Whose position on material overhead appears most reasonable?

EXERCISE 1: CONRAD CORPORATION

The Conrad Corporation is a clothing manufacturer that won a sealed-bid

contract to produce medical personnel 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 of 101,400 uniform

coats. The contract specified that the government would furnish the material

required to produce the outer shells 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 CO that the depot

was unable to fill Conrad GFM requisitions because of a stock outage. 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 CO notified Conrad that the required GFM was not

available and that the government planned to convert the balance of the contract

to contractor-furnished 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 10, 1999—the CO issued a unilateral change converting the outer shell

material from GFM to CFM. At that time, Conrad indicated that three to four

weeks of uncut GFM inventory remained and projected a five- to six-week lead

time for receipt of the CFM.

January 5, 2000—Conrad submitted a request for equitable adjustment, as follows:

Table 5.4—Conrad Proposed Equitable Adjustment

Material

Material Overhead

Other Direct Cost

Total Manufacturing Cost

G&A Expense

Total Cost

Profit

Requested Adjustment

95,000 yards @ $10/yard

5% of material cost

Estimation of cost impact of the change

10% of total manufacturing cost

15% of total cost

$950,000

$47,500

$500

$998,000

$99,800

$1,097,800

$164,670

$1,262,470

February 1, 2000—the CO requested assistance from the ACO, cognizant auditor,

and technical personnel.

February 28, 2000—technical personnel found that:

Conrad had purchased a reasonable amount of material.

The proposed material overhead was excessive for the effort involved and the

issuing and administering of 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 FPRA.

March 5, 2000—the CO developed a negotiation position based on the audit and

technical reports.

Table 5.5—Equitable Adjustment Negotiation Objective

Material

Material Overhead

Other Direct Cost

Total Manufacturing Cost

G&A Expense

Total Cost

Profit

Adjustment Objective

Accepted Conrad proposed amount

Accepted technical recommendation

Accepted Conrad proposed amount

Accepted proposed 10% rate

5% of total cost because costs are all incurred

$950,000

$250

$500

$950,750

$95,075

$1,045,825

$52,291

$1,098,116

March 31, 2000—after weeks of negotiation, the CO 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.

Table 5.6—Conrad Claim

Material

Material Overhead

Other Direct Cost

Total Manufacturing Cost

G&A Expense

Total Cost

Profit

Requested Adjustment

95,000 yards @ $10/yard

5% of material cost

Estimation of cost impact of the change

Claim preparation cost

10% of total manufacturing cost

15% of total cost

$950,000

$47,500

$500

$1,000

$999,000

$ 99,900

$1,098,900

$164,835

$1,263,735

April 5, 2000—the CO received a Claim Certification signed by the contract

manager and dated April 2, 2000.

April 15, 2000—the CO received a Claim Certification signed by the plant

manager and dated April 10, 2000. The second certification was identical to the

first, except for the signature.

Does the proposed material cost appear reasonable?

Whose position on material overhead appears most reasonable?

Is the cost of preparing the request for equitable adjustment allowable?

Is the cost of preparing the claim allowable?

Is the proposed G&A expense reasonable?

How should the profit rate be determined?

If the contractor is to be paid interest, what should be the first day for interest

calculation? (Assume that the claim was submitted after October 29, 1995.)