Accounting for Bid and Proposal (B&P) Explained
Bid and Proposal is a topic that comes up with our contractor clients on a regular basis. Most questions surrounding this topic involve: whom at the contractor should be charging B&P, especially, contractor personnel that typically charge overhead or G&A. We understand why this is confusing. It is our opinion that the guidance per FAR (Federal Acquisition Regulations) and CAS (Cost Accounting Standards) regarding this topic is unclear and leaves contractors scratching their heads trying to be compliant.
How Does the FAR Define Bid and Proposal Costs
First, let us start with the definition of B&P. FAR 31.205-18(a) states: “Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement or required in the performance of a contract.”
You may be thinking, this seems pretty clear to me, all employees associated with preparing, submitting and supporting bids should be charged to B&P projects, so indirect employees (G&A and Overhead) should be charging their time direct to these projects. At the top level, and by just reading this definition, this logic makes sense. Unfortunately, a contractor must read the entire cost principle, including CAS 420, to get the “rest of the story.”
How Does CAS (Cost Accounting Standards) Come Into Play
We know your next thought, “I am not a CAS covered contractor” OR “I’m only modified CAS, why do I care what CAS requires regarding the treatment of B&P?” This is a very good question. However, did you know that if you are a contractor subject to FAR Part 31, Cost Principles, some of the cost principles, in which you are subject, incorporate CAS? And more food for thought, it is not just contractors with cost type contracts that must comply with the Cost Principles. The Cost Principles apply to the pricing of fixed price contracts whenever cost analysis is performed – FAR 31.102. What does this mean? It means that even though a contractor is not subject to CAS, the CAS standard incorporated in FAR Part 31 sets the requirements regarding the specific cost in question. Does this make you a CAS covered contractor? No, the administrative provisions of CAS do not apply, but the measurement and allocation provisions surrounding the cost in question do. So, you must understand both bodies of regulation.
What Does the Regulation Say?
FAR 31.205-18(b), Composition and allocation of costs, states:
The requirements of 48 CFR 9904.420, Accounting for independent research and development costs and bid and proposal costs, are incorporated in their entirety and shall apply as follows- (emphasis added)
(1) Fully-CAS-covered contracts. Contracts that are fully-CAS-covered shall be subject to all requirements of 48 CFR 9904.420.
(2) Modified CAS-covered and non-CAS-covered contracts. Contracts that are not CAS-covered or that contain terms or conditions requiring modified CAS coverage shall be subject to all requirements of 48 CFR 9904.420 except 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2), which are not then applicable. However, non-CAS-covered or modified CAS-covered contracts awarded at a time the contractor has CAS-covered contracts requiring compliance with 48 CFR 9904.420, shall be subject to all the requirements of 48 CFR 9904.420. When the requirements of 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) are not applicable, the following apply:
(i) IR&D and B&P costs shall be allocated to final cost objectives on the same basis of allocation used for the G&A expense grouping of the profit center (see 31.001) in which the costs are incurred. However, when IR&D and B&P costs clearly benefit other profit centers or benefit the entire company, those costs shall be allocated through the G&A of the other profit centers or through the corporate G&A, as appropriate.
(ii) If allocations of IR&D or B&P through the G&A base do not provide equitable cost allocation, the contracting officer may approve use of a different base.
(c) Allowability. Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.
The exceptions to 420-50(e)(2) and 420-50(f)(2) simply removes the CAS 420 requirement to allocate IR&D and B&P costs among all segments of the company using the CAS 403 allocation method for residual corporate/home office expenses, which most contractors that are not CAS covered do not have to deal with anyway. So, there is not much of an exception to complying with CAS 420.
So, What Does CAS Say?
CAS 420-20 states: “The purpose of this Cost Accounting Standard is to provide criteria for the accumulation of independent research and development costs and bid and proposal costs and for the allocation of such costs to cost objectives based on the beneficial or causal relationship between such costs and cost objectives.” The Government’s view is that B&P cost benefit the contract effort in the year in which the B&P cost is incurred. Most companies look at B&P cost as an investment in future potential business. The Government has adopted a clear “we pay as we go” methodology for allocating and reimbursing B&P costs.
CAS 420-40 sets out the fundamental requirements for B&P costs as follows:
(a) The basic unit for the identification and accumulation of Independent Research and Development (IR&D) and Bid and Proposal (B&P) costs shall be the individual IR&D or B&P project.
(b) The IR&D and B&P project costs shall consist of all allocable costs, except business unit general and administrative expenses.
(c) The IR&D and B&P cost pools consist of all IR&D and B&P project costs and other allocable costs, except business unit general and administrative expenses.
(d) The IR&D and B&P cost pools of a home office shall be allocated to segments on the basis of the beneficial or causal relationship between the IR&D and B&P costs and the segments reporting to that home office.
(e) The IR&D and B&P cost pools of a business unit shall be allocated to the final cost objectives of that business unit on the basis of the beneficial or causal relationship between the IR&D and B&P costs and the final cost objectives.
(f)(1) The B&P costs incurred in a cost accounting period shall not be assigned to any other cost accounting period.
(2) The IR&D costs incurred in a cost accounting period shall not be assigned to any other cost accounting period, except as may be permitted pursuant to provisions of existing laws, regulations, and other controlling factors.
Put into layman’s terms. Set up a B&P project as you would a contract in your accounting system. Charge all direct costs to support the B&P effort to the project and allocate all indirect cost as you would to a contract, except G&A. Then take the total cost for all B&P projects for the year, exclusive of G&A, and place that total cost in your G&A pool or allocate in a separate pool using the same base you use for G&A.
Let Us See if We Can Help Bring Some Clarity
Now that we have the regulatory guidance covered, let us get back to the common topic that comes up regularly…should G&A or other indirect employees charge a B&P project. Even though this answer can vary depending on the size of the company and the unique circumstances surrounding an individual company, especially a small contractor where employees wear multiple hats (e.g., an owner of the business that provides both direct engineering effort on contracts and is the President of the company providing G&A business management effort necessary to the overall operation of the business). In most cases, the answer to the question is NO, overhead and G&A staff should not charge direct to a B&P project. Don’t get us wrong, it is fine to set up an overhead or G&A account that is related to the B&P effort (Business Development) for internal management and informational purposes, but overhead and G&A personnel should not charge the direct B&P projects which then gets an overhead allocation, and in most cases, ends back up in the G&A pool. Why you may ask? The answer is twofold:
- Because the labor cost charged to B&P projects is considered a direct cost, the B&P labor then gets an allocation of overhead. Overhead, for the most part, is the support cost for supporting your direct project functions, and includes costs such as project management and oversight, training, benefits, facilities, and anything else that is required to support the efforts of your direct labor staff. The effort to support B&P projects from indirect overhead employees (e.g., reviewing and approving estimates by program managers) is already included in the allocated overhead cost applied to the direct labor charged to the B&P projects. As for G&A employees, support cost, including oversight, training, benefits, and facilities, is already in the G&A pool so any B&P effort by these employees is going to be allocated over the G&A base in compliance with the FAR and CAS requirements.
- It really comes down to the required treatment of B&P as if it were a contract (final cost objective) under CAS 420-50(a): “The IR&D and B&P project costs shall include (1) costs, which if incurred in like circumstances for a final cost objective, would be treated as direct costs of that final cost objective, and (2) the overhead costs of productive activities and other indirect costs related to the project based on the contractor's cost accounting practice or applicable Cost Accounting Standards for allocation of indirect costs.”
CAS 420-60 also has an illustration that might be helpful (even though it is very dated):
- “Business Unit A's engineering department in accordance with its established accounting practice, charges administrative effort including typing in its overhead cost pool. In submitting a proposal, the engineering department assigns several typists to the proposal project on a full-time basis and charges the typists' time directly to the proposal project, rather than to its overhead pool. Because the engineering department under its established accounting practice does not charge the cost of typing directly to final cost objectives, the direct charge does not meet with the requirements of 9904.420-50(a).”
We do not believe the Government could have written this example anymore awkwardly if they tried. They are simply making the point that just because it is related to a B&P project, do not change the way you charge normally incurred administrative/support effort. If a contractor has an established accounting practice to charge administrative/support effort to overhead or G&A (including Business Development – B&P), charging this same type of effort/labor as direct would not comply with the provisions of CAS 420.
Lost Clarification From the CAS Promulgation
Additionally, the Cost Accounting Preambles and Regulations provide some insight to this dilemma. The CAS Board debated whether to include the following language during the promulgation of the standard: “B&P administrative costs, when separately identified and classified as B&P costs in accordance with the contractor’s normal accounting practice, are not considered B&P costs for the purpose of this Standard.”
Even though this verbiage did not make it into the CAS standard, it clarifies the intent of CAS 420 was that non-technical administrative personnel should not be charged as direct labor to a B&P project, unless those personnel consistently charge as direct labor in like circumstance to other final cost objectives (i.e., contracts).
Treat B&P Projects Like You Would a Contract
With all that said it comes down to simply treating a B&P project like you would a contract project by having direct employees charge the B&P project as direct and indirect employees charge their time to indirect labor accounts they normally charge and let your current allocation process handle the assignment of the indirect employees efforts to the B&P project. Just remember, no G&A is applied to a B&P project as the cost of the project ends up being moved to the G&A pool for allocation and any B&P effort for G&A employees is already in the G&A pool.
Redstone GCI is available to assist contractor’s in reviewing their processes and policies in this area. We can also assist in ensuring your B&P costs are properly handled in the DCAA ICE Model, as it can be confusing. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying FAR and CAS (remember some CAS is incorporated into FAR Part 31, Cost Principles).