Hard Bid Contractors – Don’t leave money on the table!
In June of 2011, Federal Acquisition Regulation (FAR) 52.216-7 Allowable Cost and Payment was issued, formalizing requirements of an adequate final indirect rate proposal. This clause establishes the basis for preparation of indirect rates, the timeline for annual submittal (six months after year end), and details the 15 required schedules of the proposal. The 15 required schedule are fundamentally the same as the Defense Contract Audit Agency’s (DCAA) incurred cost electronically (ICE Model).
Preparing the required information is generally no small or easy task, especially for firms new to this process. It involves developing an adequate indirect cost framework, aggregating the right data to conform with the schedule requirements, reconciling the schedules to the accounting system, searching and removing unallowable costs, and building the model to FAR specification.
Naturally, flexibly priced contractors (Cost reimbursable / Time and Material) go through this process annually and have some familiarity with this process. So why should Fixed Price Contractors (those who bid only hard bids / lump sum) be concerned with this? The reason is that should a change order occur on a fixed price contract with an absolute value of over $700,000, contractors are required to certify their cost or pricing data for that incremental amount under the Truth in Negotiations Act, or face civil and / or potentially criminal penalties.
As many who have contracted with the Government realize, there are many variables which can contribute to large change orders. Should fixed price contractors find themselves in this situation and fail to certify their indirect rates, “the contracting officer may then unilaterally establish the rates”, that will be “set low enough to ensure that unallowable costs will not be reimbursed.” Therefore, it’s easy to see how some fixed price contracts leave money on the table by failing to certify their rates.
It’s also critical to perform the indirect rate certification accurately. Penalties can be substantial for non-compliances identified by an auditor. If an unallowable cost is found post submission of an indirect rate proposal, the penalty is the unallowable cost plus applicable interest. If the unallowable cost is found by the DCAA pre-submission, it is the aforementioned cost times two.
In addition, contractors need to be cognizant of the dynamic Government regulatory environment that is constantly expanding with new regulations and guidance. A recent example involves an audit alert issued on March 22, 2012 by the DCAA for Bid and Proposal charging. The DCAA reinforces that their auditors should be ensuring that unless contractually required, Bid and Proposal costs are by definition an indirect expense, and should be allocated as such. The DCAA recommends this review be performed during forward pricing or incurred cost audits. Given this, contractors should be keenly attuned to making sure they’ve allocated their B&P costs as an indirect expense.
If your developing indirect rates for the first time, many contractors need help to accurately develop the indirect rate model. For those contractors that have been developing rates routinely, have you considered an analysis to ensure that your company is in compliance with recent regulations? Lastly, have you considered the benefits of outsourcing the preparation of the ICE model annually?