Cost of Superintendence on a construction contract

Vel said:

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

I think (I'm not sure) that the problem you are asking about is the problem of unabsorbed overhead in connection with a delay. If so, see if you can find a copy of Administration of Government Contracts, 5th ed., by Cibinic, Nagle, and Nash, and read the discussion of "unabsorbed overhead" in pages 647-53.

Also, if you have access to The Nash & Cibinic Report via Westlaw, the authors have written several articles about how to handle fixed field office overhead costs when pricing equitable adjustments.

Other resources include:

GOVERNMENT CONTRACTING AND TREATING EXTENDED FIELD OVERHEAD AS A DIRECT OR INDIRECT COST, https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/

Extended field overhead/delay, http://www.delaydamages.com/delay-damages/extended-field-overhead/

Recovery of Unabsorbed Overhead, http://kendall-dinielliconsulting.com/services/unabsorbed-overhead-eichleay-formula#:~:text=When the government%2C by direction,contract but for the delay.

Unaborbed Home Office Overhead, http://www.delaydamages.com/delay-damages/unabsorbed-home-office-overhead/

Project time extensions and the relational impact on unabsorbed home office overhead, https://www.hka.com/project-time-extensions-and-the-relational-impact-on-unabsorbed-home-office-overhead/

Calculation and recovery of home office overhead, https://www.pmi.org/learning/library/calculation-recovery-home-office-overhead-8913

Understanding unabsorbed home office overhead, https://www.ctconstructionlaw.com/understanding-unabsorbed-home-office-overhead/

Vern Edwards said:

I think (I'm not sure) that the problem you are asking about is the problem of unabsorbed overhead in connection with a delay. If so, see if you can find a copy of Administration of Government Contracts, 5th ed., by Cibinic, Nagle, and Nash, and read the discussion of unabsorbed overhead in pages 647-53.

Good morning Vern and thanks for the feedback.  I'm in a forward deployed scenario, so I don't have my copy of Administration of Government Contracts with me.  But if that section discusses the Eichleay formula, this case is not about unabsorbed home office overhead.  These are cost that have only one single cost objective, which is the contract in question.

@Vel

Contact me privately via the mail feature at this website and we can discuss how I can send you the Nash & Cibinic articles about fixed field office overhead.

Vel,

Quote

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay.

It depends.

Is this a fixed-price construction contract (see FAR 31.102), or a cost-reimbursement contract?

Was it awarded competitively, or sole-source?

Quote

I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

I am thinking the contractor should make its own decisions, and submit its own request for whatever adjustment it thinks is appropriate based on whatever the reason is (is it change, government delay, or something else?).  Rather than potentially giving away the store, so to speak, it seems to me that you should make sure your act is together.  Have you issued the change order to correct your defective specifications?  If NO, have you issued a stop work order for the affected work?  You want these to be YES.  Only with a YES are you ready to even start talking about a REA, which the contractor will submit based on its own understandings.  If you agree with the REA, then you formalize the modification to implement the adjustment.  If you don't agree, then you try to understand more about where the contractor is coming from.  But please be careful that you do not  become overly concerned with the contractor's business and the contractor's bookkeeping.

There was a Board of Appeals Decision perhaps 15-20 years ago that covered a field office overhead scenario similar to that described here. I don’t remember the specific circumstances or the  title of the Decision.

I believe that field office overhead was being charged as a percentage of the direct costs of changes without time extensions.   However, the Government or the contractor wanted to price extended field overhead based upon estimated or actual additional costs. The scenario may have been slightly different.  But I do recall the ruling was that the contractor could choose one or the other method for field office overhead on modifications but then had to charge consistently for changes involving both time or no time.

Perhaps the Nash and Cibinic Report addressed that case at some point. 

I disagreed with the rationale of charging flat percentage for field overhead on either time or no time changes because it bore little or no relation to the basis for an equitable adjustment under the Changes clause at 52.243-4: “(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing.”

I never negotiated field overhead as a percentage of the net increase (or net decrease) nor accepted a contractor’s proposal based upon straight percentages.

We would generally base charges for additional field overhead primarily upon demonstrable changes in the field overhead costs, at least for personnel, additional rent, estimated additional utilities, supplies, etc. Most of the field office supervisory and senior administrative staff were salaried personnel.

We considered the various field office supervision and other overhead cost, such as vehicles, rent, office type costs, etc. , based upon the nature of the costs, e.g., fixed (time related), variable and semi-variable, etc. Yes, there was some room for negotiation if a contractor could make a case for less efficiency (e.g.,  “dilution of supervision”) or other intangible effects of a change or other situation, delay, etc.

I once had a superior in a field office who insisted that we should pay it as a percentage on all non time extension mods because it was a “fair share of costs” or some similar BS reasoning that made no sense. That was long before the appeal decision. Since I was the office engineer and the office’s negotiator, I ignored his method.

Luckily, I was never personally challenged by a contractor either before or after that Decision. But I know that at least some USACE Districts adopted the methodology and wrote special contract requirements (SCR’s) to that effect in their construction contracts after the Decision.

ji20874 It is a competitively awarded fixed price contract.  I sent them a request for proposal for the time and cost impacts to incorporate the revised drawings into the contract and have received their proposal; which now attempts to charge the full delay as a daily rate (per diem basis), vice the percentage method previously used on this (and other) contracts.

Vel said:

I’ll apologize up front for the long post, but I’m trying to follow the spirit of ji20874’s tag line:  A problem clearly stated is a problem half solved.

FAR 31.105(d)(3) allows contractors to treat the cost of managing (“superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc.”) a construction contract as either a direct or indirect cost; provided the practice is in accordance with the contractor’s established and consistently followed cost accounting practices.

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract. In cases where the contract time is not extended, the contractor is essentially banking the field overhead costs.  When a change does require an extension of time, but no self-performed cost, the contractor receives no additional compensation for its management costs (except for previous/future banked costs).

In this particular case, some of the drawings under a design bid build contract were defective.  The project was not suspended, as other work was able to continue, but the critical path and completion date were impacted and an extension of time would be due just because of the delay in providing the revised drawings.  There will be a cost to implement the corrected drawings, and the change will require additional time to complete. The contractor realizes that their field overhead percentage will not cover their management cost for the entire extension that will be required and now wants to charge these costs as direct.  

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

In response to the specific scenario and question, I think that the information that Vern can provide may support requiring the contractor to charge consistently for changes involving time or no time but more recent case law may have changed.

I can certainly see where a time extension for a delay may involve little additional direct trade labor, equipment and material costs but considerable fixed (time related costs) for the field office overhead staff and rent, etc.

However, using a flat percentage rate for changes without time doesn’t bear much realism or correlation to the fixed or semi variable nature of many field overhead costs either.

Maybe FAR 31.102 will be helpful.  Can you simply agree on a firm-fixed-price and a new completion date?

Vel said:

ji20874 It is a competitively awarded fixed price contract.  I sent them a request for proposal for the time and cost impacts to incorporate the revised drawings into the contract and have received their proposal; which now attempts to charge the full delay as a daily rate (per diem basis), vice the percentage method previously used on this (and other) contracts.

Maybe I'm missing something (as usual) ... but we're not talking about the original contract award any more, right? We're talking about a non-competitive contract price adjustment based on government-caused delay (defective drawings).

If I'm right then I agree a new cost analysis and price reasonableness determination must be made. 

To the original question, the consistency requirements pertains solely to cost accounting practices and not to how prices are determined and billed. The latter is a matter for negotiation. Or so it seems to me.

Is FAR 31.105(d)(3) incorporated into the contract?

here_2_help said:

If I'm right then I agree a new cost analysis and price reasonableness determination must be made.

The original poster has not shared the dollar value of either the original contract or the proposed modification, so I do not assume that any cost analysis is needed.  FAR 31.102 plays, and I recommend that text to the original poster.

joel hoffman said:

There was a Board of Appeals Decision perhaps 15-20 years ago that covered a field office overhead scenario similar to that described here. I don’t remember the specific circumstances or the  title of the Decision.

Maybe M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623.

here_2_help said:

Maybe I'm missing something (as usual) ... but we're not talking about the original contract award any more, right? We're talking about a non-competitive contract price adjustment based on government-caused delay (defective drawings).

If I'm right then I agree a new cost analysis and price reasonableness determination must be made. 

To the original question, the consistency requirements pertains solely to cost accounting practices and not to how prices are determined and billed. The latter is a matter for negotiation. Or so it seems to me.

H2H, I agree in principle with you. The question appears to concern the methodology used to propose and price field overhead in a mod. The contractor chose to use a percentage of the direct costs for FOH for changes not involving a time extension that would extend field overhead costs.

The percentage method actually provides for additional costs for fixed type costs or semi variable cost portions of FOH like General conditions, rent or office and storage facilities, salaried supervisory and admin costs, etc. whether or not there are any such extended costs. In theory those are not directly variable with the cost of the work.

Thus, the percentage method is very generous in my opinion when no additional time is involved.

It also isn’t very reflective of a delay that doesn’t necessarily involve much if any additional  direct costs but may involve significant fixed - extended overhead.

But some case law has developed the concept that once the contractor selects a method to charge field/site overhead costs on mods, it must consistently use that method.

To me the percentage method doesn’t make sense in either case.

Vern Edwards said:

Maybe M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623.

I’m out on road but will check that one out. Thanks.

Retreadfed said:

Is FAR 31.105(d)(3) incorporated into the contract?

It's hard to see how it would be, absent a contract clause that invoked it. Was that your point?

here_2_help said:

It's hard to see how it would be, absent a contract clause that invoked it. Was that your point?

Yes.  If it is not a part of the contract, how is it binding on the contractor?

The question in this thread concerns billing or charging practices, not cost accounting practices, for what is commonly referred to as “field overhead” or “site overhead” costs.

In my experience with contractors, these costs are generally included/accounted for as a portion of the direct costs of a project. H2H can confirm or correct me. Pardon my layman’s usage of accounting terms. 

Although direct project costs, they are indirect or job site overhead because they are costs that are spread over all the individual itemized work costs.

I don’t think that the problem here concerns accounting for costs.

The commonly encountered problem is how to determine or estimate and charge for additional site overhead costs on changes or other mods with or without extended performance time.

Contractors can certainly determine a percentage of job site overhead to total project costs. But simply charging a fixed percentage for each mod doesn’t reflect the actual or approximate increase or decrease in the contractor’s cost, which is the basis for a cost adjustment or an equitable adjustment under a contract clause providing for an adjustment to the contract price.

Charging a flat percentage would, in addition to variable costs, reflect one time costs, fixed (time related) costs, whether or not affected/impacted,  as well as semi-variable costs, e.g. costs that don’t directly vary with the amount of work.

Retreadfed said:

Is FAR 31.105(d)(3) incorporated into the contract?

For fixed price, DoD contracts including construction, yes-the contract cost principles and procedures in FAR Part 31 and DFARS Part 231, including FAR 31.105(d)(3) apply.

DFARS Clauses 252.243-7000 “Supplemental Cost Principles”, 252.243-7001 “Pricing of contract modifications” and 252.243-7002 “Requests for equitable adjustment” are prescribed at 231.100-70,  243.205-70 and 243.205-71, respectively.

In fact, see FAR 31.105(c) which requires the contracting officer, regardless of agency, to incorporate the cost principles and procedures in Subpart 31.2, as modified by 31.105(d) in applicable contracts as the basis for pricing changes and other modifications. I’m assuming that other agencies use clauses similar to those DoD clauses.

Those government WIFCON readers and members in DoD and other agencies that contract for construction - and especially those who work with policy and procedures and/or administer and negotiate contract prices and modifications - should be aware of this.

The fact that the appeals courts have even dictated or acknowledged how to charge for field office overhead using a flat percentage formula indicates to me their ignorance of the nature of such costs and that it doesn’t necessarily reflect the basis for an equitable adjustment or other price adjustment.

I read through several Caddell Construction cases that reference the Mortensen Construction cases. I haven’t had time to dig into Mortensen in detail but it’s refreshing my memory. The Mortensen case might have addressed the difficulty of accurately accounting for and segregating change order FOH costs. Seems like I remember some such discussion but I need more time to review the cases.

I noticed in one appeal that Caddell confused the Eichleay Formula method for unabsorbed overhead with ordinary H.O.O. as a counter argument to the idea of charging consistently for field office overhead. That sent the Appeals Court down a rabbit hole. I knew the Caddell folks of that time period, as they are a Montgomery, Alabama based firm with long standing business relations with my USACE organizations. They could have certainly been confused…

Before pressing too hard on 31.105, it is important to read 31.102 -- a careful understanding 31.102 may obviate all the problems everyone seems to be imagining.  I have to think the original poster should negotiate a FFP for the change and resulting delay, preferably after the contractor submits its own proposal.  So long as there is no dispute, there is no need to reach for or impose judicial remedies.  Just do what 31.102 says, and negotiate an equitable FFP adjustment.

ji20874 said:

Before pressing too hard on 31.105, it is important to read 31.102 -- a careful understanding 31.102 may obviate all the problems everyone seems to be imagining.  I have to think the original poster should negotiate a FFP for the change and resulting delay, preferably after the contractor submits its own proposal.  So long as there is no dispute, there is no need to reach for or impose judicial remedies.  Just do what 31.102 says, and negotiate an equitable FFP adjustment.

JI, it is important to remember that the basis of an equitable price adjustment or other price adjustment under the changes clause or other clauses providing for such pricing adjustment are based upon the impact on the contractors costs,  not market pricing, etc. etc.

The parties certainly can come to agreement on a total price for the modification using market pricing and without resorting to cost analysis if the modification amount is less than the threshold for certified cost or pricing data -- and even if cost analysis is used, they can come to agreement on total price without agreeing on cost elements and without letting cost analysis get in the way.  FAR 31.102.

I disagree. Then you aren’t complying with the contract requirements for an equitable adjustment of the price under the changes clause.  It’s a cost based adjustment.

I wanted to say thanks to those who provided their input.  The info that Vern provided regarding M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623 and the link he provided that led to a discussion of Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/) were helpful in formulating my planned approach.  Perhaps, once the issue is resolved, I'll post the results in the "what happened" forum.

On 12/7/2021 at 2:28 AM, Vel said:

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract. In cases where the contract time is not extended, the contractor is essentially banking the field overhead costs.  When a change does require an extension of time, but no self-performed cost, the contractor receives no additional compensation for its management costs (except for previous/future banked costs).

Unless I’m reading this wrong, what you described here is not an “indirect cost” as defined in FAR or in the discussion of the Watts Decision.

The contractor is (apparently) dividing the estimated management cost for the contract (within the contract cost) by the estimated cost of the construction within the total direct costs before marking up for G&A/other overhead if any*/profit/bond.

*for construction companies , other overhead may typically be the Division of the company holding and performing the contract, e.g., Keiwit Eastern, Keiwit Western, etc.

I’m quoting from the article that Vel linked to the discussion of the Mortensen case:

”F.A.R. 2.101 defines both direct costs and indirect costs as follows:

Direct cost means any cost that is identified specifically with a particular final cost objective [e.g., contract]. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives.” See also F.A.R. 31.202.

 ***

Indirect cost means any cost not directly identified with a single final cost objective [e.g., contract], but identified with two or more final cost objectives or with at least one intermediate cost objective.”

The estimated management and supervision costs, including general conditions, office trailers, storage, safety, etc. are WITHIN the contract amount of estimated total costs or (estimated) “total direct costs” before markups are applied to obtain the total contract price. They are commonly referred to as field office overhead. The term “field overhead” or “field office overhead” here means that those job costs are generally distributed or spread over all the construction activities. 

There may be some  other support from the Division or Home Office that may be directly charged to the contract like estimating (or sometimes a project manager) but let’s not complicate it here.

Thus, in the contractor’s accounting system, essentially all of the costs directly associated with the construction contract that aren’t charged to Division or Branch Office overhead, G&A, etc. are direct costs.

SO - while field office overhead is an indirect cost on the site, it is actually a direct cost of the contract.

I don’t think that the author of the article understood that and I wonder whether the Appeals Courts understood that either.

When a contractor adds a percentage for estimated  (or actual) field office overhead to the estimated (or incurred) direct costs for a mod, the government is paying additional fixed (time related - such as salaried personnel already on-site, rent on office facilities, utilities, additional guard time, site safety, etc.), semi-variable (costs that include both fixed and variable - perhaps extension an assignment of specific supervisory personnel that would otherwise be reassigned to another contract or overtime for hourly office employees, etc. ) costs and variable (costs that are directly related to additional work or costs).

An extended daily overhead rate, would generally be incurred for mods covering extended time to perform due to a delay in the critical path of the project. For example, additional time caused by partial or full stoppage, differing site condition, additional work that can’t be worked into a current activity without delaying following or other concurrent activities, etc.

Per diem (extended overhead) theoretically would be composed of additional fixed costs and perhaps the fixed portion of semi-variable costs per day. This  would probably consist of the current daily cost of maintaining the field overhead during a time extension.

BOTH the percentage method and the per diem method are direct costs to the contract.

My problem with the percentage method is that the contractor is charging some additional fixed costs that are already part of the contract costs and contract price, aren’t related to the dollar amount of the work and usually aren’t additional incurred costs when no additional contract performance period is necessary. 

Bottom line is that the Courts are saying once the contractor uses a method, the contractor can’t switch.

I think the courts are screwed up in their reasoning and I think that paying a direct percentage for field overhead based upon the amount of additional costs is also screwed up as it treats all FOH costs as variable costs.  To say that it is “generous” would be an understatement.

joel hoffman said:

The question in this thread concerns billing or charging practices, not cost accounting practices, for what is commonly referred to as “field overhead” or “site overhead” costs.

In my experience with contractors, these costs are generally included/accounted for as a portion of the direct costs of a project. H2H can confirm or correct me. Pardon my layman’s usage of accounting terms. 

Although direct project costs, they are indirect or job site overhead because they are costs that are spread over all the individual itemized work costs.

I don’t think that the problem here concerns accounting for costs.

Sounds as if our OP has received the advice they were looking for. So this post is not aimed at Vel; it's aimed at Joel, since he called me out and invited me to correct him.

Joel, notice the part I bolded in your post (above). You yourself used the word "generally." That word implies exceptions, doesn't it?

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

I've been doing this thing I do for nearly 40 years now, and I will assert that, based on my experience, the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe. Allowable vs. unallowable is an easier call to make.

So, no. I don't know how the costs in question are treated and I don't believe you do either. You can't -- because you are not the contractor.

here_2_help said:

...the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe.

Anyone who reads the ASBCA's Mortenson decision, the ASBCA's reconsideration decision, and the three write-ups of those decisions in The Nash & 'Cibinic Report, one of which  includes remarks from Mortenson's attorney, will confirm the truth of the above quote.

here_2_help said:

Sounds as if our OP has received the advice they were looking for. So this post is not aimed at Vel; it's aimed at Joel, since he called me out and invited me to correct him.

Joel, notice the part I bolded in your post (above). You yourself used the word "generally." That word implies exceptions, doesn't it?

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

I've been doing this thing I do for nearly 40 years now, and I will assert that, based on my experience, the direct vs. indirect decision is more challenging and more nuanced than anybody outside of accounting would believe. Allowable vs. unallowable is an easier call to make.

So, no. I don't know how the costs in question are treated and I don't believe you do either. You can't -- because you are not the contractor.

H2H I don’t disagree that some of the field OH costs might be indirectly accounted for by some contractors. But they were generally itemized under the direct cost of proposals for new contracts that I negotiated over a couple of decades and were definitely itemized as direct costs in REA’s and claims. I wouldn’t negotiate FOH  as a set “rate”  in change orders when some companies would tack a flat percentage on top of all the material, labor, equipment and subcontract costs.  
Additional costs on mods and claims had to be itemized and justified. No contractor ever insisted to me that they were not charged as direct costs. Bechtel, Raytheon Constructors, BE&K, Granite, Peter Keiwit and some others that I had contractual relationships with told  me or showed that they direct charged all site costs in their accounting systems. Off-site support for the project might be charged one way or the other.

When I started out in the 70’s in the Air Force, the standard markups proposed were almost always “15% overhead and 10% profit”. It wasn’t  until I went work for the Corps and learned quite a bit more about cost analysis, technical analysis,  and other proposal preparation and evaluation techniques, schedule delays and impacts, etc. and had the benefit of Corps auditors and DCAA auditors to provide input to developing pre-negotiation objectives that I was able to dig more deeply into the detailed costs. I’m certainly not an accountant but became familiar with contractor estimating systems and where they itemized detailed cost breakdowns, including cost pools for G&A etc. 

For the ten years before I retired, as the chief of Contract Administration Division for the construction phases of the Chemical Demilitarization Program for seven active construction sites, I had project controls personnel working for me who were experts in complex project scheduling, former field engineers on TVA nuclear and fossil fuel plants who supervised contractor construction crews. I had cost analysts and schedulers who sat with some of our contractors in the field on both fixed price and cost reimbursement contracts. We also worked closely with our field office staffs who also negotiated mods and administered the contracts.

here_2_help said:

The fact of the matter is that I do not know whether the costs in question are direct or indirect costs for the contractor. Only the contractor knows. And I believe the FAR is permissive in this area, only requiring that the contractor must be consistent in application after making its decision regarding how the costs are to be treated.

On 12/7/2021 at 12:28 AM, Vel said:

In my agency, contractors that choose to treat these costs as indirect divide the estimated management costs for the contract by the estimated cost of construction for the contract, to develop an indirect rate that my agency calls field office overhead.  These contractors then apply the field office overhead rate to any self-performed work, regardless of whether or not the change requires additional time to complete the contract.

I was intrigued by the OP's statement above and watched intently as the thread unfolded.   We found out FFP competitively awarded.  "(M)y agency" "contractors choose" and "my agency calls" it "field office".   Made me wonder if the OP has not shared a specific solicitation instruction that might possibly evolve into a contract term/condition telling how a contractor is formulate their FFP?   If so it might be very important language to the ensuing question posed by the OP.  For me the nuance in this thread is something might be missing that has not been said and might actually be demanded by the contract.

joel hoffman said:

H2H I don’t disagree that some of the field OH costs might be indirectly accounted for by some contractors. But they were generally itemized under the direct cost of proposals for new contracts that I negotiated over a couple of decades and were definitely itemized as direct costs in REA’s and claims.

There's that pesky word again.

Quote

12-802.4 Indirect Costs – General**

a. General. Indirect costs allocable to direct costs incurred as a result of the delay are allowable when computed in accordance with the contractor's established accounting practices (see 6-600). Any indirect cost (including unabsorbed overhead) that was submitted as direct cost must be excluded from the computation of rates allocable to the delay/suspension proposal or claim. In addition, for purposes of determining overhead rates for flexibly priced contracts, the applicable indirect cost pool should be reduced by the amount of indirect costs charged as direct costs under this delay/disruption proposal or claim. Failure to make these adjustments will result in a duplicate recovery of costs.

b. Construction Job Site/Field Overhead. Job site/field overhead consists of expenses required to support a construction contract that are not identifiable with any specific work or task within the contract. Job site/field overhead includes salaries for project managers, superintendents, guards, mechanics, and engineers; rental or ownership costs for offices, storage trailers, office equipment and supplies; temporary utilities (electricity and water); trucks; and automobiles. Contractors propose or claim recovery of job site/field overhead on change orders that increase work and/or extend the performance period of a contract. When the Pricing of Contract Modifications clause (DFARS 252.243-7001) is contained in the contract, evaluate the costs per FAR 31 cost principles. Evaluate the proposed or claimed job site/field overhead costs to ensure that costs associated with the overall operation of the business (home office overhead) are not included. Job site/field overhead costs are allowable as direct or indirect costs provided the costs are charged in accordance with the contractor’s established accounting system and consistently applied for all contracts (FAR 31.105(d)(3)). In M. A. Mortenson Co., ASBCA Nos. 40750, 40751, 40752, 98-1 BCA ¶29,658, the Senior Deciding Group of the board ruled that FAR 31.203, when applicable, prohibits a contractor from using more than one allocation method for Page 75 of 104 recovery of job site/field overhead. In this case, the contractor used a per diem method (daily field overhead rate) when claiming job site overhead for changes and delays that increased the contract performance period but used a percentage markup method for changes that did not affect contract performance period. The latter approach was rejected since it was a departure from the contractor’s normal per diem method and violated the FAR requirement for a single distribution base for allocating a given overhead pool. In Caddell Construction Co, ASBCA No. 49333, 99-1 BCA, the board found irrelevant a contractor’s assertion that by deducting field overhead received as a percentage markup from the field overhead pool used to calculate the per diem rate, recovery of excess field overhead would be avoided. Despite this assurance, the contractor would have been in violation of FAR 31.203(b) as interpreted in Mortenson

From DCAA Contract Audit Manual (CAM) Chapter 12. (Emphasis added.)

I fear we have conflated a lot of different things in this thread.

The contract is FFP.  Therefore, any notions of direct versus indirect costs are wholly irrelevant to the Government -- they might have been relevant for purposes of agreeing on a reasonable price, but that is over and done with and are irrelevant during contract administration.  These are matters for the contractor's internal bookkeeping.

The Government does not care about FOH rate after award.  Payment to the contractor should be made as directed in the contract clause at FAR 52.232-5.  That clause does not provide for any payment to the contractor based on FOH rates or anything else.  The Government makes payment to the contractor based on percent complete.  Making payments according to cost incurred by the contractor is a violation of the clause [that said, I know some agencies, including the Corps of Engineers, does this -- maybe the Corps as a deviation to the 52.232-5 clause?].

The quote from the above comment ("Job site/field overhead costs are allowable as direct or indirect costs provided the costs are charged in accordance with the contractor’s established accounting system and consistently applied for all contracts") refers to charges in the contractor's internal books, not charges to the Government via invoice for payment -- these are direct or indirect costs in the contractor's bookkeeping, not direct or indirect costs on an invoice in a FFP construction contract.

Now that there is a need for a contract change for defective specifications, there might also be a need for an equitable adjustment.  The contractor might apply a FOH rate in its proposal for a contract price adjustment -- but the parties need to come to agreement on the bottom-line price adjustment for the modification -- they do not need to agree on any element of cost.  See FAR 31.102.

joel hoffman said:

DFARS Clauses 252.243-7000 “Supplemental Cost Principles”, 252.243-7001 “Pricing of contract modifications” and 252.243-7002 “Requests for equitable adjustment” are prescribed at 231.100-70,  243.205-70 and 243.205-71, respectively.

Joel, DFARS 252.243-7000 is reserved.  I don't see any reference to the cost principles in 252.243-7002.  However, 252.243-7001 does seem to incorporate FAR 31.1.

Retreadfed said:

Joel, DFARS 252.243-7000 is reserved.  I don't see any reference to the cost principles in 252.243-7002.  However, 252.243-7001 does seem to incorporate FAR 31.1.

Retreadfed, I should have said DFARS clause 252.231-7000 not 252.243-7000. Sorry!  I found it  from the link at the prescription in DFARS 231-100.70.

252.231-7000  are supplemental cost principles, stating: “When the allowability of costs under this contract is determined in accordance with Part 31 of the Federal Acquisition Regulation (FAR), allowability shall also be determined in accordance with Part 231 of the Defense FAR Supplement, in effect on the date of this contract.”

252.243-7001 incorporates the FAR cost principles and procedures in FAR Part 31 and DFARS Part 231. 

253.243-7002 concerns Requests for Equitable Adjustments and doesn’t address your specific question.

Vel said:

I wanted to say thanks to those who provided their input.  The info that Vern provided regarding M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623 and the link he provided that led to a discussion of Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/) were helpful in formulating my planned approach.  Perhaps, once the issue is resolved, I'll post the results in the "what happened" forum.

Vel seems to have gotten the information he wanted.

What topic is now under discussion? What question is being answered? What confusion is being eliminated?

On 12/8/2021 at 11:49 AM, here_2_help said:

From DCAA Contract Audit Manual (CAM) Chapter 12. (Emphasis added.)

H2H, I do understand what it says. But regardless of where it is accounted for, the use of a flat percentage for job site overhead , calculated by dividing all estimated or actual FOH costs by all estimated construction costs when no time extension is involved is improper in my opinion.

Such a flat rate doesn’t reflect the specific FOH cost impacts of such a change/mod. For example the percentage would be based upon all fixed (time related) and all one time costs, that were estimated or incurred for the job. The former bears little relevance to a  non-time extension mod and the latter is irrelevant to any mod.

EDIT ADD explanation: “Field overhead” and its costs are commonly referred to as “overhead”  because - with some possible exceptions - the management, supervision, admin, field engineering, subcontract management, scheduling, project controls, temporary facilities on the job site, plus some other activities (e.g.,material storage, guards, fences, temporary construction road construction, maintenance, dust control, safety and health, tool issue and control, site vehicles, etc. are not associated with individual work breakdown structure construction activities. Some projects have huge on-site staffs while others have small staffs with off-site support hired for a project or part of the off-site office for numerous contracts. These costs are spread over the CLIN or  CLINs and WBS activities under the CLIN(s).

Fab shops might be charged to specific activities or spread.

In my experience through the CAB processes, they have  been direct charged to the contract. The project manager(s) and/or top site supervision have generally been accountable for execution and controlling their budget for the contract.

Offsite project managers and other support such as estimating and proposal prep, legal, admin, payroll, benefits, purchasing, etc. might be direct charged to the project or part of some overhead pool (e.g., G&A, Division, etc.) 

Thus most field office “overhead” are likely be direct costs to the company’s project. They are composed of one time, fixed (time related), variable (direct correlation with dollar or amount of work) or semi-variable (both fixed and variable components).

Of course, for small construction projects, contract administration and support may well be handled at a home office and direct or indirectly charged to the contract. I agree that that happens.

ji20874 said:

The contract is FFP.  Therefore, any notions of direct versus indirect costs are wholly irrelevant to the Government -- they might have been relevant for purposes of agreeing on a reasonable price, but that is over and done with and are irrelevant during contract administration.  These are matters for the contractor's internal bookkeeping.

@ji20874Have you read the Mortenson decision mentioned and cited above? The contract in that case was fixed-price, and "notions" of direct versus indirect costs were relevant in that case. I think you're wrong to say that the distinction between direct and indirect costs is wholly irrelevant to the Government.

Quote

The issue in these three appeals is the same and concerns the calculation of field office overhead in change orders that do not increase the time of contract performance. Appellant contends that once the direct costs of the changed work are determined, the field office overhead is automatically calculated by multiplying the direct costs of the change by a predetermined percentage. The Government, on the other hand, contends that costs of field overhead such as salaried positions, rent, housing allowance and the like which are fixed do not incur additional costs on change orders that do not extend contract performance and, therefore, should not be included in the field office overhead.

The court quoted a well-known passage from Cibinic and Nash:

Quote

Professors Cibinic and Nash have recognized the problem of the treatment of fixed costs in overhead:

The normal cost allocability rules will determine the method of computing the overhead rate and the types and amounts of costs included in the overhead. However, one problem associated with overhead in price adjustments is the treatment of fixed costs in overhead. Since such costs by definition do not vary with changes in the volume of work, they will be neither increased nor decreased by a change that can be accomplished with the same facilities and within the same time period as the initial contract work. Thus, should an allocation for such fixed costs be included in the adjustment, the amount would not be for costs, since such expenditures would be neither increased nor decreased by the adjustment. This problem has not been resolved through litigation. John Cibinic, Jr. & Ralph C. Nash, Jr., Administration of Government Contracts at 749 (3d ed. 1995).

The court ruled that the fixed cost component of the field office indirect costs could not be included in the price adjustment.

Quote

Since change orders/modifications are reimbursed on the basis of an increase in cost, it follows that there must be some showing that an increase in cost has actually occurred. If fixed costs in a contractor's overhead have not increased because of a change order/modification, the contractor is not entitled to include the fixed costs in its overhead rate.

I think your statement, which I quoted above, is wrong. I think that in the settlement of adjustments to FFP contracts the distinction between direct and indirect costs can be highly relevant.

 If you think I am wrong, or that I misunderstood you, or that I took you out of context, please straighten me out.

On 12/8/2021 at 1:01 PM, ji20874 said:

Making payments according to cost incurred by the contractor is a violation of the clause [that said, I know some agencies, including the Corps of Engineers, does this -- maybe the Corps as a deviation to the 52.232-5 clause?].

Not sure what you mean here, ji. The clause provides for reimbursement of the amount paid for bonds and for documented cost of stored materials, both of which aren’t counted as “progress”. We don’t need to re-debate the methodologies here in this thread. 

Otherwise I tend to agree with much of what you said in your post, including the above quote:

“Since change orders/modifications are reimbursed on the basis of an increase in cost, it follows that there must be some showing that an increase in cost has actually occurred. If fixed costs in a contractor's overhead have not increased because of a change order/modification, the contractor is not entitled to include the fixed costs in its overhead rate.”

You can read the Caddell Construction Appeals referenced earlier where the GAO apparently agreed that the contractor was paid for non-incurred fixed costs. Caddell even offered to deduct those payments from its per diem claim. Then the GAO referenced the Senior Panel decision which has confused the whole matter.

Vern, I don’t think that Vels’ organization and contractors’ methodology is consistent with the Mortensen Decision, based upon how he described the calculation.

My gripe is with the calculation of a fixed formula that would include fixed costs as well as one time costs. In addition, it seems to assume all variable costs are affected .

Deleted

joel hoffman said:

Vern, I don’t think that Vels’ organization and contractors’ methodology is consistent with the Mortensen Decision, based upon how he described the calculation.

Joel, I don't know the details of the methodology, and I don't see any point in speculating or inquiring further. Vel came with a question and has since said that he got helpful information. If anyone else has helpful information they should offer it. Otherwise, I don't see much that is useful to anyone in what is being said, and I see a lot that seems confused and confusing.

Vern Edwards said:

@ji20874Have you read the Mortenson decision mentioned and cited above? The contract in that case was fixed-price, and "notions" of direct versus indirect costs were relevant in that case. I think you're wrong to say that the distinction between direct and indirect costs is wholly irrelevant to the Government.

The court quoted a well-known passage from Cibinic and Nash:

The court ruled that the fixed cost component of the field office indirect costs could not be included in the price adjustment.

I think your statement, which I quoted above, is wrong. I think that in the settlement of adjustments to FFP contracts the distinction between direct and indirect costs can be highly relevant.

 If you think I am wrong, or that I misunderstood you, or that I took you out of context, please straighten me out.

Why did you have to bring facts into this?

Hmm, seems like Velhammer brought up a similar topic in 2020.

joel hoffman said:

Hmm, seems like Velhammer brought up a similar topic in 2020.

Not the same question.

Just now, Vern Edwards said:

Not the same question.

No it wasn’t but it evolved to the same question with the same answer as here.

@joel hoffmanHere is the question that started this thread:

On 12/7/2021 at 12:28 AM, Vel said:

My question is whether the required consistency specified by FAR 31.105(d)(3) also applies to Government delay. I am thinking I should have the contractor follow their established practice of billing the field office overhead for the changed work as indirect, and submit a separate REA for the Government delay, and allow those costs to be treated as direct (actuals).

Here is the question from 10 years ago:

Quote

My question is: Does the prime contractor's established practice of treating field overhead costs as indirect costs preclude the subcontractors (that treat field overhead costs as direct) from recovering extended overhead costs as a result of Government delay.

What kind of evolution do you see there? 

The two questions are entirely different.

Sometimes, I wonder.

This thread has probably sown more misinformation and confusion than enlightenment. And all due to pointless back and forth among old-timers.

Vern Edwards said:

@joel hoffmanHere is the question that started this thread:

Here is the question from 10 years ago:

What kind of evolution do you see there? 

The two questions are entirely different.

Sometimes, I wonder.

If you read the discussion, after answering the question, we discussed the requirement for consistency of the prime contractor’s approach for field overhead on mods with or without time extensions, Mortensen, Caddell, etc. We also had a private discussion but that is no longer available. What caught my attention was the name of the questioners “Velhammer” then and “Vel” now.

Vern, you seemed to think that the question here involved unabsorbed home office overhead which had No relevance at all to questions concerning field office overhead. Just because there is “delay” on part of a job which extends the performance time doesn’t mean that there is unabsorbed overhead.

joel hoffman said:

Vern, you seemed to think that the question here involved unabsorbed home office overhead which had No relevance at all to questions concerning field office overhead. Just because there is “delay” on part of a job which extends the performance time doesn’t mean that there is unabsorbed overhead.

Yes, I originally thought that Vel was referring to home office overhead, but he sorted me out. As for unabsorbed overhead and delay, I don't think I've mentioned unabsorbed overhead in this thread. Why are you talking to me about it? I think I understand it. So please spare me an educational story about your long ago experiences with the Corps of Engineers. Instead, why not write an article about the topic for Wifcon? Share what you think you know.

On 12/7/2021 at 7:28 AM, Vern Edwards said:

I think (I'm not sure) that the problem you are asking about is the problem of unabsorbed overhead in connection with a delay. If so, see if you can find a copy of Administration of Government Contracts, 5th ed., by Cibinic, Nagle, and Nash, and read the discussion of "unabsorbed overhead" in pages 647-53.

Also, if you have access to The Nash & Cibinic Report via Westlaw, the authors have written several articles about how to handle fixed field office overhead costs when pricing equitable adjustments.

Other resources include:

GOVERNMENT CONTRACTING AND TREATING EXTENDED FIELD OVERHEAD AS A DIRECT OR INDIRECT COST, https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/

Extended field overhead/delay, http://www.delaydamages.com/delay-damages/extended-field-overhead/

Recovery of Unabsorbed Overhead, http://kendall-dinielliconsulting.com/services/unabsorbed-overhead-eichleay-formula#:~:text=When the government%2C by direction,contract but for the delay.

Unaborbed Home Office Overhead, http://www.delaydamages.com/delay-damages/unabsorbed-home-office-overhead/

Project time extensions and the relational impact on unabsorbed home office overhead, https://www.hka.com/project-time-extensions-and-the-relational-impact-on-unabsorbed-home-office-overhead/

Calculation and recovery of home office overhead, https://www.pmi.org/learning/library/calculation-recovery-home-office-overhead-8913

Understanding unabsorbed home office overhead, https://www.ctconstructionlaw.com/understanding-unabsorbed-home-office-overhead/

Yes, I posted that when that's what I thought he might be asking about. Note that I said that I wasn't sure. Then he posted this:

Quote

Good morning Vern and thanks for the feedback.  I'm in a forward deployed scenario, so I don't have my copy of Administration of Government Contracts with me.  But if that section discusses the Eichleay formula, this case is not about unabsorbed home office overhead.  These are cost that have only one single cost objective, which is the contract in question.

And then he and I communicated privately, I provided him with some information about the Mortenson decision and commentary about it, and he eventually said that the information I provided helped him and bid us goodbye.

Quote

I wanted to say thanks to those who provided their input.  The info that Vern provided regarding M.A. Mortenson Co., ASBCA 40750, 97-1 BCA ¶ 28623 and the link he provided that led to a discussion of Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (https://www.floridaconstructionlegalupdates.com/government-contracting-and-treating-extended-field-overhead-as-a-direct-or-indirect-cost/) were helpful in formulating my planned approach.  Perhaps, once the issue is resolved, I'll post the results in the "what happened" forum.

Going back to the beginning of the thread and quoting my first response to Vel is childish, especially in light of what came after.

You have no reason to be talking to me about unabsorbed overhead. You're just trying to be relevant.

Goodbye.

Vern Edwards said:

I don't think I've mentioned unabsorbed overhead in this thread. Why are you talking to me about it?

I merely answered your above question to me.

As for an article, I already wrote two contract admin manuals with policy and procedures in the early and later 1990’s. I don’t have access to them any more and don’t have a desire or time to re-do it here.

Some of the coverage  included cost and price analysis for field overhead including characterization of costs as fixed, one-time, variable and semi-variable; home office G&A and branch office overheads including the bases and the overhead pools, allowable costs, etc.; unabsorbed overhead and the prerequisites, etc. (prior to the excellent coverage in 3rd Edition of Admin. of Govt. Contracts) ; special coverage of adjustments to G&A and direct costs for contractor owned equipment ownership, maintenance repairs, mechanics, M&R shops, etc.

I also taught cost analysis classes in the early 90’s.

Goodbye.