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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.  

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