Timothy:

Yes, the different approaches would be inconsistent. In both cases the contractor is buying the machine to use in a government furnished office that supports a single contract. So why the different approaches to cost allocation?

Do you think that the decision to allocate a cost directly or indirectly is entirely discretionary That's what you seem to suggest in your sentence, "Under 52.245-5, the machine would belong to the Government if charged directly, and since Government doesn't want a fax machine the contractor buys the machine and charges it indirectly." That implies that the contractor chose the method of allocation so that the government could avoid owning something that it didn't want to own.

Let's assume for the moment that the fax machine is not a tangible capital asset. If the contractor purchased it for use only on its contract with you and not for the benefit of any other cost objective, then the cost of the fax machine is a direct cost of that contract. Period. The contractor cannot choose to allocate the cost to an indirect cost pool so that (a) the government can avoid the inconvenience of owning a fax machine that it does not want, or (b) so that it can avoid turning the fax machine over to the government at the end of the contract. (But see FAR 31.202(b).)

The contractor must allocate costs in accordance with the FAR, the CAS (if applicable), and its standard accounting practices.

By Timothy Inman on Monday, July 24, 2000 - 05:04 pm:

Can we look at consistency with an example? Suppose a small business contractor has a cost-type contract for on-base services. It needs a fax machine in the office area provided by the Government. Under 52.245-5, the machine would belong to the Government if charged directly, and since Government doesn't want a fax machine the contractor buys the machine and charges it indirectly. When the contract is over, the fax machine leaves with the contractor.

Now the contractor is bidding on a hypothetical FPIF; if successful he will need another fax machine in the new on-base office space. He lists it as an ODC because the FPIF is the only contract the machine will be used on. Title will be the contractor's because the Government doesn't direct its acquisition. Is it a consistency problem to charge this fax machine directly (FPIF) when a similar machine under similar circumstances (support of the CPFF contract) is charged indirectly? DCMA or DCAA people, is this an issue you deal with from time to time?

By John Ford on Monday, July 24, 2000 - 01:15 pm:

You are basically right. However, there is one point on which you are off. That deals with the consistency of accounting. The key is not the type of property being acquired, but whether it is being acquired under similar circumstances. If property is being acquired specifically for one contract and one contract only, under FAR allocation rules, that cost is allocated as a direct cost to the contract for which it was acquired. This property is being acquired in different circumstances from property that will be allocated to multiple contracts as an indirect charge where there is no contractual requirement for the contractor to acquire this property.

By Timothy Inman on Monday, July 24, 2000 - 11:13 am:

Thanks, Messrs. Ford and Edwards. You both shed light on what was an obscure issue for me. So basically it doesn't become contractor acquired property unless the contract directs the acquisition. If the contract is silent, then we own nothing. That leaves us in the "reasonableness" arena--would a prudent person in the course of competitive business pay full price for something that s/he wasn't going to own and that the contractor could use elsewhere in the company's business. I was looking (perhaps too deeply) at 52.245-2(c)(4)(i) and (ii)(C), which says if the "contract contains a provision directing the Contractor to purchase material..." then that property belongs to the Government when a subcontractor delivers it (i) or when the prime is reimbursed (ii)(C). That "reimbursement" in (c)(4)(ii)(C) is on the fixed price property clause, and the only "reimbursement" on a fixed-price contract (I think) is an ODC--is there some other mechanism for reimbursement? I guess the use of that word got me off track. Regardless, the contract needs a provision directing the contractor to acquire property, or else the property is his. There is still another issue, and that is consistency in accounting--a contractor's charging directly for general purpose equipment and furniture not required by the contract but necessary to perform the on-base services; are these items charged indirectly elsewhere within the corporation (of course yes, e.g. G&A stuff for the home office) and does indirectly acquired equipment support final cost objectives? That perhaps is the key--if indirectly acquired equipment supports other final cost objectives, then the same kind of equipment supporting my final cost objective (my contract) should be charged indirectly. But regardless of how it is charged, the consensus is that it doesn't belong to the Government, right?

By John Ford on Monday, July 24, 2000 - 10:12 am:

Tim, title to general purpose property acquired by a contractor in performing a FPI contract does not belong to the government unless the contract requires the contractor to acquire the property for the government. General purpose equipment as you have described is generally classified as facilities not material. Title to facilities is governed by (c)(3) of the Government property clause. You will notice that the government gets title to that property when the contractor acquires the property for the government not when the contractor acquires the property for its own use.
If the contract is subject to full CAS coverage, CAS 409 depreciation of capital assets would come into play and the contractor probably would have to capitalize the equipment. If the cost principles alone are applicable, look to the requirements of GAAP to determine how this property should be accounted for. Remember a cost is a allowable if it is accounted for in accordance with the CAS when applicable otherwise you look to GAAP.
If it is really general purpose equipment that the contractor is acquiring only for performance of this contract and for which the contractor will have no further use, charging the cost of the property as an expense instead of captializing the cost is probably acceptable. However, if the contractor does not need it for performance of other work, the contractor will probably want to dispose of the property upon completion of the contract. If that happens, the government would be entitled to a credit for the proceeds of the disposition under the general credits cost principle FAR 31.201-5.

By Larry Edwards on Friday, July 21, 2000 - 07:03 pm:

This is a good example of a problem with fixed price incentive contracts I have commented on in the past. They use fixed price clauses in what is essentially a cost reimbursement environment. You are left to interpret a clause that just does not fit. In this case, I agree with your contracting officer. The intent of the fixed price government property clause is for the contractor to retain title unless the contract calls for the contractor to purchase material for the government as a direct item of cost. I’ve used a contract line item on an FFP contract to allow the contractor to buy an item the Government wanted to keep for future work, but did not presently have. That puts the risk on the contractor to ensure it is delivered in time for use under the contract. Does your contract explicitly do that? Note FAR 52.245-2c(4) states:
“(4) If this contract contains a provision directing the Contractor to purchase material for which the Government will reimburse the Contractor as a direct item of cost under this contract –“
I believe this is the contractor acquired property referred to in 52.245-2c(2):
“2) All Government-furnished property and all property acquired by the Contractor, title to which vests in the Government under this paragraph (collectively referred to as "Government property") are subject to the provisions of this clause.”
FPI contracts are inherently unclear in many areas, because whoever wrote the FP clause wrote it for FFP probably without considering the implications of cost reimbursement under FPI. I don’t know of any ASBCA cases on Government property, but there are several on FPI interpretations of other FFP clauses. One involved Boeing and the Termination for Convenience clause. It boiled down to whether “contract price” means target price, as alleged by the Government, or ceiling price as alleged by Boeing. Of course, it really means contract price as in an FFP, a very different concept.

By Timothy Inman on Friday, July 21, 2000 - 06:57 pm:

I spoke with a man well-versed in acquisition issues after I made the earlier posting, and he said without benefit of study he thinks that the key is authorization from the CO--title vests in the Government on property for which the CO has given prior approval; without that prior approval it might not become contractor acquired property under the clause regardless of whether it is direct or indirect. I just throw that into hopper. Does a CO's acceptance of an FPIF proposal containing ODC computers and other general purpose equipment, furniture, and software not specifically required by the solicitation constitute the Government's authorization? My friend says that paying 100% price for something we don't take title to, and that will have value for the contractor after performance is complete, might be a price reasonableness issue more than a property issue. I talk too much--I'm silent now.

By Timothy Inman on Friday, July 21, 2000 - 02:21 pm:

Equipment purchased on a FFP belongs to the contractor (unless default or progress payments are involved, but I don't want to go there) because we don't care about the elements of cost; indirect or direct is irrelevant to the bottom-line price. However, on an FPIF contract (which uses the fixed-price property clause at FAR 52.245-2), what is the situation with items of general purpose equipment (computers, furniture, office supplies, etc.) proposed as other direct charges on a base O&M contract? I will be the first to say that the Government doesn't want to own any of that stuff. But here's the problem. If the offeror proposes it as an ODC, then we pay 100% of the price if we accept the proposal. Under the cited fixed-price property clause, the title to contractor acquired property vests in the Government. That is why we want general purpose equipment items to be charged indirectly. Even if the CO says in the solicitation phase (but does not write in the solicitation document) that the Government will not own property after performance, if the contract is FPIF in which we have full visibility as to the elements of cost, and in which offerors propose general purpose equipment (such as new computers for all of their employees working on base), how can we get around the fixed-price property clause's statement that title to contractor acquired property vests in the Government? Frankly, I'd prefer to see these items charged indirectly; they are what the contractor needs to do business and should be in an overhead. I also believe that the contention that a contractor would not have acquired any items of general purpose equipment except for performance on this contract has no merit, if under the contractor's cost accounting practices and FAR 31.202 the acquisition costs of such equipment might not qualify for treatment as direct costs. FAR 31.202, as everyone knows, precludes a contractor from allocating general purpose equipment acquisition costs directly to a Government contract if costs incurred for other general purpose equipment in like circumstances have been charged as indirect costs.

I welcome discussion of FAR 31.202, the nature of other direct costs in a FPIF situation where the contractor proposes that the Government pay 100% of the acquisition costs of equipment, and the actual language on title vesting in the fixed-price property clause. Also, please discuss any relevant court cases (FFP is not relevant; are there court cases on property directly acquired on an FPIF contract?). I think that ODCs should not be used for general purpose equipment and office furniture; the contractor should bring what he needs to do the job, and it should be an overhead expense. But I have a CO who maintains that a FPIF is fixed price, and any equipment proposed as a direct cost does not belong to us, regardless of what the fixed-price property clause says. The problem is that she says it but provides no support, which is fine because she doesn't have to answer to me.

I'm willing to be wrong, and I don't want the Government to own a lot of property. But I think that title must belong to the Government if we pay for equipment 100% as a clearly stated ODC on an FPIF, on which we do look at the elements of cost in determining price reasonableness. I think that the language in 52.245-2(c) supports my position, but I am inexperienced and welcome enlightenment for when I become a CO.