Policies, Procedures, Internal Controls

Inquiry: Paul, I just reviewed part of your presentation to the audience at the American Legion.  I have a concern.  Your Indirect Costs include Fringe Benefits and Payroll Taxes.  In my experience, I assign them differently.  Is there a problem?

Response: Either way could be okay, as long as the method results in a fair and reasonable assignment of the costs to final cost objectives (contracts) AND the method is consistently used.  But let's look a bit deeper......

QUESTION: Paul, I'm confused about how to determine what our pool(s) and base(s) should be for our proposal writing. We have both commercial and non-commercial rates for many types of services. These rates vary greatly depending on what we do, how we do it, how long we do it, and even for whom we do it. Our pricing policy is written down but there are always special agreements and our non-commercial rates are generally lower. All of our direct and indirect costs are built into our rates. How do I determine what our labor costs are? What could I possibly use as a base? What do you think? 

RESPONSE: Wow! A lot of questions on your mind - let's begin with an important concept.......

INQUIRY: Hi Paul,  Can you explain the difference of putting travel and client expenses into B&P versus G/A?  RESPONSE: B&P (Bid and Proposal) expenses are typically for costs incurred during the Proposal Phase while similar type costs would typically go into G&A when they are incurred for the General and Administrative activities of the company, but not for B&P purposes. Lets look closer....

Are you a Prime or Subcontract doing business or hoping to do business with the government?

Well, there are several important checklists you should have in your Tool Chest, alongside the tools we provide.  There are others, but we must start somewhere.  And they’re free!   

Really Free? Well, since your tax dollars paid for them, “technically” they aren’t free!

Inquiry: Any subcontract costs we incur will be a part of our G&A base, so my question would be is there anything in FAR 52-232-7 that precludes us from adding G&A on top of these subcontract costs?

Response: Let me answer in the Affirmative Tense: The simple answer is Generally Yes; you can add G&A to subcontract costs.   FAR 52.232-7 clearly lists Subcontracts under Materials and allows for adding Indirect costs to these.

However, your inquiry is much more in-depth than first meets the eye, and it should be.  So let’s look beyond the obvious...

Audit Alert on Allowability of Lodging, Meals and Incidental Expenses under FAR 31.205-46, Travel Costs

The Government travel regulations provide for two ceiling amounts: one for lodging and one for meals and incidental expenses. However, as provided in CAM 7-1002.3c(2), contractors are subject to only one ceiling,

The DDP memorandum states that costs incurred for ineligible dependent health care are unallowable under FAR 31.201-3 and violate the selected cost principle at FAR 31.205-6(m);

However, these unallowable costs are not expressly unallowable. Therefore, auditors should not pursue application of penalties under FAR 42.709 to the questioned ineligible dependent health care benefit costs. Accordingly, auditors also should not cite contractors that fail to exclude these costs from Government contracts for noncompliance with CAS 405.

Inquiry: So Paul, are government accounting system requirements only applicable for Cost Reimbursement Type Contracts?  Response: This is a widely misunderstood concept. Many contractors feel that they do not have to worry about audits since they do not have any cost plus fixed fee (CPFF) type contracts. Others feel that since their contract(s) are small they are okay. Boy do they find out the hard way that this is not true. Let me tell you how it generally works.  Hold on to your hats' because this is High Value guidance coming, and it's free...

Paul, can you address the impact on our contractor work force of the Executive Order issued on 21 Dec which I believe declared the 24th of December a National Holiday. Government was very unclear and fractious on how contractor work force and contractors should deal with this "holiday."

For several years now, many contractors have objected to the DCAA requiring the use of the Incurred Cost Electronic (ICE) model to submit what the DCAA considered an adequate incurred cost submission (ICS). Those complaints can now be directed towards the FAR Councils because, in FAC 2005-52, effective June 11, 2011, they have incorporated the ICE model into the Allowable Cost and Payment clause, FAR 52.216-7

Before discussing the changes made by the FAC, a few words about 52.216-7 are in order. That clause is the only FAR clause that requires submission of an ICS. Thus, if 52.216-7, or a non-standard clause requiring the submission of an ICS, is not in a contract, the contractor has no obligation to submit an ICS.

When I was looking at my Indirect and G&A rates and looked at your notebook I did not see an example of when a company uses Direct Labor hours instead of Direct Labor dollars as the base. 

Inquiry: In contracting and coming up with the bases for estimates, and taking into consideration competitiveness. What does a company need to be aware of when contracting out 1099 vs employees.

Response: When you develop your indirect rates, you should review the level of Fringe Benefits provided 1099 employees versus regular employees. You must ensure (to the best of your knowledge and ability) that according to.............

Although there are many types of Unallowable Costs, there are certain types that are Declared Expressly Unallowable by Federal statute or regulations. These type carry with them a higher incidence of fines, penalties, and interest if they are not excluded, or if they are included but not specifically identified, from billings, claims, proposals, or other types of data submitted to the government where the date could be used in decision making of any kind by the government.

A total time accounting system that accurately reports hours will generate the proper amount of revenue for contractors on each of their labor-hour and time-and-material contracts. Cost reimbursable contracts have an added twist. Many cost reimbursable contractors who report total time use a diluted hourly rate approach for distributing labor costs to projects. For example, if an employee is paid $1,000 per week and works 40 hours, the projects are charged $25 per hour. If the same employee works 50 hours the following week, the hourly rate is diluted and projects are charged $20 per hour. In this example the contractor gets no additional revenue for the extra 10 hours of effort - they are provided free of charge to the Government. 

Fortunately, acceptable standard cost approaches will negate this windfall to the Government and still allow the contractor to take advantage of uncompensated overtime. The most common of these approaches involves.......

Two Questions: (1)I’m trying to decide on 2 Pools or 3 Pools. Some in our company feel that having 3 Pools (FOG) makes us appear better organized and that the government prefers to see 3 Pools. Others feel that 2 Pools (O-including Fringe and G&A) is adequate. Does the government actually have a preference?  (2) If we go with the 3 Pools can we “double dip” the direct labor as a base for Pool 1 and Pool 2? Could this “double dipping” be a good reason to use 2 Pools instead of the 3?

So when our employees travel we give them a travel debit card to use for all expense which hits our travel expense bank account. Some of the employees are putting everything on it including meals. Then they hand in a travel voucher which has the per diem rate for meals based on location of travel. The issue we have is we cannot reconcile with them the per diem amount and the amount they have already spent on the debit card in a timely manner and we end up paying for both already charged meal expense and then the per diem on the voucher. We would like to control this better.

Why do you pay them twice? If they are charging the meals, along with all other travel cost on a debit card, then why not change your policy for reimbursement to a later time once the voucher and debit card charges are reconciled. It should not be a hardship on the employees since it sounds like most of the expenses are charged and paid up-front by the company.

In your experience what do contractors do as a rule about Travel? Is there usually some kind of administrative markup applied or not? What would you say is the norm? Is there a range of markup %’s that might be reasonable?

What is reasonable can be so subjective. I can say that whatever I choose is reasonable...smile! But that won't fly. So let's look at one simple application to address your inquiry:  Typically, a firm charges G&A to travel, when their G&A Base is Total Cost Input (TCI) and therefore travel is part of the G&A BASE.  However there are other things to consider...

In accordance with Federal Acquisition Regulations (FAR) 52.215-23, any indirect costs and associated profit applicable to subcontract costs where the contractor does not provide “added value” (e.g., subcontract management functions) are considered excessive pass-through costs which are unallowable.

Learn how the DCAA guidance to their auditors define "added value" and what is considered excessive pass-through costs. 

The legality of the FAR is daunting and oft-times takes significant judgement and experience in determining how to apply the guidelines based on Intent versus Letter of the law. There even appears to be conflict between DCAA and DCMA application of missions! What are the missions of each? Who has the authority for making the decision on a small businesses ability to perform? Who determines if a cost is allowable or not? Who else can override an Auditor or Contracting Officers decision that your accounting system is inadequate? In my opinion, this article has an excellent explanation of these and related issues and is a must read for every small business contractor. This article alone is worth the annual subscription!

Since the Federal telework program and policies cover only Federal employees, Federal contractors are not governed by OPM and GSA telework guidance or by individual agency policies, and are not counted in the annual Telework Report to Congress. However, this does not prohibit – and should not prevent – contract employees from actually teleworking, as appropriate.

Telework arrangements for contractors should be negotiated with both the contractor’s own employer and with the appropriate Federal agency official,