Wednesday, November 12, 2014

Final Indirect Rate Determination - Contracting Officer or Auditor?

Final indirect cost rates can be established on the basis of contracting officer determination or auditor determination. FAR (Federal Acquisition Regulations) contain guidance on who gets that responsibility (see FAR 42.705). Basically, the contracting officer is the one responsible for settling indirect expense rates. Under certain circumstances, the contracting officer may delegate that responsibility to the contract auditor.

Settlement of indirect expense rates for the big dollar contractors is always reserved for contracting officer determination. Business units of multi-divisional corporations under the cognizance of a corporate administrative contracting officer (CACO) must be settled by the contracting officer. Likewise, indirect expense rates at business units not under the cognizance of a CACO but having a resident administrative contracting officer must be settled by the contracting officer (a resident administrative contracting officer is one who spends more than 75 percent of his/her time on a single contractor). Rates at educational institutions, state and local governments, and nonprofit organizations are also reserved for contracting officer determination. Everything else can be delegated to the contract auditor for final determination if the contracting officer decides to delegate the responsibility. In other words, its totally up to the contracting officer to delegate or retain the responsibility for final determination.

There are several factors that the contracting officer will consider when deciding whether to delegate or retain settlement responsibility. The contract auditor must agree to accept the delegation however. If the contract auditor does not agree, the contracting officer is stuck with the responsibility.

Before responsibility is delegated, the contracting officer and the auditor must agree that the indirect costs can be settled with little difficulty and any one of four circumstances are present. These include:
  1.  The business unit has primarily fixed-price contracts, with only minor involvement in cost-reimbursement contracts (contractors with predominately fixed price work are considered lower risk than those with predominately cost reimbursable contracts).
  2. The administrative cost of contracting officer determination would exceed the expected benefits (does this presume that a contracting officer's time is more valuable than an auditor's time?)
  3. The business unit does not have a history of disputes and there are few cost problems (this would cover most contractors).
  4. The contracting officer and auditor agree that special circumstances require auditor determination.
If the contractor and the contract auditor cannot agree on rates for a submission that has been delegated to the contract auditor for determination, the contracting officer takes over the responsibility for final determination. This happens somewhat frequently for a variety of reasons. Most often its because a contract auditor cannot "negotiate" a settlement - issues are black and white and questioned costs are based on applicable cost principles. Recognizing that there are grey areas and costs where "reasonableness" comes into play, the contracting officer, by authority of his/her warrant, can negotiate a mutually agreeable settlement.

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