Industry Group Objects to Prohibiting Profit on Contractor Acquired Property

The influential industry group National Defense Industrial Association is objecting to a proposed rule change to FAR 15.404-4, dated Aug 6, that states “unless contractor acquired property is a deliverable under a contract, no profit or fee shall be permitted on the cost of the property.” NDIA says that removing profit or fee as a “contract cost element is not appropriate and conflicts with the FAR profit policy.”

Under the FAR contractor-acquired property means property acquired, fabricated or otherwise provided by the contractor for performing a contract and to which the government has title. On fixed price contracts, the government acquires title to non-deliverables but title reverts to the contractor for property not delivered to the government or not incorporated in the end item when the payment is liquidated and the end items are delivered. The proposed change is not clear on whether this property is entitled to profit. On cost reimbursable contracts the government acquires title to all property for which the contractor is entitled to reimbursement and here NDIA asks why should the government intend to deny profit on all property that is not a line item even though it has title.

NDIA says there is no basis to eliminate profit on any element of cost necessary for the performance of a contract. To do so would result in undesirable incentives such as (1) substituting labor for more efficient equipment (2) entering into more expensive operating leases for the equipment (3) charging of overhead rather than direct contract costs and (4) failing to take delivery for funding reasons. The rule would particularly hurt small businesses where if they would be required to buy such property without the opportunity for profit that will make their financial condition worse.

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