INQUIRY: I am in Construction. My contracts are typically fixed price.  Why am I being asked to breakdown my price into things like indirect and direct costs and why am I asked how I determine my indirect rates and why am I asked about my accounting system and how I handle unallowable costs?

 

RESPONSE: Good question. The short answer is that the FAR specifically states that Subpart 31.2 (which includes 31.205) shall be used if cost analysis is performed for contracts and contract modifications that are negotiated on the basis of costs (this includes construction).  Going a bit deeper…

FAR Part 31.105 specifically identifies Construction and Architect-Engineer contracts as applicable with stated exceptions.  Let me cover some of the high points of this.

The FAR clause states that when cost analysis is required by FAR 15.404-1(c) then FAR Part 31.2 can be applied.  To review this clause in detail see Reference 1 at the end of this article.  Generally, the bid or solicitation documents should identify this.  If not clearly identified, the clause may be listed under the “clauses incorporated by references”.

Except as otherwise provided in (d) of FAR 31.105, the cost principles and procedures in Subpart 31.2 (which includes 31.205) will be used to determine allowability and reasonableness of costs.

FAR 31.105 (d) outlines the additional cost principles and procedures that apply to construction and A&E firms over and above, or in place of similar cost principles under 31.2.

In addition, the following 5 situations, even in construction, give rise to the contracting officer incorporating the cost principles and procedures in Subpart 31.2 (modified by FAR 31.105 (d)):

  1. Determining reimbursable costs under Cost-reimbursement contracts, including cost-reimbursement subcontracts there under;
  2. Negotiating indirect cost rates (which may be your case);
  3. Proposing, negotiating, or determining costs under terminated contracts;
  4. Price revision of fixed-price incentive contracts; and
  5. Pricing changes and other contract modifications.

 

FAR 31.105 (d) spells out details just for construction firms pertaining to costs and situations unique to the industry.  I feel that all construction and A&E firms should review this subpart.  It is not that long and it can be very useful in determining a fair and reasonable price.  It shows areas of cost and related issues that can be to the contractors’ advantage with knowledge of them.  Follow this link directly to the FAR Part 31.105.

Summary: With the environment of the government negotiating based on costs with the construction industry, it behooves construction and A&E firms to become familiar with not only FAR 31.105 (d) but also FAR 31.2.   This is the training and tools we have made available to provide a strong foundation and understanding geared to the small contractor (and especially for those who are not comfortable with numbers).  Don’t be overwhelmed.  Become informed and trained. 

Reference 

FAR 14.404-1(c)

c) Cost analysis.

         (1) Cost analysis is the review and evaluation of the separate cost elements and profit in an offeror’s or contractor’s proposal (including cost or pricing data or information other than cost or pricing data), and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.

          (2) The Government may use various cost analysis techniques and procedures to ensure a fair and reasonable price, given the circumstances of the acquisition. Such techniques and procedures include the following:

               (i) Verification of cost or pricing data and evaluation of cost elements, including—

                  (A) The necessity for, and reasonableness of, proposed costs, including allowances for contingencies;

                  (B) Projection of the offeror’s cost trends, on the basis of current and historical cost or pricing data;

                  (C) Reasonableness of estimates generated by appropriately calibrated and validated parametric models or cost-estimating relationships; and

                  (D) The application of audited or negotiated indirect cost rates, labor rates, and cost of money or other factors.

                      (ii) Evaluating the effect of the offeror’s current practices on future costs. In conducting this evaluation, the contracting officer shall ensure that the effects of inefficient or uneconomical past practices are not projected into the future. In pricing production of recently developed complex equipment, the contracting officer should perform a trend analysis of basic labor and materials, even in periods of relative price stability.

                      (iii) Comparison of costs proposed by the offeror for individual cost elements with—

                           (A) Actual costs previously incurred by the same offeror;

                           (B) Previous cost estimates from the offeror or from other offerors for the same or similar items;

                           (C) Other cost estimates received in response to the Government’s request;

                           (D) Independent Government cost estimates by technical personnel; and

                           (E) Forecasts of planned expenditures.

                      (iv) Verification that the offeror’s cost submissions are in accordance with the contract cost principles and procedures in Part 31 and, when applicable, the requirements and procedures in 48 CFR Chapter 99 (Appendix to the FAR looseleaf edition), Cost Accounting Standards.

                       (v) Review to determine whether any cost or pricing data necessary to make the contractor’s proposal accurate, complete, and current have not been either submitted or identified in writing by the contractor. If there are such data, the contracting officer shall attempt to obtain them and negotiate, using them or making satisfactory allowance for the incomplete data.

(vi) Analysis of the results of any make-or-buy program reviews, in evaluating subcontract costs (see 15.407-2).