Source: http://www.wifcon.com/discussion/index.php?/topic/2450-looking-for-trouble-on-an-iot/
Timestamp: 2017-12-17 08:50:19
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Looking for Trouble on an IOT? - Subcontracts & Subcontract Management - The Wifcon Forums and Blogs
By InNeedofWisdom, March 21, 2014 in Subcontracts & Subcontract Management
What would you say to a defense contractor who wanted to take the following approach in preparing a sole-source FFP proposal subject to TINA for a DoD customer?
Scenario: KTR-A wants to include its sister company KTR-B in a sole-source FFP acquisition by a DoD customer. KTR-A prepares a SOW for a NON-commercial item and issues a RFP to KTR-B and a number of qualified, responsible competitors. It turns out that KTR-B beats everyone else out on performance, schedule, and price (including proposed profit). KTR-A negotiates a "subcontract" [really an inter-organizational transfer (IOT) at price] with KTR-B and includes KTR-B's certified cost or pricing data as part of KTR-A's submission to the DoD customer. KTR-A does not submit a cost or price analysis (PNM) for KTR-B's proposal since it is does not meet the definition of a "subcontract" in FAR 15.401 and would be categorized as a "make item" for FAR 15.407-2. KTR-A discloses in its proposal the profit rate negotiated with KTR-B and states that the subcontract was awarded based on adequate competition.
1. Does a DCAA auditor have any clear regulatory basis to question KTR-B's proposed profit and KTR-A's proposed profit on top of KTR-B's proposed profit?
2. Does a DCAA auditor have any clear regulatory basis to unsupport KTR-B's proposed profit until being provided additional information on the subcontract competition?
3. Do you consider FAR Part 44 to positively define a subcontract in its normative sense and FAR Part 31 to positively define an IOT in its normative sense?
4. Would you say that a CPSR reviewer should only look at any make or buy documentation for this particular IOT and not expect a PNM to have been written?
I will answer Question 3: Pursuant to FAR 2.000( b ), the definition of subcontract in FAR Part 44 applies only in FAR Part 44, which addresses (1) consent to subcontracts, (2) advance notification of subcontracts, and (3) review, evaluation, and approval of contractors' purchasing systems. That definition does not apply elsewhere in FAR, including FAR Part 15 and FAR Part 31.
This version of your story makes me think that you are trying to use the IOT pricing exception found at 31.205-26(e), which references 15.403-1(B ). If that's what you're trying to do, then you probably need to look at the definition of "subcontract" found at 15.401.
Some answers for your consideration.
1. Perhaps, based on reasonableness. Did the CO determine that the IOT price was unreasonable?
2. Yes. It is a reasonable line of inquiry to probe the probity of the competition.
3. Vern already answered that.
4. CPSR reviewers do look at make-or-buys and they look for whether the contractor considered the government's interest in that decision. (I.e., price differences).
DCAA does not audit profit nor make recommendations as to what would be a reasonable profit. Determining the profit to be negotiated is the responsibility of the contracting officer. See, CAM 9-900. However, DCAA will comment on factors that might be of interest to the contracting officer in establishing the profit objective.
Retreadfed - You are right on about DCAA not opining on profit and not even providing a recommended amount for proposed cost elements. (It's a "calculated" amount.) I should have thought to phrase the question differently by replacing with the "contracting officer" instead of "DCAA" being the questioner.
H2H - Yes, someone challenged me about the possibility of this scenario and I couldn't see any clear problems with it from FAR. Thus, I wanted to see if people like you could identify any problems. Are you saying that this IOT at price for a NON-commercial item might not qualify as a subcontract per FAR 15.401, and therefore might not be "adequate competition" for purposes of FAR 15.403-1( b )?
Vern - Yes, you are right on about the FAR Part 44 definition not being binding on other parts. Thank you for pointing out that section in FAR Part 2. Do you think that since FAR Par 2 does not define subcontract, but refers to subcontracts in regards to consent to subcontract, make-or-buy, etc. that FAR Part 44 is giving the "normative" (non-binding) definition of a subcontract by referring to the definition in FAR Part 2 for a contract and talking in detail about consent to subcontract and so on?
You need to read 31.205-26(e) very carefully. You need to think about what the exception says and means. If you do not qualify for the exception, then you have to comply with the fundamental requirement, which is to transfer allowable costs actually incurred without profit.
One of the distinctions you need to think about is "commercial work" versus "commercial item". Same thing, or not?
If you and your organization are still confused, I would recommend hiring one of the Big 4 Government Contract consulting practice advisors. I know they have deep expertise in this area, aided by experience working with counsel defending contractors who got it wrong.
Yes, thank you for bringing this up. This section is actually the basis for the original question. Like you point out, FAR 31.205-26(e)(1) does not say commercial item, but rather commercial work. However, the subject of (e)(1) is the established practice of the transferirng entity (v. the item actually being transferred). The transferred item is the subject for the following paragraph (e)(2) and appears to allow for adequate competition as an exception. Is there any confusion about my earlier question? Thank you for your help.
My post #6 was in response to your post #5. asking a question about an IOT for "non-commerical items".
I may have been asking the obvious earlier. I agree with you that the CO determines whether or not there is adequate competition. If an IOT at price for a non-commercial item (over TINA) is determined by the CO to not have been based on adequate competition, a key negotiating point for the CO would be the elimination of profit wrapped into the IOT. I was hoping that you or Vern would have additional insight beyond the referenced FAR sections to 1) The definitions of a subcontract and an IOT and 2) How this affects expectations about the appropriateness of price/cost analysis.