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    The understanding is that the Contracting Officer has discretion to either have the contractor roll its DBA/workers comp insurance into its pricing (such as a FFP CLIN) or have a separate ODC CLIN to account for it. The mindset of rolling the cost into its pricing (FFP CLIN) is for the contractor to obtain the best possible price in the open market, whereas having an ODC CLIN removes more contractor accountability. FAR 52.228-3 and 52.228-4 does not provide specific guidance regarding this. Is there any data that suggests the best way for the Government to account for this insurance?


    Answer

    Given some due diligence on the part of the requester already to not find any best practice data in this area, this professor likewise is not aware of any best practice data. Perhaps this question might be reworded as follows: what’s the best contract type/structure for motivating contractors to both a) obtain the best possible supplier prices in the open market, and b) provide for accountability/visibility (for things such as DBA Workers Compensation Insurance)? The choices considered are to either have the cost rolled into the FFP CLIN providing for the basic overseas construction or services project. Or, to have it stand alone, or amongst, other ODCs (other direct costs) in a separate contract line item (CLIN) or sub line item (SLIN) which will be reimbursed based on the contractors incurred cost for the insurance.
    First it is presumed that these cost should be treated as direct (vs. indirect) costs for specific contracts in order for them to in fact be charged directly, for example, in an ODC CLIN. The case might also be that these costs would/should be treated as indirect costs, and included in an indirect cost rate expense pool since they are either caused by, or benefitting, many or all jobs the contractor might be working on. Typically, in construction, you might not be surprised to find similar insurance charged to either the Field Office Overhead (FOOH), or Home Office Overhead (HOOH), and the application of these rates would have all contracts share these cost rather than charge them all directly to a Government contract CLIN.

    Next it is presumed that while including the cost in the FFP contract line item (CLIN) would likely provide the contractor with the maximum incentive to obtain the best prices in the market, visibility into that price obtained will be lost unless it is put into a cost reimbursable ODC CLIN. While that may be true in the instant contract, it would not necessarily be true in the negotiations of any subsequent contract subject to the Truth in Negotiations Act (TINA), 10 USC 2306a, requiring certified cost and pricing data. It is popularly misunderstood that access to contractor cost data incurred under a FFP contract is restricted. Yet there is no contract type exemption to the TINA, and TINA defines cost and pricing data as “all facts that . . . a prudent buyer or seller would reasonably expect to affect price negotiations . . . “ [10 USC 2306a(h)(1) – COST OR PRICING DATA] Unless the subsequent contract were otherwise exempt from TINA, as it might be if there were a competition with adequate price competition determined by the contracting officer, the government buyer, being a prudent buyer, would have the right to see what was paid for the insurance under the previous/concurrent contract(s).


    Another presumption (a corollary to the one immediately above that to obtain visibility one would have to put it on an ODC CLIN), is that 1) the ODC CLIN would have to be on a cost reimbursable basis, and 2) the cost reimbursable basis would not necessarily result in the government paying the best price available in the market. It is generally believed that under a cost reimbursement contracting arrangement there is no real motivation for the contractor to obtain the best pricing available in the market. But it is often overlooked that the cost must first, and still, be considered “reasonable” in order to be allowable, and thus reimbursable. The Federal Acquisition Regulation (FAR) at
    31.203-1(a) notes: “No presumption of reasonableness shall be attached to the incurrence of costs by a contractor.” And further states “. . . the burden of proof shall be upon the contractor to establish that such cost is reasonable.” One might even require up front, for example, in the paying instructions that cost reasonableness shall be established by also providing the results of a market survey conducted by the contractor where competitive alternatives were considered. In addition, one would not necessarily be limited to the ODC CLIN being on a cost reimbursable basis. One might consider using an incentive for the contractor perhaps demonstrating their seeking and obtaining the “best” price in the worldwide market. Such an incentive could be used on either a fixed price basis, or cost reimbursable basis, for the separate ODC CLIN.

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