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Residual Inventory Costs


AC123

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Hello! Yes, I have read the GFP clause. Paragraph J, states "except as otherwise provided for in this contract" and paragraph J, (2), (i), (B) states "contractor acquired property, to which the Government has obtained title under paragraph (e) of this clause ........". I understand what the process is regarding disposition of CAP for cost type contracts or cases in which the Government retains title to the property. The GFP clause and others are clear in that regard. My question is more so regarding CAP that the contractor retains title to. Per FAR, the Contractor retains title to CAP under FFP contracts and FPIF contracts when that CAP is not a deliverable or absent any financing terms. That part is clear as well. The part I have a question about is the costs for that CAP. If the Contractor retains title to the CAP do the costs for that CAP stay on the contract?

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@AC123When negotiating the total final negotiated cost of a fixed-price incentive contract, exclude the negotiated value of all residual inventory retained by the contractor. See FAR 15.408, Table 15-2, II.C.(7).

That does not apply to firm-fixed-price contracts unless the parties negotiated a clause to that effect.

And AC123, learn the proper concepts and terminology used in government contracting. Don't use non-standard acronyms when asking questions in this forum.

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@AC123

I don't think what you are describing is "contractor-acquired property" as defined at FAR 45.101. By definition, the Government has title to "contractor-acquired property":

Quote

Contractor-acquired property means property acquired, fabricated, or otherwise provided by the contractor for performing a contract and to which the Government has title.

If the contractor acquires property to perform a contract and retains title, the property is not "contractor-acquired property".

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Well, yeah. I interpreted this question as: If I charge costs to a FFP contract--and they are legitimate direct costs of the contract--then, afterwards, if I repurpose residual items to which I have retained title, do the costs associated with that material have to stay on the original contract to which they were originally charged, or do I have to transfer the costs to the contract or other cost objective where I am repurposing the material.

Answer to my interpretation of the question: It depends. You run the risk of having the customer pay twice for the same material items. (Example: Items were priced in the original FFP value, and now you are transferring them to a cost-type contract.) You also run the risk of being accused of defective pricing. (Example: Price negotiated for the second contract included costs of the materials, and if you don't transfer the costs along with the materials, you are getting a windfall profit, especially if you knew you had the residual materials when you negotiated the contract.)

So: It depends. It depends on the contract terms & conditions associated with the contract or other cost objective(s) where the company intends to reuse the residual items to which the company has retained title. It's not automatic, but it's certainly within the realm of acceptable practices.

If you transfer costs off the completed FFP contract, then you will record a higher profit/margin than you originally thought. That's not a terrible thing.

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On 2/7/2022 at 1:09 PM, AC123 said:

If a Contractor retains title to any residual inventory/Contractor Acquired Property (CAP) (that is not a deliverable and no financing provisions) on a FFP or FPIF contract do the costs for said inventory/CAP remain on the contract?

I understand your question, except for the contract type element.  As someone who had a unique work life preceding Government service as a contracting officer, I can answer your question from a practical perspective.  

As a business owner, if I won a bid for a project that required a costly piece of equipment that my company did not already own, I had one of two choices 1) buy/"invest in" that piece of equipment, or 2) rent the equipment to complete the job. 

There were times when I thought that buying that equipment as part of my company's inventory would be more profitable over the long run. This was based in part on my estimation that I would do similar work requiring use of this equipment in the future. 

You are asking about FFP/FPIF contracts.  On those contract types, prices are not subject to any adjustment on the basis of the contractor's cost experience in performing the contract; the Government does not reimburse the contractor for any its costs. However, in the context of a cost reimbursement contract, what can the contractor factor in and bill the Government toward costs when it buys a specific piece of equipment to perform work required by the contract?  You mention that the contractor will retain this piece of equipment beyond the end of its contract with the Government.  Therefore, the contractor could either continue to use that same equipment for other work, lease it out, or sell it at a depreciable amount to recover some of its expenses after its contract with the Government is completed.  I would say that the contractor should take all of these options into consideration before deciding whether to purchase the equipment.  Over the course of my own business, if I opted to buy specific equipment for a project, I would first conduct market research to determine the fair market lease rate for that equipment.  I effectively calculated the daily, weekly or monthly lease rate for that equipment toward the scope of work covered by the contract.  This is the amount I would submit toward costs to be reimbursed by my client.   Mine is not a FAR supported answer per se, but a best business practice response from my own experience as a business owner.  I believe that the fact that I struggled through business for ten years before my Government service makes me a more adept CO.  

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