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Question
When the Contractor completely complies with an FFP RFP and their proposal is rejected and Contractor is asked to rewrite the proposal as a CPFF effort, is there validity to an equitable adjustment request for the initial proposal costs?
Answer
This question has a few layers (only those involved have access to some of this vital information):

Question #1: What kind of cost are we talking about (We have to know that in order to find the applicable rules)? Are the costs bid and proposal costs or are they proposal costs required by a contract?
If the proposal preparation costs were not required by a contract, then they are bid and proposal costs (See definition of bid and proposal costs in FAR 31.205-18(a). If a contract required the contractor to submit a proposal, then they are NOT bid and proposal costs, but proposal costs required by the contract in which case FAR 31.205-18 would not apply.

Question #2: What does required by a contract mean?
In accordance with the interpretation found in 48 CFR 9904.402-61(c); under CFR part 9904 - Cost Accounting Standards, costs incurred in preparing, submitting, and supporting proposal pursuant to a specific requirement of an existing contract are considered to have been incurred in different circumstances from the circumstances under which costs are incurred in preparing proposals which do not result from such specific requirement. The circumstances are different because the costs of preparing proposals specifically required by the provisions of an existing contract relate only to that contract while other proposal costs relate to all work of the contractor.

Proposal costs incurred pursuant to the specific requirements of an existing contract, such as proposal cost incurred in connection with the definitization of letter contracts and with orders issued under basic ordering agreements. These are considered to have been incurred in a different circumstance than other proposal costs and may be charged direct to the specific contract. For example in the case of a letter contract, the clause at FAR 52.216-25 expressly requires the submission of a proposal.

If the Government contracting officer notified the contractor of his intent to issue a change order and asked the contractor for a proposal for how much the change would cost the proposal costs could reasonably be charged to the contract as a direct cost. However, if the contracting officer asked the contractor for a proposal for new work (i.e. work outside of the scope of the contract, then the proposal is not required by a specific provision of the contract is bid and proposal cost and must be allocated according to FAR 31.205-18, CAS 402, and CAS 420.

Note that even in CAS 402-61 is not worded in the imperative. In other words, a contractor may elect to charge proposal prep costs as direct costs in certain circumstances, but is not required to do so. Once the contractor has established a practice for tracking and allocating proposal preparation costs in its financial disclosure statement, it is expected to follow that practice consistently.

The proper charging of proposal prep costs is determined on a case-by-case basis, based on the individual facts and circumstances. There are only a few rules of thumb:
1- Read the contractor’s Disclosure Statement (How does it say they will allocate proposal prep cost?)!
2- Go read the memorandum issued by the Office of The Under Secretary of Defense dated 10 November
2011; entitled, “Direct and Indirect Charging of Contractor Proposal Preparation and Negotiation Support
Costs”
3- Look at the outcome of the proposal results! For example if it ends in a new contract award, then it
usually lends itself to be allocated under bid and proposal cost. However if the proposal results in a
modification to an existing contract, then it usually lends itself to be allocated as a direct charge.
4- If the contractor has the discretion whether to bid or not, then it usually lends itself to be allocated into bid and proposal cost

Question #3: Is this REA based on a protest or claim?

If this REA is based on a protest and/or a claim, FAR part 33 identifies the contracting officer’s responsibilities and potential remedies in regards to adjudicating a contractor’s protest and/or claim. Furthermore, FAR part 33 also identifies what authority the head of the agency has in response to a protest. One of this potential Award of costs remedies allowed to the contractor under FAR 33.104(h), if it is determined that a solicitation for a contract, a proposed award, or an award of a contract does not comply with a statute or regulation, is the reimbursement of bid and proposal preparation costs.

Based on the requirements and responsibilities identified in FAR part 33 as it relates to contractor protest and/or claim, it is imperative that you involve members of your leadership and legal team to review the basis of this REA. Based on that review a determination will have to be made as to whether the solicitation in question did or did not comply with a statute or regulation. Lastly, once that determination is made, a contracting officer decision can be made on if the contractor has a legal right to reimbursement of the requested proposal preparation cost.

As identified above without having total insight into all of this proposal preparation cost information and the grounds of the contractor’s REA, it is impossible to provide a definitive answer on if these proposal preparation cost are reasonable, allocable, and allowable to be reimbursed as a direct charge by the Government. However if the Government team can come to agreement and/or clarity on these three aforementioned questions, the allowability of these proposal preparation cost to be billed as a direct charge to the Government can be determined by a contracting officer.

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