CPAs and Advisors with Your Growth in Mind

Government Contractors

Subcontractor Oversight (Who’s Responsible?)

By: John N. Ford, JD; Senior Consultant 

Who has privity?

42.505 – Post-award Subcontractor Conferences

(a) The prime contractor is generally responsible for conducting post-award conferences with subcontractors. However, the prime contractor may invite Government representatives to a conference with subcontractors, or the Government may request that the prime contractor initiate a conference with subcontractors. The prime contractor should ensure that representatives from involved contract administration offices are invited.

(b) Government representatives–

(1) Must recognize the lack of privity of contract between the Government and subcontractors;

(2) Shall not take action that is inconsistent with or alters subcontracts; and

(3) Shall ensure that any changes in direction or commitment affecting the prime contract, or contractor resulting from a subcontractor conference are made by written direction of the contracting officer to the prime contractor in the same manner as described in 42.503-2.

Who has cognizance?

42.003 – Cognizant Federal Agency

(a) For contractors other than educational institutions and nonprofit organizations, the cognizant Federal agency normally will be the agency with the largest dollar amount of negotiated contracts, including options.

Why does it matter?

42.202 — Assignment of Contract Administration

(e) Secondary delegations of contract administration.

(1) A CAO that has been delegated administration of a contract under paragraph (a) or (c) of this section, or a contracting office retaining contract administration, may request supporting contract administration from the CAO cognizant of the contractor location where performance of specific contract administration functions is required. The request shall —

(i) Be in writing;

(ii) Clearly state the specific functions to be performed; and

(iii) Be accompanied by a copy of pertinent contractual and other necessary documents.

(2) The prime contractor is responsible for managing its subcontracts. The CAO’s review of subcontracts is normally limited to evaluating the prime contractor’s management of the subcontracts (see Part 44). Therefore, supporting contract administration shall not be used for subcontracts unless —

(i) The Government otherwise would incur undue cost;

(ii) Successful completion of the prime contract is threatened; or

(iii) It is authorized under paragraph (f) of this section or elsewhere in this regulation.

Responsibility for contractor oversight can be answered in the same way that most questions regarding government contract compliance can be answered: IT DEPENDS. Federal Acquisition Regulation (“FAR”) 42.302 identifies 70, count them 7-0, administrative functions that the Purchasing Contracting Officer (“PCO”) or their delegated Contract Administrative Office (“CAO”) or Administrative Contracting Officer (“ACO”) must perform. Keep in mind who and what’s above may make you as the prime, the cognizant PCO and ACO with full privity over the contract. The CONTRACT is the first part of “it depends”. Cognizance and responsibility for administrative oversight functions can be a question of the contract, not the contractor. It can also be a matter of which oversight responsibility that is being questioned. Here is just a small compliment of the 70 administrative functions, and what determines where the responsibility falls.

42.302 — Contract Administration Functions

(a) The contracting officer normally delegates the following contract administration functions to a CAO. The contracting officer may retain any of these functions, except those in paragraphs (a)(5), (a)(9), (a)(11) and (a)(12) of this section, unless the cognizant Federal agency (see 2.101) has designated the contracting officer to perform these functions.

(4) Review and evaluate contractors’ proposals under Subpart 15.4 and, when negotiation will be accomplished by the contracting officer, furnish comments and recommendations to that officer.

In all cases, the prime contractor is responsible for awarding contracts to their subcontractors. The government does not have privity of contract and in most cases should not have any say to WHOM you award subcontracts; they do have a say as to HOW you make those awards. The government has responsibility for assuring that the prime contractor has a compliant purchasing system and therefore if the prime does not follow the appropriate, FAR, Truthful Cost or Pricing Act (formerly TINA) and other rules relating to acquisitions utilizing public funds.

(5) Negotiate forward pricing rate agreements (see 15.407-3).

Many prime contractors have their “favorite” subs for certain work. In these cases, even if the prime believes that the subcontractor will deliver the best product/service for the best price (best value), the prime cannot simply award them the contract. If subcontractors do not have forward pricing rates negotiated by a government agency, the prime should do so in order to expedite future acquisition competitions.

(9) Establish final indirect cost rates and billing rates for those contractors meeting the criteria for contracting officer determination in Subpart 42.7.

This is a really big issue. In the past, it seems the regulations were overlooked. The Defense Contract Audit Agency (“DCAA”), the government entity that most auditable dollars are reviewed by, has in the past audited subcontractors even when the government did not have privity of contract. This was generally done pursuant to various statutes that have been implemented in the Audit clause, FAR 52.215-2, giving the government this power. Currently, DCAA has a backlog of nearly 12,000 final indirect rate proposals in inventory (down from over 24,000 in 2011). With such a large backlog of prior year proposals and new proposals coming every year, the agency has stopped performing audits for which they are not responsible. In fact, the National Defense Authorization Act (“NDAA”) of 2016 prohibits DCAA from performing work for non-DoD agencies until the backlog is reduced to a specified size (e.g., eighteen months). In accordance with FAR 42.003 the agency with the largest volume of negotiated contracts is normally the Cognizant Federal Agency (“CFA”) responsible for establishing billing rates and final indirect cost rates. In reality, the agency with the largest volume of auditable contract dollars has been the CFA. It remains to be seen if DCAA continues to audit final indirect rate proposals when a civilian agency may be the CFA, but DoD has contracts with the same contractor. But it is becoming clear that if no government agencies have auditable dollars (in other words, the sub has only funding through prime contractors), the government does not have privity of contract and will not be auditing those incurred cost submissions. That is now fully the responsibility of the prime contractors.

(12) Determine the adequacy of the contractor’s accounting system. The contractor’s accounting system should be adequate during the entire period of contract performance. The adequacy of the contractor’s accounting system and its associated internal control system, as well as contractor compliance with the Cost Accounting Standards (CAS), affect the quality and validity of the contractor data upon which the Government must rely for its management oversight of the contractor and contract performance.

Let’s start with the last sentence. Generally, if a subcontractor has elevated its status to such a size that it is receiving CAS-covered subcontracts, it is likely that the government has cognizance and is the responsible party. However, the outlook on subcontractor’s accounting system is much different. A government contractor should always have an accounting system that is adequate for the types of contracts it has. When it should be examined is a question that is difficult at best to answer. If a sub has no prime contracts, it is evident that the prime contractor is responsible for determining the adequacy of the accounting system. However, dependent upon the contract types being awarded, when and what needs to be in place could be a question mark. A conservative way of assuring that a company has at least some support for legitimizing the subcontractor’s system is to include a statement in the subcontract representations and certifications. Getting a copy of an accounting system survey would even further support your obligation. In this regard, recall that having an accounting system that is adequate for the contract type contemplated is a matter of responsibility. Prime contractors must justify their determination that a subcontractor is responsible when seeking government consent to subcontract.

Whoever bears the responsibility for overseeing subcontractors in whichever situation, you can be sure that the buck will stop at the door of the prime contractor. The subcontractor’s problems ARE the problems of the prime contractors. Be aware, be sure and document, document, document.

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