Our conclusion is that Contractor’s current rate structure represents the best alternative for its needs at this time.  We believe its current practices should remain in tact and we should focus on ensuring the government accepts your practices. 

First, and perhaps most important, your various overhead rates as well as material handling versus G&A rates applied to certain Other Direct Costs (ODCs) provide great pricing flexibility.  Contractor’s system allows the company to provide low prices for price sensitive, highly competitive bidding (Special Overhead), profitable yet competitive pricing in its primary lines of business (General Overhead) and higher more profitable pricing in less price sensitive circumstances (Capital Overhead).  Its treatment of direct materials, subcontracts and consulting costs allows the company to maintain a healthy G&A rate while still providing opportunities for add-ons to high dollar subcontracts and material purchases when price is based on cost-build ups. 

Second, the fact that DCAA has reviewed Contractor’s structure and has not expressed objections is quite positive.  We attribute some of this acceptance to having an usually accepting group of auditors and audit office.  Many companies with less controversial structures are occasionally challenged on their structures, particularly when new auditors/supervisors take over.  Contractor should not assume things will be so accepting if the audit office is consolidated or a different audit team takes over.  But be that as it may, DCAA's acceptance of Contractor’s structure means it has an established practice where the burden of change should fall on the government.  Also, prior acceptance of Contractor’s current practices should minimize assertions of inadequate allocation practices in the past which should mean little chance of having to prepare onerous cost impact analyses or giving back funds already received.   

Third, though open for challenge, I believe Contractor has some solid rationale for its practices. However, we should realize that prior acceptance goes a long way if you are not CAS covered, but new coverage will likely trigger a fresh look at your practices - often different personnel and supervisors are responsible for these determinations.

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