Cost Overrun Moving Direct to Indirect

[Smallbusiness]

Finalizing our indirect rates for 2021 with DCAA, we realized cost overruns on 2 task orders under an IDIQ.  LOC was in place and all remaining funds on the task orders have been de-obligated.  (No excuse, but management was OCONUS much of 2021 and did not realized how much Covid PTO was being incurred back home.) We contacted our KO who told us to invoice and that new funds could be obligated.  Our customer (who represents 100% of our business) was enraged that we would come back and ask for more money and threatened to cancel new task orders. 

We would be fine with "writing-off" these overruns; however, it seems to me that the costs change in nature from direct to indirect since they cannot be allocated to a contract.  When entered on timesheets, we thought they were direct but were wrong.  Unfortunately, it appears overruns must be categorized as unallowable expenses; but this seems to require that contractors work for free.  Employees were paid, materials were purchased, so it should be part of the legitimate costs of running a business that any prudent company would pay.  After all, I could not stop paying people who were in harms way while supporting DoD requirements. 

The KO only says to bill the government but knowing the customer and their threats (and past history with other contractors), we dare not rock the boat.  DCAA says "it is outside their mandate to allow any changes to our direct costs."

I have seen that reassignment of overruns to IR&D has been rejected by legal rulings.  My question is: are there any mechanisms to change the assignment of labor that was once "direct" to something other than direct (and other than unallowed) so that I can close-out 2021 without a loss?  Since the employees were doing work that future task orders will draw-on could it be called training?  Is there any advise on how we might break even? 

[Don Mansfield]

1 hour ago, Smallbusiness said:

Our customer (who represents 100% of our business) was enraged that we would come back and ask for more money and threatened to cancel new task orders. 

Do you have that in writing?

[Retreadfed]

1 hour ago, Smallbusiness said:

My question is: are there any mechanisms to change the assignment of labor that was once "direct" to something other than direct (and other than unallowed) so that I can close-out 2021 without a loss? 

Have you read FAR 31.202 and 203?  Also, is not suffering a loss more important than staying out of jail?

[Vern Edwards]

2 hours ago, Smallbusiness said:

My question is: are there any mechanisms to change the assignment of labor that was once "direct" to something other than direct (and other than unallowed) so that I can close-out 2021 without a loss? 

I find it impossible to answer your question, because I am confused by your account of what happened.

If the unrecovered overrun costs were properly allocated as direct labor costs, then I cannot think how you can recover those costs by allocating them as indirect costs. 

My advice is to contact a government cost accountant.

 

[here_2_help]

Smallbusiness, look at the situation this way.

The costs in question were properly charged as direct contract costs at the time. Because you didn't comply with your LoC/LoF clause(s), the customer is not obligated to pay for them. Right? In essence, the costs have become unallowable via your noncompliance with the contract clause(s).

Now you ask whether you can move the unallowable direct costs to indirect and recover them as allowable indirect costs.

What do you think your auditor(s) are going to say about that? Do you think they'll be okay with that?

Now, there is a slight chance of keeping the costs as direct costs and recovering them, if the costs are (as you describe them) COVID PTO costs. There is a lot of DOD guidance on reimbursement of such costs. Have you read the guidance? In essence--at the CO's discretion--the costs may be reimbursed. May be being the operative phrase.

[Smallbusiness]

Thank you all for your replies.  Mr. Mansfield: Nothing in writing.  He just yelled at me over the phone.  Retreadfed: Yes, staying out of jail is a goal. I'm willing to take the loss--my question was to learn if there was a legal way to not take the loss.   Mr. Edwards: Thank you. here_2_help: I had not considered the question this way. 

I guess I'll take my lumps.