Monday, February 10, 2014

Material Costs - Part 1

Whenever "material costs" are discussed, it is usually in the context of a contractor's purchasing system - a system that should be designed and operated in such a manner as to ensure that the contractor (and therefore the Government) is obtaining fair and reasonable pricing of the materials it buys or the subcontracts it awards. DFARS (DoD FAR Supplement) 252-244-7001 lists 24 different criteria that contractors must meet in order to have an adequate purchasing system.

But beyond the 24 criteria found in DFARS, there are provisions in FAR Part 31 cost principles that concerns the allowability of material costs. In the context of FAR 31.205-26, material costs include not only the cost of the item(s) but the total cost to get those parts to the contractor's facility. These include::

  1. Raw materials
  2. Parts
  3. Sub-assemblies
  4. Components
  5. Manufacturing supplies
  6. Inbound transportation
  7. In-transit insurance
The next provision that FAR adds is a reminder that allowable costs not only include the material items that go in to the end product, but also include (FAR states that contractors "shall include"):
  • Reasonable overruns
  • Spoilage
  • Defective work
This is important because contractors many times overlook these elements and auditors, when they see them in a proposal, try to question the costs (e.g. why are you proposing 13 windows for this building when the specs call for only 12?). For proposal purposes however, its a bit tricky to prepare defensible estimates of what these costs will be. Obviously, historical experience is the best indicator but many companies will not have the ability to accumulate and calculate such factors. Alternatively, there might be some industry standards available to approximate these loss factors.

Tomorrow we will review how FAR requires contractors to account for material costs.

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