Friday, September 21, 2012

New Limits Placed on Dollars Available for Contracted Services

DoD issued a new policy last Summer that attempts to put the brakes on increases in the cost of contracted services. This new policy implements Section 808 of the Fiscal Year 2012 National Defense Authorization Act.

The new policy, issued by the Director, Defense Procurement and Acquisition Policy, provides that contracts, task orders, and delivery orders in excess of $10 million, awarded to contractors in fiscal years 2012 and 2013, shall not exceed labor rates and overhead rates paid to the contractor for the same or similar contract services performed under contract in fiscal year 2010.

There is an escape clause however. If for some reason the Government cannot negotiate 2012 and 2013 prices down to the 2010 level, the Secretary of the Military Department or Head of the Defense Agency can approve the higher prices, but the approval must be in writing and must be issued prior to award. That's a fairly high level of approval and not something that most contracting officers would want to have to justify.

This will undoubtedly place a hardship on many contractors providing services to the Defense Department. Its one thing to hold down overhead rates but its very difficult to hold down labor rates to levels paid two or three years ago.

Contractors should be wary of trying to "game the system" by, for example, moving costs from direct to indirect as the auditors are going to be looking for that very thing. We'll discuss that matter, and the related DCAA guidance, next.

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