Applying G&A on Subcontract Cost under T&M Effort - Beware of the Fine Print!
This question is related to a specific solicitation that says fee cannot be added to subcontract (subcontract) costs by the Prime. The solicitation also called out FAR 52-232-7 for pricing this T&M effort. Any subcontract costs we incur will be a part of our G&A base (part of our prior conversations) so my question would be is there anything in FAR 52-232-7 that precludes us from adding G&A on top of these subcontract costs?
Let me answer in the Affirmative Tense: The simple answer is Generally Yes; you can add G&A to subcontract costs. FAR 52.232-7 clearly lists Subcontracts under Materials and allows for adding Indirect costs to these.
However, (there's that word that keeps me on my toes!) your inquiry is much more in-depth than first meets the eye, and it should be. So let’s look beyond the obvious.
One must review the entire FAR clause to understand the limitations and applications of this. (As you review my response, you can reference the FAR clause statements I included below.)
The important guidance I see is in the Definition of Materials, Hourly Rates, and Subcontracts. The clause states that the hourly rate includes those efforts performed by subcontractors the meet contract labor category qualifications! So, if you have subcontractors performing under contract labor categories, then, in my opinion, these Are Not subcontracts under the definition for Materials. But if you look closely, the clause clearly states that hourly rates include All costs, including G&A.
Therefore, if your policy is to include Subcontracts in your Base for G&A, then you should have no issue with adding G&A to your Subcontractors Hourly Rates, before you present them to the government for consideration. This would result in a Fully Burdened Rate for subcontractors that include your G&A. This is reasonable due to the administrative effort required by Prime contracts to oversee and administer subcontractors.
Let me give you some even deeper insight that few think about. When you add G&A to Subcontractor Hourly Rates, to be most accurate and meet the restrictions in other parts of the clause, the G&A should only be applied to Subcontract Fully Burdened Cost Hourly Rate, NOT Fully Burdened Hourly Rate that includes their fee/profit. Why? If you add G&A on top of subcontractor hourly rate that includes fee/profit, you are in fact charging Fee on top of Subcontract Fee! Check it out for yourself. The numbers don’t lie, and even many auditors don’t pick this up.
There are other issues that must be dealt with relating to this issue for the prime and subcontractor because confidentiality precludes many from revealing the breakdown of their fully burdened rates. In these cases, what I would do is ask the subcontractor for a range of fee percentages that might be included. With this information, or if they say no, I would then calculate (and document) and establish a target fee and use this fee percentage to back out of their fully burdened rates prior to adding G&A.
Alternatively, if this appeared to be an ongoing issue with my local DCAA/DCMA and/or Customers, I would move to change the Base I used for G&A to Exclude any Subcontractor effort that would be related to Hourly Rates. That would increase the G&A rate added to all other costs and you would still recover your costs. Of course, then you would have to deal with the psychological impact of a higher G&A rate.
Decisions, decisions, decisions! Just smile about it…. It is what it is. The challenge is how to Minimize, not eliminate, the impact and administrative effort.
You will also notice that the definition for Materials in this FAR clause narrows the description of what is considered Materials and Subcontracts for applying Indirect Costs. It clearly excludes any effort that is based on hourly rates for labor categories identified in the contract! Interesting but clear. All other Materials, as described in the definition, can have Indirect Costs added If the cost is within the guidelines outlined.
Is that a mindful or what? That’s right! The government expects the small and very small contractor to know all these little nuances and variables! So do the best you can, and document your policies to minimize fines, penalties, and interest. That’s why I developed the Policy Manual Template that so many have found very valuable in their efforts to document financial and contract cost and pricing policies.
For your convenience, I have presented below, selected excerpts of FAR 52.232-7 that support my above explanations. However, please look at the entire clause yourself, with the mindset I have provided as a guide. Don’t over analyze. Just review and use reasonable judgment in formulating your opinion(s).
Hope this helps! Paul Sr.
(a) Hourly rate.
(1) Hourly rate means the rate(s) prescribed in the contract for 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 affiliates of the Contractor under a common control.
(2) The amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed.
(3) The hourly rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. Labor hours incurred to perform tasks for which labor qualifications were specified in the contract will not be paid to the extent the work is performed by employees that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer.
(4) The hourly rates shall include wages, indirect costs, general and administrative expense, and profit. Fractional parts of an hour shall be payable on a prorated basis.
(1) For the purposes of this clause—
(i) Direct materials means those materials that enter directly into the end product, or that are used or consumed directly in connection with the furnishing of the end product or service.
(ii) Materials means—
(A) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of the Contractor under a common control;
(B) Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract;
(C) Other direct costs (e.g., incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.); and
(D) Applicable indirect costs.
(5) The Contractor may include allocable indirect costs and other direct costs to the extent they are—
(i) Comprised only of costs that are clearly excluded from the hourly rate;
(ii) Allocated in accordance with the Contractor's written or established accounting practices; and
(iii) Indirect costs are not applied to subcontracts that are paid at the hourly rates.