Inquiry: Can you charge the government for a contingent fee or commission to be paid to a firm for bringing in new business?

This is a valid question. Especially for those of us small businesses who find it hard to find the time to market for ourselves and does not have the cash flow capability to carry an employee dedicated to new business development or high retainers for consultants.

Many of us have or will face this at one time. Marketing is one of the key critical elements of the business.

Well, the answer is, it depends. The following represents my review of and expresses my opinion on the allowability and application of contingent fees or commissions as they relate to New Business Development? Direct Selling Expenses in one situation. This is based on actual experience. The parties involved are referred to as ESTABLISHED SELLING AGENCY and Contractor.

Allowability: In my opinion, according to FAR Subpart 3.4, contingent fees and commissions are allowable according to the activities performed by ESTABLISHED SELLING AGENCY on behalf of Contractor. My opinion is based on the following:

Statutory Requirements: Under FAR 3.402, Congress permitted certain exceptions to the disallowance of contingent fees as follows: FAR 3.402(b) these statues permit an exception for contingent fee arrangements between contractors and bona fide agencies.

ESTABLISHED SELLING AGENCY qualifies as a Bona fide agency as defined under FAR 3.401 as follows: Bona fide agency means (1) an established commercial or selling agency (ESTABLISHED SELLING AGENCY), maintained by a contractor (Contractor) (2) for the purpose of securing business, (3) that neither exerts nor proposes to exert improper influence to solicit or obtain Government contracts nor holds itself out as being able to obtain any Government contract or contracts through improper influence.

ESTABLISHED SELLING AGENCY meets all 3 requirements of a Bona fide agency and therefore should be able to charge contingent and/or commissions to obtain government business. And it appears Contractor meets the Contractor requirements in its agreement with ESTABLISHED SELLING AGENCY.

FAR 31 Cost Principles on Allowability:

FAR Par 31.205-38 Selling Costs Under this FAR cost principle Direct Selling costs is one of 5 broad selling categories. Under subsection 31.205-38 (b)(5), Direct selling efforts are described as those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such efforts as familiarizing a potential customer with the contractors products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting efforts, individual demonstrations, and any other efforts having as their purpose the application or adaptation of the contractors products or services for a particular customers use. It goes on to state that The cost of direct selling efforts is allowable. But please always remember the reasonableness principle.

Under subsection 31.205-38 (c) of the same clause it states as follows: Notwithstanding any other provision of this subsection, sellers or agents compensation, fees, commissions, percentages, retainer or brokerage fees, whether or not contingent upon the award of contracts, are allowable only when paid to bona fide employees or established commercial or selling agencies (ESTABLISHED SELLING AGENCY) maintained by the contractor (Contractor) for the purpose of securing business. In my opinion based on the above guidance, ESTABLISHED SELLING AGENCY and Contractors relationship adheres to the requirements needed for allowability and therefore the contingent fees and/or commissions and retainer fees are chargeable to the government, Providing They Are Reasonable.

DCAA guidance on issue:

According to the Defense Contract Audit Manual DCAM 7-1304.2 (a) Selling agents fees and commissions will usually be charged direct to contracts since, in most cases, independent agents are used and paid for individual sales transactions. However, where an agent is paid a retainer, fees may be charged indirectly. Where fixed retainer fees are paid to agents representing the contractor in specific geographical areas, they should normally be allocated to all applicable sales in these areas. In my opinion, this substantiates that the DCAA recognizes these costs as legitimate and allowable as long as they are in compliance with FAR 3.4. It is important to understand that the reasonableness of the cost and a review of how these costs were handled historically be looked at.

Summary:

In conclusion, the contingent fees and retainers are allowable based on the information provided me to date. I see no reason why Contractor should not include the cost in their proposal and invoicing to their prime contractor. Let me make it clear that there are other issues which should be looked at, including (1) How Contractor originally accounted for this cost in the proposal, (2) How Contractors accounting system handles this charge for recording and billing (both current and historically if applicable), and (3) How the agreement between Contractor and ESTABLISHED SELLING AGENCY reads as well as the original contract between Contractor and Related Prime Contractor on these costs.

Notwithstanding this, the costs should be allowable.

Understanding this, I would prepare all supporting information for this proposed cost based on the guidance provided above and submit to the Prime Contractor, Contracting Officer or Auditor for advance review, negotiation and approval.

Disclaimer:

The results of this review express my opinion and interpretation of the FAR and related guidance based on training, experience and information available at the time. It does not represent the view or interpretation of the government.

Paul L. Gunn, Sr.