How To Price a Federal Government Construction Claim

General and Administrative Costs, Bond Costs, Profit and Miscellaneous Costs (Part 4)

By Kay Kendall

The [SPELL OUT FIRST] (FAR) defines direct costs as any costs that can be identified specifically with a final cost objective.  An example of a direct cost would be labor and concrete material costs incurred to construct a concrete slab.  The concrete slab is the final cost objective.

Indirect Costs

The FAR defines an indirect cost as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost object.  An indirect cost is not subject to treatment as a direct cost.  An example of an indirect cost is a contractor’s general and administrative (G&A) expenses.  These are also known as home office overhead.  The G&A cost cannot be identified with the concrete slab above because the home office personnel did not work directly on constructing the slab.

G&A costs are calculated by multiplying the contractor’s G&A rate by all other allowable direct costs in the REA or Claim.

When preparing a REA or Claim, the actual G&A rate should be used and the costs included in the G&A calculation should be in accordance with FAR Part 31 – Contract Cost Principles and Procedures.  Costs that are not allowable should not be included in the G&A rate calculation.   Examples of costs that are generally unallowable are interest expense, advertising for the promotion of sales, bad debt and contributions.  There are others, but these are some common examples.

Some contractors arbitrarily use a rate of 5% or 10%, or some other markup for G&A.  However, without making the actual calculation, the contractor will not know its actual G&A rate.  Maybe the contractor’s actual G&A rate is 18%, but it has just arbitrarily been using 10% or less in its price proposals.  The contractor is entitled to recover its actual costs.

When submitting REAs or Claims to the government, the actual G&A rate should be used.  The government can request an audit of the contractor’s REA or Claim, and in some cases – if the total REA or Claim is over the acquisition threshold, then it is required by the FAR to be audited.

Bond Costs

Bond costs are calculated on the total contract amount.  When contractors bid a project that requires a bond, they include the cost of a performance and payment bond.  The actual bond premium is based on the entire contract amount.  The bond premium is probably calculated on a scale.

Suppose a contractor is awarded a $5,000,000 project that requires a performance and payment bond.  The premium may be calculated on a scale similar to this one: the first $500,000 may cost $15.00 per $1,000, the next $2,000,000 $13.50 per $1,000, and the remaining $2,500,000 may cost $11.00 per $1,000.  The scale may continue for anything over $5,000,000, and the premium cost will be $9.00 per $1,000.  In this example, if the original project was $5,000,000 and work was added, then the correct bond rate to use in a REA or Claim that will increase the contract amount above the $5,000,000 is the $9.00 per $1,000.

Profit Calculation

Profit is a negotiable item.  Some government entities use the Weighted Guidelines to determine the rate of profit for the contractor on a particular change.  When all of the Weighted Guidelines criteria are maximized, the highest rate of profit that can be achieved using the Weighted Guidelines is 12%.  Although the Weighted Guidelines are not mandatory in determining profit, they are widely used by government agencies.  There are other methods for determining a reasonable profit.  The key is that the method must be fair and reasonable.

Miscellaneous Costs

Other miscellaneous costs should not be overlooked – for example, builder’s risk, general liability and workman’s compensation insurance.  If these costs are not included in the G&A and are charged directly to the project, they should be included in the REA or Claim.  If they are part of the G&A rate calculation, to avoid duplication of costs, they should not be included as a direct cost in the REA or Claim.

Contractors in some states or U.S. territories incur costs that are not incurred in other states.  For example, in Puerto Rico, there is a tax calculated on the total contract amount.  The tax is an allowable cost to include in the REA or Claim.  It should be calculated at the current rate on the total amount of the change, including bond and profit.  Technically, the tax should also be calculated on the tax, but on smaller REA and Claim amounts it is insignificant.

Conclusion

With the information in these articles, contractors have a guideline for preparing REAs and Claims.  Sometimes, the REAs or Claims can become complex.  In those situations contractors should seek a qualified professional to assist with the REA or Claim preparation.

Remember, until the issue becomes a dispute or a Certified Claim is submitted, the cost to prepare and support the REA is generally allowable to include in the REA.  A consultant experienced in government contracting can facilitate a successful REA or Claim.

In the event the issue elevates to an appeal or lawsuit, a construction lawyer with federal government experience should be consulted.  Federal government law and procedures are different than in the non-government arena.

Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients.  She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors.  She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.

Vince – the blogger Reality Bite: Again, you should never undervalue the worth of a qualified claims consultant and/or a lawyer well versed in federal construction law and procedures.

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