Labor Charging on US Gov FAR regulated business

Company A is a Defense Contractor and conducts business as follows:

Contract labor is paid for as Other Direct Cost out of contract monies and cost the contract the hourly amount (plus contracting company rate) plus G&A and Fee.

The US Govt is billed at a fully burdened rate for this same Contract labor.

Burdens for ODC are about 26% and about 280% for company labor.

This seems to me like an overcharge to the US Govt.

Compliance people at Company A justify this charging by having it in ths "Disclosure Statement"

Comments please.

You said that this is a defense contractor. Please clarify your terminology. Inasmuch as I could interpret "100 percent" labor burden as doubling the direct labor rate, are you saying that a 280% labor burden makes the effective labor rate 3.8 times the direct rate for in-house labor?

Does the firm have recent DCAA audit reports to support the rates?

You said that this is a defense contractor. Please clarify your terminology. Inasmuch as I could interpret "100 percent" labor burden as doubling the direct labor rate, are you saying that a 280% labor burden makes the effective labor rate 3.8 times the direct rate for in-house labor?

Does the firm have recent DCAA audit reports to support the rates?

Contractor "A" is a division of company that does a majority of it's business with the US Govt in the Defense industry.

Rates are perodically submitted for approval by DCAA, at the moment they are not approved.

The disclosure statement is reviewed by DACO, the current one was submitted 10/28/2010 and not yet approved.

The direct labor dollars paid to a Contractor "A" employee gets burdens (O/H, Fringe, BOSC, ITSC, G&A, COM and Fee) which compounds to approximatly 3.8 time the direct rate as a charge to the Govt. If an employee is paid $50/hour the Govt is billed at approximately $190.

Contract labor employees are employed by another company which Company "A" contracts with for that persons service.

If the Contract labor person makes $50/hour then the cost to Company "A" is $50 plus the Contract labor company's fee plus G&A, COM and Fee are a multiplier of roughly 1.4 (not 1.26) or about $70/hour.

Company "A" realizes a gain of about $120/hour ($190 minus $70) for each hour worked by the Contract labor person.

Just a clarification. Company "A" bills the Govt at the $190 rate and pays for that service at $70/hour

So you are discussing the effective contracted labor rate?

Are you saying that the company charges the government the same rate for subcontracted labor as for in-house labor?

And you say that the firm's rates haven't been accepted or "approved" yet...

Company A is a Defense Contractor and conducts business as follows:

Contract labor is paid for as Other Direct Cost out of contract monies and cost the contract the hourly amount (plus contracting company rate) plus G&A and Fee.

The US Govt is billed at a fully burdened rate for this same Contract labor.

Burdens for ODC are about 26% and about 280% for company labor.

This seems to me like an overcharge to the US Govt.

Compliance people at Company A justify this charging by having it in ths "Disclosure Statement"

Comments please.

It's difficult to get at your point, but let me try to interpret.

1. Company A bills the U.S. Government for "contract labor" (i.e., labor incurred by 3rd party suppliers) at its cost plus 26% plus fee.

2. Company A bills its own employee direct labor at its cost plus 280% plus (maybe) fee.

These practices have been disclosed to the government in the company's Disclosure Statement. So, presumably, Company A is CAS-covered and has received CAS-covered contract awards valued at more than $50 million in a single fiscal year. Meaning Company A is not a small business and is likely to be of decent size.

Your concern is ... what?

That Company A's labor is too expensive and Company A should fire all its employees and just hire contract labor from 3rd parties?

That Company A won its contracts based on a price determined via use of its disclosed practices, but the Contracting Officer could NEVER have concluded that the contract price was fair and reasonable, so Company A won its contracts unfairly?

That Company A employees who receive fringe benefits and training and management support should not be more expensive than job shoppers who are paid statutory minimums (in terms of benefits, and told simply to show up at a company to report for work?

Clearly, I'm not getting your concern. Could you articulate it more clearly, please?

As you described the situation, it seems perfectly fine and normal and within Defense Industry SOP to me.

Hope this helps.

Contractor "A" is a division of company that does a majority of it's business with the US Govt in the Defense industry.

Rates are perodically submitted for approval by DCAA, at the moment they are not approved.

The disclosure statement is reviewed by DACO, the current one was submitted 10/28/2010 and not yet approved.

The direct labor dollars paid to a Contractor "A" employee gets burdens (O/H, Fringe, BOSC, ITSC, G&A, COM and Fee) which compounds to approximatly 3.8 time the direct rate as a charge to the Govt. If an employee is paid $50/hour the Govt is billed at approximately $190.

Contract labor employees are employed by another company which Company "A" contracts with for that persons service.

If the Contract labor person makes $50/hour then the cost to Company "A" is $50 plus the Contract labor company's fee plus G&A, COM and Fee are a multiplier of roughly 1.4 (not 1.26) or about $70/hour.

Company "A" realizes a gain of about $120/hour ($190 minus $70) for each hour worked by the Contract labor person.

Just a clarification. Company "A" bills the Govt at the $190 rate and pays for that service at $70/hour

Okay, I just saw your clarification. It looks like Company A has a T&M contract, is that correct? If so does the contract contain 52.232-7 and is the clause dated February 2007?

If yes, then your question boils down to whether Company A is complying with the requirements of that clause. That's a yes/no answer that DCAA should be able to answer relatively quickly.

H2H

What I am trying to determine are Company A's billing the US Govt more for Contract labor than they are intitled to charge.

Assume Company A to have $1B annual sales.

Rates are not an issue.

Joel's comment: "Are you saying that the company charges the government the same rate for subcontracted labor as for in-house labor?" is correct.

The Company pays for Contract labor at rate, say $70 and bills the Govt $190.

Company A's position that this practice is spelled out in the Disclosure Statement and is therefore OK.

I see it as an overcharging scheme.

The extra $120 gos to profit

What I am trying to determine are Company A's billing the US Govt more for Contract labor than they are intitled to charge.

Assume Company A to have $1B annual sales.

Rates are not an issue.

Joel's comment: "Are you saying that the company charges the government the same rate for subcontracted labor as for in-house labor?" is correct.

The Company pays for Contract labor at rate, say $70 and bills the Govt $190.

Company A's position that this practice is spelled out in the Disclosure Statement and is therefore OK.

I see it as an overcharging scheme.

The extra $120 gos to profit

Is this a proposal? Existing contract? Cost reimbursement? T&M?

Is this a proposal? Existing contract? Cost reimbursement? T&M?

All of the above.

Prior to CY 2003 Contract labor was bid as ODC, paid for as ODC and billed to the Govt as ODC.

In 2003 there was a didclosure statement change that allowed the company to bid outside purchased labor at inhouse rates.

Since 2003 the company has paid for contract labor as if it were ODC but bills the Govt as if it were inhouse labor and still does so.

This division is the highest profit center of the corporation and I believe in part to this charging/billing practice.

It's difficult to get at your point, but let me try to interpret.

1. Company A bills the U.S. Government for "contract labor" (i.e., labor incurred by 3rd party suppliers) at its cost plus 26% plus fee.

2. Company A bills its own employee direct labor at its cost plus 280% plus (maybe) fee.

These practices have been disclosed to the government in the company's Disclosure Statement. So, presumably, Company A is CAS-covered and has received CAS-covered contract awards valued at more than $50 million in a single fiscal year. Meaning Company A is not a small business and is likely to be of decent size.

Your concern is ... what?

That Company A's labor is too expensive and Company A should fire all its employees and just hire contract labor from 3rd parties?

That Company A won its contracts based on a price determined via use of its disclosed practices, but the Contracting Officer could NEVER have concluded that the contract price was fair and reasonable, so Company A won its contracts unfairly?

That Company A employees who receive fringe benefits and training and management support should not be more expensive than job shoppers who are paid statutory minimums (in terms of benefits, and told simply to show up at a company to report for work?

Clearly, I'm not getting your concern. Could you articulate it more clearly, please?

As you described the situation, it seems perfectly fine and normal and within Defense Industry SOP to me.

Hope this helps.

I guess the real question is can a company, by virtue of it's disclosure statement wording, violate FAR provisions?

As I previously posted, the contractor -- any contractor! -- needs to comply with the payment terms of its individual contracts. You haven't told us what the contract requires, so we cannot tell you whether Company A's billing practices are compliant with contract requirements. You want to know if Company A's disclosed cost accounting practice can "violate FAR provisions" but you haven't told us what FAR clauses you think the company is violating.

Let me answer your concern(s) this way:

1. A company's CASB Disclosure Statement establishes/discloses its cost accounting practices and NOT its billing practices. Nowhere in any Disclosure Statement will you find a discussion about billing practices, since billing practices vary by contract clause.

2. A company must consistently follow its disclosed, or established, cost accounting practices. That same thing cannot be said of billing practices, since they vary by the requirements associated with indivdual contract clauses.

3. When DCAA reviews a contractor's CASB Disclosure Statement, it looks for two things. (1) Does the Disclosure Statement adequately describe the contractor's cost accounting practices? (2) Are those cost accounting practices compliant with applicable CAS requirements? FAR doesn't usually enter into the discussion, unless a specific FAR Cost Principle conditions cost allowabilty upon compliance with a Cost Accounting Standard (e.g., 31.205-18).

Does this help you?

As I previously posted, the contractor -- any contractor! -- needs to comply with the payment terms of its individual contracts. You haven't told us what the contract requires, so we cannot tell you whether Company A's billing practices are compliant with contract requirements. You want to know if Company A's disclosed cost accounting practice can "violate FAR provisions" but you haven't told us what FAR clauses you think the company is violating.

Let me answer your concern(s) this way:

1. A company's CASB Disclosure Statement establishes/discloses its cost accounting practices and NOT its billing practices. Nowhere in any Disclosure Statement will you find a discussion about billing practices, since billing practices vary by contract clause.

2. A company must consistently follow its disclosed, or established, cost accounting practices. That same thing cannot be said of billing practices, since they vary by the requirements associated with indivdual contract clauses.

3. When DCAA reviews a contractor's CASB Disclosure Statement, it looks for two things. (1) Does the Disclosure Statement adequately describe the contractor's cost accounting practices? (2) Are those cost accounting practices compliant with applicable CAS requirements? FAR doesn't usually enter into the discussion, unless a specific FAR Cost Principle conditions cost allowabilty upon compliance with a Cost Accounting Standard (e.g., 31.205-18).

Does this help you?

Yes, your comments are helpfull. I believe I'm a bit under educated when compared to this forum's participants.

The practice that I am refering to here is consistant over all contracts. We have T&M, FFP, Cost type, all sorts of fee arrangements, Interdivisional, commercial and more.

I don't have access to the Disclosure Statement so can't see how it's worded.

I'm assuming that paying for labor at a lower rate than is being charged to the Govt is improper.

I don't know which FAR para may be in violation.

I look at a contract as being similar to an escrow account. Money comes in (payments from US Govt) and money goes out, Labor charges, mat'l, S/C, ODC, O/H and so forth. In the case of Company A the Govt is billed for Contract labor at a higher rate than it cost the Contract. I'm having great difficulty explaining that concept. I view this as improper and was attempting to get an agreement that yes it is not proper or no problem.

I've talked to our estimating manager, who is the auditing agencies interface, and asked how does the company get away with and justify, this practice and I'm told it's in the disclosure statement.

I appreciate all of you patience and comments.

Chuck,

It is possible, just barely, that Company A has a practice that labor which qualifies for a particular job category is both costed and billed at that job category's established rate, regardless of where that labor is sourced. Were I their advisor, I would caution against such a practice because it creates a pretty unsavory perception.

And I could create a scenario where what you describe takes place, and the difference between actual labor costs and labor category "costing" is treated as a credit to an indirect rate pool, and I could probably pull it off with DCAA as being a compliant practice. There would be some hard scrutiny and some hand-waving involved, but I think I could successfully get through an audit so long as I had a credit to offset the preceived "profit".

The thing is, by your own admission you lack a lot of the necessary facts, as well as the education and experience, to form a solid opinion as to whether Company A is doing an acceptable thing, or not. I would encourage you to discuss your concerns with your Ethics Department and try to learn why Company A thinks what it's doing is okay. You may be surprised. And if you don't get satisfaction, then you can drop a dime to the IG Hotline with the confidence that you tried as hard as you could to get answers from Company A.

H2H

Chuck,

It is possible, just barely, that Company A has a practice that labor which qualifies for a particular job category is both costed and billed at that job category's established rate, regardless of where that labor is sourced. Were I their advisor, I would caution against such a practice because it creates a pretty unsavory perception.

And I could create a scenario where what you describe takes place, and the difference between actual labor costs and labor category "costing" is treated as a credit to an indirect rate pool, and I could probably pull it off with DCAA as being a compliant practice. There would be some hard scrutiny and some hand-waving involved, but I think I could successfully get through an audit so long as I had a credit to offset the preceived "profit".

The thing is, by your own admission you lack a lot of the necessary facts, as well as the education and experience, to form a solid opinion as to whether Company A is doing an acceptable thing, or not. I would encourage you to discuss your concerns with your Ethics Department and try to learn why Company A thinks what it's doing is okay. You may be surprised. And if you don't get satisfaction, then you can drop a dime to the IG Hotline with the confidence that you tried as hard as you could to get answers from Company A.

H2H

Excellent advice - Thanks H2H

I am horrified by what I have read here.

Chuck,

Without getting into specifics, what you describe is a very common and acceptable practice, especially with T&M/LH contracts. Company A also disclosed it.

When a company gets a T&M contract, they often need specialized expertise they don't have or require additional people in order to perform. They can either recruit for those positions or use 1099/subcontractors. The cost to the company is different. With employees they must pay benefits and charge overhead expenses (which in Company A is 280%) and with subcontractors they don't (so the markup is less at 26%). As long as Company A successfully manges the work, the client is happy and satisfied, and all this is disclosed, they get paid $190 per hour.

Unless I'm missing something or you haven't provided all the details, that's fine and proper. Don't waste people's time trying to find fault. There isn't any.

formerfed:

Are you making a distinction between temporary workere and subcontractors? Are you saying that temporary workers under 1099s are not subcontractors?

Vern,

No. They all are the same - subcontractors.

Chuck,

Without getting into specifics, what you describe is a very common and acceptable practice, especially with T&M/LH contracts. Company A also disclosed it.

When a company gets a T&M contract, they often need specialized expertise they don't have or require additional people in order to perform. They can either recruit for those positions or use 1099/subcontractors. The cost to the company is different. With employees they must pay benefits and charge overhead expenses (which in Company A is 280%) and with subcontractors they don't (so the markup is less at 26%). As long as Company A successfully manges the work, the client is happy and satisfied, and all this is disclosed, they get paid $190 per hour.

Unless I'm missing something or you haven't provided all the details, that's fine and proper. Don't waste people's time trying to find fault. There isn't any.

While it might be acceptable for competitively bid labor hour or time and material contracts, I would be very skeptical of its propriety on a cost reimbursement type contract. It doesn't look right and would take more than hand waving to convince me that the subcontracted labor rate is exactly the same as that for in-house labor. But we don't seem to have all the information.

But we don't seem to have all the information.

Yes, indeed.

This is the post that opened this thread:

Company A is a Defense Contractor and conducts business as follows:

Contract labor is paid for as Other Direct Cost out of contract monies and cost the contract the hourly amount (plus contracting company rate) plus G&A and Fee.

The US Govt is billed at a fully burdened rate for this same Contract labor.

Burdens for ODC are about 26% and about 280% for company labor.

This seems to me like an overcharge to the US Govt.

Compliance people at Company A justify this charging by having it in ths "Disclosure Statement"

Comments please.

Maybe I'm becoming senile, but I do not understand that post, or any of cmoore812's subsequent posts. While I could speculate on what they mean, or try to interpret them as if they were written in a foreign language in which I am not fluent, why should I? And why should anyone else? I know that the people who responded were trying to be helpful, but were they? Or did they possibly cause more confusion in an already confused mind? And in other confused minds? I frankly cannot understand the impulse to respond to something like that.

We don't know the terms of the prime contract, Moreover, if we assume that the prime contract is T&M, we don't know if its a commercial item T&M contract or a noncommercial item T&M contract, and the proper response to the post might turn on that fact.

My friends, no attempt at a good deed goes unpunished. I saw that post early on, before anyone responded, and I decided to not to respond, because I could not figure it out and did not want to spend my time trying to figure out such a poorly written communication. But, like I said, maybe I'm just getting senile, or maybe I'm just stupid. I acknowledge that it's possible at my age.

This is the post that opened this thread:

Maybe I'm becoming senile, but I do not understand that post, or any of cmoore812's subsequent posts. While I could speculate on what they mean, or try to interpret them as if they were written in a foreign language in which I am not fluent, why should I? And why should anyone else? I know that the people who responded were trying to be helpful, but were they? Or did they possibly cause more confusion in an already confused mind? And in other confused minds? I frankly cannot understand the impulse to respond to something like that.

We don't know the terms of the prime contract, Moreover, if we assume that the prime contract is T&M, we don't know if its a commercial item T&M contract or a noncommercial item T&M contract, and the proper response to the post might turn on that fact.

My friends, no attempt at a good deed goes unpunished. I saw that post early on, before anyone responded, and I decided to not to respond, because I could not figure it out and did not want to spend my time trying to figure out such a poorly written communication. But, like I said, maybe I'm just getting senile, or maybe I'm just stupid. I acknowledge that it's possible at my age.

Guess I can't quite figure out why what I posted id so difficult to understand.

Company A fully burdens contract labor and pays for contract labor at a lesser amount.

All Contracts, T&M, FFP, Cost Type, Foriegn, Commercial.

Company A fully burdens contract labor and pays for contract labor at a lesser amount.

You cannot figure out what's wrong with that sentence?

When a contractor buys something to use on a contract, e.g., labor from a supplemental labor firm (which you call "contract labor"), that purchase is a direct cost to the contract. The contractor must allocate any applicable indirect costs, e.g., G&A, to direct costs. That allocation is what you call "fully burden." That means that the customer will pay the cost of the labor plus the allocated indirect cost.

So what? Why does that bother you? But I don't think that's what you are talking about. Here is what I think you meant:

The prime contractor has a time-and-materials contract which stipulates an hourly labor rate for work done by its own employees. The rate includes the prime's indirect cost and profit (making it "fully burdened"). The rate is $150/hour. But the prime has been hiring supplemental labor (what you call "contract labor") through another firm to do some of the contract work and pays for it at $90/hour. When the prime bills the government for work done by the supplemental laborers, it charges the $150 labor rate that was established for its own workers. It then pockets the $60 dollar difference. You question the propriety of that kind of billing. You think that the government should only reimburse the contractor for the supplemental labor at cost, rather than at the rate it charges the government for its own workers. You want to know if what the contractor is doing is proper.

Do I have it right?

If so, then the answer depends on what if anything the prime contract says about charging the government for supplemental labor. There is no universally correct answer. Read the contract.

Yes you have it right except that it is not being applied to a specific contract. It's applied to all contracts which would include T&M, FFP and Cost type contracts.

The issue is irrelevant under fixed-price contracts. It does not sound proper under cost reimbursement contracts, but I can't say that with certainty.

It does not sound proper under cost reimbursement contracts, but I can't say that with certainty.

That's what I said in my only opinion post. I didn't mention firm fixed-price contracts but it may or may not be relevant to that type. If the FFP rates or costs were competitively bid or if they were competitively negotiated without detailed representation of the basis of pricing, then I'd generally agree that the issue isn't relevant

However, if the FFP unit rates or costs are negotiated on the representation that the contractor would use the higher cost, in-house labor and if the contractor never intends to use the in-house labor or if the contractor intends to use a mixed labor force without disclosing it , then it might well be relevant. But it depends upon the circumstances.

H2H

And I could create a scenario where what you describe takes place, and the difference between actual labor costs and labor category "costing" is treated as a credit to an indirect rate pool, and I could probably pull it off with DCAA as being a compliant practice. There would be some hard scrutiny and some hand-waving involved, but I think I could successfully get through an audit so long as I had a credit to offset the preceived "profit".

Maybe the labor is coming from a transferring organization and it is the established practice to price interorganizational transfers at other than cost (maybe a single transfer rate) and the price is not unreasonable - I don't see a need to credit an indirect pool with the difference between cost and transfer rate.

Maybe the labor is coming from a transferring organization and it is the established practice to price interorganizational transfers at other than cost (maybe a single transfer rate) and the price is not unreasonable - I don't see a need to credit an indirect pool with the difference between cost and transfer rate.

Whynot,

You are replying to something I didn't post. I never posted that a credit needed to be created to account for the difference between IOT cost and a transfer at price. Indeed, the original post inquired about "contract labor" not IOT labor.

H2H

When you click "reply" the post you want to reply to is automatically added to the beginning of your post. It is bracketed by the word --quote name . . . .-- at the beginning and --quote-- at the end. You have at least 3 ways to respond to another's post.

1. Delete the bracketed information entirely, add your response, and your reply will come out by itself.

2. Begin your reply after the bracket that looks like --/quote--. When you do that, the item you reply to will be highlighted in a blue and your response will be below it.

3. You may add your reply first by placing it before the bracket that begins with --quote name . . . .--

The important thing to remember is not to add your reply inside the brackets. If you include your reply within the brackets, you are including your reply to the post you want to reply to and that makes it difficult to understand who is saying what.

In addition to Bob's point, this thread really belongs under the "Contract Pricing" Discussion Area, not under the "Contracting Workforce" Area. I do understand that cmoore is new to this Forum.

However, to clarify - I believe that the Contracting Workforce Area is intended to cover discussion concerning government contracting personnel, not contractors' pricing practices for their "contractor personnel".

Bob,

Thanks for the instruction.

H2H

I don't think that contract labor and IOT are mutually exclusive terms - they can be one and the same

H2H

I don't think that contract labor and IOT are mutually exclusive terms - they can be one and the same

Whynot,

I understand what you are saying. Unfortunately for you, you would be wrong.

H2H

I don't think that contract labor and IOT are mutually exclusive terms - they can be one and the same

As far as I know, interorganizational transfers of labor aren't accounted for the same as contracted labor, plus that isn't the issue in the situation described in this thread.

H2H

I don't follow. Doesn't 52.232-7, 52.216-29 and 52.216-30 all allow for contract labor to be based on IOT and that IOT can be charged in certain situations on a basis other cost? Is that where I am wrong on is it something else?

H2H

I don't follow. Doesn't 52.232-7, 52.216-29 and 52.216-30 all allow for contract labor to be based on IOT and that IOT can be charged in certain situations on a basis other cost? Is that where I am wrong on is it something else?

Whynot,

Here we are once again, on one of the now infamous WIFCON thread tangents were two or more posters argue passionately about some minor point that has nothing much (if anything) to do with the original poster's question. To your question, no. None of the contract clauses/solicitation provisions you cite "allow for contract labor to be based on IOT". In fact, each of those clauses quite clearly distinguishes between (a) labor performed by the contractor/offeror, ( labor performed by subcontractors, and ? labor performed by other "divisions, subsidiaries, or affiliates" of the contractor/offeror under common control.

If they were all the same thing, then there would be no need to differentiate them within the clauses/provisions.

Let's bottom-line this. I'm not going to perpetuate this tangent any further. Either you accept my position or you don't; but if you don't accept what I'm saying then you need to better explain/support your position.

Hope this helps.

I think I may have confused the issue by making it sound that I was trying to make an argument to treat subcontracts and IOT as the same ? I wasn?t. I too agree not to want to engage in that discussion. All I was trying to communicate, albeit too cryptically, was that the transferring organization could have purchased labor and transferred that purchased labor at an established transfer price. I thought the idea was germane because I got the impression from the original poster that they had an issue with charging purchased labor at a rate not commensurate with its cost. An IOT charged at price as opposed to cost was addressed in the cited clauses. The clauses apply to T&M. For purposes of charging, in the accounting sense, to a cost reimbursable or any contract subject to the cost principles the original poster can see the same issue addressed in 31.205-26(e)(1). For FP price and its cost is not an issue for the most part.

As Joel said

As far as I know, interorganizational transfers of labor aren't accounted for the same as contracted labor, plus that isn't the issue in the situation described in this thread.

What is the purpose of bringing up OIT again?

For FP price and its cost is not an issue for the most part.

I wish people would refrain from making broad assertions that how a fixed price contract is priced isn't an issue. Probably true in the case of a bid contract or a source selection, when pricing wasn't established through negotiation at the time of contract formation.

But when unit prices are developed through cost or price negotiations, how the unit price is represented and negotiated is usually important and pertinent. It could involve issues of false statements, false claims, fraud or defective pricing, if misrepresented at the time of negotiations.

Who said that it does not matter how the prices are established ("represented") under a fixed-price contract?

Who said that it does not matter how the prices are established ("represented") under a fixed-price contract?

Vern, nobody "said that it does not matter how the prices are established ("represented") under a fixed-price contract". I never said that anyone said that. I said "I wish people would refrain from making broad assertions that how a fixed price contract is priced isn't an issue."

The issue, as I understand it is that a firm is apparently charging the same price for much less expensive contract labor as it charges for in-house labor "on all sorts of contracts", including cost, fixed price, T&M, etc.

Whynot said this in post 336 on Jul 28 2011, 12:17 PM' : "For FP price and its cost is not an issue for the most part."

Vern said this in post #25 on July 18th: "The issue is irrelevant under fixed-price contracts. "

All I am saying is that it COULD very well be an issue on a fixed price contract under certain circumstances with specifically negotiated prices or rates.

The issue, as I understand it is that a firm is apparently charging the same price for much less expensive contract labor as it charges for in-house labor "on all sorts of contracts", including cost, fixed price, T&M, etc.

Whynot said this in post 336 on Jul 28 2011, 12:17 PM' : "For FP price and its cost is not an issue for the most part."

Vern said this in post #25 on July 18th: "The issue is irrelevant under fixed-price contracts. "

All I am saying is that it COULD very well be an issue on a fixed price contract under certain circumstances with specifically negotiated prices or rates.

Under a fixed-price contract there is no relationship between the price charged and the actual cost incurred. The cost incurred is irrelevant to the price charged. Now, if you're saying that misrepresentation, fraud, or defective pricing during price negotiations could affect the legitimacy of the price, that's true, but not relevant to the issue raised as you described it and has no bearing on my comment.

I don't mind you correcting an error or making an added point, but I do mind you complaining that I have said something that is not true when, in fact, it is true. And don't mix me in with Whynot. If you think somebody said something that was incorrect, say who it was and why it was incorrect. Don't make lump everybody under a broad generalization.

Under a fixed-price contract there is no relationship between the price charged and the actual cost incurred. The cost incurred is irrelevant to the price charged. Now, if you're saying that misrepresentation, fraud, or defective pricing during price negotiations could affect the legitimacy of the price, that's true, but not relevant to the issue raised as you described it and has no bearing on my comment.

I don't mind you correcting an error or making an added point, but I do mind you complaining that I have said something that is not true when, in fact, it is true. And don't mix me in with Whynot. If you think somebody said something that was incorrect, say who it was and why it was incorrect. Don't make lump everybody under a broad generalization.

Vern, I was referring to the situation on a FFP where, if a contractor misrepresents the cost to the company of subcontracted labor, during negotiations to establish the rates or price, in an attempt to convince the owner that subcontracted labor costs the same as in-house labor, there could be a problem. Or, if the contractor misrepresents that it will use in-house labor during negotiations, but instead uses less expensive contract labor that it had really planned to use at the time, there could be a problem. If you were referring to something else, I apologize.

In response to your post #25 on July 18, in which you stated: "The issue is irrelevant under fixed-price contracts. " I responded to you in post #26 on the same day, stating "...If the FFP rates or costs were competitively bid or if they were competitively negotiated without detailed representation of the basis of pricing, then I'd generally agree that the issue isn't relevant.

However, if the FFP unit rates or costs are negotiated on the representation that the contractor would use the higher cost, in-house labor and if the contractor never intends to use the in-house labor or if the contractor intends to use a mixed labor force without disclosing it , then it might well be relevant. But it depends upon the circumstances."

I thought that was fairly clear and you didn't challenge my statement until after I responded in post #38 on July 28 to whynot's post #36 of July 28. Whynot indicated that the labor cost on FFP contracts are not relevant, for the most part, without any explanation. I believe that my second response was pretty consistent with my July 18 response to your post #25.

Regarding the instant situation in this thread, a company employee stated that two government agencies apparently don't agree with this person's company billing rates or its accounting methods shown in its Disclosure Statement. The employee also claims that the company is using these rates for all sorts of contracts, including FFP contracts. I'm not accusing them of misrepresentation and never did. But there could be a problem.

I summarized the issue as follows in Post # 23:

The prime contractor has a time-and-materials contract which stipulates an hourly labor rate for work done by its own employees. The rate includes the prime's indirect cost and profit (making it "fully burdened"). The rate is $150/hour. But the prime has been hiring supplemental labor (what you call "contract labor") through another firm to do some of the contract work and pays for it at $90/hour. When the prime bills the government for work done by the supplemental laborers, it charges the $150 labor rate that was established for its own workers. It then pockets the $60 dollar difference. You question the propriety of that kind of billing. You think that the government should only reimburse the contractor for the supplemental labor at cost, rather than at the rate it charges the government for its own workers. You want to know if what the contractor is doing is proper.

cmoore confirmed my understanding of the issue in the next post, but said that the same thing was being done under fixed-price contracts. I said that "the issue" is irrelevant under fixed-price contracts, and it is, for reasons that ought to be obvious. Your point is different -- it is not right for a contractor to be deceptive or to submit defective data during contract negotiations, and it is not right for the contractor to bill for for something that it did not deliver. That is true, but does not contradict what I said. I not read cmoore as accusing the contractor of deception or misrepresentation. Did he make such an accusation?

Vern, cmoore appears to be an employee of the company. From my reading of his various explanations, he feels that his company is trying to pass off contract labor as costing the company the same as in-house labor, using its Disclosure Statement as justification. Apparently 2 government agencies aren't agreeing, because they are not "approving", as he put it, the company's rates or the Disclosure Statement.

I think you and I agree in principle. We don't know what is going on on "all contracts". I was just trying to clarify that if there is misrepresentation involved in negotiated pricing for fixed price contracts, there could indeed be a problem. Then 'whynot' later jumped in, making a generalized statement about labor cost not being relevant on fixed price contracts, for the most part. Then I responded to his post, again trying to make the point that there could be problems with labor cost on FP contracts, if misrepresentation was involved in the pricing of the labor.

For the record, I agree with you that what and how the contractor charges for labor on a competitively negotiated or competitively bid fixed price contract generally isn't an issue. But labor cost may become an issue on such contracts, such as in a claim or a negotiated change involving cost considerations, if misrepresentation is involved. It may be an issue on a negotiated contract, if misrepresentation is involved.

The issue at hand is not a new one. The ASBCA recently decided a case with somewhat similar facts. See Serco, Inc. v. Pension Benefit Guaranty Corp., CBCA 1695, 11-1 BCA ? 34662. The contractor hired temp labor to do part of the work and charged the rates established for the government employees. The CO insisted on reimbursing the contractor at cost instead of paying the hourly rates. The board held that the temp workers were subcontractor employees (a dubious holding) and denied the appeal.

I don't know what a CAS disclosure statement would have to do with any of this. The answer to cmoore's question depends on the language of the contract.

The issue at hand is not a new one. The ASBCA recently decided a case with somewhat similar facts. See Serco, Inc. v. Pension Benefit Guaranty Corp., CBCA 1695, 11-1 BCA ? 34662. The contractor hired temp labor to do part of the work and charged the rates established for the government employees. The CO insisted on reimbursing the contractor at cost instead of paying the hourly rates. The board held that the temp workers were subcontractor employees (a dubious holding) and denied the appeal.

I don't know what a CAS disclosure statement would have to do with any of this. The answer to cmoore's question depends on the language of the contract.

I would agree that the answer to cmoore's question depends on the language of the various contracts.

The 2000 version of the T&M Payments clause was in the contract in the Serco case that you cited above. It wasn't clear to me whether the Board only referred to the language in the contract clause or if there was other language in the contract in addition to the language of the older clause which clearly established that the hourly labor rates didn't cover subcontracted labor.

Not to stray too far off the subject, but didn't the current version (Feb 2007) of the FAR Clause 52.232-7 -- Payments Under Time-and-Materials and Labor-Hour Contracts result from a rather spirited discussion thread here on the WIFCON Forum? I recall that it was debated whether the contract T&M or Labor Hour unit rates covered work performed by either the prime or by subcontractors. The Materials paragraph of the previous version of the clause appeared to require that any subcontracted work be reimbursed at cost. Seems like somebody here raised the subject to the DAR or FAR Council and they revised the clause to eliminate that ambiguity.

The new clause provides that the hourly unit rates cover "payment for labor that meets the labor category qualifications of a labor category specified in the contract that are —

(i) Performed by the Contractor;

(ii) Performed by the Subcontractors; or

(iii) Transferred between divisions, subsidiaries, or affiliated of the Contractor under a common control."

I assume that if the government now wants to distinguish between the three types of labor, it would have to establish separate labor hour rate CLINS for each source.