Profit and G&A Rates on “Pass Through” Items
Q. You helped us on some compliance issues a few years ago. We are submitting a proposal where we would be supplying some standard parts for an aerospace customer that is under contract with the government. Our profit after cost for the parts is 4.5%. This is a simple pass through of material but it does require receiving it, source inspection, securing documentation and processing the documentation through our customer system which is a standard procedure. I guess I’m curious that if the profit is 4.5% and this is a pass-through transaction, would applying G&A be overkill? How can this be handled without undue time and cost? This is not a sole source bid. There are 4-5 companies quoting on this.
A. As I remember, you have a total cost input base for your G&A rate that includes all material, including the material you want to pass through. Hence you would be entitled to apply a G&A rate to the material plus any negotiated profit. However, it appears as if you don’t want to do this for competitive reasons. If so, you can voluntarily lower the G&A rate to a rate you believe would be acceptable to your client by, for example, lowering the G&A pool of costs by offering a “management concession.” Though it might impede your desire for a speedy result, you could try to obtain a forward agreement where you agree not to charge G&A on certain “pass through” items and in exchange, ensure such material costs can be excluded from your G&A base.
