Redstone Government Consulting Blog | Proposal Cost Volume Development & Pricing (5)

Accounting for independent research and development costs and bid and proposal costs are found in Far 31.205-18 and Cost Accounting Standards 420. Because FAR 31.205-18 incorporates CAS 420, it does not matter if your company has revenue of $50 million or under $5 million; if you have IR&D and B&P costs, this Cost Accounting Standard (CAS) provides the criteria for accumulation and allocation of those costs.

To the uninformed, there may be little or no distinction between the three adjectives which could apply to a contractor (or potential contractor) accounting system. To those dealing with the terminology in government solicitations, there may appear to be no significant distinction because the words seem to be used interchangeably. For example, an Air Force solicitation may have a prerequisite for an adequate accounting system, in contrast to Navy solicitation which substitutes the words acceptable accounting system. Then a third alternative could be a solicitation which gives competing bidders points for approved systems; i.e. 500 points for having an approved accounting system. In most cases, the solicitation links the accounting system status (adequate, acceptable or approved) to an action (written opinion or written determination) by a federal government agency or, less frequently, an opinion by an independent third party such as a CPA or consultant. There is a fourth alternative, an accounting system which has never been reviewed by any independent party (government or otherwise). In this case, a contractor (or a potential contractor) may have an accounting system awaiting its first test, so to speak.

One of the most important parts of a proper response to a Government Solicitation is the Basis of Estimate(s) (BOE). The BOE is a tool that is carefully developed by members of a project team through intricate analysis of the Performance Work Statement (PWS) in order to calculate the total price for the required effort. The BOE must be developed before the pricing can take place so that the pricing team knows the cost elements, which will require pricing. To put it differently, the BOE is an estimate developed to outline a Company’s expected staffing and solutions for the selected Government solicitation. This proposed estimate is combined with detailed explanations and supporting rationale which bolsters the overall conclusion. The BOE needs to be able to show the level of services (proposed labor), the skill mix required, materials, travel, etc., that will be required to deliver what is requested through the solicitation. In order to provide a realistic estimate, technical experts should be utilized in order to appropriately determine the work effort needed. The details in the BOE need to be sufficient for the technical evaluator (government or prime contractor) to understand the rationale used, the source of the underlying data, the detailed calculations involved, and the basis for any complexity factors.

Sometimes, a company is so anxious to receive a government contract that it ignores warning signs in the solicitation and accepts a firm-fixed-price contract when the contract type is not appropriate for the circumstances. Often the warning signs are subtle and consist of vague specifications, but in other cases, the warning signs are written, literally in capital letters. One such contract resulted in the ASBCA issuing a decision on March 30, 2016, on case number 58243. This case upheld a termination for default issued April 23, 2012, against Highland Al Hujaz Co., Ltd. This case illustrates both the warning signs the contractor should have heeded and the consequences.

For government contractors your indirect rate structure is critical to your competitiveness, perhaps more so than any other element of the proposal.  In today’s LPTA environment, most offerors are going to be very similar when it comes to technical capabilities and past performance, so almost always award decisions come down to cost.  For the select few companies that have a technical edge or a differentiator in the way of performance that outweighs the cost to your government customer you can stop reading now.  The vast majority of companies working with the federal government don’t have this luxury, so what are they doing to set themselves apart when it comes to developing their indirect rates and overall wrap rates (wrap rates are a function of total direct and indirect costs for a labor hour divided by the direct labor hourly rate); hence, a lower wrap rate is perceived to be a more competitive overall cost structure)?

The Fair Labor Standards Act of 1938 (FLSA), which is administered and enforced by the Wage and Hour Division (WHD) of the Department of Labor (DOL) imposes, among other things, minimum wage and overtime pay requirements. It is certainly nothing new and has been a hot topic amongst Human Resources professionals over the past months as President Obama directed the Secretary of Labor to update the regulations. With much speculation and rumblings of possible changes, all have been anxious for the impending proposed rule to be revealed.  

On June 18, 2015, as a retired “civil servant” whose personnel records now reside with OPM, I was notified by OPM that OPM had “recently become aware of a cybersecurity incident that may have exposed my personal information”.

Congratulations! You have won your first prime federal contract – now what do you do?! Unfortunately, regardless of how many contracts a company has won, the focus seems to be on “the win” and NOT how a company is going to manage and administer the contract. Larger companies’ that have been around for years have figured out through the “school of hard knocks” (i.e. Government audits, ACO cure notices, contract terminations, debarments, system inadequacies, etc…), how to comply with all the federal laws and regulations that are inevitably part of the Federal government contract you were just awarded.

In a recent Federal Circuit ruling, KBR found out that “simple negligence” in its calculations of a reasonable price range for subcontractor’s price proposal resulted in a “Gross Negligence ruling” by the courts. Kellogg Brown & Root Services, Inc. (KBR) v. U.S., No. 203-5030, slip op. (Fed. Cir. Feb, 3, 2014).

Coming as no surprise, President Obama signed the Bi-Partisan (2014) Budget Act on December 26, 2013 including an executive compensation cap of $487K (coincidentally one-half of the most recent statutory cap of $952,308 and significantly lower than an alternate bill with a cap of $625K).  This maybe Obama’s “crowning achievement” over his two terms proving that if someone (The President) whines enough and ignores all of the regulatory history and the fundamental principle that commercial prices constitute a reasonable cost, he will achieve his goal of forcing large government contractors to absorb more and more of their executive’s compensation.  It should be noted that the prior cap and the methodology was based upon compensation of publicly traded corporations with $50 million or more in revenues; hence, that cap was artificially low considering that a number of large government contractors have revenues in the billions and that executive compensation is correlated to company size/revenues.