Business
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.
1. Does the proposed material cost appear reasonable?
2. Whose position on material overhead appears most 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 October 29, 1995.)
