Allowability of B&P Costs to Prepare Cost Overrun Proposal

Bid and Proposal (B&P) costs are addressed in the FAR cost principles under FAR 31.205-18, Independent Research and Development and Bid and Proposal Costs (IR&D/B&P). The definition of B&P is given in Section (a):

"Bid and proposal (B&P) costs” means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract.

The allowability of B&P costs is given in Section (c):

Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.

Given this background, we come to a situation where a contracting officer was faced with a contractor that was overrunning a contract baseline due to no fault of the Government and was wondering whether the cost for the contractor to prepare a cost overrun proposal was allowable.

Obviously, the contracting officer did not want to reimburse the contractor for costs that wouldn't have been incurred had the contractor not overrun the contract in the first place. It seemed to the contracting officer that the contractor was being rewarded when it should have been penalized.

The response from DoD to the contracting officer's plea was not very helpful (at least for the contracting officer). DoD essentially stated that if the contracting officer needed a basis for disallowing the costs, it should look to the FAR 31.201-2(a), Determining Allocability. Forget about FAR 31.205-18 because that is not going to help.

DoD concluded that there is no specific limitation in FAR subpart 31.2 that make bid and proposal costs expressly unallowable. But in order to determine if the bid and proposal costs you are concerned with are allowable, a thoughtful examination of the Allocability clause is in order. Then, DoD goes on to paraphrase the allocability cost principle.

DoD also instructed the contracting officer to compare the proposed accounting practice for the bid and proposal costs at issue with the established accounting practices of the contractor. If different, the contractor could be cited for noncompliance with FAR 31.202 which imposes the requirement that costs incurred for the same purpose and under the same circumstances be accounted for as either direct or indirect, but not both methods. That guidance could be problematical because there are situations where contractors are allowed to charge B&P costs direct and indirect both. For example, a contract with a line item that requires contractors submit a proposal for a follow-on production would be a situation where contractors can (and have) deviate from their regular charging practices.

Proposal Preparation Costs - Direct or Indirect? (or Both?)

DCAA recently issued an "alert" to its auditors regarding contractor charging practices for proposal preparation costs. The alert clarifies the point that any proposal preparation costs not funded by a grant or required by contract are by definition indirect and accordingly, proposal and negotiation costs should only be charged directly to a contract when there is a specific contractual requirement for the contractor to submit a proposal.

This is one of those situations where there appears to be an inequity. There may be a contract, for example, with a line item that requires the contractor to prepare and submit a proposal for a follow-on contract or the next phase of the existing contract. Those proposal preparation costs are to be charged direct. Meanwhile, the contract also receives an indirect allocation that includes generic proposal preparation costs. In this case, the contract is being charged for both direct and indirect proposal preparation costs.

CAS 402 addresses this very situation. CAS 402-61(c) states:

... costs incurred in preparing, submitting, and supporting proposals pursuant to a specific requirement of an existing contract are considered to ave been incurred in different circumstances from the circumstances under which costs are incurred in preparing proposals which do not result from such specific requirements. The circumstances are different because the costs of preparing proposals specifically required by the provisions of an existing contract relate only to that contract while other proposal costs related to all work of the contractor.

Evidently there must be some proposal preparation issues out there as auditors are now being advised to carefully examine contractor practices that allow contractors to charge proposal costs directly, absent a specific contractual provision for the effort. Auditors are also being advised to be alert for vague and misleading wording in the disclosure statement that could lead to direct charging proposal costs that are not specifically required by an existing contract.

Contractors should be examining their own policies, procedures, and practices for consistency with the these requirements.

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.