Cost And Accounting, DCAA Relations, Incurred Cost Proposals

A Shot Across the Bow?

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Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA auditor independence
  3. DCAA’s right to change their mind in subsequent audits
  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued Costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about DCAA auditor independence. Again, I am not a lawyer and this is not legal advice.

DCAA Auditor Independence

CPA ethics drove me insane for years before I took the exam and the subsequent ethics exam. I often compare the profession’s complicated ethics rule to the Pharisees described in the New Testament. But beyond the esoteric ethic issues surrounding the audit of the town’s only bank by the town’s only CPA who is a customer of the bank, I want to focus on a couple of simple clear issues regarding DCAA auditor independence.

First, there is the general issue of questioning DCAA’s very ability to be independent. DCAA works for the government, often they work directly for the contractor’s “customer” DCMA. DCAA actually advertises their job as not finding the truth but finding “unallowable” tax dollars.  From a common sense point, not a great argument for independence. As a comparison, I do not see the IRS’s primary focus on recovering tax dollars. The focus there seems a little more skewed toward finding the facts (truth).

While I may question DCAA’s institutional ability to be independent, I acknowledge they are granted this assumption of independence by statute. While DCAA in fact, may not be independent, such independence is assumed in order for the government to protect tax payers.

Some of the alternative’s may be worse. I have argued that the government hiring of outside CPA firms to conduct incurred cost proposal audits as destroying even the institutional illusion of independence. The outside CPA firms are contractors looking to keep the contract while, for good or bad, DCAA auditors enjoy some job security and thus a bit more independence. I even referred to the CPA firm contractors as “contractors” in management responses. Outside CPA firms are even more strongly motivated than DCAA to find “unallowable” costs on behalf of their actual customer.

Again, while moaning about the possible illusionary independence of DCAA, I accept it as an institution. This brings us to the second level of auditor independence: those cases where individual auditors, offices, branches, or even the institution abandon the illusionary independence and act in an unethical manner. There are those rare occasions when an auditor is “on a witch hunt” for the contractor, or at least the contractor comes to believe this.

The issue is discussed in several paragraphs of the TSI opinion on both the actual opinion and the dissenting opinion. The following paragraph gets to the heart of the matter:

TSI advances two somewhat related factual allegations that are relevant to its course of conduct legal theory, which we will discuss shortly: first, that the DCAA auditor who performed the initial work on the FY 2007 ICP audit was, for some unstated reason, biased against TSI; and second, that the DCAA had been much easier on it in past audits (app. br. at 3-5; app. reply br. at 10-11). In testimony presented by TSI, Mr. Fletcher, its CFO, characterized the first DCAA auditor, Ms. Waller, as having been “on a witch hunt” (tr. 2/165). Moreover, as discussed above, there was ample evidence of friction between Ms. Waller and TSI and early indications from TSI that it did not believe that it would get a “fair” audit from Ms. Waller. Nevertheless, the evidence also demonstrates that the preliminary work performed by Ms. Waller was not the end of the story, given the change in questioned costs demonstrated most clearly by Tables 1, 2, and 3 above. Moreover, the ACO credibly testified that her decisions regarding which costs to question were made independently (tr. 1/251 ), which is consistent with the back-and-forth which she attempted with TSI prior to issuing her COFD. We need not delve into these circumstances any further due to the fact that TSI, itself, has “concede[ d]” that its claim that the COFD should be set aside due to lack of auditor independence “cannot be sustained” (app. br. at 3).

 

Off the top of my head, I do not recall an incident where I concluded that a DCAA auditor’s personal bias interfered with an audit, but there were many occasions where the contractor thought so and I understood how they came to this belief. To be frank, I believe contractors take personally an auditor’s professional incompetence and see this incompetence as a witch hunt. Professional competence is not simply technical but also encompasses behavior with the audit subject, and not all DCAA auditors show a mastery of this area and some of them experience a strong reaction when a contractor questions their actions or requests.

All of this simply reminds us that DCAA auditors are human beings working, in my opinion, in a less than ideal envrioment. They are asked to function as independent auditors in a instution that places enormous value on finding contractor errors. I do believe the vast majority of them rise above this pressure.

Another example of where it appears personal is when we remember that DCAA auditors are thrust out on audits with a great deal of authority and not always the experience, knowledge, or support, to exercise that power in the best way possible. DCAA is working hard to address this issue, but the last crisis took a serious toll on the agency’s institutional knowledge. I remember a young DCAA auditor threatening me with a fraud referral because he concluded that a working trial balance was an instrument to defraud the government. Many such auditors are now supervisors.

There are many findings of auditor incompetence, even serious allegations of DCAA malpractice, but I believe it is rarely, if ever, personal.

What is interesting about the TSI case is that all three of the judges were willing to look at evidence of bias. That is a warning shot across the bow of the ship DCAA.

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Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals, Running Your Business

Material Overhead Rate — Off and On

articles_moved_notice

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA Auditor independence
  3. DCAA’s right to change their mind in subsequent audits
  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued Costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

I talked about unapproved contractors in the last article and today I am going to look at item one: Supporting Material Overhead rate. Again, I am not a lawyer and this is not legal advice.

The material overhead rate did not actually end up as part of this case only because the second DCAA auditor did not pursue it. TSI proposed a material overhead rate of 1.05% that the first DCAA auditor recommended be 100% disallowed while the second auditor accepted the rate. TSI alleged that the first auditor “had it in” for them and we will discuss the minimal discussion on DCAA auditor independence later.

Almost all of this article is speculative on my part and should not be taken to represent what actually occurred, but when I got the page where the initial DCAA auditor rejected all of the material overhead rate I thought “Crap, that has been a long time coming”. When I saw that DCAA backed off in the second stab at the audit, I breathed a sigh of relief and thought, “Not this time”.

Two Sides of the Circle or Contractors with Multiple Government Bosses

It is important to remember that government contractors circle around two extremes of government compliance. On one side, there is the programs staff and their associated contracting officers. These are the guys who issue the RFP, decide you are the guy they want, and issue the contract in coordination with DCMA.

On the other side of the circle is DCAA which looks at the contractor’s costs and business systems then recommends actions to DCMA based on their audit work.

A government contractor needs to make both sides as happy as possible, and I would argue that Material Overhead Rates is one of the bizarre evolutions within government contracting that arose to make this hope of making both sides (programs and compliance) happy a reality. The concept exists in established cost accounting practice but is not as universal as many RFPs would imply.

Just Where Do We Put that Pesky G&A?

The FAR, CAS, and DCAA are strong on contractors allocating general and administrative (G&A) costs utilizing a method labeled Total Cost Input (TCI). TCI allocates G&A costs over all other costs (direct (to include materials and subcontractors), overhead, fringe and so on). CAS actually states “A total cost input base is generally acceptable as an appropriate measure of total activity of a business unit”.

Thus TCI is automatically accepted as a valid way of allocating G&A by everyone. Everyone except the government people on the other side of the circle (programs and their branch contracting officers). It often seems a majority of them think burdening travel, materials, subcontractors, and materials with a G&A rate is an outrageous and immoral act. Addressing this indignation over the years, it is clear to me that many of the associated program people (including buyers) look at this allocation as a mark-up not an allocation of actual allowable indirect costs.

I will give you two recent examples. One was a final four major accounting firm auditing a client’s incurred cost proposal on a DOE contract. The supervisor auditor entered my office at the client site (I was there supporting the audit) and spent a lot of time arguing that allocating G&A on a subcontract was unethical (his words) since the subcontract contained its own G&A and this meant the government was being charged twice.

Obviously he did not enjoy a great deal of experience with value added taxes, and I responded by asserting that was the subcontractor’s G&A and not the prime’s (my client). The two could simply not be compared. A G&A rate is not arbitrary and represents an allocation of legitimate indirect expenses, expenses of both the subcontractor and the prime contractor. It is not a ‘profit’.

He then argued that the allocated G&A simply stood out of proportion to the base cost. It takes a great deal more G&A to administer direct labor than cut a check to a subcontractor. I actually thought this a much stronger argument, but he was still out of his league. I reminded him that the prime is responsible for the subcontractor and it is never as simple as cutting a check.

He still argued on and on about the injustice of the allocation. I finally made two additional points that finally closed the argument. First, all allocation methods are ultimately subjective and arbitrary. Second, please leave my office and come back with a statutory or regulatory basis that supported his argument.

The second example involved an Army contracting officer complaining that because their contract with the contractor was about half materials and the Air Force’s contract was all services, the Army was receiving an inequitable allocation of G&A. I responded by stating that the inequity could only be applied on a government wide level and not a branch level.

The thought behind these arguments and the countless other times I encounter them, is that a dollar spent on direct materials, subcontractors, and even travel, should not receive the same amount of G&A as direct labor. To approach from a different angle, given a G&A rate of 10% it is unfair to burden $500,000 of material costs with $50,000 of G&A.

One way I attempt to explain this to the program’s side is by trying to tie them into the whole picture:

“Okay, if a contractor has $75,000 in direct labor, $25,000 in subcontractor costs with $10,000 in allowable G&A, we have to allocate the $10,000.  The government is legally obligated to pay for the $10,000. Total Cost Input gives $7,500 to the labor costs and $2,500 to the subcontractor costs. How would you do it?”

Too often I get a response such as “I do not know, but that is too much on the subcontractor”.

The Program People Come Up with an Idea

This, I believe led to the development of “Material Overhead Rate”, “Subcontractor Handling Rate” and other similar line items on various RFPs approximately fifteen years ago. These line items are intended to relieve materials and subcontractors of G&A costs while acknowledge there are indirect costs associated with these direct cost elements.

Problem solved?

The number one question I get from contractors working on these RFPs is “What rate do we use?” or “How do we calculate this rate?” In other words, how do contractors separate out from G&A the part of G&A associated with subcontractors or materials. The base is defined, but how do you populate the pool? How do we justify a 3% Material Overhead Rate with a separate 10% G&A rate?

If you want a glimpse at the potential can or worms these rates may open look at questions 12 -21 on the “Contractor Forward Pricing Rate Proposal Adequacy Checklist” under DFARS 215.403-5.

Again, this is supposition on my part, but I wonder if the first DCAA auditor asked TSI for just such documentation, the justification for creation and operation of the Materials Overhead rate. I am guessing she decided it was inadequate. I am also guessing the second DCAA auditor understood the complexity of this issue and decided to focus valuable time elsewhere.

Material Overhead and Subcontracting Handling are legitimate cost accounting objectives The challenges in developing and maintaining the rate are reduced for larger contractors where the size and frequency of activity makes it easier to allocate and define such allocations.

Small business contractors face greater challenges developing, implementing, and defending these rates. If you can identify time spent on handling materials on a specific contract, is this Material Overhead or Direct Labor? The same is true of the time spent reviewing a subcontractor invoice. Even if you feel comfortable with the methodology you develop there is no guarantee DCAA will not question it this year or next year (which is another issue raised in this case that we will address later).

This is one of those rare occasions where I will not share some of my approaches for addressing this issue among small business contractors. I prefer to share these on a case by case basis with DCAA if required. They are ethical and defensible, but vary from contractor to contractor.

Some RFPs appear to acknowledge some of these complexities and replace Material Overhead Rate with Material Overhead Fee. Take them at their word and treat it as a fee, a request not to burden materials or subcontractors with G&A while compensating contractors for the acknowledged costs involved in administrating those costs (materials and subcontractors). Do not include it in your rate proposal.

That is until some bright DCAA auditor wonders if the fee should be included in the base….

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Cost And Accounting, DCAA Relations, Department of Defense News, Incurred Cost Proposals

Wait a Moment

As pointed out by Ken Bricker, DCAA has announced that they are all caught up on incurred cost submission and will begin working on audits outside the Department of Defense. And the world turns……

http://www.dcaa.mil/mmr/16-PPD-008.pdf

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Cost And Accounting, DCAA Relations

17-2 Costs Related to Extraordinary Reviews of Unsettled Overhead Costs

One of the probably unforeseen outcomes of DCAA’s decision to spin off Chapter Seven of the Contract Audit Manual (CAM) into a new document SELECTED AREA OF COST GUIDEBOOK: FAR 31.205 COST PRINCIPLES is that it reminds us of some of the more interesting sections of the Contract Audit Manual.

And notice the clever way they seem to present their own thoughts as regulatory by linking their thoughts “Guidebook” to the actual rules “FAR 31.205 Cost Principles”.

Section 17 is lifted up from the CAM and only true regulatory or statutory reliance is the “reasonable and prudent” standard. In other words, DCAA applies the reasonable and prudent standard when they cannot find a law, legal decision, or regulation that supports their decision and decide that the contractor’s actions were not those typical to another contractor in a similar position. This assertion is made by DCAA Auditors whom, the vast majority, have never made a business decision. They have never sweated a payroll, created a set of books, invoiced, or other reasonable and prudent activities.

This aside, the section asserts DCAA’s right to question as unallowable contractor costs associated with reviewing indirect costs.

To your amazement, I have a few problems with this positon:

  • The adjective “Extraordinary” is in itself, extraordinary and subjective. It calls on DCAA auditors to determine if the review of indirect costs are routine or “extraordinary”.

 

Of course DCAA tries to help an auditor with this:

 

This extraordinary effort is often the result of the contractor’s earlier negligence in establishing, maintaining, and/or implementing an adequate system of internal control.

 When the circumstances cited above are encountered and the contractor is incurring or is expected to incur significant costs, the auditor should notify the contractor that the costs associated with such extraordinary reviews of unsettled overhead costs are considered to be unreasonable and will be questioned under FAR 31.201-3, Determining reasonableness. The reasons to be cited are:

  1.  1. The costs are not of a type generally recognized as ordinary and necessary for the conduct of the contractor’s business or the performance of a contract. The costs are duplicative of costs incurred for the same purpose in prior periods. The Government has already reimbursed the contractor for the costs of preparing billings and claims for reimbursement. The fact that this task was not adequately accomplished does not entitle the contractor to additional reimbursement.
  2. The costs are the result of the contractor’s failure to follow the requirements of generally accepted sound business practices and contract terms.
  3. The costs result from actions taken which were not those of a prudent businessman in the circumstances, considering his responsibilities to the owners of the business, his employees, his customers, the Government, and the public at large.

A lot more words they employ here call for professional judgement: negligence, significant, failure, and my favorite: duplicative.

Let us remember that DCAA Auditors are awarded professional judgment by an act of Congress. According to their own report to Congress, only about half of their professional judgements are supported and that is with the majority of contractors not contesting DCAA proposed decisions.

These words are loaded terms without definition. The “guidebook” provides no guidance to define the line between ordinary and extraordinary or any other loaded terms. The DFARS 252.242.-7006 provides some guidance on defining significant but this is not referenced in the guidebook.

2. And speaking of the DFAR regulation, how does this section match up with the requirement for Management Review and/or Internal Audit. When do these required activities become “extraordinary”?

3. Duplicative? Did DCAA forget that good internal controls are often duplicative by nature? When does double checking payroll cross from ordinary to extraordinary? When did taking advantage of the time spent preparing your incurred cost submission to check your costs become unreasonable and not prudent? Maybe DCAA is just trying to create work and success for themselves by discouraging contractors from double checking their work?

I am sorry, but I just have to wonder about this. Many people would argue that double entry is duplicative. Accounting is built on cross checking and rechecking, at least good accounting is.

DCAA, when you spend tax dollars to create something new, such as this guidebook, please create something new.

 

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DCAA Publishes New Cost Guidance

DCAA published “75” chapter new guide tying into FAR 31.205 on their website. I say “75” chapters because many of them are placeholders, but this is still a significant level of guidance that will take a while to process.

SELECTED AREA OF COST GUIDEBOOK: FAR 31.205 COST PRINCIPLES

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Department of Defense News

Supervisors Fail to Act Properly to DOD Employee ‘Misuse’ of government funds for Casinos and Adult Entertainement

Excerpt from a recent Department of Defense OIG audit followup to previous audit:

 

Finding

We determined that DoD management (cardholder’s commander or supervisor) and travel card officials did not take appropriate action when notified by the DoD OIG, during the previous audit, that cardholders had potentially misused their travel card. In this follow-up audit, we reviewed management’s actions for 30 nonstatistically selected cardholders with the highest dollar amount of high-risk transactions that had been referred to management in the prior audit. During this audit, we found that:

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Just What is a Subcontractor?

At a recent conference an audience member asserted that the FAR (Federal Acquisition Regulations) did not define subcontractors and she felt free to put the costs wherever she wished on an incurred cost proposal, specifically under Other Direct Costs. I assumed she meant consultants providing direct services on a job or contract, but I did not argue with her and we agreed to disagree.

Subsequent to this, I gave up documenting FAR definitions of subcontracting after the fifth one. All of these included the term “services”.  I will quote, cite, and discuss some of the specific definitions in a bit, but first I want to broaden the issues to the needs of government contractors, especially small business government contractors.

Not only does the FAR define subcontractors, it is an area of intense regulation and receives serious attention from DCAA to include an ever evolving “Schedule J” on DCAA’s model incurred cost electronically (ICE). It is in a contractor’s interest to avoid this greater scrutiny while complying with existing statutes, case law, and regulations (notice I did not say guidance, as in DCAA’s Contract Audit Manual or Information for Contractors).

I will also note that some contractor approaches can lead to unnecessary complications and even visits from the IRS wanting more money.

Traditionally, direct costs are recorded in five broad accounts: Direct Labor, Direct Travel, Materials, Other Direct Costs, and Subcontractors. Over the years. I observed contractors recording what the FAR and I define as subcontractor costs, in all five accounts to include Materials and Direct Travel. There is actually an accounting tax argument for recording subcontractor travel costs under direct travel (see my presentation: Meals & Entertainment Rules – Or How to Avoid Inviting Government Auditors to Your Lunch . I prefer to track subcontractor Meals and Entertainment (M&E) as part of the Subcontractor account, but I acknowledge the argument.

Despite what many DCAA auditors might argue, there is no requirement to use these five main direct cost account groups, but I am going to assume their use because of my vain hope as a taxpayer, that we can reduce costs by reasonable acceptable conventions. Adopting these five major accounts for tracking direct costs is such a convention. Further, these are the five the government cares about.

Subcontractor Definitions

Now to some of the definitions:

FAR 3.502-1

“Subcontract” means a contract or contractual action entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract.

“Subcontractor” (1) means any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment, or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract; and (2) includes any person who offers to furnish or furnishes general supplies to the prime contractor or a higher tier subcontractor.

FAR 4.1.1701

“First-tier subcontract” means a subcontract awarded directly by the contractor for the purpose of acquiring supplies or services (including construction) for performance of a prime contract. It does not include the contractor’s supplier agreements with vendors, such as long-term arrangements for materials or supplies that benefit multiple contracts and/or the costs of which are normally applied to a contractor’s general and administrative expenses or indirect costs.

FAR 52.244-2

“Subcontract” means any contract, as defined in FAR Subpart 2.1, entered into by a subcontractor to furnish supplies or services for performance of the prime contractor a subcontract. It includes, but is not limited to, purchase orders, and changes and modifications to purchase orders.

Subpart 22.801

“Subcontract” means any agreement or arrangement between a contractor and any person (in which the parties do not stand in the relationship of an employer and an employee)—(1) For the purchase, sale, or use of personal property or nonpersonal services that, in whole or in part, are necessary to the performance of any one or more contracts; or (2) Under which any portion of the contractor’s obligation under any one or more contracts is performed, undertaken, or assumed.

“Subcontractor” means any person who holds, or has held, a subcontract subject to E.O. 11246. The term “first-tier subcontractor” means a subcontractor holding a subcontract with a prime contractor.

Discussion

So much for the FAR not defining subcontractors and the definition not covering ‘services’ provided by consultants and other professionals. Having said this, it is critical to remember that FAR definitions typically apply to the section where they are found. For example, the last definition is found in the Equal Employment Opportunity section which is why it further defines subcontract as non employment.

This is where the FAR experts, Contracting Officers, DCAA auditors, and other government employees can spend too much time parsing the FAR in an attempt to twist it into what they mean. A few years ago, a DOE pricing specialist in a vain attempt to prove that the contract was enforceable before the FAR, ended up accidentally accusing the contractor of criminal fraud. Context is critical to pulling out FAR clauses.

But sometimes, the only regulatory guidance is stranded in strange places. The ONLY guidance on how to withdraw an incurred cost proposal properly is found under “Indirect Cost Rates” (FAR 42.7) but under the section about waving penalties (42.709-5)

Now, having said that, the first three definitions appear numerous times in the FAR and could be argued to create a general definition. Let us look at some of the general conclusions we can draw from these definitions:

  • Subcontracts, for government contracting purposes, only apply to direct costs. Many DCAA auditors attempt to apply subcontractor regulations and procedures to costs charged as indirect. Notice one definition specifically addresses this. Professional and consultant costs are covered under FAR 31.205-33. This FAR section seems to assume such charges are indirect; but is not specific about consultants as a direct charge, and not burdening them with the additional definition as a subcontractor.
  • There does not have to be a contract, note the term ‘contractual action’ in the first definition and the inclusion of purchase orders in other definitions.
  • Your weekly trip to Walmart for office supplies does not make Walmart a subcontractor. Any contractual action, to include the right of return, does not create a subcontractor relationship. Again, I am not a lawyer, but I do believe this is a bit of a grey area. A recent example of this was the IRS attempt to force business to issue 1099s to everyone. Fortunately, Congress corrected the situation. Vendors such as Walmart are not subcontractors, but a plumber that provides services on multiple contracts is a subcontractor even if one of the definitions would appear to make this an exception.

As a final look at the regulations, let us look at the requirements reference subcontractors for the contractor’s incurred cost proposal found at FAR 216-7(d) :

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contract information).

Complicating Your Life

Now if we are all depressed about the definition of a subcontractor and recovering from our dashed hopes of trying to avoid the extensive subcontractor requirements, let us look at a couple of other common actions small business contractors take with subcontractor costs that can actually complicate their lives.

  • Treating subcontractors as Direct Labor – This is fairly common. For example: Jane, your 1099 ‘employee’ works alongside the regular employees and is invited to all of the parties. Your customer may even require her to fill out a timesheet just like the regular employees. This treatment does presents a couple of challenges.
    1. First, since you treat Jane as an employee and charge her time to Direct Labor; the IRS will decide she is an employee and will send you a bill for her payroll taxes, interest, and penalties. There is now even a section on Jane’s tax return to tell the IRS about this.
    2. Second, as if the first issue was not enough, it makes a bit of a challenge to reconcile your payroll to your labor costs, as required by regulation and on the Schedule L of the DCAA model ICE. If you segregate the 1099 costs in their own account under Direct Labor, you identified them as nonemployee and we are back to the subcontractor identification.
    3. Third, there is the issue of rates and comparative rates in competitive bidding. If you are including 1099 labor in your fringe and G&A base, an appeal could argue that your rates are artificially low and even deceptive. Additionally, we all know how many contracting officers hate paying G&A on subcontracts and will award only a special ‘handling’ or ‘management’ rate for the subcontractor part. I am sure they would be happy to discover what they consider subcontractor costs in Direct Labor.
    4. Fourth, many contracts require contractors to notify the contracting officer about any subcontracts and if a significant portion of your Direct Labor could be seen as actually subcontractors, this could present a problem to include allowability of the costs.
  • Another common approach is to classify all ‘consultants’ as Other Direct Costs. This decision would raise the same issues raised above as to rates and notification. Also, the common sense definition of Other Direct Costs are costs that cannot be easily categorized as Labor, Travel, Materials, or Subcontractors. DCAA might conclude that consultants would fail this categorization as Other Direct Costs.
  • Spreading the Joy – I mentioned the tax argument for segregating the subcontractor M&E costs and some of those engineers might express a desire to separate out the material costs from the subcontractor’s invoice.

These temptations are easily addressed by adding subaccounts to the subcontractor account for travel and materials, if you wish.

Conclusion

Ah, the joy of government contracting. Again, there are excellent reasons why contractors attempt to reduce the government (DCAA) involvement in subcontractor management. Both the regulation and guidance are extensive, to include a requirement to flow down clauses on employee texting while driving. Unfortunately, this is the nature of the beast and any attempts to reduce the government’s involvement in the contractor’s employment of subcontractor needs to be carefully planned and compliant with statute and regulation.

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