(Editor’s Note. As part of our continuing series on exploring a FAR 31.205 cost principle, we have relied on numerous texts for this article especially Accounting for Government Contracts by Lane Anderson.)
Allowability
Bid and Proposal (B&P) costs are incurred in preparing, submitting and supporting bids and proposals (whether or not they were solicited) on potential government or non-government contracts. Although marketing and sales costs are similar to bid and proposal costs, basic B&P costs are incurred in preparing specific documents whereas selling and marketing costs are more general in nature. Costs incurred in deciding if a bid or a proposal should be prepared, for example, are not considered B&P but marketing.
Since 1997 all bid and proposal costs are allowable if reasonable and allocable to a contract. This is a significant change over rules that limited reimbursement of bid and proposal and independent research and development costs for the prior 30 years. When the government used to impose ceilings on bid and proposal costs distinguishing between B&P and other costs were essential since recovery of other costs were not limited. Though less critical, making distinctions is still important. For example, in General Dynamics (ASBCA Nos. 15394 and 15858) the government contended the costs of building a mock-up of a product were improper B&P costs but should be considered development and test expenses. The Board disagreed ruling since the mock-up was needed to display the company’s capabilities as well as to develop the products, the costs were properly classified as B&P. This was significant because had the costs not been B&P they would have been considered direct costs of the contract rather than indirect costs resulting in a cost overrun to the contract and hence non-recoverable. On the other hand, in another General Dynamics case (ASBCA 12814) the Appeals Board ruled that costs of constructing a product were not properly classified as B&P. The distinction was that capabilities that can be displayed by a mock-up can be charged to B&P while costs of making the product itself cannot.
Allocation
Bid and proposal costs should generally be treated as indirect costs unless the contract requires submission of a proposal for subsequent work and authorizes the costs be charged directly to that contract. Individual task orders on ID/IQ contracts frequently contain this stipulation. These are the only conditions under which B&P expenses may be charged directly to a contract and when these conditions are met, only bid and proposal costs covered by the contract clause must be direct charges.
This raises the question about whether all B&P costs incurred on one of these contracts must be charged direct to that contract even when, for example, the task order or contract may limit the amount of reimbursement (e.g. caps on B&P reimbursement). In Boeing (ASBCA 29793) the contractor treated some costs as direct in compliance with contract terms while other related costs were charged indirect. The contractor argued this treatment was appropriate because the costs charged indirect were for efforts above and beyond that required to submit the proposal since they were incurred before the government requested a submittal of a proposal. The Appeals Board rejected these arguments and classified the entire effort as direct costs to the contract but a higher Court (Boeing Co. v. US, CA FC No 88-1298) reversed this decision. The Court said the contractor’s distinction was appropriate and the treatment of some costs as direct and others as indirect was warranted under the circumstances. The Court concluded the only costs required to be treated as direct in this case were those incurred after the government’s go-ahead for preparing the proposal but before its submission – costs incurred before and after this period were properly treated as indirect.
Many would think these B&P costs would have to be treated either direct or indirect in accordance with CAS 402 (consistency of treating like costs under like circumstances). To prevent such an interpretation in the light of the Boeing case, DCAA changed its guidance to auditors to permit direct charging of the cost of preparing task order price proposals under an ID/IQ contracts as long as such costs are classified as B&P, the contractor’s policies provide for direct treatment and the contract terms require the contractor to submit such a bid.
CAS Covered Contractors
Accumulation and allocation of bid and proposal costs are to be the same as IR&D costs. CAS 420, Allocating IR&D/B&P costs provide for similar treatment. The basic unit of accumulation is an individual B&P project or if immaterial in amount, a single account. For example, a contractor may decide to establish a separate account that would accumulate the costs of individual B&P projects whose expected costs are to exceed, say $10,000 while a separate account would be established to accumulate the costs of all other B&P expenses. CAS 420 requires costs allocated to B&P projects be treated as if they were final cost objectives or contracts (although G&A is not allocated) and treated as if they were G&A costs (e.g. allocated on the same base). B&P costs must include all the associated direct and overhead costs just as if they were another contract. The standard requires use of the same base used to allocate G&A costs and B&P costs are routinely included in the G&A pool.
Like IR&D costs, B&P can be accumulated at either the segment or group level. The proper accumulation point is determined by whether the costs benefit only one segment or several within a group. If a B&P project may benefit more than one segment then allocation of these costs must take this into account.
Non-CAS Covered Contractors
FAR 31.205-18(b)(2) provides that non-CAS covered contracts and contracts subject to modified CAS coverage must still meet all provisions of CAS 420 except for CAS section 420.50(e)(2) and 420.50(f)(2) which have to do with allocation of costs within a business unit. In lieu of these two CAS requirements, the FAR basically requires that IR&D and B&P costs be allocated like G&A unless they benefit other business units or the business of the entire company. If so, allocation of B&P costs should be made through the G&A expenses of the other business units or through the corporate G&A expense pool.
Unlike the more restrictive requirement of CAS 420, the FAR permits use of an allocation base other than the G&A base if (1) the results of using the G&A allocation are "inequitable" and (2) the CO approves another base. The existence of two product lines within a single division having varying requirements for B&P costs would be an example of where another base may be desirable. In practice, we have not seen many circumstances where COs have approved use of another base (we’d be interested in hearing from others).
Does Clear Requirements for IR&D Apply to Less Clear B&P Costs
There is some question by some commentators whether the rules that clearly apply to IR&D costs also apply to B&P expenses. First, DOD FAR Supplement 231.205-18, IR&D and B&P Costs, states these costs must have "potential interest to the Department of Defense" to be allocable to defense contracts. Though they are sufficiently broad to include just about all IR&D effort (we are unaware of any successful challenge) there is some question whether all B&P costs have similar "potential interest." Second, there is some question whether deferred B&P costs are allowable like its IR&D brethren. Offering an opportunity that neither generally accepted accounting procedures or the tax laws provide, the government allows contractors to recover deferred IR&D costs under certain limited circumstances. Though the FAR 31.205-18 cost principle addressing deferred IR&D costs includes "IR&D" and "B&P" in the title only IR&D costs are actually referred. Though this raises the question whether deferred B&P costs are allowed, two ASBCA cases (North Am Rockwell Corp. ASBCA No 13067 and Channel Splicing Machine Co., ASBCA No 10209) have supported the conclusion that B&P and IR&D costs should be treated the same.
© 2024 Government Contract Associates. All Rights Reserved.
