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Definition of subcontract

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Does the definition of subcontract in FAR 44.101 include vendors whose charges are allocated as indirects to overhead or G&A, or only those charged direct to contracts?

Thanks

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Seeker,

The definition of subcontractor does not reach to EVERY indirect charge to another contractor in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

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C'mon ji20874, that answer's not going to do. First, Seeker is asking about the definition of "subcontract" at FAR 44.101--not "subcontractor." Second, you've asserted something without providing any support for your answer. You're a bronze member now, you need to post like one.

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I don't think there is a consensus within government or within industry about the proper interpretation of the definition in FAR 44.101. I have a letter from an industry attorney which states that some companies consider indirect cost purchase orders to be subcontracts and some do not. Moreover, the definition in 44.101 does not really make sense, since it defines subcontracts in terms of the definition of contract in FAR 2.101, which talks about commitments that obligate the government to an expenditure of appropriated funds. The proper interpretation of the 44.101 definition of subcontract is one of the great mysteries in FAR. I do not believe that the meaning has ever been resolved by a decision of a court or board of contract appeals. I have looked and have not found such a decision. The closest such decision was the Federal Circuit's decision in United Technologies v. Rumsfeld, which did not resolve the matter in terms of FAR 44.101.

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Let me try again, to satisfy Don...

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract. This is how I have worked it out in my own mind and experience, within FAR 44.101.

I have to take this approach to make things sensible -- the prime contractor has many contracts on-going that are not directly related to the instant prime contract -- those contracts occurred before the prime contract and will exist afterwards -- that's part of the definition of indirect. In my mind, it doesn't make sense to apply a prime contract's subcontracting rules to those normal-course-of-business contracts. Hence, my answer, offered to be helpful: the definition of subcontract reaches only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

The question of whether a charge is direct or indirect is helpful but not dispositive in the matter of whether a prime contractor's contract with another party is a subcontract for the sake of an instant prime contract.

I cannot give a citation, as Don requires. But it is my answer and it is a reasonable approach. I offer it in this forum to be helpful to the original questioner.

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Part of the messiness might be the reason for calling a subcontract a subcontract -- if it is for the purpose of a small business subcontracting plan, then it makes sense to count all the normal-course-of-business contracts -- if it is for the purpose of flowing down a FAR clause, then it makes sense to count only the contracts entered into specifically to obtain supplies or service for performance of the prime contract.

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I am confused. Are you saying that the definition applies to some purchases charged to indirect cost pools, but not others? If so, which are which? Your wrote:

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

That is contradictory. The cost of purchases (contracts and purchase orders) made by a prime to get supplies or services for performance of the prime contract are direct costs. They would not be charged to overhead or G&A.

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For some time I have been tempted to write an article entitled, "What is a Subcontract?" for Contract Magazine. The article would essentially survey the myriad number of definitions and usages of that partcular word in the FAR. I think it's painfully obvious that the word means different things in different contexts and that there is no one-size-fits-all definition.

But the original question concerned the definition of the word within 44.101. Vern's reply of 4:07 AM was pretty accurate, from my experience within the prime contractor community.

The thing is, why does Seeker need to understand that particular usage/definition?

If the reason is that Seeker is about to experience a CPSR and needs to know if the review team is going to look at indirect purchases, then I think the answer is "probably"--especially if the company has one single purchasing system that acquires both direct and indirect goods/services.

I'm struggling to think of any other reason that the definition would matter so much ... but perhaps I'm about to be enlightened in that regard.

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Help:

Take a look at the Federal Register of May 18, 2011, 76 FR 29936, in which DOD published an interim rule concerning contractor business systems. The interim rule followed a proposed rule of December 10, 2010, 75 FR 25550. One of the business systems is purchasing. In the interim rule the applicable definition of subcontract is the one in FAR 44.101. In the background statement to the interim rule, there was this response to a comment about the proposed rule:

Comment: The definitions of subcontracts and purchase orders should be revised to exclude agreements with vendors that would normally be applied to a contractor's G&A expenses or indirect costs.

Response: Because the Government reimburses contractors for its applicable share of indirect expenses, it would be inappropriate to revise the definitions of subcontracts and purchase orders to exclude agreements with vendors that would normally be applied to a contractor's G&A expenses or indirect costs.

The letter I mentioned in my earlier post was sent to Prof. Nash at The Nash & Cibinic Report a couple of months ago and suggested that we comment. Prof. Nash suggested that I write a piece since I had written a long piece about the definition of subcontract for an issue last year, commenting on the CBCA's Serco decision, Serco, Inc. v. Pension Benefit Guaranty Corp., CBCA 1695, 2011 WL 802670. The new article will appear in the April issue of the Report and is entitled, "What Is A Subcontract? Who Is A Subcontractor?"

Background statements are not regulations and have no regulatory force. Moreover, I'm not sure that the response to the comment represents considered DOD policy. I hope not. But if it does the implications are very significant. The interim rule of Mat 18. 2011, with minor changes, was adopted as a final rule on February 24, 77 Fed. Reg. 11355.

I don't know if this has anything to do with Seeker's inquiry, but whether it does or not, it should be cause for concern on the part of all contractors.

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Vern,

First, thanks for the heads-up that you already are working on the topic. Much appreciated.

Second, and as I alluded to in my previous post, my CPSR experience (which is now sadly about a decade in the past) is that YES, indirect purchases are subject to review (though the flow-down requirements are not the same). The government reviewers take (took?) the position that, since the government was allocated indirect costs, it had the right to assure itself that prices paid were fair & reasonable, and that the acquisitions complied with applicable statutory requirements.

The silver lining in that cloud was that the SBA reviewers allowed us to take credit for SB and SDB awards made on indirect purchases in our SF 295 submissions. In fact, the reviewers pretty much insisted we do so. So that was nice.

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Let me try again, to satisfy Don...

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract. This is how I have worked it out in my own mind and experience, within FAR 44.101.

I have to take this approach to make things sensible -- the prime contractor has many contracts on-going that are not directly related to the instant prime contract -- those contracts occurred before the prime contract and will exist afterwards -- that's part of the definition of indirect. In my mind, it doesn't make sense to apply a prime contract's subcontracting rules to those normal-course-of-business contracts. Hence, my answer, offered to be helpful: the definition of subcontract reaches only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

The question of whether a charge is direct or indirect is helpful but not dispositive in the matter of whether a prime contractor's contract with another party is a subcontract for the sake of an instant prime contract.

I cannot give a citation, as Don requires. But it is my answer and it is a reasonable approach. I offer it in this forum to be helpful to the original questioner.

If the contractor enters enters into an agreement to obtain supplies or services specifically for the performance of a contract, how could the cost of that agreement be considered an indirect cost?

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I regret if I wrote in such a way that readers are interpreting something I didn't intend. I wrote--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.


Please do not interpret this to mean something like--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts [covered by overhead and G&A pools] which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.


Perhaps it will be better if I re-write it as follows--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A. Rather, the definition of subcontract covers those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.


In the midst of the confusion that Vern points to, this is how I look at things when I consider whether a FAR contract clause in a prime contract is applicable to or flows down to a subcontract. For this purpose of flowdown, I want to maintain that there is a difference between ( a ) subcontracts entered into specifically to obtain supplies or services for performance of a particular prime contract; and ( b ) subcontracts entered into for the normal-course-of-business operations. As I mentioned above, I don't maintain this difference when looking at subcontracting plans. I don't do purchasing system reviews for cost-reimbursement contracts, so I haven't had to consider this matter in that light.

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There is a lot of confusion here, and it seems to come from ignorance of FAR definitions. Rather than address it here, I am going to write a blog entry about it this weekend and sort things out. I'm overdue for a blog entry anyway.

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I regret if I wrote in such a way that readers are interpreting something I didn't intend. I wrote--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

Please do not interpret this to mean something like--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A, but only to those contracts
[covered by overhead and G&A pools]
which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

Perhaps it will be better if I re-write it as follows--

The definition of subcontract does not reach to EVERY indirect charge in the overhead and G&A. Rather, the definition of subcontract covers those contracts which the prime entered into to specifically to obtain supplies or services for performance of its prime contract.

In the midst of the confusion that Vern points to, this is how I look at things when I consider whether a FAR contract clause in a prime contract is applicable to or flows down to a subcontract. For this purpose of flowdown, I want to maintain that there is a difference between (a) subcontracts entered into specifically to obtain supplies or services for performance of a particular prime contract; and ( B) subcontracts entered into for the normal-course-of-business operations. As I mentioned above, I don't maintain this difference when looking at subcontracting plans. I don't do purchasing system reviews for cost-reimbursement contracts, so I haven't had to consider this matter in that light.

I am thoroughly confused by B. I assume that by " subcontracts entered into for the normal-course-of-business operations" you are referring to such things as copy machines, office furniture, break room supplies etc. If you are referring to these contracts as subcontracts, what is the prime contract?

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The government reviewers take (took?) the position that, since the government was allocated indirect costs, it had the right to assure itself that prices paid were fair & reasonable, and that the acquisitions complied with applicable statutory requirements.

Help:

When you said that the reviewers "took the position" that the government had the right, did you mean that they officially nterpreted the definition in FAR 44.101 to include purchases charged to indirects and based their assertion of right on an interpretation of the contract, or did you mean that they based their assertion of right on some extra-contractual claim, such as: Since we're paying some of it we ought to have the right... "?

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Vern,

The memory is a bit hazy after all these years, but as I recall it was more the latter--the "we ought to have the right."

We had a single purchasing system. In fact we had a single "Contracts" department that handled everything, including prime contract management, pre- and post-award management of subcontracts (as WE defined them in our command media), procurement of supplies and cosumables, and procurement of goods and services to be charged to indirect cost objectives such as overhead and G&A departments. We did it all under the same set of policies (though of course with different policies for different efforts). Since everything was acquired under our "purchasing system" the reviewers felt no hesitations about looking at everything so acquired.

But as I recall they did not base their assertion on any contract clause or FAR direction. It was more of "since we are paying for some of it AND you have a single company-wide purchasing system that we are reviewing ...."

Looking forward to your blog article. And if I can beg a copy of your N&C article, that would be the cherry on my Sunday Sundae.

H2H

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Vern,

The memory is a bit hazy after all these years, but as I recall it was more the latter--the "we ought to have the right."

We had a single purchasing system. In fact we had a single "Contracts" department that handled everything, including prime contract management, pre- and post-award management of subcontracts (as WE defined them in our command media), procurement of supplies and cosumables, and procurement of goods and services to be charged to indirect cost objectives such as overhead and G&A departments. We did it all under the same set of policies (though of course with different policies for different efforts). Since everything was acquired under our "purchasing system" the reviewers felt no hesitations about looking at everything so acquired.

But as I recall they did not base their assertion on any contract clause or FAR direction. It was more of "since we are paying for some of it AND you have a single company-wide purchasing system that we are reviewing ...."

Looking forward to your blog article. And if I can beg a copy of your N&C article, that would be the cherry on my Sunday Sundae.

H2H

This is similar to a situation I encountered where a contractor's purchasing system was found in adequate because the contractor did not include proper flow down clauses in purchases for inventory that would be used on various types of government contracts and non-government contracts. Obviously, at the time of purchase, it could not be determined what type of contracts the inventory would be used on or whether any of it actually would be used on government contracts.

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This is similar to a situation I encountered where a contractor's purchasing system was found in adequate because the contractor did not include proper flow down clauses in purchases for inventory that would be used on various types of government contracts and non-government contracts. Obviously, at the time of purchase, it could not be determined what type of contracts the inventory would be used on or whether any of it actually would be used on government contracts.

Under the new DOD "contractor business systems" policy, the CO could withhold a percentage of progress payments or performance based payments for failure to flow clauses down. The policy apples to CAS-covered contracts.

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Under the new DOD "contractor business systems" policy, the CO could withhold a percentage of progress payments or performance based payments for failure to flow clauses down. The policy apples to CAS-covered contracts.

True, however, I read the FAR and the Purchasing System clause to require the prime to have a prime contract subject to the clause before withholding can occur. In the situation I was describing there was no prime contract. The contractor was merely purchasing material to go into its inventory for future use on indeterminate contracts, some of which might be government contracts that were priced in different ways and some of the inventory might go into products to be delivered under non-government contracts. The purchase of the material was not related to any current government contract.

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