What Does It Mean When FAR 52.216-7 Is In Your Contract?
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Okay, so you’ve just been awarded a cost reimbursable contract, and in reviewing the contract, you discover the FAR (Federal Acquisition Regulation) Clause 52.216-7 Allowable Cost & Payment, in Section I Contract Clauses. So what exactly is this clause and what does it mean? At it’s most basic level, this clause is your requirement to be FAR compliant, or as most of the DoD Contracting industry calls it, DCAA Compliant. DCAA is the Defense Contract Audit Agency, and they are responsible for almost all contractor financial related audits for the Department of Defense. Most DoD contractors call it DCAA Compliance since DCAA is tasked with auditing cost reimbursable contracts, and the financials systems used by the contractor.
What DoD Contractors mean by DCAA Compliance is the requirement to comply with the requirements of FAR Part 31 Contract Cost Principles and Procedures. In FAR Part 31 provides definition for what makes up total cost (FAR 31.201-1), allowability of cost (FAR 31.201-2), what cost is reasonable (FAR 31.201-3), how to allocate costs (FAR 31.201-4), how to handle credits (FAR 31.201-4), and how to account for unallowable costs (FAR 31.201-6). It also lays out the contractor’s responsibilities for tracking and monitoring direct costs (FAR 31.202), indirect costs (FAR 31.203), and selected areas of costs which may be unallowable (FAR 31.205). It provides definitions for each type of cost, and what kind of costs will not be reimbursed to the contractor as they are deemed unallowable. FAR 31.205 lays out 52 selected areas of costs that may be unallowable of which 6 are “reserved” for future use. Each cost type has a full section dedicated to it describing scenarios in which the cost would be considered allowable (reimbursable to the contactor) or unallowable (not reimbursable to the contractor).
Of all of the FAR 31.205 Selected Areas of Cost, the most researched is FAR 31.205-46 Travel Costs. But why would travel costs be confusing? You fly on a plane, you stay in a hotel, you eat food, do your work of course, and return home. Bill the Government…seems easy. Unfortunately, this isn’t so easy as travel, being likely the second most incurred expense by contractors behind labor, has many specified restrictions within it. Travel costs cover transportation, lodging, and meals and incidentals (M&IE). When a contractor incurs transportation costs, the can request reimbursement using mileage rates (for personally owned vehicles), actual cost incurred, or a combination of the two so long as the cost is deemed “reasonable”. When referring to lodging and M&IE, the contractor may use per diem, actual costs, or a combination of the two, again as long as they are reasonable.
Per diem rates are capped rates, for a given location, that may be incurred by a contractor for lodging and M&IE. These rates can be found on the GSA website at https://www.gsa.gov/travel/plan-book/per-diem-rates. Lodging & M&IE rates will be based on the zip code of the location in which you will lay your head to sleep. So, for example, search on the GSA Per Diem site for the zip code of your hotel, and those will be the max lodging and M&IE rates you can use for each day while there. One note, max lodging rates are for the base rate of the hotel only. This doesn’t include the taxes and fees assessed by the specific hotel. So the max rate you see on the GSA Per Diem website is for base fee before taxes and fees. Please note that if you are unable to find a hotel within a reasonable distance of your work location that fits within the max lodging rate (perhaps there is a special even happening in the area or time of travel is during a high occupancy season), you may request allowability of cost in excess of max lodging from the contracting office. Do so in advance of travel.
When it comes to M&IE, there are a few special factors to keep in mind. First, the first and last day of your travel period are only allowable up to 75% of the daily max per diem rate. This is because it is recognized that more often than not, a travel day doesn’t result in the need for all three meals. You are usually in need of breakfast and lunch, or lunch and dinner, but not all three. Second, you must reduce your max M&IE per diem rate for each meal that is provided to you for the day. Individual amounts for breakfast, lunch, and dinner that make up the total meal portion of M&IE can be found on the GSA Per Diem website under “M&IE Breakdown”. So if the hotel you are staying at provides a continental breakfast as part of the hotel fee, you must reduce the max per diem by the breakfast amount. If the customer you are visiting provides you lunch or dinner, reduce the max M&IE by the amounts for each of those.
If a contractor opts to use actual costs rather than the stated M&IE per diem rates, the contractor must provide a receipt for each cost incurred for costs at $75 or more. If less than $75, no receipt is required. In either case, to be allowable, the contractor must provide the date and place of the expense, purpose of the trip, and name of the person on the trip.
For transportation, mileage rates for each mile traveled using a personal vehicle may be applied. Those rates can also be found on the GSA website at https://www.gsa.gov/travel/plan-book/transportation-airfare-pov-etc/privately-owned-vehicle-pov-mileage-reimbursement-rates. When traveling using airfare, FAR 31.205-46 requires contractors to use “…lowest priced airfare available to the contractor during normal business hours…”. A contractor may incur costs in excess of lowest available if travel at lowest cost would be require circuitous routing, excessive travel hours, travel during unreasonable hours, or result in increased cost. Adequate justification should be documented, and if time permits, approved by the contracting officer in advance of travel.
Okay, say you invoice on a monthly basis. All labor and travel costs have been incurred and recorded in your accounting system and you are ready to invoice the government. How do you send them an invoice? The DoD in particular uses what is called Wide Area Work Flow or WAWF. WAWF is the portal within the Procurement Integrated Enterprise Environment (PIEE) website at wawf.eb.mil. Contractors create an account on the website tying them to their contracts for purposes of invoicing the government. Many contractors find the WAWF system to be highly difficult to navigate and understand. There are a lot of companies out there who offer WAWF Training, and still several more who offer to help you submit invoices to the government for you. This is a rather simple process. As the admin on your WAWF account, you can authorize other individuals to have access to your contracts and submit invoices on your behalf. If you want to learn yourself, there is WAWF Training available on the PIEE website under the FAQ section which leads you to some resources.
So how do you submit an invoice? First, the government, and specifically DoD, calls an invoice a “Public Voucher”. This voucher is created using the Standard Form 1034, or SF 1034. The SF 1034 is called the Public Voucher for Purchases and Services Other Than Personal. The SF 1034 is really just a cover form for the detailed breakdown of the voucher which is found on the SF 1035. The SF 1034 provides basic information like the sequential voucher number, what gov’t agency is being invoiced, the contractor’s name and address, period being invoiced, and the total being vouchered. The details behind the total vouchered amount are found on the SF 1035 called the Public Voucher for Purchases and Services Other Than Personal (Continuation Sheet). On this form you find the sequential voucher number, the total contract ceiling (both cost and fee), total funded amount of the contract (both cost and fee), what percentage of fee is to be withheld (if any), and a detailed breakdown of the total cost from the SF 1034 for the period being invoiced, as well as the cumulative amounts invoiced for that same breakdown. For both, details about the total cost are broken down by cost element. Cost elements to be broken out include items like labor, travel, material, equipment, subcontractors, and other direct costs. It further includes fringe applied, overhead applied, G&A applied, and fee invoiced. A good example of the properly filled out SF 1035 can be found on the DCAA website under Guidance, and specifically in the Information for Contractors guide on page 49.
In WAWF, you identify the contract being invoiced, identify pertinent information about what CLIN (Contract Line Item) and or ACRN (Accounting Classification Reference Number) and how much is being invoiced to each. When all filled in, you will attached your prepared SF 1034 and SF 1035 under the Attachments tab of the WAWF voucher. When all complete, submit the voucher. This sends the voucher to your contracting office and DCAA, among potentially many other people, for review and approval. Once approved by the required personnel, the voucher is sent on to DFAS (Defense Finance & Accounting Service) for actual payment to the contractor.
Lastly, FAR 52.216-7 prescribes two other processes that must be completed by the contractor. These two processes, or reporting/approval requirements are the Provisional Billing Rates (PBRs) and the Final Annual Indirect Cost Rate Proposal, better known as the Incurred Cost Propsoal (ICP). On cost reimbursable contracts, a contractor must submit to the Government (typically to the contracting office and DCAA) an indirect rate forecast at the beginning of the contractor’s fiscal year (most contractors are calendar year fiscal year, or Jan 1 to Dec 31). This forecast is due within 3 months of the start of the contractor’s fiscal year. This forecast is then reviewed by the Gov’t and negotiated. Once negotiated, this is converted into a formal document called the Provisional Billing Rate agreement. These negotiated indirect rates become the indirect rates you are to use when preparing your voucher for the current contractor fiscal year.
At the end of the contractor fiscal year, the contractor is to prepare their Incurred Cost Proposal. The ICP is due to the Gov’t within 6 months following the contractor’s fiscal year end. The ICP is a big spreadsheet that must be created which requires a whole discussion on its own but suffice to say it lays out your actual costs incurred for the prior fiscal year for all of your direct costs for each contract and all of your indirect costs. Ultimately, the Gov’t audits these costs in order to develop the final allowable and billable direct and indirect costs to the Government for your cost reimbursement contracts. Contractors are then required to adjust the total amounts invoiced for the given fiscal year to match the final, negotiated amounts from the ICP.
While all of this seems daunting, don’t be overwhelmed. While the learning curve may be steep for some, once you get used to it, it’s pretty straight forward. If you don’t want to take on this task, seek a “DCAA Compliance” expert or firm to help you navigate the process or take over these functions on your behalf. Welcome to the wonderful world of cost reimbursement contracting.
* Commonly searched versions of these terms:
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