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kdiekemper

Who is responsible for review and determination of subcontractor final indirect cost rate proposals

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We as a prime contractor have been wrestling with who is responsible for reviewing a subcontractors final indirect cost rate proposal and determining the rates. It's an easy thing if the subcontractor has an approved accounting system but what if he doesn't and you are awarding a T&M subcontract. FAR 42.202(e)(2) states "The prime contractor is responsible for managing it subcontracts". Does this mean every function described in 42.302(a)? Further when you get to T&M subcontracts there is no requirement to flow down the T&M payment clause 52.232-7 nor is there a requirement to flow down the allowable cost and payment clause 52.216-7. However, a purdent contractor should include some of the requirements in these clauses in their T&M subcontract. Vern and Don have said contractors do not have to comply with FAR in awarding subcontracts except when clauses specifically contain a flow down requirement. I hope I haven't misinterpreted this. DCAA wants to hold prime contractor's feet to the fire on everything and some ACO's want us to follow the FAR to the letter. Drives me nuts and forgive me for rambling. The real question is how do you determine who looks at a subcontractor's final indirect cost rate proposal? FAR 42.703-1(a) says "A single agency (see 42.705-1) shall be responsible for establishing final indirect cost rates for each business unit." Is it only the government based on the matrix of cognizance within DCMA and DCAA? Is the prime responsible, and if so when? What if the subcontractor will not provide access to his books? Who does it then?

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Let me ask a fundamental question. You say the potential subcontractor does not have an approved accounting system. Without discussing whether such a system is actually required, the FAR does list elements of responsibility. Having an accounting system that is adequate for the contract type contemplated is an element of responsibility. The prime is generally responsible for determining the responsibility of the sub. How have you determined the potential sub is responsible if you have not determined that it has an adequate accounting system?

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We do determine adequacy either through a previous DCAA review or through our own review. But the issue is really is the responsibility for the ICP. DCAA says its the prime contractor unless they have previously done one. Yet the FAR speaks to agency. Is the prime the CFAO for a sub?

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I assume that you have a contract that provides for reimbursement of allowable incurred costs.

You will invoice for reimbursement of certain costs. The question for the government is whether your costs are allowable, including your subcontract costs. The government does not care whether you have to reimburse your sub. The government only cares whether it has to reimburse you.

If you seek reimbursement of costs incurred by a subcontractor, and if those costs are unallowable, then the government will not reimburse you, even if you paid the sub. The government doesn't care that you reimbursed the sub -- that's between you and the sub and it's your problem. They only care if they have to reimburse you. So, in order to protect yourself, you must flow down certain clauses even if you are not required to do so, including the allowable cost and payment clause and the T&M payment clause. If you don't, you may find yourself required to pay the sub for something that the government does not have to reimburse you for. The government requires you to flow down clauses for its own interests, not yours.

How about subcontractor final indirects cost rates? The government gets the right to audit subs under some circumstances, but it does not have to audit or determine final rates for your benefit. It will be up to you to prove that what you reimbursed the sub for was allowable under your contract.

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A very timely question.

I guess you're correct that 52.216-7 does not have to be flowed-down to T&M subcontracts. It's in the matrix for prime contracts, but I didn't see the flow-down language within the clause itself. But why would you NOT flow-the clause down? To Vern's point, how are you protecting yourself?

If you don't have the clause in the subcontract, how to you assure that the subcontractor is billing you only for allowable direct & indirect costs? That's more fundamental, it seems to me, than whether the subcontractor has an adequate accounting system.

If you had put the clause (or equivalent) into the subcontract, we could be having an entirely different discussion. But you (apparently) did not do that. So we are left with Vern's point that "it will be up to you" to prove to your customer's satisfaction that the subcontractor's direct and indirect costs are allowable, allocable, and reasonable.

What I don't like about Vern's position is, if he is correct, then we are looking at the specter of the subcontractor being audited by multiple prime contractors with respect to multiple prime contracts. That's going to be real fun for the subcontractor, and fodder for the DOD IG and the GAO when they figure out how much that's costing the taxpayers.

This issue is also going to be fodder for DCMA when they come to evaluate your Purchasing System.

Hope this helps.

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Lets look at it this way. A contractor or subcontractor has no inherent obligation to submit an incurred cost proposal. They only have to do so if there is a clause in the (sub)contract requiring a submission. The only FAR clause that requires establishment of final indirect cost rates is the ACP clause, 52.216-7. If your subcontractor has any prime contract with that clause in it, the government will establish final indirect cost rates for that company. If the subcontractor does not have a prime contract with the clause in it, you, as the prime will have to demonstrate to the government that the costs you claim are allowable. This includes indirect costs you have paid to your subcontractors. If you cannot do so, the government will not allow those costs. This means you as the prime must develop a process to ensure that the subcontractor's final indirect costs meet the test for alowability. This does not mean that you must review the rates, but must have a process for determining them and be able to show their allowability.

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To answer the question on what's in our subcontracts. We include requirements from the allowable cost and payment clause to include the submission of the indirect cost proposal in all cost reimbursable subcontracts. The issue we are continually wrestling with is even if we do a review of the ICP and determine rates or we review the accounting system and using the guidance from DCAA on accounting system reviews and determine adequacy we can still be hung out to dry. It's real easy if the subcontractor has cost reimbursable prime contracts. Not so easy if they don't. Competing contractors don't want to open their books for another contractor to do a review. So to contract or not and how to protect the company and still comply with customer requirements. No easy answer but thanks for the discussion.

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Oh and here_to_help you are so correct. It's going to be interesting. ACO's and DCAA have not been responsive to assistance requests in this reqard - so should be interesting. Contractors do not have the same hammer that the Government does. Boy was that an eye opener going from a "Contracting Officer" to contractor employee.

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kdiekemper,

Looking at YOUR subcontract language (including any language that substitutes "Prime Contractor Representative" for "Government Contracting Officer") to whom would you say the subcontractor needs to submit its final indirect rate proposal? Whom would you say is responsible for determining the subK's final indirect rates?

Again, don't look at the FAR clauses, look at your individual subcontract language. Then answer the questions, if you would.

H2H

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