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Prime's Verification of T&M Subcontracts' Accounting & Billing Systems


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If a prime contractor plans to award (or wishes to award) T&M subcontracts for commercial services under FAR 12.207(B), what responsibility (if any) does the prime have in verifying that the subcontractor's system meets clause FAR 52.212-4, Alternative I (I) requirement, where qualifications, timesheets, and invoices.

Let?s assume that the prime contractor grants the subcontractors the option to use the prime's system to perform qualification checks, record and approve time, and labor distribution. Essentially, the prime is doing all the administrative documentation required under FAR 52.212-4 for the subk. Is there a FAR reference or other authoritative pronouncement that specifically states entities selling commercial items do not need acceptable accounting and billing systems? What is the risk of CPSR failing if a prime cannot demonstrate adequate invoicing of the subk although the prime is doing all the administrative work?

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If a prime contractor plans to award (or wishes to award) T&M subcontracts for commercial services under FAR 12.207(B), what responsibility (if any) does the prime have in verifying that the subcontractor's system meets clause FAR 52.212-4, Alternative I (I) requirement, where qualifications, timesheets, and invoices.

Let?s assume that the prime contractor grants the subcontractors the option to use the prime's system to perform qualification checks, record and approve time, and labor distribution. Essentially, the prime is doing all the administrative documentation required under FAR 52.212-4 for the subk. Is there a FAR reference or other authoritative pronouncement that specifically states entities selling commercial items do not need acceptable accounting and billing systems? What is the risk of CPSR failing if a prime cannot demonstrate adequate invoicing of the subk although the prime is doing all the administrative work?

In regard to your second paragraph, let me ask you a few questions that may help you answer the questions you posed. When you say "acceptable accounting system", what do you mean by acceptable? Acceptable for what? As for billing systems, where are billing systems addressed in the FAR? Finally, what is the relevance of a CPSR to acquisitions for commercial items?

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Guest Vern Edwards

In regard to your first paragraph: (1) Is the prime contract for commercial items? (2) What do you mean by "subcontractor's system"? System for what? (3) What do you mean by "verify"?

If the prime contract is a contract for commercial items, then the prime has no responsibility to "verify" (determine the adequacy of) any of the subcontractor's "systems" (accounting processes). See FAR 44.000(B), 44.302(a), and 44.303.

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In regard to your second paragraph, let me ask you a few questions that may help you answer the questions you posed. When you say "acceptable accounting system", what do you mean by acceptable? Acceptable for what? As for billing systems, where are billing systems addressed in the FAR? Finally, what is the relevance of a CPSR to acquisitions for commercial items?

Those are great questions. Let's see if I can frame it completely and accurately. In regards to CPSR, assume that a prime contractor for T&M (through a Task Order) is awarded non-competitive contract. The prime obtains commercial T&M rates for some of the proposed rates. I believe those T&M subcontract rates are subject to FAR 52.212-4, Alternate I, requirements, even though it is commercial, the Government would have the authority to ascertain the primes compliance with subcontracting (purchasing) practices so far as the clauses stipulates.

I probably should not have used the phrase "acceptable accounting system" because that would be beyond the scope of the "Contract Terms and Conditions -- Commercial Items" clause although it does contain limited scope evaluation criteria in FAR 52-212-4, Alternate I, (a) & (i). It appears to me that commercial items are not as hands-off as intended. As you referenced FAR 44.000(B), it reads that consent and advance notice requirements are not applicable for commercial items according to part 12, but part 12 requires the subcontractor to open their facilities and personnel, timekeeping, invoicing and crediting to the Government (i.e. limited scope evaluation).

My reference to "subcontractor system" refers to the billing and accounting systems.

Even if a prime is awarded a competitive T&M contract for commercial items, would the FAR 52.212-4, Alternate I, clause be past down? Does it matter?

I believe DCAA wants all commercial T&M contracts reported through incurred cost submission; thus, it falls under FAR 52.216-7? Also, recent FR suggested changes under FAR Case 2011-003; Payments Under Time-and-Materials and Labor-Hour Contracts incorporate the idea.

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Those are great questions. Let's see if I can frame it completely and accurately. In regards to CPSR, assume that a prime contractor for T&M (through a Task Order) is awarded non-competitive contract. The prime obtains commercial T&M rates for some of the proposed rates. I believe those T&M subcontract rates are subject to FAR 52.212-4, Alternate I, requirements, even though it is commercial, the Government would have the authority to ascertain the primes compliance with subcontracting (purchasing) practices so far as the clauses stipulates.

I probably should not have used the phrase "acceptable accounting system" because that would be beyond the scope of the "Contract Terms and Conditions -- Commercial Items" clause although it does contain limited scope evaluation criteria in FAR 52-212-4, Alternate I, (a) & (i). It appears to me that commercial items are not as hands-off as intended. As you referenced FAR 44.000(B), it reads that consent and advance notice requirements are not applicable for commercial items according to part 12, but ).

My reference to "subcontractor system" refers to the billing and accounting systems.

Even if a prime is awarded a competitive T&M contract for commercial items, would the FAR 52.212-4, Alternate I, clause be past down? Does it matter?

I believe DCAA wants all commercial T&M contracts reported through incurred cost submission; thus, it falls under FAR 52.216-7? Also, recent FR suggested changes under FAR Case 2011-003; Payments Under Time-and-Materials and Labor-Hour Contracts incorporate the idea.

I'm not sure I understand what you are trying to get at here. You wrote "In regards to CPSR, assume that a prime contractor for T&M (through a Task Order) is awarded non-competitive contract. " However, you did not say whether the prime contractor is providing the government commercial services or non-commercial services. This is significant because as Vern pointed out, the consent and advance notice requirements of Part 44 do not apply to acquisitions conducted under Part 12. The primary purpose of conducting a CPSR is to determine if a contractor's purchasing system adequately protects the govenrment so that advance notification of a prime's intent to subcontract and consent to subcontract is not required. If advance notice and consent are not required for subcontracts awarded under prime contracts entered into under Part 12 procedures, conducting a CPSR would serve no useful purpose. Further, having an approved purchasing system is not a prerequisite to a contractor furnishing commercial items entering into a subcontract without government consent. Apparently, these are some of the reasons why 44.303 states that a CPSR will not consider a contractor's policies and procedures for awarding subcontracts for commercial items.

You followed that by saying "The prime obtains commercial T&M rates for some of the proposed rates." From this I assume you mean that the prime contractor has awarded at least one subcontract for commercial services priced on a T&M basis.

You then stated "I believe those T&M subcontract rates are subject to FAR 52.212-4, Alternate I, requirements." You did not say why you believed this or what you meant by it. It is unclear as to whether you meant that 52.212-4 and Alt I must be terms of the subcontract or whether the prime could only invoice the government for subcontractor effort in accordance with Alt I. If the former, I disagree. Neither the basic 52.212-4 nor its Atl I has a subcontracts provision. Further, neither states that it is to be included in subcontracts. Finally, neither is listed as one of the clauses that 52.244-6 identifies as those that must be included in subcontracts.

You ended your first paragraph "even though it is commercial, the Government would have the authority to ascertain the primes compliance with subcontracting (purchasing) practices so far as the clauses stipulates." You are correct that the government has the authority to ascertain the prime's complaince with contract terms. However, there is no standard FAR clause that addresses subcontracting under a prime contract awarded using Part 12 procedures.

In your second paragraph, you asserted "part 12 requires the subcontractor to open their facilities and personnel, timekeeping, invoicing and crediting to the Government (i.e. limited scope evaluation)." This is partially accurate. Alt I (a) states that the govenrment will have the right to conduct inspections at a subcontractor's facility. However, because this is a provision in a clause that is inserted in a prime contract, by implication, it imposes a responsibility on the contractor to include a provision in the subcontract that permits the government to exercise this right. On the other hand, Alt I(i)(1)(i)(D) does not require a contractor to include any terms in a subcontract. Instead, it imposes the responsibility for providing the supporting data listed there on the contractor. In this regard, notice that Alt I (i)(4), Access to records, does not mention the government having any access to subcontractor records.

In conclusion you said "I believe DCAA wants all commercial T&M contracts reported through incurred cost submission; thus, it falls under FAR 52.216-7?" 52.216-7 does not apply to T&M contracts for commercial services. While 52.232-7 expressly incorporates it into T&M contracts for non-commercial items, it is only applicable to material, not labor. On the other hand, 52.212-4 Alt I does not mention 52.216-7 or the cost principles in FAR Part 31. Material under T&M contracts is generally reimbursed at the cost to the contractor without regard to allowablity under the cost principles. Similarly, indirect costs under T&M contracts for commercial services are reimbursed at a fixed amount, not an indirect rate that is subject to change in accordance with 52.216-7. The FAR Councils did this intnetionally to avoid having contractors providing commercial services under T&M contracts submit incurred cost proposals. As for the representation of T&M contracts for commercial services in a contractor's incurred cost submission, that can be done on a lump sum basis accompanied by a list of such contracts. Finally, as to what constitutes an adequate incurred cost submission, see the revision to 52.216-7 (d), effective June 11, 2011, made by FAR 2005-52.

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