A Closer Look at the Allowability of Bid and Proposal Costs
Bid and proposal costs, commonly referred to as “B&P” costs, have been at issue in the news recently, namely serving as a grounds for suspension or debarment. Contractors subject to Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) requirements have had clear guidance for the treatment of B&P costs, but nonprofit organizations have been operating in a grey area since 2004, when the B&P cost principle in OMB Circular A-122 was removed. The confusion arises in situations where staff who typically charge time directly to awards are asked to perform proposal activities that may not be properly recorded on the employee’s timesheet. While it may seem like the proposal activities are directly associated with one project, there are actually limited instances where this time can be charged direct. This post will take a closer look at the rules and regulations that govern B&P costs, as well as the unique circumstances that can warrant a deviation from the usual treatment.
What Do the Regulations Say?
When lacking authoritative guidance for an accounting issue, one best practice is to look at other regulations that may help to clarify the Government’s position. The new OMB Super Circular, 2 CFR 200, which applies to assistance awards granted on or after December 26, 2014, includes guidance for the treatment of B&P costs at §200.460, “Proposal costs”:
Proposal costs of the current accounting period of both successful and unsuccessful bids and proposals normally should be treated as indirect (F&A) costs and allocated currently to all activities of the non- Federal entity. No proposal costs of past accounting periods will be allocable to the current period.
The Super Circular does not explicitly state that B&P costs must be charged as indirect costs; consequently, B&P costs can be charged direct in certain circumstances. The FAR and agency-specific supplements to the FAR prescribe similar guidance. FAR 31.205-18, “IR&D and B&P costs,” states that:
… costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.
The FAR is also silent on the option to treat B&P costs as direct. Organizations can look to CAS for additional guidance and interpretations. CAS 420, “Accounting for IR&D and B&P costs,” states:
B&P cost pools of a home office shall be allocated to segments on the basis of the beneficial or causal relationship between the B&P costs and the segments reporting to that home office…B&P cost pools of a business unit shall be allocated to the final cost objectives of that business unit on the basis of the beneficial or causal relationship between the B&P costs and the final cost objectives.
CAS 420 typically specifies indirect treatment of B&P costs. However, at 9904.402.61(c), “Interpretation,” CAS 402 allows for the direct treatment of a specific type of B&P costs: those that are incurred due to specific requirement of an existing contract:
Under 9904.402, costs incurred in preparing, submitting, and supporting proposals pursuant to a specific requirement of an existing contract are considered to have been incurred in different circumstances from the circumstances under which costs are incurred in preparing proposals which do not result from such specific requirement. The circumstances are different because the costs of preparing proposals specifically required by the provisions of an existing contract relate only to that contract while other proposal costs relate to all work of the contractor.
The exception created by CAS 402 has caused some organizations to be more aggressive in the direct treatment of B&P costs, a practice that has been scrutinized by the government. On January 27, 2012, Shay Assad, Director of Defense Pricing, issued a memorandum clarifying the Government’s position on the issue:
Proposal preparation and negotiation support costs not funded by a grant or required by a contract are by definition to be indirectly charged to contracts through the bid and proposal (B&P) indirect cost pool. If there is a specific requirement in an existing contract to submit one or more proposals, costs of preparing those proposals are allocable only to the contract requiring the proposal preparation. In comparison, proposal costs not specifically required by a contract relate to and are allocable as B&P costs to the contractor’s total business activity.
… The specific requirement should manifest itself in the contract, such as in a funded line item.
The memo further explains that contracting officers should avoid reimbursement of direct charges of B&P costs whenever possible, as this places the government in a position where it is reimbursing B&P costs with little or no competitive control over the costs incurred. Basic follow-on work does not necessarily qualify to be directly charged due to the assumption that a contractor wishes to participate in a continuing program. There must be a “specific contractual requirement” in order for B&P costs to be distinguished as direct contract costs.
B&P costs should generally be treated as indirect costs, allocated their fair share of fringe and overhead (if applicable), and included in the General & Administrative pool to be distributed to all activities of the organization. Direct treatment should only be used in the rare circumstances where a contract specifically requires the work. If your organization believes that it has a contractual obligation to incur additional B&P costs and wishes to charge them directly to a contract, confirming that treatment with the contracting officer is recommended.
 B&P costs, by definition, are the costs of preparing bids, proposals, and applications for potential activities such as federal and non-federal grants, contracts and other agreements. B&P costs include the development of scientific, cost, and other data needed to support such bids, proposals, and applications.