Equitable Adjustments
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The Conrad Corporation is a clothing manufacturer that won a sealed-bid contract to produce uniforms for the Government. Now several months later, Conrad has submitted a claim related to the Government's failure to provide Government Furnished Material (GFM). The following paragraphs outline contract events related to the claim:
October 20, 1998. A contract was awarded for production for 101,400 uniform costs. The contract specifies that the Government will furnish the material required to produce the outer shell of the required coats. GFM consumption was estimated at 2.4 yards per coat for a total material usage of 243,360 yards. The contract called for the Government to release GFM in quantities no larger than 50,000 yards to limit contractor storage space requirements at the Conrad plant.
October 5, 1999. Government Depot personnel notified the contracting officer that the Depot was unable to fill Conrad GFM requisitions because of a stock shortage. Depot computer records indicated that there were 100,000 yards of material available but a physical inventory failed to locate any of the required material or an acceptable substitute.
November 5, 1999. The contracting officer notified Conrad that the required GFM was not available and that the Government planned to convert the balance of the contract to Contrctor-Furniched Material (CFM). At that time, Conrad estimated that 95,000 yards of material would be required to complete the balance of the contract (39,584 units).
November 19, 1999. The contracting officer issued a unilateral change converting the outer shall material from GFM to CFM. At that time, Conrad indicated that a 3-4 weeks of uncut GFM inventory remained and projected a 5 to 6 week lead time for receipt of the CFM.
January 5, 2000. Conrad submitted a request for equitable adjustment (See attached file for data)
February 1, 2000. The Contracting Officer requested assistance from the ACO cognizant auditor and technical personnel.
February 28, 2000. Technical personnel found that:
- Conrad purchased a reasonable amount of material.
- The proposed Material Overhead was excessive for the effort involved, issuing and administering a single purchase order. Estimated actual cost was $250.
February 28, 2000. The cognizant auditor did not question any of the proposed cost. The auditor did comment that the proposed indirect rates complied with the current Forward Pricing Rate Agreement (FPRA)
March 5, 2000. The contracting officer developed a negotiation position based on the audit and technical reports. (See attached file for data)
March 31, 2000. After weeks of negotiation, the contracting officer and the contractor could not reach agreement on an equitable adjustment. The major areas of difference were Material Overhead and Profit. As a result, the contractor submitted a claim seeking payment under the disputes clause of the contract. (See attached file for data)
The Conrad Corporation is a clothing manufacturer that won a sealed-bid contract to produce uniforms for the Government. Now several months later, Conrad has submitted a claim related to the Government's failure to provide Government Furnished Material (GFM). The following paragraphs outline contract events related to the claim:
October 20, 1998. A contract was awarded for production for 101,400 uniform costs. The contract specifies that the Government will furnish the material required to produce the outer shell of the required coats. GFM consumption was estimated at 2.4 yards per coat for a total material usage of 243,360 yards. The contract called for the Government to release GFM in quantities no larger than 50,000 yards to limit contractor storage space requirements at the Conrad plant.
October 5, 1999. Government Depot personnel notified the contracting officer that the Depot was unable to fill Conrad GFM requisitions because of a stock shortage. Depot computer records indicated that there were 100,000 yards of material available but a physical inventory failed to locate any of the required material or an acceptable substitute.
November 5, 1999. The contracting officer notified Conrad that the required GFM was not available and that the Government planned to convert the balance of the contract to Contrctor-Furniched Material (CFM). At that time, Conrad estimated that 95,000 yards of material would be required to complete the balance of the contract (39,584 units).
November 19, 1999. The contracting officer issued a unilateral change converting the outer shall material from GFM to CFM. At that time, Conrad indicated that a 3-4 weeks of uncut GFM inventory remained and projected a 5 to 6 week lead time for receipt of the CFM.
January 5, 2000. Conrad submitted a request for equitable adjustment
Proposed Equitable Adjustment
Material 95,000 yards@ $10/yard $950,000
Material Overhead 5% of material Cost $ 47,500
Other Direct Cost Estimation of cost impact of $ 500
the change ________
Total Manufacturing $998,000
Cost
G&A Expense 10% of Total Mfg Cost $ 99,800
_________
Total Cost $1,097,800
Profit 15% of Total Cost $ 164,670
_________
Requested Adjustment $1,262,470
February 1, 2000. The Contracting Officer requested assistance from the ACO cognizant auditor and technical personnel.
February 28, 2000. Technical personnel found that:
? Conrad purchased a reasonable amount of material.
? The proposed Material Overhead was excessive for the effort involved, issuing and administering a single purchase order. Estimated actual cost was $250.
February 28, 2000. The cognizant auditor did not question any of the proposed cost. The auditor did comment that the proposed indirect rates complied with the current Forward Pricing Rate Agreement (FPRA)
March 5, 2000. The contracting officer developed a negotiation position based on the audit and technical reports.
Equitable Adjustment Negotiation Objective
Material Accepted Conrad proposed amount $ 950,000
Material Overhead Accepted Technical recommentation $ 250
Other Direct Cost Accepted Conrad Proposed amount $ 500
________
Total Mfg Cost $ 950,750
G&A Expense Accepted proposed 10% rate $ 95,075
Total Cost $1,045,825
_________
Profit 5% of Total Cost because costs all
incurred $ 52,291
_________
Adjustment objective $1,098,116
March 31, 2000. After weeks of negotiation, the contracting officer and the contractor could not reach agreement on an equitable adjustment. The major areas of difference were Material Overhead and Profit. As a result, the contractor submitted a claim seeking payment under the disputes clause of the contract. (See attached file for data)
1. Does the proposed material cost appear reasonable?
2. Whose position on Material Overhead appears reasonable?
3. Is the cost of preparing the request for equitable adjustment allowable?
4. Is the cost of preparing the claim allowable?
5. Is the proposed G & A expense reasonable?
6. How should the profit rate be determined?
7. If the contractor is to be paid interest, what should be the first day for interest calculation? Assume that the claim was submitted after Oct. 29, 1995)
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Equitable adjustments are examined.
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Please see attached file for the tutorial
For long problems or cases just like this, what I do first is read and understand what is being asked. Hence I read the 7 questions first before reading the entire case. This is to give me a point of reference when I am reading the case. Because of its length, it is reasonable to assume that there will be a lot of information that are not relevant at all.
1. Does the proposed material cost appear reasonable?
Let us see a side-by-side comparison of the proposed cost materials for both the government and Conrad (Please see the Excel file for the table):
PRICE COMPARISON Government Conrad
Material 95,000 yards @ $10/yard $950,000 $950,000
Material Overhead $250 $47,500
Other Direct Cost Accepted Conrad proposed amount $500 $500
Claim preparation cost $1,000
Total Manufacturing Cost $950,750 $999,000
G&A Expense Accepted proposed 10% rate $95,075 $99,900
Total Cost $1,045,825 $1,098,900
Profit 5% of Total Cost because costs all incurred $52,291 $164,835
Adjustment ...
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