SMALL BUSINESS FEDERAL GOVERNMENT CONTRACTING ("Smalltofeds")
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Tuesday, July 1, 2025
Risk Analysis and Provisional Indirect Rates In Government Contracting
Establishing FAR and CAS Compliant Business System
DCAA Audits and Small Business Job Cost Accounting Systems
Chapter 51 of the free book, 'Small Business Federal Government Contracting' contains an explanation and examples of a forward pricing budget plan from which provisional rates are established and negotiated with the government. Under "Management Factors" the book goes on to explain that it is not always possible to execute the plan as anticipated.
Programs and projects will come and go, entering and leaving the business base sometimes earlier and sometimes later than planned. Expenses do not always materialize as anticipated. For these reasons actual experience in terms of indirect rates may differ (+or -) from provisional rates.
There are three important points to remember regarding provisional bidding and billing rates:
1. Provisional rates are utilized for both pricing and billing and billed rates must be reconciled to actual rates at contract closeout for cost type contracts.
2. Provisional rates are audited by DCAA and negotiated with Administrative Contracting Officers. They are the baseline frame of reference for the government in reviewing cost proposals and billings until the contractor asks for a change. Provisional rates are used for billing existing contracts and for pricing new work. Provisional rates are approved by the government on an interim basis or they would not be "Provisional" by definition. A constant frame of reference is the actual running rate being experienced by a contractor as opposed to the current provisional rate. The difference must be reconciled on cost type contracts at contract closeout.
3. A request for change to provisional rates must be supported by data regarding actual running rate experience and may start a series of questions by DCAA or contracting activities regarding what sort of management corrective action is planned for differences between provisional and actual running rates (particularly if a provisional rate increase is proposed under time and material or cost type contracts or prices for outstanding proposals are increased due to rate changes prior to negotiation).
There are no industry average indirect rates in federal government contracting because there are wide swings due to many factors. Company indirect rates are managed based on the competition, the market and the funding availability of the customer. Site-unique indirect rates inside government facilities are always lower than company site operation rates because the government is paying a portion of the expenses (facilities occupancy, heat, light, etc.) on work occurring inside a government facility.
Assuming a small business pays roughly the same on the open market for labor, material and ODC as the competition, and has to offer the same fringe benefits to retain employees, the remaining overhead and G and A rate expenses are principal drivers in winning new business and have the most potential to lose a job, cause funding difficulties on an existing program or be responsible for a loss on projects negotiated at fixed rates.
Below are examples of a risk analysis thought process when evaluating whether or not to make a provisional rate change:
EXAMPLE 1
One could say that it may be a poor time to change a provisional rate when there are several FFP proposals outstanding and in negotiation or a major competition is coming up.
On the other hand if there is a wide unfavorable variance between the current actual running rate experience and the existing provisional rate and the future forecasted base and expenses do not show improvement, perhaps the rate should change to avoid signing up to prospective losses or ambitious funding profiles that may mislead a customer.
EXAMPLE 2
One could say that it is a good time to change a provisional rate if several cost plus and T&M contracts are pending closeout and there is a wide disparity between billed cost and actual cost due to rates. In fact, if the government is going to owe you money at closeout, the issue should be broached as soon as possible to the contract funding authorities to insure there are enough funds on the programs to cover the final bills.
Conversely, if you will owe the government money at closeout your forecasts should project the anticipated drop in final contract pricing that will be settled in the closeout actions with the government.
For most companies a provisional rate change comes about at the end of the calendar year and the beginning of the new calendar year. Accountable personnel perform a bottoms-up projection of the anticipated business base and associated expenses by cost center. The company then submits the results to DCAA to get them approved for the new year as revised provisional rates.
Nothing mandates a specific date for a provisional rate review. DCAA audits proposals and contract closeouts, fixed price progress billings and cost-plus and time and material billings. During those audits there may be questions regarding the comparison between bidding and billing and actual running rates.
The company takes the action for provisional rate changes by requesting them from the government as a function of an annual budgeting cycle or business developments. DCAA approves them.
Throughout, the data is very company private and closely held. No other company, to include prime contractors has the right to your rates and rate supporting data. When necessary they will see only fully loaded labor, material and ODC.
The term provisional implies subject to change and approved on an interim basis by DCAA. Provisional rate changes for billing and pricing can occur more often than annually if the business is changing on a volatile basis with work coming and going from the business base in an unplanned manner and expenses increasing or decreasing with economic changes.
I have seen some corporations that had several changes a year. It is a management call, but DCAA reserves the right to review and approve each one.
A provisional rate change is a delicate matter and should be approved by a management level of the company where authority to effect cost change resides (usually the CEO and CFO).
Management must make rate change decisions based on company-unique product and service lines, work location, forecasts, customer demands, competitive factors and contract status. It is a job that should be undertaken by executives who get paid for balancing such factors and who are accountable for successful outcomes from decision results.
Tuesday, June 24, 2025
Managing Risk Under 'The Truth In Negotiations Act (TINA)'
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:
The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend management techniques to comply with this law and avoid defective pricing claims by the US Government.
THE TRUTH IN NEGOTIATIONS ACT (TINA)
Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations. The following are the principal features of the law:
- Defines requirements for obtaining cost or pricing data
- Requires certification that data are current, accurate, and complete
- Delineates exceptions to the requirement
- Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”
- Provides right of Government to examine contractor records
- Defines cost or pricing data
- Provides rules governing defective pricing
- Downward Contract price adjustment
- ·Recovery of overpayment (cost & profit) & interest (as of 1985)
- 2 M Threshold for contract actions (DOD recently increased from 750 K) Recent Procurement Reforms
- Contract actions include contracts, subcontracts, and modifications
- TINA applicability is not affected by contract type
- For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING
1) The information in question fits the definition of cost or pricing data.
(2) Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.
(3) Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.
(4) The Government relied on the defective data in negotiating with the contractor.
(5) The Government’s reliance on the defective data caused an increase in the contract price.
MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.
Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly. If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.
Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price. Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing.
If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor. Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose.
Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor. Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers.
Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government. If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.
SUMMARY
Defective pricing actions by the government can have a severe impact on your past performance rating. They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations.
A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA. This will keep your business system sharp, your ethics and standards high and your past performance record clean.
Monday, June 23, 2025
UPDATE: Remember the Small Business Instant Depreciation Tax Break
"Nerdwallet" by Andy Rosen
Key takeaways
"Section 179 of the Internal Revenue Code lets businesses write off assets immediately rather than after they've depreciated.
Office furniture, certain vehicles, computers and off-the-shelf software are typically considered deductible expenses.
For 2025 (taxes filed in 2026), the maximum Section 179 deduction is $1,250,000.
What is the Section 179 deduction?
Section 179 deductions are major purchases that can be used to lower a business’s taxable income in the year the purchased items are put into service. Items that fall under Section 179 may be deductible at full value rather than depreciated.
For example, if you buy a new piece of machinery for your factory and begin using it right away, you may be able to deduct the entire cost from your business’s taxable income when you file taxes the next year. This is true even though the purchase will continue to have value to you in future years.
How the Section 179 tax deduction works
Office furniture, computers and off-the-shelf software are among the business
equipment covered by Section 179
It doesn’t generally cover real estate. While some vehicles, such as cargo vans, are eligible Section 179 expenses, the federal government has narrowed businesses’ ability to write off vehicles traditionally used for personal transportation.
Another thing to remember when considering business costs for tax purposes is that many expenses are immediately deductible, regardless of whether they qualify for Section 179. These include rent, office supplies, insurance and some startup costs. In contrast, Section 179 mostly deals with assets that will retain value after you begin using them and would otherwise be written off gradually during the course of their time in service."
More:
Thursday, June 19, 2025
Government Contract Negotiating For Success

INTRODUCTION
You have worked to establish your federal government contract business contacts. You have developed your company infrastructure and processes to accommodate the Federal Acquisition Regulation. Your company has effectively marketed and teamed on a prospective program. A proposal has been carefully prepared and submitted to the contracting officer. You have been selected as the apparent winner and you are ready for the next phase on the government contracting process - the negotiation.
Unlike commercial business, many federal government contracts are subject to negotiation. The government may award a contract based on best value (a combination of technical, cost and other factors) not necessarily to the lowest price bidder. The final price paid by the government is then subject to negotiation. Under General Services Administration (GSA) Schedules and Indefinite Delivery/Indefinate Quantity (IDIQ) Contracts, terms and conditions and labor hour pricing are agreed upon in advance but individual delivery orders are negotiated separately regarding the labor hours, material and travel cost necessary to complete a discrete scope of work.
This document will address contract negotiations under three (3) different business scenarios:
Negotiations directly with a government contracting officer pursuant to a federal government contract
Negotiations with a prime contractor for a subcontract under the prime's federal government contract
Negotiations with a subcontractor to establish a price and flow down the terms and conditions of your contract with the federal government.
NEGOTIATION TEMPLATE
In federal government contracting each of the above scenarios pass through the following template of negotiation steps:
Audit
Fact-finding
Pre-award Survey
Cost Negotiations
Final Profit Negotiations
The above template is recognized throughout the Federal Acquisition Regulation (FAR) and in the Defense Contract Audit Agency (DCAA) Handbook. All government agencies and contractors utilize it.
Your proposal represents an initial offer to a government agency or a prime contractor. Correspondingly, a subcontractor's proposal represents his initial offer to you. Government contract and subcontract negotiation is an art, not a science. You will find the above negotiation template is applied with various degrees of expertise among government agencies, prime contractors and subcontractors. Like many other aspects of business, the intellect and experience of customer or supplier personnel will vary with the agencies and the companies with whom your are dealing.
Keep in mind that your client or your subcontractor is also developing his/her position against the above template. Confirm with the other party at which step the negotiation is located and the fact that the negotiation is moving from one step to the next. If you are dealing with an agency or company representative who is unfamiliar with the process, take the time at the beginning to convey in a tactful manner your understanding of how the negotiation will proceed. Keep a careful written record of events during each step, to include information provided, offers and counter-offers made and agreements reached.
Develop a negotiation with a "target" position and a "floor" position. Your objective is to conclude the negotiation achieving a price as close to the target position as possible while never going beneath the floor.
Courtesy and politeness are mandatory. Avoid confrontations. Do not reveal your strategy in front of the other party except to objectively explain your position in terms of an incremental offer or a counter offer. Excuse yourself for outside caucuses or adjournments whenever it is necessary to study an offer, assess a situation or develop your next move.
It is always best to look at negotiations from a win/win perspective. Be honest and forthright during the audit, fact-finding and site survey steps. Look for insights into the other party's negotiation position from the questions being asked, the data being requested or the responses being obtained. Defend your cost and performance position as conveyed in your proposal with documented facts. Look for openings in your subcontractor's proposal support documentation. When cost and profit negotiations commence, offer compromises and trade-offs of value to the other party in return for acceptance of your position.
NEGOTIATIONS DIRECTLY WITH A FEDERAL GOVERNMENT CONTRACTING OFFICER
Procurement Contracting Officers (PCO's) hold warrants to represent the federal government. PCO's must have internal approval of a contract within their respective agencies before they can sign a contract. Only a PCO is authorized to officially commit the government. For smaller contracts a PCO may delegate his authority to an Administrative Contracting Officer (ACO). This often occurs in larger industrial plants where the ACO is resident in the facility or in remote locations where the ACO is a member of the Defense Contract Management Area Office (DCMAO) in the city where the contract is being performed.
Pre-award Survey - A pre-award survey is an extension of fact finding in the form of a visit to a new supplier's facility. The PCO or the ACO and the COTR usually attend. In some instances the local Defense Contract Management Area Office (DCMAO) is involved. As you become a regular supplier to an agency, site survey visits will normally cease or occur only rarely. The site survey team is interested in establishing the physical presence of a new supplier, the technical capability and the human resources to perform the prospective work and the quality of the environment in which the effort will be performed.
Cost Negotiations - At the conclusion of audit, fact-finding and pre-award survey steps, the PCO and the COTR complete their should cost and open negotiations. They may make a counter offer to your price proposal at this time. Such a counter-offer reflects the government's initial position on cost and a reasonable profit. Assess how far from your negotiation target the counter-offer is and how close to your floor the government wants to take you. In the vast majority of cases you and the government determine that further negotiations are necessary.
Cost Elements Least Subject to Negotiation
(1) Direct Labor Rate - The contractor can supply cost history, salary surveys or other documentation to support direct labor rates.
(2) Labor Overhead & Material Handling Rates - DCAA has reviewed the company forward pricing rates
(3) G&A Rates - DCAA has reviewed the company forward pricing rates
(4) Direct Material Cost - The contractor can supply vendor quotations and demonstrate competitive bidding
(5) Travel Costs - The contractor can supply airline and rental car quotes and government per diem rates are used for lodging and meals
(6) Terms and Conditions - All clauses required by the government and public law were contained in the RFP when the solicitation was provided for contractor response. In a competitive environment very few contractors take exception to these requirements. However, if the procurement is a HUB Zone or 8(a) Set aside to your compan there may be certain terms which the government is willing to negotiate.
Cost Elements Most Subject to Negotiation
Labor Category - The government may choose to question or have an alternative assessment of the skill level and mix necessary to perform the statement of work. A mutual agreement on the labor skill mix must be achieved.
Labor Hours - The government may choose to question or have an alternative assessment of the quantity of labor hours necessary to perform the statement of
work. A mutual agreement on the labor hours to do the job must be achieved.
Number of Travel Trips - The government may choose to question or have an alternative assessment of the quantity of trips necessary to perform the statement of work. A mutual agreement on the number of trips must be achieved.
Data Items - Some data item requirements are negotiable, such as the level of reporting in the product hierarchy for cost and schedule reporting. Agreement must be reached on these fields. Although data items are normally not quoted separately in the proposal, their preparation cost can be dramatically influenced by content requirements and heavily effect direct labor hours.
Material and Labor Escalation - The government generally recognizes the Consumer Price Index (CPI) as a reasonable projection of annual labor and material cost increases. In the event the contractor proposes escalation values in excess of the CPI, compounded for multi-year contracts, the rationale must be supported and agreed upon.
At the conclusion of the cost negotiation, all elements of cost for the base price of the contract have been agreed upon. During the course of the cost negotiations this agreement can be reached by arriving at a fully negotiated amount for each of the above cost elements one by one, or offering and counter-offering at the total cost line until agreement is achieved.
Final Profit Negotiations - During the offer/counter-offer process the preliminary profit positions which may have been conveyed from one party to the other must be finalized. Under Federal Acquisition Regulations (FAR) a PCO must place in the negotiation file a memorandum on the derivation of the profit rate awarded to the contractor in the final price.
Contract Type
Firm, Fixed Price (FFP) - 15% to 20% profit on total cost
Time and Materials (T&M) - 5% to 15% profit on fully burdened labor cost
Cost Plus (CP) - 5% to 15% profit on fully burdened cost
The Federal Acquisition Regulation (FAR) prohibits profit awards above certain levels for certain types of contracts where the government is bearing virtually all the risk. The PCO has the authority to negotiate the profit rate with the contractor but his profit memorandum to the file must specify the logic he utilized. PCO's must therefor justify the profit by discussing risk and certain other factors in the memorandum.
Certain cost plus incentive fee and cost plus award fee arrangements are available to the government and are usually specified in the RFP. Contractors are required to provide proposal input to these arrangements. A base fee is negotiated and then an incentive fee range or an award fee pool is also negotiated. The contract requires regular awards of additional increments of fee based on the performance achievements negotiated in advance with the contractor.
Contract Award -. Agreement on a final price for the contract is determined by the total negotiated cost plus the negotiated profit. The negotiation result is documented by the contractor in the form of a letter to the PCO specifying the date negotiations were concluded and the agreed upon price.
Upon receipt of negotiation confirmation from the contractor and the Certificate of Current Cost and Pricing, if required, the PCO and his staff prepare the contract document. The document is forwarded to the contractor for review, approval and signature. The PCO then signs the contract and returns a copy of the fully executed document to the contractor.
You are obligated for delivery of the supplies and services specified in the negotiated and signed contract in accordance with the delivery schedule and terms and conditions contained therein.
NEGOTIATIONS WITH A PRIME CONTRACTOR FOR A SUBCONTRACT
You signed a teaming agreement with a prime contractor during the RFP stage of a solicitation. You prepared your proposal and submitted it to the prime contractor who incorporated it into the submission to the government. Your submission contained flowdown versions of terms and conditions from the prime's federal contract as well as a technical description of the effort you intend to perform.
Most prime contractors prefer to negotiate subcontracts with their team members before they negotiate the final prime contract with the government. Therefore, you will likely be approached by your prime with a certain element of urgency to finalize your subcontract and enable him to negotiate his deal. Keep in mind that your prime contractor is preparing his cost for negotiations with the government and may be seeking to obtain cost benefits at your level which will offset elements of his proposal which he may have bid ambitiously.
A. Audit - Prime contractors do not have a right to your direct and indirect rate information. Subcontractors propose fully loaded labor and material through profit and do not disclose their rates to primes. Your teaming agreement may specify the profit rate your team member and you have agreed to apply. Other than profit, your prime does not know the make-up of your direct labor, overhead, material handling and G&A rates. Your proposal disclosed labor hours at a fully loaded rate and burdened material and travel cost. If your prime wants to audit any other cost element of your proposal he must request an assist audit through his PCO.
Fact-Finding - Prime contractors have similar limitations to subcontractor proprietary data during fact-finding as they do during audit. However, as the government’s buying agent for the subcontractor supplies and services, the prime is expected by the government to conduct a thorough source selection, to include market surveys, competition, technical qualification and contract negotiation.
Pre-Award Survey - The government PCO may request the Defense Contract Management Area Office (DCMAO) to complete the survey of a major subcontractor on a program where the subcontractor has a major portion of the effort and in cases where the subcontractor is new to the defense business.
Cost Negotiations - You will be negotiating with a representative of the prime contractor, deemed a "Subcontract Administrator" or a "Subcontracts Manager" instead of the government. Only this person is authorized to commit the company and care should be taken not to undertake matters of negotiation with other members of the prime contractor organization without an authorized contracts representative present.
Contract Award - You will receive your subcontract from the prime contractor and the prime's subcontract manager instead of the government and the PCO.
NEGOTIATIONS WITH A SUBCONTRACTOR UNDER YOUR FEDERAL GOVERNMENT CONTRACT
You signed a teaming agreement with a subcontractor during the RFP stage of a solicitation. Your subcontractor prepared a proposal and submitted it to you. You incorporated it into the prime contract proposal to the government. You have negotiated flowdown versions of terms and conditions from your federal contract to the subcontractor as well as a technical description of the effort the subcontractor will perform.
It is preferable to negotiate subcontracts with team members before you negotiate your final contract with the government. Going into negotiations with the government having definitized your subcontracts reduces your risk in terms of unknowns contractually at the supplier level. It also eliminates the subcontractor wanting to know the result of your prime contract negotiations so that he can use it as a frame of reference for his negotiation position with you.
Fact-Finding - You have similar limitations to access subcontractor proprietary data during fact-finding as you do during the audit. As the government's buying agent for the subcontractor's supplies and services, you are expected by the government to conduct a thorough source selection, to include market surveys, competition, technical qualification and contact negotiation.
Pre-Award Survey - A government pre-award survey may be completed by the government and results will be supplied to the PCO. You will get a general statement that the government either concurs or does not concur with your subcontractor selection.
Cost Negotiations - You will be negotiating with a representative of the subcontractor, deemed a "Contract Administrator" or a "Contracts Manager" instead of the government. Only this person is authorized to commit his company and care should be taken not to undertake matters of negotiation with other members of the subcontractor's organization without an authorized contracts representative present.
Final Profit Negotiations - The profit rate will be agreed upon with the subcontractor as either a function of the teaming agreement or as a function of subcontract negotiations. You will be in the contracting role instead of the government. Make use of weighted guidelines to support your proposed profit.
Contract Award - You will issue a subcontract to your partner.