Tuesday, April 26, 2016

Using Blended Labor Rates to Implement New Compensation Caps - Part 3

We began this series on DoD's initiative to allow contractors to blend labor rates in order to facilitate the implementation of the new limitation on compensation by discussing the impetus behind the program (see Part 1)Yesterday, we demonstrated how the blending would be calculated for incurred cost (see Part 2). Today we tackle the slightly more difficult task of blending rates for forward pricing proposals.

At first blush, one would think that there would be no reason to blend labor rates for forward pricing purposes. After all, if the contract is going to be awarded after June 24, 2014 it must comply with the new compensation cap. The complication arises when factoring in modifications and change orders for contracts awarded prior to June 24, 2014. Those contracts and modifications thereto are still subject to the old compensation caps.

The greatest challenge in this exercise is to estimate the value of pricing for new solicitations and for modifications to existing contracts. This is not an easy task and will require the exercise of judgment. How easy is it to estimate the value of contracts it will be awarded during the year? To some extent, its always a guess. How can one estimate the value of modifications to existing contracts that will be awarded during the year? Often times contractors have no idea that the Government is contemplating contract modifications.

Once those two baselines are established, the mathematics to blending rates are the same as for incurred costs.

Like the blended rate calculations for incurred costs, the blended rate examples from DCMA rely on total contract costs. But as we warned yesterday, total contract costs might not be a good basis for blending rates. Contractors need to be aware of their indirect rate allocation methodologies to ensure that the blending method achieves an equitable result.

Tomorrow we will conclude this series by highlighting other aspects of the newly issued DCMA guidance on blending labor rates.

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