Q.  We are bidding on a negotiated firm fixed price contract where we are required to submit cost and pricing data and would like to include a warranty in our price.  How should we price the warranty to recover direct material and labor as well as overhead and G&A?

A.  I'm not sure how your firm accounts for warranty costs so I can't give you a definitive answer but let me give you some general ideas.  Warranty costs are generally allowable unless they are inconsistent with the terms of the contract.  The DCAA Contract Audit Manual, which is consistent with our experience, identifies three ways that can be used for pricing and costing purposes: (1) an ODC where direct labor and direct material as well as an allocable share of indirect costs may be included (2) an indirect cost where all estimated warranty costs would be included in an appropriate pool or (3) a cost that is allocated on a reserve basis.  In the last way, the estimated costs may be charged either direct or indirect with a corresponding credit to a reserve for warranties - DCAA likens it to accounting for bad debt losses.

If material, you might expect DCAA to look at the proposed costs in some detail.  You can take a look at DCAM Chapter 7-1600 for what DCAA will likely be looking at.  For example, they would likely review the RFP to verify warranty costs are requested, compare how you treat warranties on this contract compared to others, request historical warranty cost data to compare with your proposal and look at your accounting practices to ensure such costs are segregated.  If an audit is anticipated, you want to make sure these audit areas are satisfactory so your accounting and pricing practices are not called into question.

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