selected far cost principles: ir&d, b&p, selling and ... public relations costs; broadly...
TRANSCRIPT
Selected FAR Cost Principles:
IR&D, B&P, Selling and Related
Costs
Phillip R. SeckmanGale R. Monahan
• The “Selling” Cost Family
• Selling Costs
• Advertising/Public Relations Costs
• Market Planning
• Lobbying Costs
• B&P Costs
• IR&D Costs
• MP&E Costs
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Introduction
The "Selling" Cost Family
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• Complex area of cost and fact-driven• Selling Costs (31.205-38)
• Public Relations and Advertising Costs (31.205-1)
• Economic Planning Costs (31.205-12)
• Entertainment Costs (31.205-14)
• IR&D/B&P Costs (31.205-18)
• Manufacturing & Production Engineering (31.205-25)
• Lobbying and Political Activity Costs (31.205-22)
• Organization Costs (31.205-27)
• Recruitment Costs (31.205-34)
• Trade, business, technical and professional activity costs (31.205-43)
• Training and education costs (31.205-44)
• Travel Costs (31.205-46)
• Alcohol Costs (31.205-51)
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Selling and Related Costs
• “Selling” is a generic term encompassing all efforts to market
the contractor’s products or services (FAR 31.205-38)
• Limits allowability to five categories of selling type costs:
• Advertising (FAR 31.205-1): the use of media to promote the sale
of products or services; narrow/limited rules for allowability
• Corporate Image Enhancement (FAR 31.205-1): generally
includes public relations costs; broadly targeted sales efforts
• B&P costs (FAR 31.205-18): costs incurred in preparing,
submitting, and supporting bids and proposals
• Market Planning (FAR 31.205-12): market research and analysis
and general management planning concerned with business
development; long-range economic planning costs under
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Selling Costs
• Five allowable categories (cont.)
• Direct selling: acts or actions to induce particular customers
to purchase particular products or services by person-to-
person contact.
• Familiarization of potential customers with products or
services, conditions of sale, service capabilities, etc.
• Negotiation, liaison between customer and contractor,
technical and consulting efforts, individual demonstrations
• Any other efforts “having as their purpose the application or
adaptation of the contractor’s products or services for a
particular customer’s use”
• Seller compensation, fees, commissions limited to bona
fide employees/established commercial agency
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Selling Costs (cont.)
• “Person-to-person” contact
• Generally occurs prior to issuance of RFP (communication
is unlikely after RFP is issued)
• Distinction is important: selling can include technical effort
similar to IR&D where direct selling is primary purpose
• Prototype construction that involves no development
(e.g., Technical Readiness Level remains unchanged)
• Design effort to permit use of a product for a particular
application that involves no development
(e.g., application engineering)
• Development to pursue single potential contract opportunity
(e.g., to demonstrate a capability)
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Identifying Direct Selling Costs
• Pre-RFP presentation to existing customer about products
and capabilities
• Pre-RFP presentation to potential customer about
products and capabilities
• Development of a prototype aircraft (Gen. Dynamics Corp.
v. United States, 202 Ct. Cl. 347 (1973))
• Customer is considering updates to its software and asks
whether contractor offers a better product; contractor
responds
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Distinguishing Selling Costs
• Public Relations/Advertising (FAR 31.205-1)
• Unallowable includes
• Costs whose primary purpose is to promote sale of products
or services by stimulating interest in a product or product line
• Costs of enhancing company image to sell products
• Costs of meetings, symposia, etc. when principal purpose is
other than dissemination of technical information or stimulation
of production
• Allowable includes
• Community service
• Communicating with public
• General liaison to keep public informed on matters of public
concern
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PR/Advertising Costs
• Trade, Business, Technical and Professional Activity Costs
(FAR 31.205-43)
• Allowable when “principal purpose” of a meeting,
conference, etc. is “dissemination of trade, business,
technical or professional information”
• Costs of organizing, sponsoring meetings, including rentals,
incidentals, subsistence, transportation, etc.
• Business meals
• Includes travel costs
• Costs of non-employees (i.e., consultants) when attendance
is “essential"
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Trade, Business, Technical and Professional Activity
Costs
• Unallowable lobbying costs include (FAR 31.205-22)
• Costs to influence executive branch personnel to give
consideration to or act regarding a regulatory or contract
matter on any basis “other than the merits”
• Key distinction is whether efforts are “on the merits”
• Direct selling to the government may be allowable if based
purely on the merits of the product/service (FAR 31.205-
38(b)(5), 31.205-22(a)(6), 3.401)
• Allowable efforts may include:
• Meeting with executive branch employee to discuss attributes
of specific products
• Meeting with DOD program manager encouraging support for
proposed program based on program benefits
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Lobbying Costs
• 31 U.S.C. 1352 (2000), FAR Subpt. 3.8• Prohibits use of “appropriated” funds to influence any type of
federal award
• Requires disclosure of payments made to outside lobbyists to influence an award
• Influencing an award includes an extension, renewal or modification, or the earmarking of funds for a particular program within a bill
• Unless an exception applies, the costs of such activities are unallowable; an unallowable charge code should be used to capture this effort
• While disclosure applies only to federal awards >$150K, costs of Byrd activities for all awards (regardless of value) are still unallowable (FAR 3.808, 31.205-22, 52.203-11)
• Flow to sub-awardees (FAR 52.203-12)
• Standard Form LLL requires identification of LDA registrants engaged in covered activities for that award (but not internal employees)
• Awardee must certify that appropriated funds not used for lobbying
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Lobbying/Byrd Amendment
• Look to the “principal function”
• Gen. Dynamics, ASBCA No. 12814, 68-2 BCA ¶ 7,297
• FAR 31.204(d): When more than one subsection is
relevant the cost shall be apportioned; if apportionment
cannot be performed, then allowability based on section
that most specifically deals with or best captures the
essential nature of the cost at issue
• Selling v. Lobbying?
• Selling v. IR&D?
• Selling v. Professional Costs?
Multi-Purpose Costs: Which Cost Principle Applies?
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• Sampling
• Ramifications of unallowable costs: Business Systems
deficiencies, penalties, CAS 405
• Robust systems/policies
• Training
• Document
• Plan ahead vs. retroactive characterization
• DCAA favorite: targeting business purpose for things like
travel and business meals
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Best Practices/Ramifications
B&P Costs
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• “[I]ncurred in preparing, submitting and supporting bids or proposals (whether or not solicited)” on potential contracts
• Even if no bid is made, B&P costs still proper
• Known proposal opportunity is key requirement for B&P; key is whether buyer’s needs are sufficiently defined
• R&D effort may overlap with B&P when in support of a specific proposal
• Similar to IR&D limitation; B&P costs are generally indirect costs
• Boeing Co. v. United States, 862 F.2d 290 (Fed. Cir. 1988); proposal development costs are not B&P costs if they are required in performance of a contract
• FY 2017 NDAA requires DOD to establish a goal that limits reimbursement of contractor B&P expenses to less than 1% of the aggregate industry sales to DOD
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B&P Costs
IR&D Costs
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• IR&D is research and development that is not sponsored by a grant and “is not required in the performance of a contract”
• CAS 420; FAR 31.205-18: FAR and CAS definitions are the same (ATK Thiokol Inc. v. United States, 68 Fed. Cl. 612 (2005), aff’d 598 F.3d 1329 (Fed. Cir. 2010))
• If R&D cost is not specifically required by a contract, then it is not required in the performance of the contract and may qualify as IR&D
• IR&D costs are allowable when they meet the requirements of
• FAR 31.205-18
• DFARS 231.205-18
• CAS 420 (when applicable)
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IR&D
• Two recent rules affect IR&D Costs
• DFARS Case 2016-D017 (still pending)
• Ensure that IR&D expenses as a means to reduce evaluated
bid prices in competitive source selections are evaluated in a
uniform way during competitive source selections
• Changes to DFARS Pt. 231
• Ensure that both contractors and DOD have sufficient
awareness of each other's efforts and to provide industry with
feedback on the relevance of proposed IR&D efforts
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IR&D Cost Updates
• DFARS Case 2016-D017; Advanced Notice of Proposed
Rulemaking, IR&D Expenses, 81 Fed. Reg. 6,488 (Feb. 8,
2016)
• Requires offerors to describe in detail the nature and value
of prospective IR&D projects
• Notes that the “intended purpose of IR&D” is not to gain a
price advantage in a specific competitive bid
• On Feb. 2, 2017, the comment period closed for the
proposed rule
• Dentons submitted comments
IR&D Cost Developments Proposed Change
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• Rule presents potential issues for contractors
• DOD position that IR&D costs are contract costs
• Proposed price adjustments penalize contractors for
conducting IR&D
• Requires contractors to provide cost or pricing data with
competitive procurements
• Ignores that contractors are permitted to use IR&D,
undertaken at their own risk, to gain a relative price and
technical advantage (Raytheon Co. v. United States, 809
F.3d 590, 593 (Fed. Cir. 2015))
• The fact that contractors are not required to complete IR&D
projects does not present a significant risk to DOD because
contractors are required to perform contracts or risk default
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Price Adjustments for Future IR&D Costs
• Changes to DFARS Pt. 231
• Proposed IR&D efforts must be communicated to
appropriate DOD personnel prior to initiation (“technical
interchange”) for the costs to be allowable
• Requires annual reports on progress
• Rule applies to major contractors (i.e., those allocating more
than $11M in IR&D and B&P costs to covered-contracts in
the prior FY)
• Effective Nov. 4, 2016
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IR&D Cost Developments: Final DFARS Rule
• New DFARS final rule makes IR&D cost allowability contingent upon compliance with certain reporting and oversight requirements
• Beginning in a contractor's FY 2017, IR&D costs are only allowable on DOD contracts, if prior to incurring IR&D costs, contractors:
• Provide summary information regarding ongoing and completed IR&D projects to ACO and DCAA; and
• Communicate proposed IR&D efforts to appropriate DOD personnel by means of a “technical interchange”
• This requirement was delayed by DOD for FY2017; must conduct technical interchange in FY 2017, not before IR&D cost are incurred
• Beginning in FY 2018, technical interchange must occur prior to start of IR&D project or the costs may be unallowable
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IR&D Cost Allowability
MP&E Costs
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• R&D to improve the quality and efficiency of production
processes, reduce manufacturing costs or utilize modern
production methods
• Focuses on development of the means to manufacture a
product
• Includes materials, equipment and tool development,
provided the company does not intend to sell the equipment
• Very similar to IR&D, but distinction may be important
• IR&D allocated over G&A base
• MP&E often allocated over overhead base
• M&PE costs frequently occur late in IR&D process, or just
after completion of IR&D effort
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MP&E
Phil Seckman
303.364.4338
Gale Monahan
303.634.4311
Questions?
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Thank you
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