In government proposals, contracts, and agency billing, G&A is typically applied as an indirect expense markup to direct billable non-labor costs such as Travel and Other Direct Costs (ODCs). Some customers, however, have begun disallowing G&A markups, citing the restriction as a cost-saving measure to avoid paying what the agency deems “pass-through” costs. Others have said it is not allowable per the FAR.
Although the practice is still not widespread, when government entities do put such a measure in place, it effectively prevents contractors from recouping the administrative costs necessary to source, purchase, and process all costs for the contract, including Travel and ODCs.
If you find solicitations not allowing G&A on Travel and/or ODCs, know that G&A on travel and other direct costs are expected and ordinary expenses to support necessary activities such as seeking approval and other required authorizations for these expenses, procurement of ODCs, administering changes orders, managing delivery and accounting for, reporting on, and paying for these costs. These expenses are typically including in the G&A pool and performed by G&A staff members. Further, this is an expressly allowable cost under the FAR.
So what might be going on?
The first step is to understand the rationale for disallowing indirect costs on Travel and/or ODCs. There is no basis in the FAR to disallow appropriate indirect costs. Through dialogue or Q&A, see if you can discover any of the below:
- The Contracting Officer may unknowingly not consider these costs as part of the definition of actual costs.
Discuss with your Contracting Officer your standard cost accounting practices that consistently treat these costs in the G&A base and that it is currently not an option to remove these costs. Refer to FAR 31.202 for direct costs and FAR 31.203 for indirect costs. FAR 31.203 expressly states “(d) Once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements. All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the allocation of G&A costs, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.” Further, in February 2007, the Government revised for clarity FAR 52.232-7. Section (b)(1)(ii) defines the “M” of T&M to include applicable indirect costs as part of the cost definition.
- The Contracting Officer may be incorrectly considering G&A as an excessive pass-through charge, which is unallowable under FAR 215-23.
You can emphasize that your indirect costs are usual and customary costs within the indirect expense rate structure. Your ultimate rates in comparison with industry will also illustrate that costs are not excessive when applied with the company’s standard indirect rates. The application of G&A support costs also does not fit the meaning for pass-through costs cited in this FAR section.
- The Contracting Officer’s objective may be to reduce total cost.
You may find that the bottom-line desire is to reduce costs. If that is the driving reason, you may be able to negotiate a slightly lower fixed fee or profit. It is preferable to not modify your standard cost accounting practices for one contract and deviate from appropriate cost treatment.
Also, if you are a small business contractor, remind the Contracting Officer, that there are limited resources in growing a small business and having the ability to recover actual costs—both direct and indirect—is essential for solid financial position. Depriving the recovery of all actual cost is counter to the desire to have small business contractors that are financially strong and viable in performing against small business objectives.
Seeking a solution
If this issue is seen often and/or results in meaningful dollar value, you may want to consider excluding these Travel and/or ODC costs from the G&A base. This would involve a modification to your standard cost accounting practices and require communication, coordination and agreement with the DCAA. If you have CAS-covered contracts, this would also need to be reflected in a disclosure statement.
Consider how much this matters by considering your contract type. If you are working on a fixed price contract, the removal of indirect expenses from Travel and/or ODC costs will essentially reduce your profit. You can calculate the impact on your revised effective profit. Or, if bidding, adjust your profit to accommodate the impact. However, if this is a T&M or cost plus contract, you may want to pursue some of the previous suggestions.
Applying G&A on Travel and ODCs is a usual and customary business practice. The FAR language is structured to allow contractors to track costs in logical cost groupings and allocate them in a rational manner to the benefiting contracts. Seeking to recover all allowable indirect cost is reasonable. There is nothing in the FAR or CAS that prohibits reimbursement. You are well within your rights to seek a solution. Nevertheless, the Contracting Officer may stand firm on not applying G&A to Travel and/or ODCs in new solicitations. If the Contracting Officer is seeking to disallow G&A on an existing contract that does not explicitly state that this cost is unallowable, the regulations and standards support billing this cost. Be aware of some of the possible reasons for pursuing a G&A exclusion and your considerations. In the end, it is a business decision for your firm on whether and how to pursue.
CAVU experts can advise you on a communication plan for this as well as evaluating other aspects of a successful strategy for addressing restrictions on applying indirect cost to Travel/ODCs or other cost accounting practices.