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When is a subcontractor a subcontractor?

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I work for a non-profit organization which has both federal contracts and grants. A couple of questions have come up recently regarding subcontractor classification in our reporting. It is a bit confusing, so I'm hoping someone can lay it down simply for me.

1. We use a modified total direct cost method of calculating our Indirect rate. Under A-122 we exclude all but 25k of subcontractor/sub-recipient costs from direct costs when calculating our indirect rate. We determine what is a subcontractor/sub-recipient vs. a vendor consistent with the definitions given in A-133.

2. When reporting our subcontracting for small business reporting purposes we use a broader definition of a sub-contractor that (at the risk of over-simplifying) basically includes any contracted good or service.

Because we use the term subcontract in both instances, it is causing some confusion when reporting to management. I guess I just want to confirm that the term "subcontractor" has different meanings depending on the context. Does anyone have any suggestions of how I explain this to management? Thanks!

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You are correct. There is no single official definition of subcontract that is applicable in all cases. If there is an applicable official definition then that is the one that will apply. But in many instances the regulations and contract clauses use the term without definition, in which case you can use an ordinary English dictionary definition or a trade specific dictionary definition. Be aware, however, that some dictionaries include purchases of material as subcontracts and others do not.

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I think the best practice is to define the term in your policies/procedures/instructions, and then follow your definition consistently.

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That's an excellent idea. I encourage you to define subcontract and subcontractor as follows:

Except as otherwise defined by applicable statute or regulation, or by contract, a subcontract is a contract entered into for the sole purpose of performance of a part of the work of a specific contract that this company is obligated to perform. The term does not include contracts for materials. The term also does not include contracts for parts, components, or services that are not manufactured or rendered especially for a specific contract of this company. A subcontractor is a firm that is performing a subcontract for this company or is performing a subcontract for one of our subcontractors.

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Vern, why would you exclude contracts for materials from the definition of "subcontract?" I can see why bulk buys would be excluded when the material is not intended for any specific contract. However, purchases of material intended for a specific contract seem a different animal.

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Retread:

I wasn't clear. I'm sorry. I define "materials" as things that are sold in the normal course of business and that are not custom made for a particular purpose. Steel or titanium sold in standerd stock grades, forms, and sizes is material. Steel or titanium specially manufactured, formed, or cut to order for a specific contract is not.

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If you are a Grant recipient you have contractors that are either sub-recipients or vendors, you do not have subcontractors. As a Grant recipient you are not considered to be a prime contractor and therefore you can not have subcontractors. If you are sub-recipient or a vendor to another grant recipient then you could have subcontracts. A grant is not a contract.

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A grant is not a contract.

Not true. Although a grant is not a procurement contract governed by the FAR, it is typically a contract.

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True in the legal sense. But the terminology issue is interesting. The United States Code generally uses the term "subgrant." See for example 42 U.S.C. 3056b:

No grant or subgrant shall be made and no contract or subcontract shall be entered into under this subchapter with an entity who is, or whose employees are, under State law, exempted from operation of the State workers' compensation law, generally applicable to employees, unless the entity shall undertake to provide either through insurance by a recognized carrier or by self-insurance, as authorized by State law, that the persons employed under the grant, subgrant, contract, or subcontract shall enjoy workers' compensation coverage equal to that provided by law for covered employment.

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Cheers to everyone posting on this topic! The nail has been hit on the proverbial head. Words have meaning! And, I think Don and Vern are alluding to the most important part when it comes to Government items. Read the appropriate Act, statute, regulation, etc. and look at how it does or does not define the term, that is your guiding light and the venacular that the drafters should be presumed to have intended. If the law defines a thing/person/activity as a subcontractor as it relates to one set of circumstances, but defines that same thing/person/activity as a subgrantee or subrecipient under other sets of circumstances, and another part of law requires that things be done relative to sub-contractors and is silent on the issue of subgrantees, then those things ought not to be done with respect to subgrantees. Expressio Unius Est Exclusio Alterius!

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I'm not sure what you're talking about. What are we supposed to learn from the executive order and Title 15 of the CFR? Is it the difference between subcontract and subgrant? Something else?

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A grant is not a contract. As a nonprofit also that has many grants and contracts, this needs to be drilled into our staffs heads daily. See the definition of contracts under FAR 2.101, it ends "Contracts do not include grants and cooperative agreements".

A grant is a financial assistance award with very little oversight, and are subject to different policies (NIH grant policy statement, DODGARS, etc.), instead of the FAR, HHSAR, or DFAR.

The OP is a nonprofit and would use A-110 which uses the terminology "subaward" or "subrecipient", not "subcontract" or "subcontractor".

Subawards are issued under grants and subcontracts are issued under contracts. There are some instances that you can have a subcontract issued from a grant, but they must include the requirements at 45 CFR 74.48.

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Sorry to break the news to you, pmh. A grant is typically a contract. The FAR definition of "contract" excludes grants and cooperative agreements because the FAR only applies to procurement contracts. The last sentence of the definition means nothing more than that when the word "contract" is used in the FAR, it does not mean grants and cooperative agreements. It does not mean that grants are not contracts in general. A procurement contract is one several types of contractual transactions that the Government enters into. The Government uses contracts when purchasing real property, selling real or personal property, making grants, cooperative agreements, CRADAs, and other transactions, and employing personnel. None of these are subject to the FAR, but they are still contracts.

See the discussion of "Transactions" and "Grants and Cooperative Agreements" in Chapter 1 of Formation of Government Contracts, Fourth Edition, by Cibinic and Nash. Here's an excerpt:

"...most grants now require the funds or property only for specified purposes, 42 Comp. Gen. 289 (B-149441) (1962). Such grants are contractual agreements but are not procurement contracts, Thermalon Indus., Ltd., v. United States, 34 Fed. Cl. 411 (1995). See also Westmoreland Human Opportunities, Inc., v. Walsh, 246 F.3d 233 (3d Cir., 2001) treating a grant as a contract at a preliminary stage of the litigation, and San Juan City College v. United States, 391 F.3d 1357 (Fed. Cir., 2004), treating a grant in the form of a 'program participation agreement' as a contract."

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Don is right and he provided excellent references. A grant is a contract under the common law if it has all of the elements of a contract as established in the law. In the Thermalon Indus, Ltd, decision cited in the quote provided by Don the Court of Federal Claims goes through a grant element by element to show that it had all of the elements of a contract -- offer, acceptance, competent parties, legal purpose, mutual assent, and consideration. It may be that not all grants are contracts under the common law, but it is clear that many are. More than most people think.

As Don points out, FAR 2.101 defines procurement contracts, but does not make that clear. Prof. Cibinic discussed this problem in the July 1995 issue of The Nash & Cibinic Report:

The [Federal Grants and Cooperative Agreements Act], enacted in 1978 and modified in 1982, provides the criteria for determining whether a procurement contract, a grant, or a cooperative agreement should be used in accomplishing the Government's mission...

When the FGCAA was initially adopted, it distinguished between “contracts” and “grants and cooperative agreements.” In the 1982 amendments, the term “contracts” was changed to “procurement contracts.” This change recognized that a cooperative agreement is one of many types of governmental agreements that are contractual in nature but do not involve procurement. Nevertheless, incorrect and confusing statements concerning their legal nature abound. For example, the FAR 2.101 definition of contract states: “Contracts do not include grants and cooperative agreements covered by 31 U.S.C. Sec. 6301, et seq.” A proper statement would be that grants and cooperative agreements are not procurement contracts.

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To add to what Don wrote, think about the definition of "contract" that is generally used to describe a commercial arrangement between private parties. That is it is an agreement between competent parties for a legitimate purpose supported by adequate consideration. This clearly describes a grant.

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Following on to Vern's last statement, the FAR is promulgated pursuant to the OFPP Act. According to that Act, the FAR is only to apply to procurement contracts as defined in the Act. Because the FAR only applies to procurement contracts, the FAR definition of a contract should not be interpreted as meaning that other agreements that are not procurement contracts are not contracts. In other words, the only thing we can derive regarding grants from the FAR definition of a contract is that a grant is not a proucrement contract. We cannot say that a grant is not a contract.

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Difference between a contractor and a subcontractor for a Grant recipient

Speaking of semantics, the phrase “subcontractor” is often used instead of “contractor” when referencing contracts under financial assistance awards. Perhaps using the “sub” prefix helps staff remember that a contract is not the instrument being used by the agency to fund the recipient. Using the phrase “subcontract” helps to identify the activity as a lower tier transaction. A “subcontractor” however, is a party that provides a good or service to a contractor, such as the eraser supplier for the pencil manufacturer that sells pencils to an agency or an agency’s financial assistance recipient. Probably ‘tis better to call the situation what it is really is – a contract under a financial assistance award, not a subcontract. Accuracy helps avoid confusion.

That statement cam from

Office of the Assistant General Counsel for Finance and Litigation, Federal Assistance Law Division, Vol 13 January 4, 2000

“Subawards or Contracts – More Than Just A Name”

by Jana Gagner

I don't have a url.

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Along this line, I have a follow-up question. A federal agency is trying to determine for us that a company we are using is a subcontract instead of a vendor. For our purposes, we are required to follow OMB Circular A-133 section ____.210, which is brought into our contract under FAR 52.215-2 and states:

Characteristics of a vendor are:

  1. This service is provided as part of their normal business operation.
  2. They provide a similar service to many different purchasers.
  3. They operate in a competitive environment.
  4. Their program compliance requirements do not pertain to the service provided.

Characteristics of a vendor are:

  1. Their performance is measured against meeting the objectives of the program.
  2. They have authority for administrative and programmatic decisions.
  3. They provide on-going service for the life of the program.
  4. They carry out a program of the subrecipient as compared to providing services for a program of the prime recipient.
  5. They are responsible for applicable program compliance requirements.

The government’s argument is that based on the definition of a vendor in the “Government Contracts Reference Book,” a vendor is only an organization selling goods (as opposed to services) and in this case it is not a simplified acquisition. They have stated because it is a large sum of money, they want us to flow down all of the contract requirements and they want to be able to manage the money more closely than they would be able to if the company was considered a vendor. We would like to follow the OMB Circulars as to not make ourselves an audit risk.

The question is: Do government contractors have the authority to tell us what mechanism to use to issue funds from a federal contract, particularly if we feel it goes against our audit regulations?

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