Indirect Cost Rate Flowdown on FFP Contracts

[MorganS]

Hi,

We are a Prime on a FDA IDIQ FFP Award.  We are going to subcontract out to several dozen institutions.

Since this the prime is FFP, do the subcontractors have the right to charge their full indirect rate? Or could we cap that rate at, for example, 10%? Since it is FFP and we do not expect to report back our finances to the government, it seems like we could create the sucontract between us and the entity and there would be no need to include the flow down.

 

Thanks

[Retreadfed]

What flow down are you referring to?

[here_2_help]

On 10/1/2020 at 10:38 AM, MorganS said:

Hi,

We are a Prime on a FDA IDIQ FFP Award.  We are going to subcontract out to several dozen institutions.

Since this the prime is FFP, do the subcontractors have the right to charge their full indirect rate? Or could we cap that rate at, for example, 10%? Since it is FFP and we do not expect to report back our finances to the government, it seems like we could create the sucontract between us and the entity and there would be no need to include the flow down.

 

Thanks

Yes and no. 

The subcontractors have the right to propose their full indirect rates. They have the right to expect you, as prime, to accept them as proposed and price them into the subcontract -- especially if they are supported by DCAA or other government audit results (e.g., a NICRA).

However, you as prime have the right to push back and ask for lower-than-proposed rates, especially if you believe the subcontractors' full rates are not supported or are not likely to reflect future costs. You also have the right to request that the rates be capped in order to prevent cost growth. Be advised that if you push the subcontractors to accept less than their full (actual) indirect rates in the subcontract price, you are essentially asking them to take a loss.

Have you considered the subcontract type? If you award a T&M or even FFP/LOE subcontract type, you have prevented cost growth from indirect rate deltas without having to negotiate a potentially difficult issue.

 

[MorganS]

1 hour ago, here_2_help said:

Yes and no. 

The subcontractors have the right to propose their full indirect rates. They have the right to expect you, as prime, to accept them as proposed and price them into the subcontract -- especially if they are supported by DCAA or other government audit results (e.g., a NICRA).

However, you as prime have the right to push back and ask for lower-than-proposed rates, especially if you believe the subcontractors' full rates are not supported or are not likely to reflect future costs. You also have the right to request that the rates be capped in order to prevent cost growth. Be advised that if you push the subcontractors to accept less than their full (actual) indirect rates in the subcontract price, you are essentially asking them to take a loss.

Have you considered the subcontract type? If you award a T&M or even FFP/LOE subcontract type, you have prevented cost growth from indirect rate deltas without having to negotiate a potentially difficult issue.

 

The Yes and No answer is unfortunately the one we also are contemplating.

The subcontractors are universities and larger institutions, so they have a NICRA and will surely push back, but we want to be able to say that the 10% is mandated.  We are awarding FFP subcontracts since as the prime, we were initially awarded a FFP.

So basically from a compliance standpoint, it challenging to understand the Indirect Rate requirement since the project is FFP.  We are technically not going to do any financial reporting.

Thoughts?

 

 

[here_2_help]

13 minutes ago, MorganS said:

The Yes and No answer is unfortunately the one we also are contemplating.

The subcontractors are universities and larger institutions, so they have a NICRA and will surely push back, but we want to be able to say that the 10% is mandated.  We are awarding FFP subcontracts since as the prime, we were initially awarded a FFP.

So basically from a compliance standpoint, it challenging to understand the Indirect Rate requirement since the project is FFP.  We are technically not going to do any financial reporting.

Thoughts?

 

 

If the subcontract is FFP, then there is very little (to no) risk of cost growth related to indirect rates. All you are doing is negotiating the FFP subcontract price. If you set the price below what it would have been, had you accepted the NICRA, have you just converted the subcontract into a cost-share agreement? Something to think about.

You have not said whether you are subject to the cost principles at 2 CFR, but I bet your subcontractors are. I would be careful awarding FFP subcontracts to those entities. At a minimum I would review 2 CFR Section 200.323 through 200.332, as well as Section 200.414.

[MorganS]

Educate me... why would we (as a Non-Federal Entity) not be subject to the 2 CFR but our subcontractors (Universities) would?

Our main reason for mandating the 10% indirects is so that the departments have enough funds to run the project. Otherwise, if they use 50% for indirects (as their Nicra may show), they won't have enough funding for their direct costs.  The question is whether mandating a 10% indirect rate is compliant, considering this is a Federal FFP IDIQ.

My initial thought is that since this is a federal award, the institutions have the right to charge their Nicra and we can't mandate lessor. However, since this is FFP and we are the prime, since the subcontract is between ourselves and the institutions, I wonder if are in fact able to mandate a lessor %.

 

[Patrick Mathern]

If your Prime is FFP, use the same with your subs and leave it to them to figure out their indirects and profit.  Your budget is what it is...they can either do the job for that price or they can't.  Their rates are irrelevant as long as they provide the contractual deliverable.  No need to get hung up on "mandating" rates...they are under no obligation to do the job if it loses money for them. 

[MorganS]

Totally with your Patrick - that was my initial suggestion, but it got push back from the PIs because they wanted to provide a strict budget to make sure the funds were allocated correctly to get the work got done (I suggested provided a sample budget instead but let the projects figure it out).   From a project point of view, they are concerned that the subs won't allocate enough labor to actually do the work (which is why we've arrived to this conversation since its a trade off between direct and indirect costs...)

[here_2_help]

1 hour ago, MorganS said:

Educate me... why would we (as a Non-Federal Entity) not be subject to the 2 CFR but our subcontractors (Universities) would?

You need to follow FAR Part 31, right?

Read 31.104

 

[Retreadfed]

2 hours ago, MorganS said:

Educate me... why would we (as a Non-Federal Entity) not be subject to the 2 CFR but our subcontractors (Universities) would?

I think there is a little confusion here.  In your initial post, you used the term FFP award.  I think some people, me included, thought that you were referring to a FAR contract.  Your latest post indicates that is not the case.  To be specific, what type of award are you talking about?  If it is not a contract, why are you referring to "subcontractors"?  Finally, what part of 2 CFR are you referring to?

[MorganS]

Hi thanks for your questions. The prime is a FFP IDIQ and each year an Order for Commercial Supplies is given to us to obligate the current year's funding. So that is why I referred to it as a FFP Award (also for simplicity as I know a lot of people don't work with FFP IDIQs, I didn't think there would be a difference compliance wise)

So we are the prime and we are contracting out to different universities (hence subcontractors)

My question on the 2 CFR was a response to the suggestion that our subcontractors are compliant to the 2 CFR - so I wondered why we, as a Non-Federal Institutions, wouldn't also be subject to the clause (s) [referring to the end clause..].

A lot here, hopefully this clarifies...