Tuesday, April 10, 2012

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.

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