Reasonable Overhead Costs

When you're working on non-competitive service contracts with former public servants, you need to understand how overhead cost restrictions intersect with fee limitations during their lump sum severance payment period. This isn't about your standard overhead rates. It's about a specific policy framework designed to prevent the government from paying someone twice for the same period.

How It Works

The Supply Manual Chapter 3.6.5 on Contract Costing and Pricing establishes that all contract costs must be reasonable, properly allocable to the contract, and consistent with the contractor's established cost accounting practices. For most service contracts, overhead rates should be based on audited historical data or forward pricing rates approved by Public Services and Procurement Canada. You'll typically see overhead rates capped at 15-20% depending on the complexity of the work.

Here's where it gets specific for former public servants: Contracting Policy Notice 2022-2 introduced restrictions on fees payable under non-competitive service contracts during the 12-month lump sum severance payment period. If you're awarding a non-competitive contract exceeding $10,000 to someone who just left the public service with a severance package, no fees can be paid during that period. The logic is straightforward—the government already compensated them for that time through their severance, and paying them again through contract fees would be double-dipping at taxpayer expense.

The Treasury Board Directive on the Management of Procurement reinforces this in Appendix B, emphasizing that these restrictions exist specifically to maintain fiscal responsibility. You can't structure overhead or fees in a way that circumvents this limitation. The Financial Administration Act section 32 provides the broader legal framework, requiring that public money only be spent for purposes authorized by Parliament and must represent reasonable value.

Key Considerations

• The $10,000 threshold for former public servant restrictions is lower than the standard $25,000 threshold for competitive bidding under the Government Contracts Regulations section 6. This catches people off guard. Just because you're under the GCRs threshold doesn't mean the fee restrictions don't apply.

• For contracts over $100,000, Treasury Board policy requires detailed cost justification regardless of whether the contractor is a former public servant. Your overhead rates need documentation and solid audit trails.

• The 12-month lump sum payment period clock starts from their departure date, not from when you award the contract. You need to verify exactly when they left and whether they received a lump sum payment before you finalize any non-competitive procurement.

• Standard overhead allocations that would be acceptable in competitive contracts might still be scrutinized more heavily in non-competitive arrangements, particularly when dealing with former public servant contracts where transparency and fiscal prudence are paramount.

Related Terms

Contract Fee Limit Policy, Non-Competitive Procurement, Former Public Servant Contracts

Sources

• Government of Canada Supply Manual - Chapter 3.6.5 - Contract Costing and Pricing

• Contracting Policy Notice 2022-2: Contracting with Former Public Servants

• Treasury Board Directive on the Management of Procurement - Appendix B

Bottom line: verify employment history and severance details before you structure any non-competitive service contract. The paperwork now saves you audit headaches later.