Proposal Preparation Costs - Direct or Indirect?

The Department of Defense recently issued a reminder to its acquisition personnel regarding the proper charging of proposal preparation costs. Proposal preparation (and negotiation support) costs not specifically funded by a grant or required by a contract are B&P costs (Bid and Proposal, see FAR 31.205-18) and must be charged to contracts through an indirect cost pool (usually the General and Administrative cost pool). If there is a specific requirement in an existing contract to submit one or more proposals, costs of preparing those proposals are allocable only to the contract requiring the proposal preparation.

When proposal and negotiation costs are chargeable direct to contracts, the requirement to do so will be specifically called out in the contract, such as in a funded line item. As a matter of policy however, DoD has told its contracting officers to minimize the situations where a contractor will be contractually required to prepare proposals for new requirements or to definitize unpriced contractual actions.

According to Cost Accounting Standards (CAS) and FAR, if B&P costs are incurred without a contractual requirement, those costs can never be re-characterized as direct costs of any contract since they were independent B&P costs at the time they were incurred. Likewise, if there is a specific requirement for submission of a proposal in a contract, the proposal and negotiation costs are direct costs of that contract and cannot be transferred to another contract. This is especially relevant to the situation where a contract requires a proposal be prepared for new requirements or a follow-on contract and then the contractor or contracting officer improperly attempts to transfer the proposal and negotiation costs to the new contract resulting from the proposal.

Follow-on work does not automatically qualify to be charged directly to a contract merely because there is an assumption that the contractor will submit a proposal as part of a continuing program. For the costs to be charged directly to a contract there must be a specific requirement. If a contracting officer requires a proposal for a follow-on contract or for new requirements, or determines it is necessary to award undefinitized contractual actions, the Department will often be placed in the position of paying for the proposal and negotiation costs on a reimbursable basis with little or no competitive control over the costs incurred. DoD is warning its Contracting officers to avoid placing the Government in that position.