Compliance and Best Practices Blog for USAID Grantees and Contractors.
The topics presented here are for informational (and sometimes entertainment) purposes only and should not be relied upon as legal advice. Any comments or reactions to the posts posted by members should likewise not be considered legal advice. If you have a specific question about any legal matter, you should consult with a licensed legal professional.
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.
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….
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
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
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.
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.
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.
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?
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.
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
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:
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.
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
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.
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:
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
·Fraud, Waste and Abuse in Overseas Programs
·Protection Against Sexual Exploitation (PSEA)
·Trafficking in Persons (TIP)
·Preventing Corruption in Humanitarian Aid
·Timekeeping and Time Allocation (including use of Work
Authorizations and CAS considerations)
Brief and Overview of Terms and Conditions – for projected dedicated staff
specific to their contract/award
Mandatory: Contracts & Grants Staff
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
Methods, Best Practices and Records
·Advanced: Grant Methods, Best
Practices and Records
·Advanced: Cost Principles in
·Advanced: Identification and
Treatment of Unallowable Costs
Cross Functional Elective: Contracts
& Grants Staff
of the above +
·Advanced Plus: Property Management
·Advanced Plus: USAID Project Management Cradle to Grave Basics: