Are you allowed to use ceiling labor rates on a CPFF, or any cost type CLIN? Under cost the direct labor rate billed is the actual cost so long as it allowable, reasonable and allocable. What basis would we the Government have to not pay on direct labor cost billed at a rate higher than the (NTE) ceiling labor rate? It seems to violate FAR 31.
A cost re-imbursement contract establishes an estimated total cost and a ceiling that the contractor may not exceed without approval from CO/KO (FAR Part 16.301-1). This ceiling applies to the estimated total cost and not to direct labor rates per se. Under FAR Part 42.707, indirect cost rate ceilings are established as part of a cost sharing arrangement under research and development contracts. In these cases, an equitable ceiling covering final indirect costs may be negotiated and specified in the contract. Forward Pricing Rate Agreement (FPRA) can be used as a basis for pricing all contracts, contractual actions, etc. (FAR Part 15.407-3) including CPFF Contracts. FAR Part 42.704 allows CO/KO or auditor to establish billing rates based on information from recent reviews, previous rate audits, etc. For cost proposals received in response to a solicitation contemplating the award of a cost re-imbursement contract, the Government must perform cost realism analysis and develop a probable cost estimate IAW FAR Part 15-404-1(d) to determine whether proposed costs (labor rates) are realistic, fair, and reasonable. So the CO/KO has multiple FAR references he/she can use to help establish realistic rates.
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In the second sentence of your question it states "What basis would we the Government have to not pay on direct labor cost billed at a rate higher than the (NTE) ceiling labor rate? It seems to violate FAR 31." If applicable to your contract, the Service Contract Act of 1965 (for Service Contracts) or Davis Bacon Act (Construction Contracts) requires prime contractors to pay its employees a set minimum rate normally based on a local wage determination. A contractor can always pay a higher rate than specified but would need to justify this higher rate and provide supporting documentation/rational to CO/KO for review/approval. FAR 31.204(a) specifically states that costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203, and 31.205. This determination must be made by the CO/KO. So if the CO/KO has approved the higher labor rate and the rates are deemed reasonable, allocable, and allowable there would be no violation of FAR 31.
Since 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 further guidance.