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Subcontractor Fees - Allowability Issue

By jaweber on Tuesday, April 02, 2002 - 08:30 am:

I have a CPFF Construction Contract. Invoices have come in from a sub-subcontractor through the subcontractor and then from the prime. My prime is asking for the fixed fee on the total invoice from the sub which included a fee. The total amount requested by the subcontractor includes an invoice from the sub-subcontractor which also includes a fee. So I have an invoice for fee on fee on fee. The prime contract was awarded as a letter contract in Sept and we are in the process of definitizing it. Where can I find the information of what I can allow on fee from subs.

By Vern Edwards on Tuesday, April 02, 2002 - 05:46 pm:

I don't understand what you mean when you say that your prime is asking for "the fixed fee on the total invoice from the sub."

If you have a CPFF contract, then the fee should be a fixed amount of money that is fully payable upon completion of the work. The contract should include a clause that describes how the contractor can invoice for portions of the fee as the work progresses. The amount of the fee does not change with the cost of the work--it is fixed, unless the contract is modified to definitize a change or settle a claim.

Do you mean to say that the prime has received a claim from the sub to a sub and is passing it on to you, asking for additional fee for itself as well as for the subs.?

By anon1 on Tuesday, April 02, 2002 - 07:52 pm:

Vern, having seen this situation many times before, it appears that the sub-sub had a short period of performance and may have submitted his invoice which included fee. It would appear that jaweber is suggesting a situation that I used to call pyramiding of fee. There's nothing wrong with that. Anybody that provides a service is entitled to profit(FP)or fee(CP) based on the services that they provided at any tier. May not be cost efficient as opposed to direct hire but that's the way it is. Like you said on one of your threads, fee has too often been established on a percentage of cost(barring CPPC)(did I get that right?) So unless there is a restriction in the contract that says fee(if a CP contract)to the prime is structured such that the fee cannot be applied against cost and fee to a subcontracor at any tier, I don't see a problem, do you? Anytime, Joel.

By joel hoffman on Tuesday, April 02, 2002 - 08:18 pm:

I believe I agree with you anon1. Were you asking?

Some keys in "controlling" multi-tiered subcontracting are fully understanding the scope of work; preparing Government estimates, including means and methods; performing technical analyses of proposals, including what I call "make or buy" evaluations (i.e., does it make better sense for the prime or first tier sub to self-perform the work or to subcontract?); and communicating with the Contractor early, before it commits to subcontracts and second tier subcontracts. We regularly encounter this on both cost and FFP construction contracts.
As to the fee question, contractors are normally allowed fee on their subcontract costs. If one hasn't already established a fixed fee, the amount of fee should certainly reflect the various factors enumerated in the FAR/DFARS guidance for cost contracts. I usually consider subcontracting less risky and involving less capital investment than if the work is self-performed. happy sails! joel

By anon1 on Tuesday, April 02, 2002 - 10:03 pm:

Joel, yep, that was my invite. We've been down the same paths, I see. Hope you find that place to sail again. I get to visit California next month, maybe I'll try my longboard again-Take care.

By Vern Edwards on Wednesday, April 03, 2002 - 07:01 am:


While I agree in principle that a contractor is entitled to profit or fee recognition for subcontract management, I think that there is more to jaweber's question than that.

He/she has an undefinitized letter contract. Payment prior to definitization is governed by FAR 52.216-26, Payments of Allowable Costs Before Definitization. That clause makes no provision for payment of any profit or fee prior to definitization. I don't think that FAR necessarily prohibits payment of profit or fee prior to definitization, but if the government is going to make such payments it needs to negotiate an agreement with the contractor about how the profit or fee is to be calculated, in order to avoid any possibility of a prohibited cost-plus-percentage-of cost arrangement. Although jaweber says the contractor has asked for a fixed amount, how was that amount calculated?

Profit or fee is not a surcharge on costs, and while it may be common practice to discuss and even negotiate profit or fee as a percentage of cost, it is unwise and poor professional practice to make a habit of doing so, especially prior to definitization of a letter contract.

FAR 15.404-4(d)(1)(i) tells COs to develop profit or fee negotiation objectives based on the difficulty of the work -- including the work of "material acquisition" -- not on how much the work costs. So when a person asks if he or she can "allow" fee "on" some cost, I wonder about what they are doing. One simply shouldn't discuss profit or fee in terms of what is allowable or allocable with reference to some cost. (Although, see FAR 31.205-26(e).)

So I would still like to get more information from jaweber. After all, we don't want to give him/her an Ask A Professor type answer, do we?

By joel hoffman on Wednesday, April 03, 2002 - 07:20 am:

Ah, yes. It appears that the question may concern payment of fee on an undefinitized action, rather than the appropriateness of multi-tiered subcontracting. Good point, Vern. I would also agree that you are not bound to include fee, at this point, on the payments.

happy sails! joel

By joel hoffman on Wednesday, April 03, 2002 - 07:28 am:

P.S., a good "professor" generally would contact the questioner to clarify the question and discuss it, before responding. That doesn't seem to work on Internet forums, as anonymous questioners OFTEN drop off questions, then wait for days or weeks to answer clarification requests, if ever. AAP questioners identified themselves, with an e-mail address and phone number.

Unclear questions beget foggy answers and multiple responses tend to stray from the original question. happy sails! joel

By Vern Edwards on Wednesday, April 03, 2002 - 05:35 pm:


I agree.


By joel hoffman on Wednesday, April 03, 2002 - 09:33 pm:

jaweber at Newport Chemical Depot,

Mr. Vern Edwards - being a "good professor" - asked you to clarify your question. Did he answer your question to your satisfaction?
happy sails!
Joel Hoffman, P.E.
Huntsville Chem Demil Directorate

By anon1 on Wednesday, April 03, 2002 - 10:49 pm:

Okay Joel:

You turned around on me.

Vern: I agree with much of what you said and I think that jaweber should provide more information, however,my response was based on other theories somewhat related to FAR 52.216-26.(And yes I understand the provisions) Mainly, if the sub-sub had a short term FP contract and performed the services prior to definitization (which can take awhile) should the sub-sub be penalized(having had my own business and I was penalized or considered it such) under prompt payment payment, etc. and have to wait until definitization before I get paid for all my services. I think the Prime should fight for that.

Spent 22 years in Federal Contracting before going to law school at the ripe age of 48, so I look at legal theory applied to FAR and wonder why certain changes can't be made. On another thread I asked why couldn't the premise of estoppel be applied against the limitation of funds clause. Got no takers. Bottom line, have experienced situations where a company continuosly did work beyond the LOF but the Feds, via e-mails, etc. promised to reimburse and did. Bottom line, if you show history, can estoppel trump LOF. This is a very good forum,but does anyone want to challenge the old system and and move forward. The most daring up-to-date response I have seen was a post by "interested", he made a lot of sense and seems to be going where I think we should strive to make logical changes. Lot of good brains here, what do you think? Vern: I was considered a rebel in "Nam"(apparently things have changed since I was there) and as a cop, but why can't we change the system, that obviously we see holes in. Sorry guys, burnt out , have a long day tomorrow-Regards

By Vern Edwards on Thursday, April 04, 2002 - 06:40 am:


Payment to the sub-sub is not the issue. No one is suggesting that the sub-sub or the sub should suffer a delay in payment. The issue is whether jaweber should give the prime fee "on" the fee that the prime will (presumably) pay to the sub and that the sub will (presumably) pay to the sub-sub.

There is no need to change any system or to rebel in any way. The sub owes the sub-sub money and should pay. The prime owes the sub money and should pay. But the prime has signed a letter contract that may limit its entitlement at this time to only its costs (which include the profit or fee paid to the sub and the sub-sub), within limits, prior to definitization. Thus, the question before us (and that jaweber asked) is how much fee, if any, jaweber should pay to the prime for its subcontract management work.

By Anonymous on Thursday, April 04, 2002 - 10:20 am:

Vern, et.al.,

Wouldn't a properly constructed cost-type letter contract have a specific provision addressing interim billing and fee allocation pending definitization?

And if it didn't and the issue has now raised itself, wouldn't it be prudent to modify the letter contract to add a mutually agreeable provision?

As far as the issue of whether "fee on fee" is appropriate, that's a negotiation issue not an allowability issue. When developing your fee objective consider, along with complexity, risk, etc. whether you will exclude subcontractor fee from the cost base you use to crunch the numbers when developing your negotiation fee objective. At the end of the day you negotiate a fixed fee with the contractor that does not change, barring a change in contract scope. Separate from the amount of the fixed fee is how that fee will be allocated to periodic billing; time-based, incurred-cost based, progress-based, etc. Arguing over whether the prime is entitled to fee on fee is accepting a premise that diverts you from the real issues.

By Vern Edwards on Thursday, April 04, 2002 - 12:02 pm:


Bingo. I agree with everything you've said.