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    How does the Contracting Officer translate added value into a dollar figure? I am concerned make verses buy items receive the same indirect rates with the exception of manufacturing and engineering.


    Answer

    In order to answer this question we first must define "value added". FAR 52.215.23 defines value added as "that the contractor performs subcontract management functions that the contracting officer determines are a benefit to the Government (e.g., processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions)".

    Putting a dollar figure on value added can be difficult. Per GAO-08-269 January 2008, GAO found when using full and open competition, contracting officials assessed contractor value added based on the technical ability to perform the contract, but did not separately evaluate cost since market forces generally control contract costs, potentially minimizing the risk of excessive pass-through charges. However, when using noncompetitive contracts, contracting officials were required to evaluate more detailed cost information in assessing value added, as market forces did not determine the contract cost.

    The bottom line is that contracting officers have wide latitude to exercise business judgment when applying these regulations to value added. While no specific criteria exist for contracting officers to use in evaluating contractor value added, one way to put a dollar figure on value added would be to compute how much time/money it would take the Government to perform these same specific value added functions (for example like processing orders, maintaining inventory, etc.) and compare that amount to the amount that the contractor had proposed. The difference would be the value added by the contractor and include such things as their G&A, profit, and overhead rates.

    As we do not have all of the facts particular to your contract, program, and situation, we highly recommend that you consult with your contracting officer and Legal Office for guidance.

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