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  • Question

    Is it proper to award the action as a "P" purchase order or should it be awarded as a "C" type contract action?


    Answer

    There is a reason why such emphasis is placed on the treatment of indirect costs (overheads and G&A) by the ANSI/NDIA Guidelines. It is because there absolutely is value added to EVM from monitoring how the contractor deals with indirect costs in relation to government contracts. Remember that EVM is an integrated program management tool and as such is bigger than what the CAMs have direct control over. Its best use is as a tool to tie together scope, schedule and cost for the Program Manager (PM) to realize not only how the program is doing today but also to determine what are the risks that could befall the program tomorrow. It is that type of information that makes it possible for the PM to successfully manage the program.

    Indirect costs currently constitute nearly fifty percent of all Major Defense Acquisition Program (MDAP) budgets. All by itself that constitutes a huge cost risk right from the time that a Forward Pricing Rate Agreement (FPRA) is negotiated and a contract is signed.

    Changes to indirect costs can have huge implications for the government PM. Decreases in the contractor’s business base will cause overhead rates to rise. This will cause the costs to all of the existing contracts to increase through no fault of the program. If the contractor makes a business decision to shift how costs are captured (sometimes at the PM’s request), it will impact the costs that are billed against the program’s contract. I would argue that indirect costs are a significant risk that the PM should be and needs to be aware of. However, monitoring of those costs is a fairly audit oriented endeavor. For that reason, the original intent was that the Defense Contract Audit Agency (DCAA) would be providing assistance to the Defense Contract Management Agency (DCMA) in the surveillance of the ANSI/NDIA Guidelines that deal with indirect costs.

    Finally, indirect costs should in fact be included in the Performance Measurement Baseline (PMB). As the back of the EVM "Gold" Card shows, the only things that should not be in the PMB are Profit/Fee and Management Reserve.

    With all of this being said, I hope that you recognize the benefits of monitoring the indirect costs of the contractor, particularly when it comes to EVM.

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