carrying costs FFP

You said that neither party is responsible for “damages”. What is that based upon and what are you referring to as “damages”? 

Is the government and/or the prime  responsible for obtaining the permit?

If not, who is responsible and what is the permit for?  

Is the delay over (is the permit now in hand or a date given to expect the permit)? 

If not, is there an estimated date ?

Since the subcontract is supposed to be FFP,  are there any FFP clauses specifically applicable to the FFP subcontract in the subcontract?  The subcontract is with the prime contractor. There should be clauses for a FFP subcontract…

general_correspondence said:

Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

No.

What caused the permit delays? Do you think your company owes the subcontractor for the "carrying costs," whatever those are?

general_correspondence said:

However the most recent Notice is a claim for carrying costs.  Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

There are two aspects to a claim:  entitlement and how much.  My question relates to entitlement.  Usually if an excusable delay occurs, the contractor experiencing the delay eats any cost associated with the delay.  What entitles your subcontractor to receive any additional payment for increased costs, of any sort, relating to the excusable delay?

general_correspondence said:

in order of precedence the contract has:

FAR 52.242-17

FAR 52.249-14

The -17 clause is “Government Delay of Work”. What causes or circumstances would make this clause for a cost reimbursement contract applicable to this FFP subcontract delay? 

The 52.249-14 clause is excusable delays for cost reimbursement contract.  It provides for a time extension.

Is the delay due to “acts of the Government in either its sovereign or contractual capacity?”

In other words,  Is either the government or the prime responsible for obtaining the permit for the sub to perform the work?

If you have a “FFP subcontract for construction” you have to have a subcontract arrangement that is appropriate for FFP, not “cost reimbursement” subcontract.

Depending upon who is responsible for obtaining the permit to allow the subcontract to proceed, the actual scenario  appears to a constructive suspension of work.

But the “FFP subcontract” clauses and conditions should be appropriate for FFP construction and would seem to be of relevance to determine what if any costs are compensable and/or fee bearing for the subcontract.

The permit is the responsibility of the USG, 

In addition to the FAR clauses in the subcontract, there is a "changes" clause that says: If any changes causes an increase or decrease in the time required for performance of this contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both, and the contract shall be modified accordingly"  

This is why I wanted to know what is the rule of thumb or FAR accounting principle anyone knows that can be used to baseline this negotiation?

general_correspondence said:

The permit is the responsibility of the USG, 

In addition to the FAR clauses in the subcontract, there is a "changes" clause that says: If any changes causes an increase or decrease in the time required for performance of this contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both, and the contract shall be modified accordingly"  

This is why I wanted to know what is the rule of thumb or FAR accounting principle anyone knows that can be used to baseline this negotiation?

Okay, so does the subcontract contain a suspension of work clause for FFP construction?

The government is apparently responsible for the delay. It would be a constructive rather than directed suspension of work if the government hasn’t secured a necessary permit to allow the subcontract to proceed.

The Suspension of Work Clause would be operative for a price adjustment for increased costs (no fee/profit).

As for the basis of cost, it would depend upon the specific circumstances. Some considerations include whether the delay period is indeterminable, whether the sub has had to remain on standby or could it divert its resources elsewhere, etc. you said that the sub diverted its direct labor to other work.  Are there fixed daily costs that can’t be eliminated or mitigated, etc. Is there a projected date for obtaining the permit?

I don’t think that the Changes clause is applicable here. What was “changed”?

The specific circumstances would determine whether “unabsorbed home office overhead” is applicable to the subcontract and whether the delay affected all or just part of the subcontract work.  But I could explain more to you separately. G&A on any direct (e.g., fixed) delay costs is allowable but can’t be duplicative with UHOO costs.

A Defaults (excusable delay) clause would provide for a time extension to both the prime and sub contracts…

Of  course the Government Delay of Work Clause is applicable for the prime contract.

general_correspondence said:

We are the prime contractor on a CPFF with our DoD customer.  We have a FFP subcontract for construction work. Permit delays, neither party liable for damages, considered an excusable delay.  The subcontractor gave us Notice of these delay impacts when required and in conformance of the contract.  However the most recent Notice is a claim for carrying costs.  Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

The delay has been well beyond 6 months, The subcontractor has told me they have "diverted" most of the field labor during this delay so the costs are FE, likely OH and G&A type mostly, including Fee.  (Fee may be prohibited?) Is there a process to use to baseline negotiations,

I'm excited to learn what "carrying costs" means in this context. I Googled the phrase, and it seems to have something to do with the cost of maintaining inventory. If you can, please let me know how the subcontractor calculated its additional incremental costs related to an inability to start work as anticipated. I'm also interested to learn what "FE" stands for -- Field Engineers?

Is  FE “fixed expenses”? Time related costs?

general_correspondence said:

If any changes causes an increase or decrease in the time required for performance of this contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both, and the contract shall be modified accordingly"

Cite the clause that says that. What's the clause number?

I meant FTE, full time equivalent 

Joel asked the most obvious question thus far, "where is the changes"

I should have the same enthusiasm as Here 2 Help to discover what carrying costs means, but I am leaning on the Redtread comment and Joels latest comment.  The subcontract clause in the contract is titled: "Contract Direction/Changes" the full language the subcontractor is using to stake this claim from their agreement is as follows: 

"The contractor shall submit any "proposal" for adjustment under this clause within 7 days from date  of the written order. However if the primes subcontract manager decides the facts justify it, the subcontract manager may act before final payment of the contract.  If any changes causes an increase or decrease in the time required for performance of this contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both, and the contract shall be modified accordingly"  

2 key points to that language are I never provided a change or written directive to prompt a proposal, and 2, the contract is a long way away from the final payment of the contract.

we the prime never received a suspension notice from the USG, we have been working on non permit related activities.

general_correspondence said:

Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

Yes the rule of thumb the CPFF is to be performed within the contract estimated cost.   If the prime has to pay the subcontractor more money you as the prime will be reimbursed (paid) by the government within the estimated cost unless the government wants to make a case that the subcontract (as modified) was unreasonable (unallowable).  Therefore you as the prime must come to a reasonable decision on what you are going to pay the subcontractor not only pursuant to the terms of your subcontract but what is reasonable in settling a request of adjustment to the subcontract when in the end no specific clause in the subcontract addresses the issue but yet it just seems reasonable.    Some primes might even discuss the matter with their government contact on what they are thinking.   Doing so might help get the subcontract total cost approved when submitted for reimbursement.  Most of all document what you considered when you arrived at the adjustment to help support you made a reasonable decision.

general_correspondence said:

I should have the same enthusiasm as Here 2 Help to discover what carrying costs means, but I am leaning on the Redtread comment and Joels latest comment.  The subcontract clause in the contract is titled: "Contract Direction/Changes" the full language the subcontractor is using to stake this claim from their agreement is as follows: 

"The contractor shall submit any "proposal" for adjustment under this clause within 7 days from date  of the written order. However if the primes subcontract manager decides the facts justify it, the subcontract manager may act before final payment of the contract.  If any changes causes an increase or decrease in the time required for performance of this contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both, and the contract shall be modified accordingly"

Can you please quote the part of the subcontract clause defining what a “change” is that would require an adjustment?

At any rate, we have determined that the government has constructively delayed the work of the subcontract under the prime contract.

If there is no change here* and if there is *no suspension of work clause in the subcontract but there is a delay, I think the governments position should (?) be that the 52.242-17 clause “Government Delay of Work” would provide for a cost adjustment but no profit. That should flow down to subcontract costs, too. 

And the FAR cost allowability principles should apply.

Regarding unabsorbed home office overhead, that principle and the criteria for entitlement have been established by the US appeals Courts, as well as most if not all State Courts for non-federal contractsz

And one can’t duplicate the same costs in the amount of unabsorbed overhead allowed when allowing G&A on the other delay costs.

Do you have reference for the US Appeals court decisions ?

no definition to that word other than it is defined as:  "Change Order",  'Amendment", "Modification". a formal written order describing the changes to be made, issued and signed by the prime

joel hoffman said:

Regarding unabsorbed home office overhead, that principle and the criteria for entitlement have been established by the US appeals Courts, as well as most if not all State Courts for non-federal contracts

Just now, general_correspondence said:

Do you have reference for the US Appeals court decisions ?

Now I will admit that I am not a Cost Reimbursement expert but is this too much into the weeds? 

You have a FFP subcontract correct?  You have a request for an adjustment to it correct?   So I am just wondering why FAR principles analyzing every cost in the request for the subcontract adjustment apply?   Are you in the world of the scope of FAR Part 31?    Otherwise even with an adjustment when you finalize the subcontract price and pay it you will be seeking reimbursement for it via your request to government.   Its reasonableness and that it is within the CPFF costs will dictate what the government does.  

 Consider a couple of FAR references -

31.000 Scope of part.

This part contains cost principles and procedures for-

(a) The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15.404-1(c)); and

(b) The determination, negotiation, or allowance of costs when required by a contract clause.

31.102 Fixed-price contracts.

The applicable subparts of part  31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b)a fixed-price contract clause requires the determination or negotiation of costs. However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.

Carl, if the FFP subcontractor intends to claim unabsorbed home office overhead as part of a delay claim, the criteria for entitlement and the methodology for paying it have been established by the courts.

general_correspondence said:

Do you have reference for the US Appeals court decisions ?

G.C., the later editions of Nash and contributors’  “Administration of Government Contracts” have fairly up to date case references. I don’t have the latest editions.

You can Google “Unabsorbed Home Office Overhead Case Law” for numerous references, which will usually describe what is required for entitlement. “The Eichleay Formula” methodology is recognized as how to compute the recovery. You can Google “the Eichleay Formula” or “the Eichleay Method” for many references.  

general_correspondence said:

no definition to that word other than it is defined as:  "Change Order",  'Amendment", "Modification". a formal written order describing the changes to be made, issued and signed by the prime

Ok, GC. In my opinion that definition of a change doesn’t include a constructive suspension of work. which is a pure delay caused by the government not obtaining the necessary permit(s) for the subcontractor to proceed with the work.

Unless there is something else in the subcontract covering this type of delay, I recommend covering it as a Government Delay of Work entitlement under that clause. The subcontract is FFP,  not cost reimbursement but it is still a government delay- but the entitlement is not an “equitable adjustment” (does not include profit/fee).

Carl et al, the applicable subparts of part  31 shall be used in the pricing of modifications to fixed price subcontracts whenever (a) cost analysis is performed, OR (b) when a fixed-price contract clause requires the determination or negotiation of costs. (Per your reference at FAR 31.102).

Just now, joel hoffman said:

(a) cost analysis is performed, OR (b) when a fixed-price contract clause requires the determination or negotiation of costs.

Yep, so do either apply or not?  Do you know?  Or should GC let us know?

G.C., as a practitioner and in oversight of contract admin activities, I had quite a bit of experience in dealing with government construction contract delays due to changes, constructive and directed suspensions of work, etc.

I used to write Contract Administration policy and guidance on those issues. That was over about a 25 year period. It’s been awhile but the principles are pretty much the same.

C Culham said:

Yep, so do either apply or not?  Do you know?  Or should GC let us know?

On 3/22/2023 at 2:19 PM, general_correspondence said:

The subcontractor gave us Notice of these delay impacts when required and in conformance of the contract.  However the most recent Notice is a claim for carrying costs.  Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

The delay has been well beyond 6 months, The subcontractor has told me they have "diverted" most of the field labor during this delay so the costs are FE, likely OH and G&A type mostly, including Fee.  (Fee may be prohibited?) Is there a process to use to baseline negotiations,

That’s what I’ve been addressing and discussing with G.C. He has to determine and negotiate a cost adjustment for a government delay of the subcontractor’s work. It’s not a cost reimbursement subcontract . A fixed price subcontract requires entitlement to a cost adjustment based upon the allowable differences in cost due to the entitlement.

If no entitlement - no cost adjustment. And for unabsorbed home office overhead, there are very specific criteria for entitlement and for the methodology.

The courts developed and refined the Eichleay methodology over the years. That’s why it’s screwed up in my opinion but it’s there…

EDIT-ADD: Contracting Officers and contract administrators often get themselves into expensive trouble when constructive or directed actions or inaction causes delays - in particular indefinite delays that affect all or most of a contractor’s scheduled activities - if the government doesn’t understand how to manage or mitigate the delay to minimize the impact on the contractor and their resources. If a contractor has to standby to be ready to resume work at some unknown date-which prevents them from pursuing or performing other work - be ready to open up the Treasury and the checkbook.

Deleted. Not relevant

On 3/22/2023 at 3:19 PM, general_correspondence said:

the most recent Notice is a claim for carrying costs.

GC, is DFARS 252.243-7001 in your contract or did you include it in the subcontract?  Also, you need to answer H2H's question concerning what do you mean by carrying costs?  I would be interested in that answer also.

Note the prescription for DFARS 252.243-7001:

“243.205-70 Pricing of contract modifications.

“Use the clause at  252.243-7001 , Pricing of Contract Modifications, in solicitations and contracts when anticipating and using a fixed price type contract.”

I doubt that it would have been included in a CPFF, cost reimbursement prime contract or that the prime would have used it in a FFP subcontract that has a custom changes clause and no suspension of work clause.

But GC can answer the question if he  wants to.

Added: I don’t think GC’s  problem is so much about the cost principles. An identified cost element in a FFP modification that is unallowable in a cost reimbursement contract wouldn’t necessarily become an allowable expense.

The challenge may primarily be determining entitlement to a cost adjustment to the subcontract’s Fixed Price for the various cost elements.

G&A/home office overhead that is unabsorbed during a government suspension delay is a special situation.

He also asked if profit (“fee”) is allowed on government delay of work costs. It isn’t for a cost reimbursement contract and wouldn’t be in a FFP contract either under a constructive Suspension of Work.

My impression is that whoever wrote the construction subcontract may not be familiar with traditional construction FFP risk allocation for various possible events/situations.

joel hoffman said:

I doubt that it would have been included in a CPFF,

Joel, never underestimate the capacity of a contracting officer to do the wrong thing.

On 3/22/2023 at 12:19 PM, general_correspondence said:

Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?

Yes, there is such a rule of thumb and it's very straight-forward.

Make the subcontractor provide detailed support for each of the costs being claimed. Make the subcontractor show you how those costs were incurred solely because of the delay, and not for any other reason. Make the subcontractor show you how the costs could not have been avoided with respect to your subcontract.

There. That's it. Everything else in this thread is, in my opinion, not responsive to your question.

GC, H2H provided you with some advice that you should consider.  Further, remember, that you have a cost reimbursement contract.  That means the costs you incur and claim for reimbursement from the government must be an allowable cost.  If you agree to include an unallowable cost in a price adjustment to the FFP subcontract, assuming the adjustment is warranted, the government may reduce the amount it reimburses you for your subcontract costs.

By the way, the prime contractor has characterized this issue as a subcontractor claim due to government responsibility for a six month (at least) delay .

On 3/24/2023 at 8:52 AM, here_2_help said:

Yes, there is such a rule of thumb and it's very straight-forward.

Make the subcontractor provide detailed support for each of the costs being claimed. Make the subcontractor show you how those costs were incurred solely because of the delay, and not for any other reason. Make the subcontractor show you how the costs could not have been avoided with respect to your subcontract.

There. That's it. Everything else in this thread is, in my opinion, not responsive to your question.

I disagree that everything else in this thread is non-responsive. The actual scenario is different than stated in the original post.

The OP characterized it as “Permit delays, neither party liable for damages (which parties prime and sub? Government and contractor?), considered an excusable delay (probably true).

The sub and the prime are going to have to establish entitlement to an adjustment to a FFP subcontract and justify a cost (no “fee” or profit) adjustment. I agree with H2H’s bolded statement but there is more to it.

GC asked: 

“Is there a rule of thumb, or an accounting standard that the prime should use to negotiate the costs being claimed by the subcontractor?”

Yes, establish entitlement, allowability, reasonableness etc.

“The delay has been well beyond 6 months, The subcontractor has told me they have "diverted" most of the field labor during this delay so the costs are FTE, likely OH and G&A type mostly, including Fee.  (Fee may be prohibited?) “

I’m assuming that the sub will claim unabsorbed overhead. It can otherwise only claim overhead/G&A on the direct costs, which would be relatively low due to the delay.

GC must understand the required criteria and specific methodology for unabsorbed home office overhead and other overheads.

He didn’t know if subcontract  “fee” (profit) and perhaps prime fee are prohibited.

The sub claims there is a change but the action doesn’t fall under the subcontract’s changes clause.

It’s also not a change under the prime contract clauses.

It’s a government delay of the contract work.

By the way the courts have stated that unabsorbed home office overhead isn’t applicable under a changes clause. It is a remedy under a suspension of work clause for a delay that interrupts the work.

There are clauses in the prime contract for the contractor to use for an adjustment for cost and time. They are 52.242-17  and 52.249-14 . 

I believe all this was necessary to discuss and ferret out.

“Is there a process to use to baseline negotiations?” 

Yes -

establish and understand the basis for entitlement;

“Make the subcontractor provide detailed support for each of the costs being claimed. Make the subcontractor show you how those costs were incurred solely because of the delay, and not for any other reason. Make the subcontractor show you how the costs could not have been avoided with respect to your subcontract.”

Then develop your negotiation objectives.

What hasn’t been discussed is that this is a FFP subcontractor claim with the prime, which would eventually require some government acknowledgement and response pursuant to the above mentioned clauses. It isn’t simply just a cost increase within the current contract amount or contract cost. It is an additional cost to the government for an actionable event beyond the original work, irrespective of whether or not the current funded amount is exceeded.

EDIT: I agree with Vern’s assessment below.

The prime will have to justify to the government entitlement to the additional costs and that they are reasonable, allowable and allocable and for any time impacts.

@general_correspondence

On 3/24/2023 at 6:52 AM, here_2_help said:

Make the subcontractor provide detailed support for each of the costs being claimed. Make the subcontractor show you how those costs were incurred solely because of the delay, and not for any other reason. Make the subcontractor show you how the costs could not have been avoided with respect to your subcontract.

I suppose you could call that a rule of thumb. But that can be more succinctly yet more formally and comprehensively stated in the language of contracting as follows:

Require the contractor or subcontractor to prove entitlement (liability), causation, and quantum (amount of injury).

See SERVIDONE CONSTRUCTION CORPORATION v. The UNITED STATES, 931 F.2d 860, United States Court of Appeals, Federal Circuit. April 24, 1991:

Quote

To receive an equitable adjustment from the Government, a contractor must show three necessary elements—liability, causation, and resultant injury. Wunderlich Contracting Co. v. United States, 351 F.2d 956, 968, 173 Ct.Cl. 180 (1965).

See also WUNDERLICH CONTRACTING COMPANY, a Nebraska Corporation, Curlett Construction Company, a California Corporation, and Chas. H. Thompkins Company, a District of Columbia Corporation v. The UNITED STATES, 351 F.2d 956, United States Court of Claims, Oct. 15, 1965:

Quote

A claimant need not prove his damages with absolute certainty or mathematical exactitude. Dale Construction Co. v. United States, No. 134—57, Ct.Cl., December 11, 1964; Houston Ready-Cut House Co. v. United States, 96 F.Supp. 629, 119 Ct.Cl. 120 (1951). It is sufficient if he furnishes the court with a reasonable basis for computation, even though the result is only approximate. F. H. McGraw & Co. v. United States, supra; Locke v. United States, 283 F.2d 521, 151 Ct.Cl. 262 (1960). Yet this leniency as to the actual mechanics of computation does not relieve the contractor of his essential burden of establishing the fundamental facts of liability, causation, and resultant injury. River Construction Corp. v. United States, supra; Addison Miller, Inc. v. United States, 70 F.Supp. 893, 108 Ct.Cl. 513 (1947), cert. denied, 332 U.S. 836, 68 S.Ct. 217, 92 L.Ed. 408 (1947); J. D. Hedin Construction Co., Inc. v. United States, supra, 347 F.2d at pp. 246—247.

Retread said:

On 3/24/2023 at 7:46 AM, Retreadfed said:

GC, H2H provided you with some advice that you should consider.  Further, remember, that you have a cost reimbursement contract.  That means the costs you incur and claim for reimbursement from the government must be an allowable cost.  If you agree to include an unallowable cost in a price adjustment to the FFP subcontract, assuming the adjustment is warranted, the government may reduce the amount it reimburses you for your subcontract costs.

For a formal statement of those propositions, see the payment clause for cost-reimbursement contracts𑁋FAR 52.216-7, Allowable Cost and Payment (AUG 2018), subparagraph (a)(1):

Quote

The Government will make payments to the Contractor when requested as work progresses, but (except for small business concerns) not more often than once every 2 weeks, in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) subpart 31.2 in effect on the date of this contract and the terms of this contract.

and then see FAR 31.201-1, Determining allowability, paragraph (a):

Quote

A cost is allowable only when the cost complies with all of the following requirements:

(1) Reasonableness.

(2) Allocability.

(3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

(4) Terms of the contract.

(5) Any limitations set forth in this subpart.

In short, if you agree to a settlement with your sub that the contracting officer for your cost-reimbursement contract considers unjustified, he or she might declare the cost of the settlement to be unallowable and refuse to reimburse your company in whole or in part.

GC, hopefully what you have been told above demonstrates the necessity for precisely defining what you mean by "carrying costs" because such costs have to be allowable under the cost principles of FAR 31.2.  If you cannot define the costs, I don't see how you can determine their allowability.