What Do You Know about Cost Type Contracts?

What Do You Know about (the contract-type) Cost Plus?

With a Cost Plus award, the contractor or grantee bills the Government each month for actual incurred costs, plus some agreed-upon Fee. Unlike a Fixed Price award, if actual costs are less than established in the contract language, the overage is (not incurred, so) not paid. Test your knowledge of Cost Plus contracts. The answers are at the end of the test.

1. FAR 9.105 requires that promptly after a bid opening or receipt of offers (i.e., proposals):

The contracting officer shall obtain from the auditor any information required concerning the adequacy of the prospective contractor’s accounting system, and the system’s suitability for use in administering the proposed type of contract.
The contracting officer shall obligate all funds required for the performance of the contract.
The prospective contractor shall submit form SF1408.
For each prospective contractor with an accounting system not previously approved, the auditor (DCAA) must schedule an accounting system review.

2. FAR 16.301 requires that a cost-reimbursement contract may be used only when:

The contractor’s accounting system was purchased from a Government-approved software developer (e.g., Deltek, Procas).
The contractor’s accounting system is adequate for determining costs applicable to the contract or order.
The Government has no remaining funding budgeted for Fixed Price awards.
The contractor’s estimating system is adequate for proposing costs applicable to the contract or order.

3. FAR 42.704 requires that the contracting officer should ensure that the billing rates:

Are audited.
Represent a placeholder to recoup estimated indirect expenses during each contractor fiscal year, until contract closeout after the entire contract is complete and all actual expenses known.
Are as close as possible to the final indirect cost rates anticipated for the contractor’s fiscal year, as adjusted for any unallowable costs.
Are at least 25% lower than final indirect cost rates for each (applicable) contractor fiscal year.

4. DFARS 252.242-7006 describes the “accounting system” as:

A software program approved by DCAA.
The contractor’s general ledger.
The contractor’s policies and procedures related to accounting for costs.
The contractor’s system for accounting methods, procedures, and controls to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data.

5. When all or a portion of the actual costs on a contract are reimbursable, the contract is labeled “flexibly priced.” Flexibly priced contract-types include:

Time & Material and Cost Plus Award Fee.
Labor Hour and Cost Plus Fixed Fee.
Fixed Price and Cost Plus Incentive Fee.
Fixed Price Incentive Fee and Cost.

6. A cost-plus-incentive-fee contract is a cost-reimbursement contract with a fee:

Set by regulation at 5% of ceiling costs, regardless the actual incurred costs.
Adjusted for the relationship of total allowable costs to total target costs. As actual incurred costs go down, the incentive fee goes up.
That can exceed the ceiling fee if costs are higher than targeted.
That equals a fixed percentage of cost.

7. A CPFF contract takes the form of either completion or term, which means:

Costs are billed upon completion of specific milestones or at specified times (such as each month-end).
Reports showing Estimate at Completion and Percentage Complete (in dollars contrasted by accomplishments) are submitted for either completed Task Orders or for time periods (such as quarterly).
The scope of work is a definite goal or target or a specified level of effort for a stated time period.
Customer payment (in full) comes only after completion of the scope of work or full payment (and completion) happens at a specific date.

8. The SF1408 asks whether the Accounting System has:

Proper segregation of direct costs from indirect costs.
Identification and accumulation of direct costs by contract.
Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.
All of the above.

9. The DCAA “PRE-AWARD SURVEY OF PROSPECTIVE CONTRACTOR ACCOUNTING SYSTEM CHECKLIST” asks:

Does the Accounting System use a logical and consistent method to allocate indirect costs to intermediate and final objectives?
Does the timekeeping system identify employees’ labor by department?
Does the labor distribution system charge all labor as Direct to a final cost objective (e.g., a contract)?
Does the General Ledger include (comingle) preproduction costs with production costs to disclose total costs?

10. The pre-award survey of the accounting system specifically verifies that:

Incurred Cost submissions (such as ICE submissions) were accepted without findings for the previous two years.
Specifically unallowable costs in FAR 31.2 are segregated in the General Ledger.
High-dollar purchases with multi-year useful lives are expensed in full when paid.
PTO is expensed when taken.

ANSWERS:

1. a. – FAR 9.105 requires that the contracting officer obtain any information needed to conclude that the contractor’s accounting system is suitable to administer the proposed type of contract.

2. b. – FAR 16.301 requires that a cost-reimbursement contract may be used only when the contractor’s accounting system is adequate for determining costs.

3. c. – FAR 42.704 requires that the contracting officer ensure that the billing rates are as close as possible to the final indirect cost rates.

4. d. – DFARS 252.242-7006 describes the Accounting System as the contractor’s system for accounting methods, procedures, and controls to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data. This includes implemented policies and procedures plus source documentation (i.e., evidence) that these methods are used and controls in effect.

5. a. – Flexibly priced contract-types include Time & Material and Cost Plus Award Fee. The “Material” (which may be Travel) portion of a T&M contract is at actual incurred cost; only the “Time” is at a fixed rate.

6. b. – A cost-plus-incentive-fee contract is a cost-reimbursement contract with a fee adjusted for the relationship of total allowable costs to total target costs. See FAR 16.304. The fee may not be a fixed percentage of cost, which would drive reimbursable costs up (in order to earn more fee).

7. c. – A CPFF contract takes the form of either completion or term, which means the scope of work is a definite goal or target or a specified level of effort for a stated time period. See FAR 16.306.

8. d. – The Standard Form 1408 asks whether the Accounting System has each of the characteristics listed.

9. a. – The DCAA Checklist asks whether the Accounting System uses a logical and consistent method to allocate indirect costs to intermediate and final objectives. Indirect costs may be allocated to intermediate pools, such as G&A (e.g., Fringe on G&A Labor), and to final/direct costs (e.g., Fringe on Direct Labor).

10. b. – The pre-award survey of the accounting system specifically verifies that unallowable costs described in FAR 31.2 are segregated into separate, unallowable accounts. Also, unallowable accounts do not comprise any indirect pool when calculating its indirect rate – but are always included in the base. For example, Unallowable Direct Labor causes employer Fringe to be paid at the same rate as Allowable Direct Labor; after calculating an indirect Fringe rate, Unallowable Direct Labor absorbs (applied) Fringe at the same rate as Allowable Direct Labor. Incurred Cost Submissions typically have not already been made at the “pre-award” survey. Cash-basis accounting does not comply with Generally Accepted Accounting Principles; accrual-basis accounting requires depreciation of capital assets and (consistent amount each month) accrual of PTO.