Contractor’s Obligations to Monitor their Subcontractors

calendar iconMay 7, 2019

By: John Ford, Senior Consultant and Eric Poppe, Senior Manager

Federal Acquisition Regulation (“FAR”) 42.202(e)(2) states that “[t]he prime contractor is responsible for managing its subcontractors.” However, the FAR does not provide further guidance as to what this means. At least one Defense Contract Audit Agency (“DCAA”) office and Defense Contract Management Agency (“DCMA”) contracting officer have contended that this means that prime contractors are to perform all the functions of a DCMA Contract Administration Office in regard to subcontractors. Based on this theory, the Administrative Contracting Officer (“ACO”) issued a claim for over $100,000,000 against Lockheed Martin Integrated Systems, Inc. (“LMIS”) alleging that LMIS had breached two contracts because:

the contractor did not provide any records demonstrating that they attempted to cause the subcontractor to prepare an adequate [incurred cost] submission or any requests to the government for assistance if the subcontractor refused. A literal interpretation of FAR 42.202 requires the prime contractor to act on behalf of the government and serve as both the contracting officer…and the contracting administrative office…for each subcontract that it awards under a government flexibly priced contract. This includes the requirement for the prime contractor to audit their subcontracts or request audit assistance from the cognizant DCAA office when the subcontractor denies the prime contractor access to their records based on the confidentiality of propriety [sic] data.

Fortunately, LMIS appealed this matter to the Armed Services Board of Contract Appeals (“ASBCA”), which rejected this notion by observing that FAR 42.202 is not a contract clause, and is not otherwise incorporated into any contract clause. Therefore, the duty that DCAA and DCMA attempted to impose on LMIS is nonexistent. (See, Lockheed Martin Integrated Systems, Inc. ASBCA No. 59508 (December 20, 2016)).

The LMIS case demonstrates that FAR sections are not binding and applicable to contractors. Instead, the FAR only provides guidance to contracting officers and other government officials engaged in the conduct of an acquisition. On the other hand, contractors are only bound by the rights and obligations provided for by the terms of their contracts.

While LMIS was able to avoid any liability to the government based on FAR 42.202, there are FAR clauses and provisions, as well as clauses and provisions from agency FAR Supplements, which impose duties on contractors in regard to subcontracts. For example, there are some FAR clauses, such as the Audit clause, FAR 52.215-2, that, by their terms, are to be included in subcontracts when included in prime contracts. Failure to include these mandatory flowdown clauses in covered subcontracts means that the prime contractor has breached its obligations under the prime contract and can be terminated for default due to a failure to comply with a term of the contract. Further, failure to include these mandatory flowdown clauses in covered subcontracts can result in the contractor being deemed to have an inadequate purchasing system under Defense Federal Acquisition Regulation Supplement (“DFARS”) 252.244-7001. Unfortunately, the only way to determine which clauses are mandatory flowdown clauses is to read each individual clause.

In addition to including mandatory flowdown clauses in subcontracts, other clauses impose affirmative duties on prime contractors in regard to subcontractors. For example, the Government Property clause, FAR 52.245-1 requires contractors to:

have a system of internal controls to manage (control, use, preserve, protect, repair, and maintain) Government property in its possession. The system shall be adequate to satisfy the requirements of this clause. . . .  This requirement applies to all Government property under the Contractor’s accountability, stewardship, possession or control, including its vendors or subcontractors.

To ensure that subcontractors have an adequate property control system, the clause also mandates that the contractor “shall assure its subcontracts are properly administered and reviews are periodically performed to determine the adequacy of the subcontractor’s property management system.” Failure to comply with this latter requirement may result in a contractor’s property management system being determined inadequate under DFARS 252.245-7003.

While the foregoing discussion has focused on contract clauses, there are also solicitation provisions that impose requirements on potential prime contractors in regard to potential subcontractors. An example of such a provision is DFARS 252.215-7009. This provision should be inserted in RFPs when certified cost or pricing data or other than certified cost or pricing data will be required from the offeror(s) and requires the offeror to complete a Proposal Adequacy Checklist and to submit the checklist with its proposal. Item 17 on the checklist asks whether “a price/cost analysis establishing the reasonableness of each of the proposed subcontracts included with the proposal” as described in FAR Table 15-2 found in FAR 15.408. In this regard, Table 15-2 provides that offerors are to “[c]onduct price analyses of all subcontractor proposals. Conduct cost analyses for all subcontracts when certified cost or pricing data are submitted by the subcontractor. Include these analyses as part of your own certified cost or pricing data submissions for subcontracts expected to exceed the” threshold for submission of certified cost or pricing data.

Obviously, this can create a problem for prime contractors if the subcontractor does not provide the contractor with access to the information necessary to conduct these analyses. In this case, the offeror should use item 15 of the Checklist and identify the proposal submitted by any such subcontractor as one that requires the contracting officer to request field pricing support.

Finally, there are clauses that impose implied duties on prime contractors in regard to subcontractors. One such clause is FAR 52.222-41, Service Contract Labor Standards. This clause specifies that:

Each service employee employed in the performance of this contract by the Contractor or any subcontractor shall be paid not less than the minimum monetary wages and shall be furnished fringe benefits in accordance with the wages and fringe benefits determined by the Secretary of Labor, or authorized representative, as specified in any wage determination attached to this contract.

Although not specified in the clause, under the Service Contract Act (“SCA”; “the Act”), contractors and subcontractors are held jointly and severally liable for any violations of the Act. If a subcontractor violates this requirement, the prime contractor can be held liable for that violation. Further, any contractor who is held liable for a violation of the SCA can be debarred from government contracting. Consequently, it should be incumbent on prime contractors to ensure that subcontractors are complying with this clause.

While the foregoing is not an all-inclusive discussion of clauses or provisions that impose obligations on prime contractors in regard to subcontractors, it does illustrate that prime contractors cannot fail to properly monitor subcontractor performance.