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Saturday, September 22, 2018

Profits for Grants under Contract - CPPC Violation?

My last blog on this subject at Are you Ready to Assume the Risks? talked about how the Grants under Contract (GUCs) should be included in the total amount of funds at risk when calculating a fixed fee under Cost Type contracts with USAID. The blog was written at the time when USAID’s RFPs categorically advised offerors that no fee % could apply to the plug-in GUC number.   It would appear that USAID heard the industry’s arguments and finally started to allow a separate fee % to be proposed for the amount of funding, allocated (plug-in) to GUCs under each contract.  Often, that % is lower for GUCs which are funded through USG Letter of Credit and higher for self-funding contractors.  This, of course, is excellent news for contractors and a small triumph for those of us advocating for fair risk allocation for several years.  But…. there is a but…

Unlike the % of fee, which is proposed under Cost Type contracts during proposal stage, which becomes fixed as a dollar amount upon award, the fee on Grants under Contract remains a percentage in many contracts, including some recently issued IDIQs.    Once fixed, the “regular” fixed dollar fee is attached to deliverables through a fee schedule or an award fee plan for CPFF completion or CPAF contracts or to days of level of effort for CPFF term contracts, which is consistent with the requirements of the FAR 16.  

But the GUCs’ Fee % remains a % and is allowed to be charged as a percentage of cost without any consideration for schedule, performance or some other quality metric.  The more GUC money you push out, the more “fee/profit” you would get – precisely the type of arrangement which is prohibited by FAR 16.102(c) – prohibition of cost-plus-percentage-of-cost contracts.  

I believe the confusion stems from the fact that some contractors may be calling this % rate - a handling fee- which is not a profit at all and is in fact a name used for the indirect cost pools, which deal with accumulating segregated costs, allocable specifically to handling of subcontracts or grants under contract.  It is a legitimate practice, even though most of the GUC handling costs are normally charged directly, so creating a separate indirect pool just for GUCs' handling costs often does not make sense and those costs are normally rolled into the general overhead pools/rates of the contractor.  However, for those contractor for which it does make sense, it can be done.  The material handling indirect pool is then included in the contractor’s accounting system, approved as part of the contractor’s NICRA and can in fact apply as a percentage of GUC costs like other indirect rates. The difference is - the indirect rates are trued up through audit every year and become fixed costs – representing the actual allowable costs incurred by the contractor in support of contract performance.
The fixed fee is not supposed to cover indirect costs.  The fixed fee is covering the contractor’s risks associated with performing a cost type contract and offers a reward for proper performance.  The proper application of a separate profit % rate for Grants under Contract would be to simply include the proposed GUC’s funding amount into the total fixed fee calculation for a cost type contract by assigning a low weighted risk percentage of 1-4% and including the result into the final fixed dollar amount fee under the contract.

If the desire to segregate the GUCs’ fee is there for funding tracking purposes, or due to the fact that the total "plug" amount for GUCs may never become available, a separate fixed dollar fee could still be calculated and fixed at the same time the regular fixed fee is fixed at contract award.  The separate fixed fee for GUCs can then be paid through an establishment of a separate fee plan, which focuses on timely delivery of grants, proper administration and even audit results.  

Monday, September 10, 2018

Contractor Compensation Ceilings - USAID Contractors

Employee compensation is the single largest element of cost for many Government contractors.  The US Government is, not surprisingly, quite interested as well.  The compensation wars that are being fought in the court rooms under recent JFT and Metron cases represent just a few of those, which are capitulated by contractors during the course of audits, or settled in pre-court dispute procedures. 
Most of the disputes are about what used to be called “executive compensation” and the FAR used to prescribe limits (at FAR 31.205-6) on how much compensation government contractors could claim as being allowable for their top 5 most highly paid executives at each business segment. The rationale for those allowability limits being, of course, that the government didn’t want taxpayers to fund exorbitant executive salaries, which, arguably, provided the least amount of actual direct or indirect benefit to Government contracts….
Arguably…  

Thursday, August 30, 2018

Establishing Reasonable Compensation under Cost Reimbursable Contracts FAR 31.205-6

It would appear and, considering the recent decisions in Metron, Inc., ASBCA Nos. 55624, 56751, 56752 (Jun. 4, 2012) and  Appeals of J.F. Taylor, Inc., ASBCA Nos. 56105, 56322 (January 18, 2012)), the courts agree that this process of establishing reasonable limits in contractor personnel compensation should not be as complicated nor as simple as the auditors or Contracting Officers like to tell you it should be.
I am finding a worrying trend in Cost Reimbursable contracting where Contracting Officers’ ("CO") are unwilling to review any market data and, are, instead, focusing their review of contractors' personnel compensation solely by looking at each proposed candidate’s salary history.  Another worrying trend is that even those COs who claim they are looking at market data, are, in their own admission, only looking at the proposed rates by other contractors on different projects in the same country as the benchmark and panacea of market comparability.

This is an inherently flawed approach and is inconsistent with what compensation FAR cost principle requires at FAR 31.205-6.  Nor is it consistent with what the courts have decided again and again regarding the establishment of limits on reasonable compensation under USG contracts.

Not only a candidate’s salary history is not always indicative of the market where a specific contractor is purchasing its labor, it is unnecessarily limiting the ability of under-paid professionals, coming from areas where gender, social class, industry or other factors determine their earning ability, to be able to earn a fair and reasonable rate on projects funded by US Government. 

Comparing salaries proposed by other contractors for unidentified “other projects” does not represent relevant market data either, and, is not an adequate and fair method.  This is because such other contractors may be operating at a different revenue bin level, or paying most of their compensation through incentives, fringe and deferred plans or otherwise proposing a lower salary which is balanced elsewhere on an overall total compensation level.

The correct process is supposed to work something like this:

Step 1 Determine the position to be evaluated (scope of work, minimum qualifications, maximum qualifications) and total compensation you are proposing to offer, i.e. salary + bonus+ fringe+ allowances + other.  You could use two levels to establish range:  minimum quals and years of experience and maximum quals and years of experience, for example.

Step 2 Identify survey or surveys of compensation for the position to be evaluated which match your company in terms of revenues, financial performance, industry, geographic location of where the labor is being purchased and other relevant factors: e.g. only security cleared personnel, unique knowledge, minimum academic requirements for comparable positions, requirements to travel and live in unhealthy conditions, etc.    
    
Step 3 Update the surveys to a common data point for each year through the use of escalating factors.  So, if your survey is for 2017 and you are evaluating the salary in 2018, look for escalation factors in the survey to bring it to the mid-point of 2018

Step 4 Combine data from various surveys for the relevant compensation elements (i.e. salary, incentive comp, fringe, deferred comp, pension, relocation allowance es, hardship differentials etc) and array as the average (mean) at selected percentile (i.e. take survey data at 50% or 75% depending on your company’s particulars – see Step 2 or use a range) and develop a composite number for each element.

Step 5 Determine which of the element numbers to use for comparative purposes, i.e. salary + bonus only, salary + bonus + fringe + allowance etc

Step 6 Apply a range of reasonableness such as 10% (DCAA is particularly fond of this number) to the number or numbers selected

Step 7 Adjust the actual total cash compensation, which is being compared for lower than normal fringe benefits – i.e. lesser paid vacation, lesser medical or other benefits, no 401K etc. calculate the monetary value of the difference and deduct from the actual proposed total cash compensation of the candidate for comparability purposes.

Step 8 Compare adjusted compensation to the range of reasonableness.

If reasonable, look up to see if there are any salary billing limitations under your contract.  So, if the total cash compensation (i.e. salary plus bonus) appears reasonable at $200,000, but you can only bill the Government base salary of $176,500 (e.g. USAID Contractor SALARY threshold), then you may consider offering up to $23,500 as incentive comp based on your consistently applied incentive compensation policy for achieving performance milestones.  

Even though bigger contractors are using a much more sophisticated approach than this, with bell curves and statistical adjustments, this is a good start and is certainly better than any arbitrary decisions based on salary histories.


We understand the Government’s desire not to overpay on high risk cost reimbursable contracts.  

However, streamlining the compensation decisions by requiring that contractors develop and provide for approval compensation plans (based, essentially, on the above) and agreeing on the limitations arising from their proposed and accepted methodologies, would surely eliminate the administrative burden which contributes immensely to the cost of performance and the frustration of both contracting parties.

Tuesday, May 29, 2018

Creating Value in CPFF contracts

The topic is CPFF contracts: incorrect use of incentives and death by a thousand papercuts….

If you went through the early days of USAID Iraq programming, you would remember that after a decade of T&M contracting, USAID discovered CPFF. The premise was innocent enough: they wanted a flexible instrument to allow for ramp up and ramp down at will, with scopes of work you could drive a proverbial truck through, minimal profits (CPFF is the lowest risk contract type for contractor) and the promise of some monster incurred costs audits to keep the contractor from spending too much money on things it did not really need.

After deciding that they wanted to have the same thing as T&M, but with the ability to see and audit all the costs, as opposed to some highly suspect fixed daily rates, USAID settled on CPFF “term” type contracts (FAR 16.306 (d)(2)).  The Contracting Officers, who were handed these CPFF term contacts, received very little training on what a CPFF was, and, received no training on what a CPFF “term” form meant.  

Thursday, February 22, 2018

I Don’t Think It Means What You Think It Means. Government Consent to Subcontract under Cost Type Contracts

This is the language that all Contracts Professionals cringe to see in a consent to subcontract, received from the Government: “this approval does not constitute determination of allowability of costs”.

After laboring to comply with FAR 44 in determining the needs, conducting exhaustive competition and selection of the right contractor and painstakingly documenting all the factors to present to the CO, this one little sentence tells you that all your work may be in vain, once a particularly angry auditor finds your methods not to his/her liking. 


But does this language really mean what the auditors think it means? Can the Government’s knowledge, approval and acquiescence really mean that little?


Well, not quite… This brilliantly written decision from a while ago shows you just how it is all supposed to make sense:


Husky Oil NPR Operations, Inc., IBCA 1792, 86-1 BCA ¶18,568, stating at 93,246


Although the contract provision for CO approval of subcontracts and purchase order does contain exculpatory language that such approvals do not constitute a determination of the allowability of such cost, the approval process must be taken to have some meaning. At the least, the approval process provides continual monitoring by the CO to assure that the contractor was adhering to accepted procurement practices to secure adequate competition or utilizing acceptable negotiation procedures to assure cost-effective awards. The disclosure of complete information by the contractor to the CO in order to secure the mandated approvals did assure that the CO was in the knowledgeable position to concur in the proposed award. While the approvals do not assure allowability of “such cost”, meaning the entire costs of the subcontracted tasks, the approvals must indicate a general agreement of the CO with the judgement of its CPFF contractor-manager that the award was necessary to the project, that the approach taken in subcontracting for the needed equipment, supplies or effort was acceptable, and that the costs properly expended under the subcontract would be allowed. For such judgments to be reversed by a successor CO after an auditor suggests a different approach should have been taken is an unwarranted interference with the management prerogatives of the CPFF contractor, and a lack of consistency in the Government’s obligations towards the contractor. The contemporaneous judgement of an informed CO to agree to a sole source awards, or to an award to another instead of the low bidder should be binding on the Government and successor CO’s as it is on the contractor, otherwise, the position of the Government, after audit, is that despite our agreement at the time of award, we now accept only those judgments that retrospectively applied prove to be most cost effective. This violates the basic nature of the relationship of the parties under a CPFF contract expressed in J.A. Ross & Company, ASBCA Nos.2326, et al., (Dec. 12, 1955) 6 CCF 61,801 (emphasis added)


Government knowledge. The Government obtains knowledge dealing with allowability of costs in various ways: from audit reports, disclosure statements, procurement system reviews, payment of invoices and administrative functions, like approvals of subcontracts.   It is in the contractor’s best interest to document it all with the view of proving that the Government had specific knowledge of the allowability of cost in question and it did not disagree with the proposed approach or treatment (we are not talking about expressly unallowable costs here, which Cos are not authorized to overrule).


It is not sufficient to just show that the Contractor sent something to the Government and they did not said “no”. Specific knowledge and action must be established. It is essential that you show that you relied on the Government’s knowledge, not knowing that the Government disagrees or specifically disapproves something. 


In the example of a subcontract consent pursuant to 52.244-2, the extent to which the CO is provided and examines the details of awarding a specific subcontract, determination of pricing, sole source etc. can be paramount in defending allowability for the pesky auditor or under a claim.


FAR 44.202-2 provides a road map for requesting a proper consent to subcontract and detailing the specific actions which went into determining the needs for the project, the approach taken in procurement methods, the type of awarded subcontract and price reasonableness determination.   If you follow this process, document it properly and your CO consents in writing, the documentation will go a long way to support allowability of all resulting costs (provided your subcontract is properly written and subsequently managed and enforced to protect Government’s interests).


Here are some of the details to include in your request for consent:



  • Is this subcontract needed to assist the Prime in performing the work? Was an in-house option considered?
  • General description of the services/goods being purchased and how they benefit the ongoing Prime Contract (FAR 44.202-2 (a) (3))
  • Type of Competition: Open Competition, Short List Competition, Sole Source
  • Basis for Procurement Evaluation:  Lowest Price/Technically Acceptable; Best Value Overall/Trade-Off; Sealed Bids etc.
  • Were Small Business Subcontractors considered? (not applicable if all work is performed entirely overseas) (FAR 44.202-2 (a) (4)).
  • Which Company was selected? Name, address, DUNS number (if available), Tax ID (if available)
  • Nationality of Supplier/Source of Commodity (USAID Contracts)
  • Type of Contract Selected. Is this an appropriate type of contract for risks involved and consistent with Prime Contractor procurement policy? (FAR 44.202-2 (a) (9)).
  • Environmental Considerations and Form Completed? (if applicable)
  • Was a Selection Committee convened? PCI/OCI forms on file?
  • What was the step-by-step process for evaluating the submissions, including scores, explanation of trade-off (for best value procurement) etc?
  • What was the Prime Contractor cost estimate for this procurement? 
  • Provide adequate price competition or absence explanation. For example: if only one bid was received, how was the price independently verified? (FAR 44.202-2 (a) (5)).
  • Provide adequate cost or price analysis or price comparisons and the certified cost or pricing data certification (if required). (FAR 44.202 (a) (8)).
  • Provide sound basis for selecting and determining the responsibility of the selected contractor.  What due diligence was performed?  (FAR 44.202 (a) (7)). FAR 44.202-2 (a) (12)).
  • Were all Prime Contractor Procurement Policy Forms Completed and Included in procurement File?

Tuesday, November 14, 2017

Achieving Functional Excellence in Development Programs

There are so many different resources and recommended learning programs out there that it makes one’s head spin.  The more we send our employees on uncoordinated, non-sequential and non-strategic training jaunts to check the box of “we offer training”, the more confused and, ironically, uneducated in the areas of their functional responsibility they become.  There is, after all, no greater threat to any program than people who know just enough to be dangerous.

An intelligently designed training program for your staff, especially Procurement, Contracts, Grants and Finance staff can lead to nonpareil functional excellence in the areas which represent the back bone of a solid and effective development program management.

Having been around a bit, I have now finally noodled out that a good training program consists of three main categories of training, provided online or in classroom (on regular and repetitive basis) for all existing and incoming employees:

General Mandatory Training –these would be training sessions on topics mandated by state, federal or local laws and regulations as well as those specific to the corporate status of each entity, as well US Government mandated training topics for its contractors and grantees.

Functional Mandatory Training – this would consist of basic training courses which link each person’s functional category/position/job description to the standards of excellence expected of them by the company.  For example: Understanding company’s Procurement Policy for Procurement staff, Finance SOP for finance staff etc.  This would also include continuous education courses for those who would like to progress and deepen their knowledge of their chosen functional area/field.  These should be designed with built in exams, to assess the progress and understanding of advanced topics, and linked to promotion opportunities within the chosen category.  For example:  Contracting Officer 1 with $100,000 warrant and signatory authority upon completion of Basics to Contracting Officer 2 with $1,000,000 warrant and signatory authority upon completion of Advanced and so on.

Functional and Cross Functional Elective Training - these could be almost anything designed to deepen personnel’s knowledge of their own or adjacent functional categories.  For example:  Procurement Personnel learning about Grants or Finance staff being apply to apply for Procurement Positions within the company.

As an example of a good program, addressing all three categories of training, I would like to use my Functional Excellence Training Dream Plan for Contracts & Grants staff working on USG (primarily USAID and DoS) programs:

General Mandatory (All Staff across Functional Categories)
·       Ethics and Business Conduct
·       Ethics and Business Conduct Compliance: Cross-Cultural Component (include cross cultural element for all countries of performance)
·       Business Etiquette and Professionalism
·       Cultural Diversity in Workplace
·       Overview of Company:  Core Competency, History, Past Experience, Mission, Vision, Current Strategy
·       Safety & Security in Workplace (include global component if necessary)
·       Fraud, Waste and Abuse in Overseas Programs
·       Protection Against Sexual Exploitation (PSEA)
·       Trafficking in Persons (TIP)
·       Preventing Corruption in Humanitarian Aid
·       Anti-Harassment
·       Timekeeping and Time Allocation (including use of Work Authorizations and CAS considerations)
·       Contract/Award Brief and Overview of Terms and Conditions – for projected dedicated staff specific to their contract/award


Functional Mandatory: Contracts & Grants Staff
All of the above +

·       Basic: Procurement Policy Overview and Procurement
·       Basic: Grants Overview: Grants under Assistance, Grants under Contract  
·       Basic: Subcontract and Vendor Management
·       Basic: Subgrantee Management
·       Basic: Audit Readiness for Pass Through Instruments (subcontractors, subgrantees, grants under contract etc.)
·       Basic: Procurement & Grant Fraud Awareness, Mitigation and Prevention:  Best Practices
·       Advanced: Assistance & Acquisition Instruments in Depth
·       Advanced: Procurement Methods, Best Practices and Records
·       Advanced: Grant Methods, Best Practices and Records
·       Advanced: Cost Principles in Depth
·       Advanced: Identification and Treatment of Unallowable Costs



Functional and Cross Functional Elective:  Contracts & Grants Staff

All of the above +

·       Advanced Plus: Property Management
·       Advanced Plus: USAID Project Management Cradle to Grave Basics:
Proposal-Negotiation-Implementation-Close Out-Audit
·       Advanced Plus: Effective Communication and Presentation Skills
·       Advanced Plus: Teaming Agreements
·       Advanced Plus:  Foreign Language
·       Cross: Direct & Indirect Cost Policy Overview
·       Cross: Financial Management of USG Contracts
·       Cross: Financial Management of USG Awards
·       Cross: Program Start Up and Close Out
·       Cross: Monitoring & Evaluation: Effective Design and Implementation of M&E Programs



Thursday, October 20, 2016

Indirect Rate Ceilings on CPFF contracts = #winning?



I googled “caps on indirects” before writing this and found very little in the area of any other agency but USAID. The chief reason for that is the fact that establishing indirect ceilings in cost type contracts is not widely used by any other Government procurement agency. The reason why they don’t is simple - if they desire to fix costs, they use Fixed Price or T&M type instead.