Source: http://www.wifcon.com/discussion/index.php?/topic/4039-profit-on-subcontractor-fee-oh-8a-set-aside/&tab=comments
Timestamp: 2019-10-20 14:56:32
Document Index: 750931686

Matched Legal Cases: ['art 31', 'art 31', 'art 31', '§ 19', '§ 15', '§ 19', '§ 15', '§ 124', '§ 124', '§ 124', '§ 637', 'art 31']

Profit on Subcontractor Fee & OH 8(a) Set-Aside - Contract Pricing Including CAS & Allowable Costs - The Wifcon Forums and Blogs
By Mr_Batesville, June 28, 2017 in Contract Pricing Including CAS & Allowable Costs
Mr_Batesville 0
The requirement is an 8(a) sole source for construction and a FFP type contract is contemplated. the estimated value is 3-5million. The ktr has an OH rate of 14.95%. We normally see overhead in the range of 6-10%. The ktr has a 10% fee on top of all the subcontractor's markup. All of the proposal backup for subcontracted work only has the lump some numbers on the quotes provided.
2. Can a prime (8(a)) get profit on profit? Im looking for a dumb down answer on this one. I have seen that some say this is allowable however I need a FAR reference to validate. I have seen some post on this topic but none are plainly clear or easily spelled out with a clear yes/no and have a direct reference provided. Also, I have seen some site the excessive pass-through clause, this only applies to cost reimbursement type contracts for civilian agencies.
3. Can the Excessive pass-though rationale be used for an FFP construction contract in a civilian agency? Would this be a deviation since far only says it can be used for cost reimbursement?
You have asked a lot of questions, which are difficult to answer in detail in a Forum, especially without seeing the proposal. I can give (relatively) short answers, which you might or might not use to develop your negotiation objectives. The contractor might or might not agree with your opening point(s) during negotiations.
Question number one. It can be negotiated. But your negotiating position should be based upon an analysis of the "overhead rate". What does it represent? Is it general and administrative (G and A) home office overhead? Does it include project or field office overhead? Do you know how to review a G and A pool to analyze all the cost elements? How has the OH rate been calculated and what is the base used? Does it include costs for owned construction equipment and supporting Maintenance, repairs, mechanics, shops, etc. (which are to be removed from the OH pool, treated as direct costs, and added to the direct cost base). That is especially important if most of the work will be subcontracted rather than self performed or if equipment being used is rented rather than owned. Check every cost element in the pool for allowability and allocability, reasonableness, etc.
Question number two. The subcontract amount is a direct cost to the prime, including the sub's profit allowance in its proposal. Profit is generally allowed on direct costs. For instance, material prices include the manufacturer's, distributor's and seller's costs, correct? Rented equipment includes profit on the rental company's cost, right? The prime contractor is required to manage and integrate the subs' work and schedule. The prime is at risk to the government for a sub's failure to complete the work in accordance with the contract requirements (quality, time, etc.), rework, impact to other subs, to the schedule, impacts due to re-work disruptions, sub labor problems, sub payment of labor and materials , late material delivery, material shortages, wrong materials, safety problems, integration of trades, warranty work, etc. The prime is entitled to a reasonable fee on overall cost of subcontracted work as they are for the overall costs for materials, rentals, supplies, etc., which also include allowances for profit.
The USACE uses a structured, weighted guideline method to determine the pre-negotiation object for profit, in which the amount of subcontracting is one weighted factor. The higher the percentage of subcontracting the lower the factor rate. For the overall contract, we would apply one overall profit rate. For mods, when all direct costs are subbed, the rate would be lower than if it were to be self-performed.
You said that the subcontract prices are lump sum. Unless the sub price is based upon competition, we would generally require a cost based breakdown of the subcontract price, too. It really depends upon factors such as the type of work, the share of the overall direct cost and amount of the proposed subcontract, etc. We might negotiate the reasonableness of the proposed subcontract costs and markups, too.
Question number three. If the prime is performing at least the amount of self-performed work required by the Limitation of Subcontracting clause and is actively managing and supervising the project, how can it be "excessive pass through" cost? Small construction prime contractors on general building projects typically sub a major share of the work but are required to self-perform at least in accordance with the LOS. That's my opinion.
See FAR 15.404-1(a), and also (a)(1). Note the emphasis on "final agreed-to price" and "final price" being fair and reasonable.
There is nothing wrong per se with an overhead rate of 14.95%. I assume you're getting certified cost and pricing data (sole source over the threshold), so you can review or challenge or audit or negotiate any part of it.
There is nothing wrong per se with profit on subcontracted work. If you don't use a structured approach to analyze profit, you'll still want to consider the factors listed in FAR 15.404-4(d)(1)(i) through ((vi) in your analyzing profit.
Mr. B, when you say allowable are you asking if something is permissible or are you asking if something is allowable as that term is used in FAR Part 31? Also, when you say the contractor has an OH rate of 14.95% are you saying that is what the contractor has proposed or that is a rate that the government has agreed to for some current purpose such as a FPRA or a billing rate?
Mr. B, are you with a civilian agency? I'm not familiar with civilian agency supplements for preparing profit objectives for negotiations, if they exist.
DoD has a supplement and PGI with its own alternate structured weighted guidelines method. Some DoD agencies, like the US Army Corps of Engineers, have their own alt. structured weighted guidelines approach for construction and A/E contracting.
Some small firms, especially developing firms, may have a very high G&A rate (such as 14.95%). I agree 14,95% may appear to be "high". If the firm's cost of sales or other overhead allocation base is relatively small, then the rate will likely be higher than that of a large firm. However, we don't know what the "14.95% OH" rate represents here because you didn't provide any details.
I generally analyze the rate and also ask whether DCAA or some other entity has reviewed or audited the rate details and if they are current, old, etc. In fact, I used to generally put little faith in the accuracy of DCAA G&A audits of construction companies, unless the auditor is familiar with some of the quirks of construction contracting. I'm definitely not an expert in accounting. However, a review of indirect cost pool categories can sometime reveal unallowable costs, such as certain advertising, contributions, direct equipment costs and related support costs, etc. that may not be allowable for government construction contracts.
And - if the "OH" is a combination of field office indirect costs and home office, G&A OH, then I might want it to be segregated. The Bechtels of the world tend to classify all "project costs" as "direct costs" to the Division and Home Offices, Some costs, like "field overhead costs" might not actually all be directly variable with changes in the amount or direct cost of work done on the site, whether large or small contractor. So, I don't want to agree to a combined OH rate to be used as a forward pricing rate for mods, etc.
P.S., an 8(a) sole source , negotiated acquisition is not an "8(a) Set-Aside". Set-asides are competitive acquisitions. That was made pretty clear in a discussion thread a couple of years ago. I discovered the difference through that discussion, myself.
18 hours ago, Mr_Batesville said:
See FAR 31.201-2. In order to be allowable in this case, the indirect cost rate must be:
(1) Reasonable.
(2) Allocable.
(3) Compliant with the terms of the contract.
(4) Compliant with any limitations set forth in FAR Subpart 31.2.
No one here can say based on the info that you've provided whether 14.95 percent is allowable in this case. You must make that determination based on FAR 31.201-2 and the facts presented to you with the proposal. If "There is nothing wrong per se with an overhead rate of 14.95%" there is nothing per se right about it, either. As Joel has already said, yes, it can be negotiated.
2. Can a prime (8(a)) get profit on profit?
If by that you mean can an 8(a) prime calculate profit based on the markup it pays to its subcontractors, the general answer is yes, unless agency policy is not to give the prime profit on subcontractor markup. What is your agency's policy?
3. Can the Excessive pass-though rationale be used for an FFP construction contract in a civilian agency?
To what "excessive pass-through rationale" are you referring? Please cite a law, regulation, or agency policy.
The concept of allowability in FAR Part 31 relates to costs. A contractor's indirect cost rate is not a cost but is comprised of various pool and base costs each of which needs to be examined for allowability. Unallowable costs must be excluded from the indirect cost pool. While such costs are to be excluded from any billing to the government, they are to be allocated separately to contracts for accounting purposes. See, FAR 31.201-6 and CAS 405. On the other hand, unallowable costs are included in the indirect cost base for calculating the indirect cost rate but while allocable to contracts for accounting purposes, they are excluded from billings to the government on contracts subject to the cost principles. See, FAR 31. 201-6, 203 and 201-1. That is why I was asking the OP what he meant by "allowable"?
Well, rather than confuse people and send them off on wild goose chases looking for nonexistent differences, I will say that I am not aware of any distinction between "fair market price" and "fair and reasonable price" other than the words "market" and "reasonable." That is a distinction without a difference.
There is no official definition of fair and reasonable price. The only official definition of fair market price of which I am aware is in FAR FAR 19.001:
Fair market price means a price based on reasonable costs under normal competitive conditions and not on lowest possible cost (see 19.202–6).
I don't know of any statute, regulation, determination, decision, or treatise stating that there is a substantive difference between the concepts of fair and reasonable price and fair market price, and I have looked. I would be grateful to anyone who could refer me to one. SBA has used the terms interchangeably in communications with the GAO. See AeroSage LLC, B-414314, 2017 CPD ¶ 137, in which the GAO quoted the SBA as follows:
[D]uring a typical Rule of Two determination, an agency determines whether there is a reasonable expectation that the contract will be awarded at a fair market price. Agencies can rely on the expectation of price competition to satisfy the fair-market-price requirement. Expecting only co-owned firms to submit offers, however, would not reasonably support an expectation of price competition.... Given these facts, we do not find it unreasonable for the agency to determine that it lacked a reasonable expectation of receiving offers from two or more SDVOSBs and award would be made a fair and reasonable price.
Other agencies have done the same. See Analytical Graphics, Inc., B-413385, 2016 CPD ¶ 293.
The GAO has used language that suggests that it considers a fair and reasonable price to be a fair market price. See KNAPP Logistics Automation, Inc., B-406303, 2012 CPD ¶ 137:
Based on this record, we think that the CO reasonably relied on the fact that R/X had been previously awarded the contract at a fair and reasonable price, and his conclusion concerning the prospective offerors' commercial experience, to conclude that there was an expectation of adequate price competition, and therefore an award at a fair market price. See National Linen Serv., supra, at 3–4.
See also Atlantic Dredging Co., Inc., B-239834, 90-2 CPD ¶ 241:
Generally, an agency may withdraw a small business set-aside on the basis that award to a small business would be detrimental to the public interest, for example, by payment of more than a fair market price. See Federal Acquisition Regulation (FAR) § 19.506(a) (FAC 84–48). In determining the fair market price of small business set-asides, the FAR provides that the agency shall apply the reasonable price guidelines of FAR § 15.805–2. See FAR § 19.202–6(FAC 84–56). Under those guidelines, the contracting officer may use one or more of several listed methods to determine a fair and reasonable price, including a comparison of proposed prices received in response to the solicitation, a comparison of prior proposed prices and contract prices with the current proposed prices, and a comparison of proposed prices with independent government cost estimates. FAR § 15.805–2.
The boards of contract appeals have used the terms interchangeably. See e.g., Texas Carbon Ribbon, Inc., GSBCA 9905-P, 89-2 BCA ¶ 21723:
Following his initial review of the products offered by the lower bidders, it was evident to the contracting officer that even if he were to pursue a size qualification procedure through the Small Business Administration (SBA), he would not be able to make an award to a responsive bidder at a fair and reasonable price. The contracting officer then considered whether it would be appropriate to cancel the solicitation and re-issue at a later date without designating the procurement a set-aside. He determined that this alternative would be in the best interest of the Government, because it would facilitate the purchase of diskettes at reasonable prices...
Should the contracting officer subsequently determine that an award to a small business would not benefit the public interest, however, e.g., because of payment of more than a fair market price, the regulation further provides that it is entirely proper for the contracting officer to withdraw the set-aside determination. 48 CFR 19.506 (1987). Having determined that the prices available under a small business set-aside would not be reasonable, the contracting officer could not properly have allowed such an award to take place.
SBA regulations prescribe a procedure for establishing fair market price. See 13 CFR § 124.511, "§ 124.511 How is fair market price determined for an 8(a) contract?" It reads as follows:
(a) The procuring activity determines what constitutes a “fair market price” for an 8(a) contract.
(1) The procuring activity must derive the estimate of a current fair market price for a new requirement, or a requirement that does not have a satisfactory procurement history, from a price or cost analysis. This analysis may take into account prevailing market conditions, commercial prices for similar products or services, or data obtained from any other agency. The analysis must also consider any cost or pricing data that is timely submitted by SBA.
(2) The procuring activity must base the estimate of a current fair market price for a requirement that has a satisfactory procurement history on recent award prices adjusted to ensure comparability. Adjustments will take into account differences in quantities, performance, times, plans, specifications, transportation costs, packaging and packing costs, labor and material costs, overhead costs, and any other additional costs which may be appropriate.
(b) Upon the request of SBA, a procuring activity will provide to SBA a written statement detailing the method it has used to estimate the current fair market price for the 8(a) requirement. This statement must be submitted within 10 working days of SBA's request. The procuring activity must identify the information, studies, analyses, and other data it used in making its estimate.
(c) The procuring activity's estimate of fair market price and any supporting data may not be disclosed by SBA to any Participant or potential contractor.
(d) The concern selected to perform an 8(a) contract may request SBA to protest the procuring activity's estimate of current fair market price to the Secretary of the Department or head of the agency in accordance with § 124.505.
Thus, a CO is supposed to determine fair market price using the same techniques used to determine fair and reasonable price.
As someone who negotiated 8(a) contracts on behalf of 8(a) contractors when I worked for the Los Angeles District Office of the SBA, I can say that we never considered the two to be different. It was simply a matter of SBA using one term and agencies under the Armed Services Procurement Regulation using another. SBA probably uses fair market price because that's the term used in its statute. See e.g., 15 USC § 637. Who knows why?
Anyone who asserts that there is a substantive difference between the two concepts ought to explain what that difference is.
37 minutes ago, Retreadfed said:
The concept of allowability in FAR Part 31 relates to costs. A contractor's indirect cost rate is not a cost but is comprised of various pool and base costs each of which needs to be examined for allowability.
Oh, come on. The contractor is going to propose a dollar amount based on the rate and state the rate used to derive that amount. The dollar amount is a cost.
That is true for a proposal. The dollar amount contained in a proposal is a potential cost to the government. However, 31.201-1, which you referenced, refers to the allowability of contractor costs. FAR 31.201-1 does not apply to indirect cost rates, but to the individual costs that are used to compute the indirect cost rate.
Thanks for all the detail provided. I am going to hash through it all and get back with an update on my understanding and how things go. Thanks again for the help.
BTW.....I'm with USDA. Our AGAR is pretty light when it comes to further guidance such as structured methods. There is not one for determining profit..................I will respond back once i go through all the comments.
In regards to the overhead, after numerous exchanges with the contractor and their accountant providing multiple FY's of information on allowable cost and revenues, I simply just negotiated. 14.95 down to 12 percent.
In regards to profit, I used a "Structured Approach" from USACE ( They have a great template for construction and a-e profit analysis btw) to determine profit because our agency does not provide such approach. Negotiated from the "Historical Automatic Application" of 10% to 6%.
All in all, we negotiated close to $1million in savings.
Saying Thanks to all who provided help and guidance. Much appreciated.
2 hours ago, Mr_Batesville said:
In regards to the overhead, after numerous exchanges with the contractor and their accountant providing multiple FY's of information on allowable cost and revenues, I simply just negotiated.