Non Arm's Length Rental of Contractor's Office - Allowability

[Tzarina of Compliance]

Can anyone help with this?  A contractor plans to rent an office that belongs to one of the contractor's majority owners.  The market research has been conducted and the lease price is below the market that is offered by the owner.    Would this be an allowable indirect cost (this is the main office for the contractor) even though this is not an arm's length transaction?   Many thanks.  

[joel hoffman]

12 hours ago, Tzarina of Compliance said:

…the lease price is below the market that is offered by the owner.

Please clarify. What does “below the market that is offered by the owner” mean? Are you saying that the lease price is below the market price and is reasonable in amount?

12 hours ago, Tzarina of Compliance said:

Would this be an allowable indirect cost (this is the main office for the contractor)

Please clarify. Are you saying that it would be included in the G&A pool  and that it “is” (already)(?) or did you mean “ it will be”(?) the “main office” of the contractor?

Where is the firm’s  “main office”now?

Does the “main office” serve the contractor’s other contracts too (I.e., the total cost denominator for G&A includes the total cost of company sales or similar designation)?

Just need to understand the full context of the scenario. Thanks.

Edited September 6 by joel hoffman

[Vern Edwards]

12 hours ago, Tzarina of Compliance said:

Would this be an allowable indirect cost (this is the main office for the contractor) even though this is not an arm's length transaction?  

Have you read FAR 31.205-36, Rental Costs, paragraph (b)(3)?

Also, see Government Contract Costs and Pricing, § 43:4, Case law interpretation—Leases between organizations under common control.

[here_2_help]

14 hours ago, Tzarina of Compliance said:

Can anyone help with this?  A contractor plans to rent an office that belongs to one of the contractor's majority owners.  The market research has been conducted and the lease price is below the market that is offered by the owner.    Would this be an allowable indirect cost (this is the main office for the contractor) even though this is not an arm's length transaction?   Many thanks.  

 

58 minutes ago, Vern Edwards said:

Have you read FAR 31.205-36, Rental Costs, paragraph (b)(3)?

Also, see Government Contract Costs and Pricing, § 43:4, Case law interpretation—Leases between organizations under common control.

Vern's advice is spot on. The answer is that the facility rental cost, if adjusted in accordance with the cost principle Vern cited, will be allowable. But the adjustment must be made.

[Retreadfed]

The key to answering the question is whether there is common control.  This is a fact specific issue.  Two ASBCA decisions that might be helpful in this regard are Data-Design Labs, 85-1 BCA 17,825 and Talley Defense Systems, Inc. 93-1 BCA 25,521.  If there is common control, the adjustment referenced by H2H needs to be made.  If there is not common control, no adjustment needs to be made and the question becomes one of reasonableness.

[here_2_help]

For those following this thread, the key point is that, when the lease is with an affiliated entity under common control, it does not matter whether the monthly rent is at market rates, below market rates, or above market rates. The market research to show that comparison is irrelevant to the allowable rent expense that may be claimed by the contractor. The contractor must perform the calculations required by the cost principle to adjust the actual rent expense to the allowable value. Failure to do so likely creates unallowable cost that, if claimed in a certified final billing rate proposal, might lead to assertions that the amounts are expressly unallowable, which invites penalties and interest.

[Vern Edwards]

 

On 9/7/2024 at 7:42 AM, here_2_help said:

For those following this thread, the key point is that, when the lease is with an affiliated entity under common control, it does not matter whether the monthly rent is at market rates, below market rates, or above market rates.

The rule is really quite simple, except for the question of "common control". In that regard, see my citation of Government Contract Costs & Pricing in my first post for the source of the following quote:

Quote

The FAR does not define the term “common control.” Whether common control exists depends upon all the facts and circumstances. The decisions look to whether both organizations are effectively controlled by the same person or entity. Factors to consider include stock ownership, interlocking management or ownership, identity of interests among family members, shared facilities and equipment, common use of employees, and other contractual or financial relationships.

We haven't heard back from the OP, so, presumably, inquiry resolved.

[Tzarina of Compliance]

On 9/7/2024 at 12:16 PM, Vern Edwards said:

It

The rule is really quite simple, except for the question of "common control". In that regard, see my citation of Government Contract Costs & Pricing in my first post for the source of the following quote:

We haven't heard back from the OP, so, presumably, inquiry resolved.

Thank you so much.   Sorry for the delay - I was searching for the copy of the Government Contract Costs and Pricing, § 43:4.  You have resolved my question and many thanks for the additional information as well.  As ever, ❤️