LANL overhead changes trouble subcontractors

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Cost structure: Lab adjusts business overhead model

By Tris DeRoma

The bagel and coffee breakfast hosted by the Los Alamos Chamber of Commerce for Los Alamos National Laboratory officials and their subcontractors went down pretty easy, but subcontractors who were present had a hard time swallowing the bad news they received from a LANL presentation.

LANL’s group leader for the Chief Financial Division, Aaron Menefee, started the presentation off with data that showed LANL has lost $400 million in funding to support contracting work since 2011, a number that is projected to grow larger as the government looks to trim expenses in a number of areas overall.

Then Menefee, along with Doug McCrary, head of acquisition services management at LANL, told the subcontractors exactly what the dismal parade of figures could mean to their livelihoods,  as well as the future of their businesses.

Menefee and McCrary said because of the losses, LANL will be trying a new “cost model” that will ask subcontractors to share more of the cost burden.

“We just want to make sure we’re charging everyone a fair and equitable amount,” Menefee said during his talk. “When we go back and talk to our customers, we want to make sure we can tell them that everyone is paying their fair share of these overhead costs.

“I haven’t talked to a sponsor or anyone at the laboratory that likes paying these overhead costs. It’s a fact of life; we have to have these overhead costs in order to run the laboratory.”

Menefee also said they’re shifting the burden to be in compliance with federal cost accounting standards.

“It’s not only to be fair and equitable, but it’s also about not being able to pick and choose who you charge overhead to,” he continued. “If you’re working on a work-for-others (projects involving non-federal entities) then your druthers might be to charge all this overhead to the weapons program and make everything else real cheap. You can’t do that,” Menefee said. “We have to basically treat all our program sponsors the same.”

Menefee also said that the last time they changed the cost model was in 2004.

“Quite honestly, one of the reasons we went back and looked at it was to see if what we had baked into that cost model the things that we wanted to continue to be doing,” he said. “The answer was no.” Some of the “baked in” exemptions were special lower overhead rates for capital and construction activities.

“The reality is that those projects ought to be paying their fair share going forward, particularly the institutional costs like the gross receipts tax and other things,” he said. “Supplemental labor (subcontracting work) that we buy on purchase order ... we want to capture that as labor.  We want to burden it, or tax it, just like our own LANS (Los Alamos National Security) labor and the COMPA (the contract company LANL uses for professional, technical and administrative support) labor,” Menefee continued.

“What we realized was that we have people who are basically doing the same job working on our programs, some might be LANS employees, some might be COMPA employees and then we may go purchase through a vendor people who come in and do the same work. So you have three flavors of people. Two of them are being charged all the overheads that we charge our normal labor and the third category (supplemental, subcontracting work) is being charged as a procurement which is a much reduced amount of overhead. We don’t want to have that kind of pricing bias if the same type of labor is being performed.”

It was then that McCrary stepped in and defined for the audience of subcontractors just what LANL considers “supplemental labor” and what is “procurement.”

“It all has to do with who’s directing the work,” McCrary said. “If we have a LANL program manager or supervisor directing your employee on a day-to-day basis, that’s supplemental labor; versus, ‘I have a statement of work with a particular task and you deliver that task at a cost.’ In the past, our contracts that have been effectively supplemental labor and have been taxed differently. In the new cost model, it will be taxed the same.”

By the time the meeting was over and all the talking was done, many subcontractors still did not know where they stood with LANL and what their future with the lab was going to be.

“I’m confused about how the laboratory is burdening various types of subcontracts,” said Scott Gustafson of Merrick and Company. “There was some good information exchanged and a dialogue was started, but it’s not clear how the burdens are going to be affecting us.”

Like many of subcontractors there, Gustafson added that he’s afraid the changes are going to negatively impact his company.

“By burdening the subcontracts with this overhead tax, which was handled differently in the past, the end user or the people we serve will see it as too much of a burden to take on,” he said. “Because the burden is so severe, they will look for other methods to doing it differently, including doing it internally and quite possibly, doing with people that have less expertise.”

Some contractors at the meeting came away with no hope at all about the situation, saying that LANL’s new business plan is going to wreck their business.

“There’s no doubt the budget is going down,” John Marin, a senior geologist with Eberline Services, said. “But Bechtel has destroyed the economies of almost every community where they’ve taken over a Department of Energy facility and they’ve done it by using this cost model or trying to capture more work inside the laboratory or by disincentivizing their managers to use subcontractors.”

Kevin Holsapple, executive director of Los Alamos Commerce and Development Corporation/Chamber of Commerce,  said he was glad to have hosted the two parties and is glad to see that a dialogue between the two parties has at least been started.

“I think the messages they should take away are one, the lab is interested in being out there, being connected to and understanding their concerns; I think that’s important.” Holsapple said. “I think the biggest message I took away was that you have end users, the people that are actually using the programs and the science, who don’t understand this model from what the subcontractors have been told and it may be causing them to not even ask for service because they assume through an incomplete understanding that it’s going to be way too costly for them.”

Holsapple added that he was glad to hear that LANL and the subcontracting community was going to do what it can to correct that notion.  

“To me, if I was a subcontractor working with those end users, I’d say I can be valuable to you, but this is how you need to structure the work so it doesn’t get confused and put in the category of supplemental labor, because they can actually get a lower overhead applied if they are categorized not as supplemental labor, but rather as a general procurement.”

Holsapple also said that he hopes the chamber can further act as a catalyst between LANL and the subcontractors.

“That’s what chambers do for the community,” Holsapple said. “We’re trying to produce a better outcome than what would occur if the issue was left to its own devices.”