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Gwestbury

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My company holds several cost type contracts and under one of these contracts we are performing a task that includes the use of a subcontracted fabricator. Based on the need to better control the quality of our end product on this job our management team has decided to get into the fabrication business and purchase this said fabricator. This subcontractor, who has done very little FAR based work at any tier in the past, will become owned by our parent company and will therefore be under common control with us. Of course the first question from the management team to me was what other work that we have could we give them to expand the revenue of their new toy.

So what would be a good answer? I've gone down the road in my head of moving buy work to make work and it doesn't look too good. This small business fabricator will now become a segment of a large business under common control with us. I'm sure they are not currently able to support cost transfers as required by 31.205-26(e) and taking the commercial exemption would be a difficult sell for most of this work. We don't have any formal Make v Buy programs but the general statement at 15.407-2 is enough to require me as a contractor to ensure lowest overall cost. I would have a great technical argument but almost no supporting information on cost. Certainly our own desire to expand revenue with a new acquisition isn't going to satisfy.

In a previous Circle Bar W life I remember we competed affiliates and kept the transactions on the buy side. We put in place OCI mitigation to include our ACO opening the proposals if necessary. As I recall our customer really didn't like this approach though.

Any other ideas? "Don't do it" doesn't seem to be an option!

Thanks in advance.

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As a new affiliated entity, you are now responsible for the compliance of your former subcontractor. That means investing in appropriate systems, policies, procedures, and controls to provide assurance that they meet the standards of your company. You need to do this even without throwing them new work -- as your former subcontract just became an Inter-Organizational Transfer.

Anyway, since you've got to invest in the acquisition in any case, you might as well give them more work.

Oh, one final thought. Your fabricator was not performing up to snuff and you acquired it "in order to better control the quality of our end product." What is going to change at the fabricator now, after acquisition, that will lead to improved quality outcomes? If you tell me "more and better management" then you will need to properly account for that management. You won't want to keep the costs of that management in the holding company, since the benefit is at the acquired fabricator.

Hey, congratulations! You've just added a bunch of costs to the acquired entity. I wonder what your management will say about that? Yes, indeed, I agree it might have been prudent for management to have considered these (and other) challenges during the due diligence phase. In particular, it would seem to have been important to realize that the former small business likely lost its SB status upon acquisition by your (large) company, which is going to significantly affect the ability to win new orders from other primes and from the government.....

Hope this helps, but I doubt it will.

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  • 3 weeks later...

Thanks for the reply. I also spoke with a legal expert on interdivisional matters and he believes my issue is squarely FAR 31.205-26(e). Making the commercial exemption claim is really our only hope; otherwise we might as well just fold them in to the federal segment if they, indeed, want to do federal work.

Now I just have to relay the bad news....

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Gwestbury,

Thanks for following-up. When delivering the bad news to your management, it might not be a bad idea to show them what happens when a contractor identifies a noncompliance with the requirements of 31.205-26(e).

Hope this helps.

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