I know that material costs under a T&M contract are billed at cost (no profit). What about travel costs? Our contractor would like to negotiate a factor to apply to his travel costs for billing purposes. His proposed rate includes an allowance for profit. Is this allowed?

By joel hoffman on Monday, December 17, 2001 - 02:33 pm:

Looks like "cost plus a percentage of cost"to me. Is travel to be billed at actual costs plus a percentage? happy sails! joel

By Smokey on Monday, December 17, 2001 - 03:18 pm:

I have always included travel as an ODC item, exclusive of profit.

By Dave Berkey on Monday, December 17, 2001 - 03:38 pm:

The contract should allow for recovery of material handling costs as well as travel "handling costs" (normally a G&A pool). The T&M Payments clause specifically allows for profit within the burdened labor hour but is silent about profit for material handling costs or other other direct costs. The "factor to apply to his travel costs" may be a G&A applied only once in the labor hour or separately as a G&A %age applied to actuals. I would not permit profit on ODCs like travel and materials.

By Anonymous on Monday, December 17, 2001 - 04:04 pm:

Joel,

Yes, the contractor has proposed a factor of 1.XX to be applied against actual travel costs. The "XX" portion includes his normal burdens; i.e. G&A, O/H, fringe, etc., and a 10% profit. I agree with you that this represents a "cost plus percentage of cost" situation, but couldn't you argue that labor under T&M is reimbursed on a "cost plus percentage of cost" basis also?

By joel hoffman on Monday, December 17, 2001 - 10:53 pm:

No, we've been through the discussion about labor before, in earlier threads. Here's what FAR says about materials under 16.601(b):

(2) Material handling costs. When included as part of material costs, material handling costs shall include only costs clearly excluded from the labor-hour rate. Material handling costs may include all appropriate indirect costs allocated to direct materials in accordance with the contractor's usual accounting procedures consistent with Part 31.

(3) Optional method of pricing material. When the nature of the work to be performed requires the contractor to furnish material that it regularly sells to the general public in the normal course of its business, the contract may provide for charging material on a basis other than at cost if --

(i) The total estimated contract price does not exceed $25,000 or the estimated price of material so charged does not exceed 20 percent of the estimated contract price;

(ii) The material to be so charged is identified in the contract;

(iii) No element of profit on material so charged is included as profit in the fixed hourly labor rates; and

(iv) The contract provides --

(A) That the price to be paid for such material shall be based on an established catalog or list price in effect when material is furnished, less all applicable discounts to the Government, and

(B) That in no event shall the price exceed the contractor's sales price to its most-favored customer for the same item in like quantity, or the current market price, whichever is lower.


happy sails! joel

By Anonymous on Tuesday, December 18, 2001 - 07:42 am:

Well Joel, you've given me a very comprehensive response to the treatment of material costs; but this still leaves open the treatment of travel costs. The contractor is arguing that their travel costs will be a significant portion of their total costs (probably true) and under any other contract type, these costs would not be excluded from the cost base before applying profit. Are there any regulations or dispostioned cases that address this issue specifically? The contractor has shown me examples of T&M contracts he has with other agencies that have allowed exactly what I've described in this thread - so at this point, precedence is in his favor. By the way, a different contract type is not an acceptable option here.

By Dave Barnett on Tuesday, December 18, 2001 - 01:14 pm:

I tink Smokey hit on the crux of the issue, travel expense in not a material handling issue, it's an ODC issue. Under other contractual circumstances would one allow profit/fee to be applied to ODCs, of course one would, the rate would normally be low (10% seems(?) it is excessive)but I'm from the old school where I've used the old DoD WGL to develop profit/fee objectives. Unfortunately, the Armed Services Pricing manual, Vol I, chap. 4 doesn't seem to be available on-line, and that's what I'd use to develop a profit/fee objective as a negotiation position.

It's been so dang long, but what is the purpose of profit/fee: to motivate the contractor and to reward the contractor. Will the gov't be paying the contractor employees the agreed to labor rates while the contractor employee is on travel e.g during the 4 hour flight? If your paying the employee's labor while in a travel mode, I'd say travel costs sans profit/fee, whatever profit is to be realized is already in the loaded hourly labor rate. However, if the contractor's employee is in a travel mode and your not paying the hourly rate while that employee is on travel, then I would be gracious (considering that the contractor is one dumb *%*&^ for not insisting on a portal to portal arrangement knowing that travel is involved) when considering profit/fee.

By Philip on Tuesday, December 18, 2001 - 01:49 pm:

The contract pricing reference guide allows profit on travel.

Travel is an ODC. See Contract Pricing Reference Guide, Volume 3, Chapter 8. Following is the link:
http://www.acq.osd.mil/dp/cpf/pgv1_0/pgv3/pgv3c8.html

For a profit/fee see the Contract Pricing Reference Guide chapter 8. This clearly allows profit/fee on ODC's. Following is the link
http://www.acq.osd.mil/dp/cpf/pgv1_0/pgv3/pgv3c11.html#11.0

Although allowable, my view is that profit on travel is a negotiable item. I have never allowed profit on travel. I negotiate the cost as a pass through item and pay actuals only.

Regards Philip

By Anonymous on Tuesday, December 18, 2001 - 06:28 pm:

I pay actuals and G&A on the actuals. The fee is in the hourly wages. None of my contractors have ever requested anything else.

By joel hoffman on Wednesday, December 19, 2001 - 10:17 am:

Philip, please show me the application of the Contract Pricing Reference Guide to profit on a time and materials contract. ODC is an allowable cost for fee base on a cost reimbursement or FFP contract. That isn't the question. I didn't see any reference to T&M in the travel discussion in the Pricing Guide. Please guide me to the guidance. Thanks. happy sails! joel

By Vern Edwards on Wednesday, December 19, 2001 - 10:32 am:

Folks:

There is no rule about this. Travel is not a materials cost; the payment clause for time-and-materials contracts says nothing about travel. The parties have to negotiate an agreement. The agreement may include an allowance or amount for administrative costs as well as actual travel costs and something for profit or fee, but not on a cost-plus-percentage-of-cost basis.

By webmaster on Wednesday, December 19, 2001 - 10:53 am:

Anonymous:

Here is an idea you may wish to consider. There is a four step analysis for determining an illegal cost-plus-a-percentage-of-cost system of contracting. It has been discussed here before. I am sure someone can point it out from a specific court or Comptroller General case--I do not have it at hand.

Either you alone or you and an attorney apply the steps to your specific case. If you are convinced that it is an illegal cost-plus-a-percentage-of-cost system of contracting, then you cannot pay the fee. Additionally, if the contractor insists on a fee, let the contractor know that if any other of the contractor's contracts are illegal in this sense, then those fees are recoverable by the government. Explain that you would be willing to assist your fellow contracting officers in making such a determination.

This may prove to be an effective negotiating tool.

By Philip on Wednesday, December 19, 2001 - 11:28 am:

Joel et. al.
I can find no rule linking travel to a specific type of contract arrangement to give any guidance in either the DCAA Audit Manual or the Contract Pricing Reference Guide.

The CPRG is structured in such a way as to allow profit on ODCs (including Travel Costs) as shown in the WGL mechanism.

I also searched the DCAA audit manual and I can find no rule restricting profit on travel. (DCAA Section 9-900 "Profit in Price Proposals." AND Section Section 7-1000 "Employee Travel Costs and Relocation Costs")

The only indication given that profit is allowed on Travel is the structure of the Weighted Guidelines form/mechanism. In WGL profit is allowed on Travel/ODCs.

Philip

By Dave Berkey on Wednesday, December 19, 2001 - 01:17 pm:

Folks, let's remember that the fully burdened, negotiable labor hour component of T&M can be regarded as cost plus %age of cost. That is, each hour of labor expended accrues a fixed rate of profit. So what is done to avoid the %age of cost is to not allow profit at all on ODCs. Like Anon above, I too have never recalled a contractor requesting profit on ODCs, whether 8(a) or Fortune 500 in 20 years of T&M contracting. I believe this to be the convention within the industry when dealing T&Ms.

By Vern Edwards on Wednesday, December 19, 2001 - 01:32 pm:

Whoa, Dave! The labor rate component of T&M cannot be regarded as cost plus percentage of cost.

By joel hoffman on Wednesday, December 19, 2001 - 02:31 pm:

Philip, materials are also included in the weighted guidelines for profit application. I think you're taking the CPRG (which appears to be based on the old Armed Services Pricing Manual) out of context.

Section 1.7 of the ASPM describes the time and material type contract and explains why profit is not paid on materials, as a direct percentage of the cost of materials ("Mark-up Pricing"). The reasoning concerning why such an approach would appear to be cost-plus-percentage of cost is analogous to the treatment of a direct percentage markup for profit on travel costs.

Profit is not prohibited on travel. However, In my opinion, paying profit as a direct percentage of travel costs on a T&M contract is the same as paying profit as a direct percentage of actual material costs for purposes of determining whether it is a cost-plus-percentage of costs method. happy sails! joel

By Philip on Thursday, December 20, 2001 - 10:56 am:

Joel,

If I'm taking information out of context, I'm not aware of it.

Does the ASPM still exist? If so where. I've looked for it for several years and haven't found it. I was eventually led to believe that the ASPM was obsolete.

As far as "Profit" being a percentage of cost. There seems to be widespread acceptance of dealing with it this way. WGL get around this by reducing profit to a mathematical formula, then stating the profit as a "percentage of cost." Actually sort of a 'play on words.'

Regards Philip

By webmaster on Thursday, December 20, 2001 - 11:03 am:

Phillip:

The ASPM is gone and replaced by the guides provided above. I think the official title was the Armed Services Procurement Manual for Contract Pricing (ASPM 1). Eric will correct the title I gave if I have it wrong because he liked that manual also.

By joel hoffman on Thursday, December 20, 2001 - 11:32 am:

It was the "Armed Services Pricing Manual". The CPRG replaces it, I think.

Regardless of what the CPRG does or doesn't say, one must examine the elements of cost-plus-percentage of cost contracting in any contracting action. Just because the CPRG doesn't describe CPPC doesn't mean that it doen't exist.

The CPRG reference you provided doesn't give a cookbook method for pricing a time and material contract, either. It is structured for lump sum items and includes profit on materials.

To repeat, profit is not prohibited on travel costs. However, In my opinion, paying profit as a direct percentage of travel costs on a T&M contract is the same as paying profit as a direct percentage of actual material costs - which isn't done, partly because it is a cost-plus-percentage of cost method of contracting. happy sails! joel

By webmaster on Thursday, December 20, 2001 - 11:33 am:

Joel:

I don't think so.

By webmaster on Thursday, December 20, 2001 - 11:35 am:

I am going to go see if it is in the library. We have some old stuff up there. Be right back.

By joel hoffman on Thursday, December 20, 2001 - 11:43 am:

Web, if we're talking about the 6"X9" yellow or tan book, 11/16" thick (Volume 1, 1986), or 3/8" thick (Volume 2, 1987), they are the 2 volume "Armed Services Pricing Manual" ... "issued by direction of the Assistant Secretary of Defense Directive No. 5128, dated July 5, 1985." While comparing this with the first part of CPRG, I noticed that the CPRG closely resembles ASPM. Whether it replaces it or not, I don't know. If it doesn't, they heavily plagerized it. happy sails! joel

By bob antonio on Thursday, December 20, 2001 - 11:55 am:

Joel:

Both of us are nearly correct.

The 1975 version is called the Armed Services Procurement Regulation Manual for Contract Pricing (ASPM No. 1). That is what I remembered. However, I had copies of that one and the 1985 version. The 1985 version was called the Armed Services Pricing Manual. Of the two of us, you are correct and I missed a word.

However, the 1975 title was longer so I know you will forgive me for forgetting "Regulation."

They were both identified as acceptable guidance in Part 15 of the Federal Acquisition Regulation for for all agencies and I think the new guides are now identified in the same place as guidance.

By bob antonio on Thursday, December 20, 2001 - 12:18 pm:

Below is the provision in the Federal Acquisition Regulation for the current guides. The old ASPMs once were identified in this section and have now been replaced by the current guides.

"15.404-1 -- Proposal Analysis Techniques.

(7) The Air Force Institute of Technology (AFIT) and the Federal Acquisition Institute (FAI) jointly prepared a five-volume set of Contract Pricing Reference Guides to guide pricing and negotiation personnel. The five guides are: I Price Analysis, II Quantitative Techniques for Contract Pricing, III Cost Analysis, IV Advanced Issues in Contract Pricing, and V Federal Contract Negotiation Techniques. These references provide detailed discussion and examples applying pricing policies to pricing problems. They are to be used for instruction and professional guidance. However, they are not directive and should be considered informational only."

By Philip on Thursday, December 20, 2001 - 12:28 pm:

Bob / Joel,

If guidance is not given in the CPRG that was originally in the ASPM (as Joel cited above), can we still use the ASPM as a guide. (FAR doesn't reference ASPM anymore)

Regards Philip

By bob antonio on Thursday, December 20, 2001 - 12:36 pm:

Philip:

In my opinion, you would need to make sure that the ASPM provision does not conflict with any current law, regulation, legal decision, and even the advice provided in the current guides. There may be a reason why the ASPM section is excluded from the current guide.

By Philip on Thursday, December 20, 2001 - 12:40 pm:

I just found this at the following address. The CPRG has replaced ASPM.

http://198.17.75.65/fril/1996/19960620/96-14521.sum

Excerpt follows:

In the Federal Register June 20, 1996, FAC 90-39ACTION: Final rule.


SUMMARY: The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council have agreed on a final rule to amend the Federal Acquisition Regulation (FAR) to replace the Armed Services Pricing Manual, as the reference guide for pricing and negotiation personnel, with five desk references jointly prepared by the Air Force
Institute of Technology and the Federal Acquisition Institute.

Regards Philip

By joel hoffman on Thursday, December 20, 2001 - 12:49 pm:

Philip, I hope you're not relying on the new guidance to determine whether an element of a time and material contract is cost-plus percentage-of cost, because I can't find any discussion in the new guidance one way or the other. Were you able to?

Doesn't mean that CPPC doesn't exist...

happy sails! joel

By Dave Barnett on Thursday, December 20, 2001 - 01:15 pm:

My volume I of the "Armed Forces Pricing Manual" is in a 8 x 11 loose leaf format dated 1986, my vol II of the ASPM is the yellow paperback bound version dated 1987. I hung onto these because the civilian agencies I've worked for use the old DoD weighted guidelines to this day and I found the ASPM valuable. The current DoD pricing manuals address the current DoD profit development methodology.

The WGL method form we currently use can be found at:

http://www.dot.gov/ost/m60/earl/frm4220_32.pdf

By joel hoffman on Thursday, December 20, 2001 - 01:21 pm:

I extracted this bit of advice from the archives at http://www.radix.net/~ambrose/forum215.htm

"by Vern Edwards on Thursday, July 12, 2001 - 11:29 pm:

Eric:

It is precisely the four criteria to which we should pay attention. You can't put too much weight on them. The criteria were established by the GAO, it's the GAO that is most likely to rule on any CPPC issue, and the GAO has adhered to the four criteria for at least 46 years. Here is how they articulated those criteria in 1975:

"WE HAVE RENDERED DECISIONS INVOLVING THE ISSUE OF WHETHER CERTAIN TYPES OF CONTRACTUAL ARRANGEMENTS CONSTITUTED PROHIBITED COST-PLUS-A-PERCENTAGE-OF-COSTS ARRANGEMENTS. CF. 35 COMP.GEN. 434 (1956); 38 ID. 38 (1958); AND 46 ID. 612 (1967). THE GUIDELINES APPLICABLE TO THIS CONSIDERATION ARE: (1) PAYMENT IS ON A PREDETERMINED PERCENTAGE RATE; (2) THE PREDETERMINED PERCENTAGE RATE IS APPLIED TO ACTUAL PERFORMANCE COSTS; (3) CONTRACTOR'S ENTITLEMENT IS UNCERTAIN AT THE TIME OF CONTRACTING; AND (4) CONTRACTOR'S ENTITLEMENT INCREASES COMMENSURATELY WITH INCREASED PERFORMANCE COSTS."

35 Comp.Gen. 434 (1956). (Forgive the capital letters; that's the way the decision was printed.)

Here is the way the GAO articulated the four criteria 37 years later:

"Our Office uses the following criteria to determine whether a method of payment represents a prohibited cost-plus-a-percentage-of-cost arrangement:

(1) Payment is at a pre-determined rate,

(2) the pre-determined rate is applied to actual performance costs,

(3) the contractor's entitlement is uncertain at the time of contracting, and

(4) the contractor's entitlement increases commensurately with increased performance costs."

B-252378 (1993).

Stick with the four criteria and you won't have any trouble. "

By Philip on Thursday, December 20, 2001 - 01:30 pm:

Joel, et al

1. As to whether or not I'm relying on the new guidance to determine whether an element of a time and material contract is cost-plus percentage-of cost, I'm not. As I said in a previous post, I've never paid profit on travel. I'm arguing theory.

2. Thanks for your 1:21 pm post. This information is most valuable. This information should be given somewhere in the Contract Pricing Reference Guide, but it isn't. If it is, I haven't seen it yet (5 volumes is a lot of info). Since we can't use ASPM anymore (per FAR) as guidance, at least the GAO and Vern Edwards came through for us.
Thanks again
Philip

By joel hoffman on Thursday, December 20, 2001 - 01:58 pm:

Philip, you are correct. The GAO guidance or implementation SOP's, thereto, should either be in the CPRG or directly in the FAR. I can't find any definition of CPPC within the FAR. I did find some explanations using the Google search feature, that Bob just added to the site. Most references simply state that it is prohibited in Federal contracting. Perhaps, we ought to suggest to the CPRG authors that they expand on the subject. happy sails! joel

By bob antonio on Thursday, December 20, 2001 - 02:02 pm:

Joel and Philip:

That is the 4-step process that I was seeking. Notice the use of the word "entitlement" and not fee. There is a reason for that.

By Philip on Thursday, December 20, 2001 - 02:45 pm:

Bob,

I'll bite, why "entitlement" instead of fee? Regards Philip

By bob antonio on Thursday, December 20, 2001 - 03:09 pm:

Philip:

The entitlement is not restricted to fee. It may be a cost too. I do not have an example because these things are so rare.

Years ago, we told an agency they had an illegal cost-plus-a-percentage-of-cost system using a G&A rate in an illegal system. I cannot remember the specifics.