpreting it as an exemption from all audit activity on SBIR contracts < $7.5M.  Thanks.

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Interpret the class deviation on the basis of what it says. It specifically calls out FAR 52.215-2. In my opinion, any interpretation that applies the deviation more broadly is erroneous.

Of course, the way to resolve the issue is to contact the office that issued the class deviation ask for clarification.

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  • 2 weeks later...
On 7/25/2022 at 6:08 AM, HitTheNutz said:

Assumptions: (1) Contractor has only one contract; (2) Contract is a SBIR contract valued at less than $7.5M and is the CPFF type; (3) SBIR contract contains the clauses at at FAR 52.216-7 and 52.215-2.  Class Deviation Memorandum 2018-O0009 labeled “Pilot Program for Streamlining Awards for Innovative Technology Projects” states the following: "In addition, contracts, subcontracts, and modifications of contracts or subcontracts valued at less than $7.5 million awarded to a small business concern ... pursuant to ... the Small Business Innovation Research Program are exempt from the requirements for audit and records examination under the clause at FAR 52.215-2, Audit and Records-Negotiations."

****

Question 2: At year end, does the contractor have to submit an incurred cost submission (ICS) related to this contract? If so, would that ICS be auditable by DCAA (i.e., could the contractor claim that the ICS is not auditable by DCAA because they are exempt from FAR 52.215-2)?

In my view, Vern is correct. The Class Deviation does not exempt the contract from the requirements of 52.216-7. The contractor must prepare and submit a timely proposal to establish final billing rates (commonly called an "incurred cost" proposal).

The good news is, if that this is the only cost-reimbursement government contract the contractor has, the chances that DCAA will audit it are relatively slight. DCAA uses a "risk-based" approach for determining which contractor proposals to audit, and this situation will likely qualify as being "low-risk" to the government. Accordingly, I would expect DCAA to review the proposal for mathematical accuracy and completeness, and then issue a memo to the CO recommending that the final billing rates be established as submitted. (I assume the contractor has an adequate accounting system.)

Even if DCAA decides to perform an audit, it's not the end of the world. If the final billing rate proposal was done well, with support available from the accounting system, there really isn't much to worry about.

If, however, the contractor doesn't have a solid indirect rate structure and a decent accounting system, that might be another matter entirely. If that is the case, the contractor really had no business accepting a CPFF contract award in the first place, nor should the government have awarded it.

 

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On 8/6/2022 at 11:40 AM, here_2_help said:

In my view, Vern is correct. The Class Deviation does not exempt the contract from the requirements of 52.216-7. The contractor must prepare and submit a timely proposal to establish final billing rates (commonly called an "incurred cost" proposal).

The good news is, if that this is the only cost-reimbursement government contract the contractor has, the chances that DCAA will audit it are relatively slight. DCAA uses a "risk-based" approach for determining which contractor proposals to audit, and this situation will likely qualify as being "low-risk" to the government. Accordingly, I would expect DCAA to review the proposal for mathematical accuracy and completeness, and then issue a memo to the CO recommending that the final billing rates be established as submitted. (I assume the contractor has an adequate accounting system.)

Even if DCAA decides to perform an audit, it's not the end of the world. If the final billing rate proposal was done well, with support available from the accounting system, there really isn't much to worry about.

If, however, the contractor doesn't have a solid indirect rate structure and a decent accounting system, that might be another matter entirely. If that is the case, the contractor really had no business accepting a CPFF contract award in the first place, nor should the government have awarded it.

 

H2H - Thank you for your reply.  There are interpretations out there (not mine); that the Class Deviation memorandum exempts the SBIR contract < $7.5M from any and all audit activity...period....from beginning to end of the contract lifecycle.  So no ICS adequacy review, no PBR, no IC audit/LRM, no floor checks, no post-award accounting system audits, no interim billing reviews, no nothing.  This interpretation would be based on the fact that the contractor is exempt from FAR 52.215-2 - and that is the clause that audit organizations hang their hat on to perform audit activity.  Thanks,

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@HitTheNutz

2 hours ago, HitTheNutz said:

There are interpretations out there (not mine); that the Class Deviation memorandum exempts the SBIR contract < $7.5M from any and all audit activity...period....from beginning to end of the contract lifecycle.

Okay, well, buy in to those interpretations and don't do any audits—"no nothing." What more can anyone say?

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2 hours ago, HitTheNutz said:

This interpretation would be based on the fact that the contractor is exempt from FAR 52.215-2 - and that is the clause that audit organizations hang their hat on to perform audit activity.  Thanks,

(Emphasis added.)

Well, that's absolutely not correct in the slightest.

See, for example, 52.216-7(g). Or 52.215-20(a)(2). Or 52.230-2(c) -- when applicable.

Shrug. Somebody's stretching hard to support a weak position, and I suspect that position will not prevail if tested. But whatever. I'll add that, if I were a government auditor and somebody told me I couldn't perform an audit that a contracting officer had requested me to perform, my first thought would be to wonder what the contractor was hiding.

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  • 8 months later...
On 7/25/2022 at 6:08 AM, HitTheNutz said:

Assumptions: (1) Contractor has only one contract; (2) Contract is a SBIR contract valued at less than $7.5M and is the CPFF type; (3) SBIR contract contains the clauses at at FAR 52.216-7 and 52.215-2.  Class Deviation Memorandum 2018-O0009 labeled “Pilot Program for Streamlining Awards for Innovative Technology Projects” states the following: "In addition, contracts, subcontracts, and modifications of contracts or subcontracts valued at less than $7.5 million awarded to a small business concern ... pursuant to ... the Small Business Innovation Research Program are exempt from the requirements for audit and records examination under the clause at FAR 52.215-2, Audit and Records-Negotiations."

Question 1: What takes precedence?  (A) If the SBIR contract contains the clause at FAR 52.215-2, does the contract term take precedence and apply? OR (B) If the SBIR contract contains the clause at FAR 52.215-2, does the class deviation memo take precedence and exempt them from the contact clause?

Question 2: At year end, does the contractor have to submit an incurred cost submission (ICS) related to this contract? If so, would that ICS be auditable by DCAA (i.e., could the contractor claim that the ICS is not auditable by DCAA because they are exempt from FAR 52.215-2)?

Restating my position(s):

1. You don't provide the contract award date (or effective date if not the award date) so there is no way to tell whether the contract was awarded before or after the Class Deviation was issued and took effect. If the contract was awarded before the Class Deviation took effect, then the contract language controls. If the contract was awarded after the Class Deviation was issued, the contract language still controls--unless somebody wants to argue the point in court. If you think the clause doesn't belong in the contract, because of the Class Deviation, you should request it to be removed via contract mod.

2. Yes, because the contract contain 52.216-7 and that clause requires submission. Inclusion (or not) of 52.215-2 does not trump the requirements of 52.216-7. In point of fact, though, DCAA rarely audits the ICS submitted by small businesses, because there's typically not much recovery for audit hours expended. DCAA calls this "risk-based" auditing.

EDITED:

From the link provided by HitTheNutz:

Quote

However, this guidance and DCAA interpretation fails to consider the FAR 52.216-7, Allowable Cost and Payment clause. The process outlined in FAR 52.216-7 clause requires the Contractor to invoice with provisional billing rates and then prepare an Incurred Cost Proposal for each fiscal year a cost reimbursable type contract has incurred costs. The Incurred Cost Proposal is subject to audit and is critical in the contract closeout process for cost reimbursable contracts. This audit of the Incurred Cost Proposal ensures that unallowable costs are not claimed as well as the costs incurred are accurate, reasonable, and allocable. DCAA typically reviews the Incurred Cost Proposal to determine if it is “adequate for audit” and then eithers audits or provides a low-risk memo to Contractors.

 

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The author wrote "SBIR contracts that are less than $7.5 million will not be reviewed or audited by DCAA" without providing any support for that assertion.  I can find no DCAA guidance that would support this statement.  Further, it is DoD policy that DCAA will not review proposals for cost reimbursement contracts that have an anticipated value of less than $100M.  Instead, DCMA is responsible for evaluating those proposals.  Thus, DCAA normally would not review a proposal for an SBIR contract that is below $7.5M in any event.

One of the most sensitive issues for DCAA is access to records.  If DCAA is denied access to records by a contractor that asserts DCAA does not have a right to those records, that contractor may be in for a long fight and may have to contend with a DCAA subpoena that is enforceable by the Justice Department.

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