G&A Rate Variances Across Contracts

[On to Consulting]

Can anyone tell me if there is anything that needs to be done to account for some customers getting a lower final price due to a downward adjustment to the G&A rate as part of contract negotiations? For context, the company has cost plus effort and this is not supply schedule POs. Over the years they have contracted G&A rates all over the board with no regard for actuals or consistency. They are now trying to clean up their contract accounting and are curious if there is any adjustment or credit that needs to be made when there are commercial customer contracts with lower indirect rates. 

My inclination is that contracts get negotiated at different rates all the time and that the government only cares about the "actual" rate or the agreed to rate for the purposes of their contracts and that DCAA would not have any visibility into varying rates that are negotiated with other customers. But I would love a second opinion on this. 

Also, please note, this is not referencing sales discounts for payment terms, as an example. This is true indirect rates that were agreed to as part of the contracts/POs with various customers. Although, as a side bar, I'd also love a second opinion on sales discounts. Currently, I have instructed a client to book the discount to an unallowable account and credit materials so that the government doesn't pay for the discount the client is giving on payment terms. But if anyone has any second thoughts, I'd happily take those too:) 

Please note, I've been in the industry (DCAA and private) for 15 years but I am BRAND NEW to Wifcon so please go easy on me! lol

[Retreadfed]

4 hours ago, On to Consulting said:

They are now trying to clean up their contract accounting and are curious if there is any adjustment or credit that needs to be made when there are commercial customer contracts with lower indirect rates. 

The FAR does not require such an adjustment.  However, that does not mean that the terms of specific contracts might not require such an adjustment.  Also, if your company is required to submit certified cost or pricing data, does it disclose the fact that some commercial customers have contract prices based on lower indirect cost rates than those proposed for government contracts?

[Neil Roberts]

46 minutes ago, Retreadfed said:

Also, if your company is required to submit certified cost or pricing data, does it disclose the fact that some commercial customers have contract prices based on lower indirect cost rates than those proposed for government contracts?

I am not aware of the FAR Table 15-2 item that requires a contractor keep track of and review all prior commercial contracts as to what its internal allocation of G&A rate were in each such contract, and or, what it proposed as such a rate. Not clear to me what "based on" means in each contract situation and why it is a disclosure item in general. Have the same question of @On to Consultingwith respect to the term "downward adjustment."

Is there a contract line item G&A rate in each contract? Even so, the parties can negotiate any contract line item G&A rate the parties want. I can't see its relevance.  

[Retreadfed]

16 hours ago, Neil Roberts said:

I am not aware of the FAR Table 15-2 item that requires a contractor keep track of and review all prior commercial contracts as to what its internal allocation of G&A rate were in each such contract, and or, what it proposed as such a rate.

Neil, if a contractor is required to submit certified cost or pricing data, the first step in this process is determining whether data in the possession of the contractor meets the definition of cost or pricing data.  If the data does meet that definition, it needs to be disclosed regardless of whether it fits neatly within one of the 15-2 boxes.  I agree that contractors are not required to create data, but if they have it and it meets the definition of cost or pricing data, it needs to be disclosed.

In this case, I can see a potential government concern that it is somehow subsidizing the contractor's commercial work.  

[joel hoffman]

13 hours ago, Retreadfed said:

In this case, I can see a potential government concern that it is somehow subsidizing the contractor's commercial work.  

A contractor doesn’t have to absorb all of its G&A overhead costs. For instance,  there is an indirect cost pool (numerator) and a cost of sales pool (denominator) when G&A uses cost of sales for the determination basis.

in that case, I don’t see the government subsidizing the contractor’s commercial work. Regardless of what the contractor is charging other contracts for G&A, the government shouldn’t be paying any more than what the supported G&A rate would be. Am I wrong?

Edit: Many construction contractors include various construction equipment costs, such as amortization of capital equipment, shops, mechanics, etc. in their G&A pools. But FAR 31.105 I’m in a requires a contractor to remove such costs from indirect cost pools and treat them as direct costs when a rate schedule is required/used for owned construction equipment. Thus, the effective G&A rate should be different (lower)  than the company’s normal” rates that may be used on commercial, non-government work. 

[Neil Roberts]

7 hours ago, Retreadfed said:

In this case, I can see a potential government concern that it is somehow subsidizing the contractor's commercial work.  

The posting was concerning G&A "over the years," and it was not stated that or how current cost or pricing data was required either "currently" or with commercial contracts "over the years." If the government was independently concerned with contractor subsidizing the contractor’s commercial work, it should perform an audit. How would they suspect this? Are you suggesting the contractor should perhaps voluntarily advise the government that "over the years," the company "contracted G&A rates all over the board with no regard for actuals or consistency?" I am having doubts about what the posting means with "contracted G&A rates."      

[Neil Roberts]

@On to Consulting, my suggestion is your company hire an experienced consultant to work with you regarding all the terms used in your post to sort out the applicable situation so that your posting question can be answered, due to use of the following terms in the post:

1. downward adjustment

2. contracted G&A rate

3. contracts with lower indirect rate

4. varying rates that are negotiated with other customers

5. actual rate

6. actuals

7. true indirect rate

8. agreed to rate

9. discount the client is giving on payment terms

[Retreadfed]

On 1/13/2024 at 12:36 PM, joel hoffman said:

Regardless of what the contractor is charging other contracts for G&A, the government shouldn’t be paying any more than what the supported G&A rate would be. Am I wrong?

No you are not wrong.  However, I would add "properly" before "supported" in your statement.  I think we all know that sometimes some contractors commit fraud against the government.  This is sometimes done by contractors submitting fraudulent data to support claimed costs.

[joel hoffman]

48 minutes ago, Retreadfed said:

No you are not wrong.  However, I would add "properly" before "supported" in your statement.  I think we all know that sometimes some contractors commit fraud against the government.  This is sometimes done by contractors submitting fraudulent data to support claimed costs.

Agreed.

[C Culham]

After all is said does not this reference basically support the discussion in this thread and answer the OP's question - FAR 31.203? 

[joel hoffman]

26 minutes ago, C Culham said:

After all is said does not this reference basically support the discussion in this thread and answer the OP's question - FAR 31.203? 

If the original poster is referring to construction contracts, then far 31.105 is also important.

The contractor can charge whatever it wants and the owner can agree to, when applicable,  for G&A for commercial market contracts or contract actions that aren’t subject to the cost principles in FAR.

[here_2_help]

From what I gather, there are two processes in play here: (1) annual "true-up" between budgeted (or "target") and actual G&A rate to clear any over/under variance (which may be carried on the balance sheet); and (2) whether the impact of the true-up (either debit or credit) can or should be passed on to a customer.

With respect to (1), if the contractor has any contract that includes 52.216-7 or any CAS-covered contract, then this process must be executed at least annually.

With respect to (2), contract terms and conditions will govern whether any resulting impacts from the true-up process may (or must be) passed on to the customer.

[C Culham]

15 minutes ago, joel hoffman said:

The contractor can charge whatever it wants and the owner can agree to, when applicable,  for G&A for commercial market contracts or contract actions that aren’t subject to the cost principles in FAR.

Ah yes but it seems the OP is referring to contracts subject to the FAR (by example references to DCAA, government and supply schedule) but that is just my read.

[C Culham]

22 hours ago, here_2_help said:

at least annually

Based on a cost account period that is the entites established fiscal year unless the government agrees to another annual period that is consistent with the contractors practices?

[here_2_help]

3 hours ago, C Culham said:

Based on a cost account period that is the entites established fiscal year unless the government agrees to another annual period that is consistent with the contractors practices?

Yes, that's what CAS 418 says at 418-50(g)(3). I have rarely seen that provision put into practice.

[On to Consulting]

On 1/15/2024 at 9:24 AM, here_2_help said:

From what I gather, there are two processes in play here: (1) annual "true-up" between budgeted (or "target") and actual G&A rate to clear any over/under variance (which may be carried on the balance sheet); and (2) whether the impact of the true-up (either debit or credit) can or should be passed on to a customer.

With respect to (1), if the contractor has any contract that includes 52.216-7 or any CAS-covered contract, then this process must be executed at least annually.

With respect to (2), contract terms and conditions will govern whether any resulting impacts from the true-up process may (or must be) passed on to the customer.

Do you by any chance have any example of a contract term that would govern what happens when the rates are trued-up? By that I mean, an example that would potentially impact across contracts, i.e. the true up of G&A on one contract impacts the G&A billed to another? I don't see how the impact of truing up rates on one contract could potentially lead to how the true up of another contract would be handled.

[On to Consulting]

On 1/15/2024 at 8:57 AM, C Culham said:

After all is said does not this reference basically support the discussion in this thread and answer the OP's question - FAR 31.203? 

I don't see how FAR 31.203 answers the question of whether or not federal government customers need to be "made whole" when a company gives a lower rate to a commercial customer or another agency. The referenced FAR goes into great detail about how to calculate rates and what goes into that but I don't see any insight into what to do when you have another customer with no FAR requirements in the contract. Do you have a specific line of thought?

[On to Consulting]

On 1/12/2024 at 6:19 PM, Neil Roberts said:

I am not aware of the FAR Table 15-2 item that requires a contractor keep track of and review all prior commercial contracts as to what its internal allocation of G&A rate were in each such contract, and or, what it proposed as such a rate. Not clear to me what "based on" means in each contract situation and why it is a disclosure item in general. Have the same question of @On to Consultingwith respect to the term "downward adjustment."

Is there a contract line item G&A rate in each contract? Even so, the parties can negotiate any contract line item G&A rate the parties want. I can't see its relevance.  

@Neil Roberts not sure what your question is about my use of the term "downward adjustment"? But to hopefully clarify, I just mean some type of credit to a federal customer with a flexibly priced contract for the difference between billings at the "actual" indirect rates for the year and billings to other customers at potentially lower agreed to rates. 

There being a G&A line item is contract specific, so I can't answer the question about is there a contractual line item in each. 

[here_2_help]

18 minutes ago, On to Consulting said:

Do you by any chance have any example of a contract term that would govern what happens when the rates are trued-up? By that I mean, an example that would potentially impact across contracts, i.e. the true up of G&A on one contract impacts the G&A billed to another? I don't see how the impact of truing up rates on one contract could potentially lead to how the true up of another contract would be handled.

No. The rates must be trued-up for all contracts but whether the customer sees the impact of the true-up depends on the individual contract terms

[Needforspeed]

To throw out another perspective, the entity’s actual G&A rate for a given fiscal year is calculated for the organization [first], then applied to contracts where it is required. The number of contracts where G&A is ‘charged’ or billed through its invoicing does not impact the G&A calculation itself.

Say your G&A expense pool (numerator) is $125K. Your G&A base (denominator) is $1M. Your G&A is 12.5%. 

Provisional or ‘target’ indirect rates that track closely against the ‘actual’ rates allow for the rate variance to be kept to a minimum. It seems unusual if the government required proof of provisional billing rates during negotiations that there would be rates bid all over the place or without consistency.

It may be helpful to visualize a pyramid. At the top of the pyramid are your company’s contracts that contain FAR 52.216-7, as Help already said. Those are the contracts where you are *required* to perform the true up of applicable indirect rates charged at ‘target’ versus ‘actual’. Would focus on those first.

The next down on your pyramid could be subcontracts where the federal government is the ultimate customer, or other cost plus or grant agreements with non federal customers. Read the contract terms to see what if any terms dictate the settlement of indirect rates. Read the proposal too if you can.

Everything else at the bottom of the pyramid - commercial contracts - should not require much additional analysis. Seems unlikely a ‘requirement’ would exist to perform a rate true up for a commercial non-FAR customer although I suppose it is possible. More likely the company bid G&A as an administrative ‘markup’ or material handling rate without the intent of ever settling the difference between ‘target’ and ‘’actual’

[C Culham]

16 hours ago, On to Consulting said:

Do you have a specific line of thought?

 

16 hours ago, here_2_help said:

The rates must be trued-up for all contracts but whether the customer sees the impact of the true-up depends on the individual contract terms

Would have been my "thought".     

[Retreadfed]

20 hours ago, On to Consulting said:

By that I mean, an example that would potentially impact across contracts, i.e. the true up of G&A on one contract impacts the G&A billed to another?

What do you mean by "true up"?  I have my definition, but I don't know yours.  In any event, there is a difference between billing costs and allocating costs.  Not all costs allocated to a contract are required to be billed, and in some cases, cannot be billed to the customer.  In your situation, are G&A costs being allocated to contracts, both government and commercial, on the basis of base costs allocated to those contracts or are you allocating G&A cost on some other basis?