Can the government deny the reimbursement of the direct costs of preparing cost estimates based on CO directed changes, on a CPIF contract and on what basis? And if so, what is the source document for making that denial? Are there any situations where the direct costs of estimating changes would be allowable under the existing contract?
Yes, if I correctly understood the background information you provided, I believe your Contracting Officer can deny costs associated with estimating potential changes to the contract.
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First, FAR 31.202(a) prohibits treating the same cost as both indirect and direct on the same contract. Bid and Proposal costs that are included in an overhead rate cannot be charged as a direct cost as well. You could argue that generating estimates is different than B&P cost. But, it also sounds like you have a Not Separately Priced (NSP) CDRL CLIN requiring the contractor to submit estimates on potential work changes as requested. So, both parties anticipated the need to adjust the work requirement at the time of award. This could be a case of a special term in the contract superseding the cost principles in FAR 31.205 and CAS/GAAP.
If the contractor acknowledges that the contract terms do not permit estimating costs, but feels that the volume of requests has become unreasonable (as you suggested); they have the right to submit a claim. However, I'd encourage them to work with their CO and negotiate a level of direct management cost in each estimate that is sufficient to cover "all" their responsibilities. These estimates form the basis for equitable adjustments associated with each Change Order and they will require bilateral agreemen