I know this has been discussed before (http://www.wifcon.com/arc/forum318.htm) but I didn't see an answer to my question.

It appears to me that under T&M contracts:

(a) profit on labor is acceptable, and
(b) profit on materials is not acceptable (as evidenced by no mention of profit in FAR 16.601 with respect to material costs).

Assuming I'm correct on these, what about:

(c) profit on ODC?
(d) profit on Travel expenses (it appears to me that people disagree on whether travel expenses are considered ODC)?

References to the FAR or other authorities would be peachy.

Any help would be greatly appreciated.

Best regards,

P

I think it has been considered a controversial item in the past...which merits discussions.

FAR 16.601 defines what is included in Materials and specifically lists ODC's and Travel.

We must prevent a "Cost-Plus-Percentage of Cost" situation. If the "M" part is paid at cost, then that would be a consideration for profit on any ODC's and Travel.

Is the profit on materials exclusion only for non-commercial T&M contracts?

This first of this year the Time and Material provisions were re-written and I think the new language now directly answers these questions. It also subject the material portion to the Allowable Cost and Payments clause which addresses the CPPC question.

16.601 Time-and-materials contracts. …
(a) Definitions for the purposes of Time-and-Materials Contracts. …
“Materials” means—
(1) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of the contractor under a common control;
(2) Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract;
(3) 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
(4) Applicable indirect costs.


52.232-7 Payments under Time-and-Materials and Labor-Hour Contracts.
As prescribed in 32.111(a)(7), insert the following clause:
PAYMENTS UNDER TIME-AND-MATERIALS AND LABOR-HOUR CONTRACTS (FEB 2007)
…. (4) Payment for materials is subject to the Allowable Cost and Payment clause of this contract. The Contracting Officer will determine allowable costs of materials in accordance with Subpart 31.2 of the Federal Acquisition Regulation (FAR) in effect on the date of this contract.

…. (7) Except as provided for in 31.205-26(e) and (f), the Government will not pay profit or fee to the prime Contractor on materials.

Thank you everyone, especially g. This was very much appreciated! Happy Holidays y'all...

Is your contract governed by the Part 12 standard clauses, i.e., "commercial"? If so you should look at 52.212-4 Alt 1(i), which covers the new rules for payment on commercial T&M, instead of 52.232-7.

There are separate rules for commercial contracts because they aren't subject to the cost accounting standards, unlike noncommercial contracts.

You probably still wouldn't get profit on travel, (which is specified to be an ODC), unless you happen to supply travel commercially and have an established catalog or market price for it.

But you should check out those rules anyway, as they provide, for example, that you can't bill the travel unless travel is specifically listed as an ODC in your contract.

Happy hols to you too.

P, the definition of a T&M contract is one in which labor is billed in loaded and fixed hourly rates which include actual labor direct cost, any indirects and profit. In addition, contractors are reimbursed AT cost for anything other than labor, plus, in some cases, a small material handling fee (basically another indirect rate-usually 1-3% or so). You cannot have a seperate amount of fee. Please read all of FAR 16.601.

I have see T&M + award fee contracts-but I think what are you asking about is can you basically have T&M with a fixed fee based on the ODC's, and the answer is no. All the profit is loaded into the labor rates.

Ci:

You said: "All the profit is loaded into the labor rates."

That's wrong.

I thought that was the case-are you saying you actually can assess fee elsewhere on a T&M?

I think ci meant to say "hourly rate" (not "labor rate).

But never say "never"...I have actually seen two separate solicitations using a "modified" T&M type arrangment where fee is not included in the hourly rate but is a separate item - and could be a fixed fee, an award fee or some other form. For whatever reason, people seem to be trying to avoid cost contracts, avoid indirect rate issues/management and, call me skeptical or a pessimist - but are also calling the T&M's "performance based", "fixed price" or both.....

Used to be if it waddled and quacked it was a duck - now, it can be called a performance based, fixed price, mission support, strategic sourcing, incentive contract...If OFPP wants blocks checked, they will get checked....

Raise the PBA goal from 45% to 50% (OFPP's latest December 5, 2007 memo) - just means more blocks will get checked. Obviously they didn't listen to the Acquisition Advisory Panel

It would not have made any difference if civ1102 had said labor rate instead of hourly rate. The answer would still have been wrong.

Read the two clauses: they expressly permit the inclusion of profit in materials charges under specified conditions.

52.232-7(b)(7)- "Except as provided for in 31.205-26(e) and (f), the Government will not pay profit or fee to the prime Contractor on materials."

31.205-26(e) and (f) - "(e) Allowance for all materials, supplies and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart. However, allowance may be at price when—
(1) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate of the contractor under a common control; and
(2) The item being transferred qualifies for an exception under 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.
(f) When a commercial item under paragraph (e) of this subsection is transferred at a price based on a catalog or market price, the contractor..."

I don't read the above as expressly permitting the inclusion of "profit" on material charges, but merely allowing material payments to be made at a "catalog or market price", under very narrow circumstances.

While one may normally assume that a catalog or market price would contain some element of "mark-up (profit)" for the seller above the seller's costs, there is no negotiation of, or allowance for, a separate "profit" on material - simply permission to make a material transfer at a pre-established "price", under the very narrow exceptions cited.

t:

WHAT?

When the rules permit allowance for materials "at price" they expressly permit profit. That's Contracting 101. See the definition of price at FAR 15.401. Whether or not a particular price is sufficient to actually yield a profit is a different matter and irrelevant to the question at hand. There is absolutely no need to separately discuss cost and price when negotiating profit unless cost or pricing data are required.

Criminy!

I said "There is absolutely no need to separately discuss cost and price when negotiating profit unless cost or pricing data are required." I meant to say: There is absolutely no need to separately discuss cost and profit when negotiating price unless cost or pricing data are required.

V
I did read 15.401 before posting....it reads, "15.401 “Price” means cost plus any fee or profit applicable to the contract type."

There is no "negotiation" when accepting a catalog or market price - it is what it is......Whether it contains "profit" or not is immaterial to the transaction. The "catalog or market price" could be established by a philanthropist giving away his/her family fortune and is "priced" at less than cost......Who knows (or cares)???

The authority granted by the exceptions is only to pay the "catalog or market price" (whatever it represents) not to pay a "profit", i.e., the cost of the material "plus any fee or profit" desired. All we know is that a pre-existing "price" exists for the material and are authorized to pay that amount - "profit" included or not. So I cannot agree there is an "express" authority to pay profit on materials, only an authority to pay a "catalog or market price" under limited exceptions.

T,

peterb said: "It appears to me that under T&M contracts: (a) profit on labor is acceptable, and (b) profit on materials is not acceptable (as evidenced by no mention of profit in FAR 16.601 with respect to material costs)."

That's wrong. A contractor can get profit on materials under a T&M contract, as expressly provided by the T&M payment clauses, which provide for payment of materials "at price" under specified circumstances. "At price" may include profit. There is no absolute prohibition against profit on materials under a T&M contract. The matter is not debatable. I don't care whether you agree or not.

As for there being "no 'negotiation' when accepting a catalog or market price" -- what on earth are you talking about? Of course there can be negotiation when a contractor proposes a catalog or market price. Only an idiot would pay a catalog or market price under a government contract without first trying to bargain it down.

V
We can disagree. But the provision is to pay a "price" on materials under the limited exceptions - not pay a cost plus a "profit". The price may contain a profit or not - but it is simply a "price".

The obligation of the CO per 15.402(a) is to "(a) Purchase supplies and services from responsible sources at fair and reasonable prices." If a catalog or market price can be determined reasonable there is no basis or justification to "negotiate". However, per 15.402(a)(2) the CO may seek "(2) Information other than cost or pricing data: i) Information related to prices (e.g., established catalog or market prices or previous contract prices), relying first on information available within the Government; second, on information obtained from sources other than the offeror; and, if necessary, on information obtained from the offeror. When obtaining information from the offeror is necessary, unless an exception under 15.403-1(b)(1) or (2) applies, such information submitted by the offeror shall include, at a minimum, appropriate information on the prices at which the same or similar items have been sold previously, adequate for evaluating the reasonableness of the price." And then absent any other course of action, "(ii) Cost information, that does not meet the definition of cost or pricing data at 2.101." With cost or pricing data being the last resort.

Now this raises an interesting question... If faced with having to request "other than cost or pricing data" or cost and pricing date as a last resort, to determine "reasonableness" and we begin to negotiate the "price" , are we now outside the limited exceptions authorized for T&M contracts on paying profit on materials? We are in fact no longer paying "a price based on a catalog or market price" or relying on the practice of pricing "interorganizational transfers at other than cost". In fact we are now negotiating "cost" and "profit" - and profit is not allowable unless we are proceeding under one of the limited exceptions.

I will also disagree that only an idiot would pay a catalog or market price without first trying to bargain it down. The objective of price negotiation, per 15.405(b) is "... to achieve a total result—a price that is fair and reasonable to both the Government and the contractor." If the catalog or market price is fair and reasonable on its face (using whatever price analysis techniques you determine appropriate), with consideration for the quantities involved, then attempting to negotiate the price downward is simply 'bullying' - and not in consonance with the Government's policy of paying "fair and reasonable prices".

T,

I have noticed in this thread and others that you interpret the “fair and reasonable” standard so as to limit the ability of the contracting officer to obtain price reductions. Above, you use the term “bullying”.

Perhaps that was a good approach in the days of the Government marketplace when we were buying based on Government specs from contractors selling goods and services only to Government sources using cost based proposals audited by DCAA.

In the commercial marketplace, the relationship between cost and price is much weaker than in the government marketplace. I do not believe that Ford, Dell, Frito Lay or COMCAST arrive at a sell price based upon a rational buildup up of costs and an application of a weighted guidelines driven profit percentage. A fair and reasonable price is whatever the buyer and seller agree upon regardless of the price posted in a catalog. A seller can agree to reduce prices because of the demand of a potential buyer, the behavior of competitors, or the seller’s economic circumstances extant when a negotiation is taking place. Sometimes sellers will cut prices to the point that they are recovering only their fixed or even marginal costs.

Look at the behavior of retailers in the holiday market. Everyday, I receive hard and soft copies of catalogs and e-mail notices offering substantial reductions from published price lists. Why should I not try to obtain these Christmas discounts in July? Why should I not do the same for the Government?

I believe that it is the seller’s job to sell, and it is the contracting officer’s job to buy. Hard negotiation is the right and obligation of both. That is why it is called a free market.

n,

I know t can speak for himself, but I think you totally misread his position. I don't think he's saying there's any "limit" on the ability or propriety of a contracting officer to seek reductions. He's only saying that price reductions for price reduction's sake, i.e. driving the price as low as your bargaining power will allow, is not necessarily a good business practice.

V said "only an idiot would pay a catalog or market price under a government contract without first trying to bargain it down." I believe tomr was only trying to point out that there are circumstances where an intelligent contracting officer might reasonably "pay a catalog or market price under a government contract without first trying to bargain it down," and not be considered an idiot for doing so. Of course, we're all entitled to our opinions.

T:

The question was whether profit is ever allowed on materials under a T&M contract. The answer is yes. Why? Because under some circumstances the contractor may charge for materials "at price." Since price may include profit (indeed, is defined as including profit), it follows that profit may sometimes be obtained on materials under a T&M contract. Whether a given price is sufficient to yield a profit is simply irrelevant to the question. I ignored your lecture in your second paragraph, since it is apropos of nothing. I ignored your "interesting question" in your third paragraph, also. I think your analysis is a little much.

Attempting to negotiate a price downward is not bullying. I hope you're not teaching that it is. Bullying is threatening to withhold an award or withholding an award unless a price reduction is given despite the fact that the price appears to be fair and reasonable. A government negotiator should always seek a reduction from a catalog or a market price. Only by probing in this way can the negotiator determine what the seller considers to be fair and reasonable. It scares me to think that there might be other people who think that asking for a lower price is bullying.

nav,

Unless we are discussing Dostoevsky, I would prefer not to refer to "Idiot".

I believe Tom is asserting a rule not an exception when he says "If the catalog or market price is fair and reasonable on its face (using whatever price analysis techniques you determine appropriate), with consideration for the quantities involved, then attempting to negotiate the price downward is simply 'bullying' - and not in consonance with the Government's policy of paying "fair and reasonable prices"."

I believe a contracting officer should always negotiate hard for the reasons I set out. Let sellers take care of themselves.

n/V
I don't think I've said here, or elsewhere, that CO's should not seek price reductions in order to obtain a fair and reasonable price. But I do believe that the fair and reasonable standard should restrain CO's from seeking "unreasonable" prices.

Certainly, 15.403-3 states, "(c) Commercial items. (1) ... The fact that a price is included in a catalog does not, in and of itself, make it fair and reasonable."

I like napolik's holiday market example. Retailer has a price of $305 in its catalog for GPS XXX. Yet the "holiday price" is $225. Retailer quotes the Gov't $305 based on its catalog. Should CO simply accept the catalog price? No. Knowledge of the market and/or prior sales history says a fair and reasonable price may be $225.......and if I'm buying 1,000 units, maybe even less. Is that "bullying"? No. As you say, if you can sell it for that in December, why not July! And how about a quantity discount too !!

But now let's say I want to buy ten IPOD Model xxx - catalog price $299. I do my market research...never seen a discount, never seen a lower price and there's no sales history showing a lower price ever offered. Can you ask if the seller can sell it lower? Sure, go for it. But to browbeat the seller under this situation to reduce the price because we're the Gov't and can apply economic pressure, artificially threaten to change my requirements and buy another product unless I get a price reduction, etc. is, in my view, bullying.

I believe CO's have a duty to the taxpayer to seek fair and reasonable prices (using whatever analysis technique is necessary/appropriate), and negotiate hard to obtain a fair and reasonable price. But to inappropriately use the Gov't's economic power to leverage a contractor into price concessions below what is considered a fair and reasonable price is inappropriate. If contractor is seeking an unreasonable price - hard negotiation is not only proper, but also the CO's duty.

Vern - we may be parsing words, but telling people they can pay "profit" on materials is simply, to use your word, "wrong". Under the limited exceptions, they can pay a "price" - we don't know if that given price is sufficient to yield a profit or not. Could it include some amount of profit - maybe, maybe not. But there is no separate line item in a T&M contract under materials for 'profit', even under the exceptions.

T:

We are not parsing words. You are mischaracterizing my statements.

I did not say, as you suggest that I did, that the government can pay profit on materials in all cases. I said that a contractor may be entitled to profit on materials "under specified circumstances."

I said absolutely nothing about a separate line item for profit on materials. I did not allude to any such separate line item. I said that a contractor may get profit on materials when the clause permits the contractor to charge for materials "at price." My use of the words "at price" show that I was not talking about a separate line item for profit on materials.

I said nothing about brow beating contractors or using the government's power to seek an unreasonably low price, nor did I suggest it. I said, and I quote: "Only an idiot would pay a catalog or market price under a government contract without first trying to bargain it down." I stand by my words.

V "Dostoevsky"

Vern's analysis is quite correct. In the circumstances contemplated, as cited above, materials can be charged at price rather than at cost. Price, by definition, is cost + profit. Ergo, in some cases, such as interdivisional transfers, profit can be built into the charge for materials. However, going back to the original question, you could, e.g., have a line item for "fee" or "profit"-it has to be accounted for by materials being priced, not costed-correct??

V
I didn't try to mischaracterize your statements. You unquestionably stated "under the specified circumstances/exceptions" which are the conditions we are talking about.

No, you didn't say create a separate line item for profit, you said CO's can pay profit on materials under limited exceptions. I say, no, they can pay a "price" when the clause permits.

If you wish to say "price" means profit on materials under limited circumstances, go ahead. I won't. I will say the policy for T&M contracts is the Government will not pay profit or fee to the prime Contractor on materials except as provided for in 31.205-26(e) and (f).

T:

Saying that the government will not pay profit or fee on materials except as provided by FAR 31.205-26(e) and (f) is not correct.

FAR 52.232-7(b)(2) says that contractors will be paid for their own commercial items at the established catalog or market price, appropriately adjusted. Payment at established catalog or market price means that the contractor may get profit on those materials.

Moreover, the T&M payment clause for commercial items does not contain the prohibitory language about profit or fee that appears in FAR 52.232-7(b)(7), does not otherwise mention the cost principle, and says nothing about profit or fee on materials. For commercial items the rule is that the government will reimburse the contractor for its own commercial items at the established catalog or market price, appropriately adjusted, which means that the contractor may receive profit or fee on those materials. See FAR 52.212-4, Alt. I, at (i)(1)(ii)(A).

So I think a better statement of the rule is that a contractor may receive profit or fee on materials under a T&M contract only as provided in the T&M payment clauses. Can we agree on that statement?

Agree V - I was focusing on 232-7.

But since these are limited exceptions, stating it in the negative may be more accurate to avoid confusion/misunderstandings: "The Government will not pay profit or fee on materials under a T&M contract except as may be provided for in the T&M payment clauses."

T:

I can live with that language. (I don't think we need the "may be," but I can live with it in order to keep the peace.)

V

Good call....I've been living in R&D too long to notice the new T&M pricing clauses for commercial. Thanks for bringing it to my attention, V.