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Lower-tier Subcontract Issue on Prime Contract DO Containing FFP and T&M CLINS

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Scenario:

Lower-tier subcontractor performing on a DO issued under the restricted suite of an IDIQ MATOC for maintenance and services. The DO contained 2 types of CLINS: 1. FFP (for preventative maintenance) and 2. T&M (for corrective maintenance).

Prime contractor (Company A) submitted hourly labor rates to Govt.; the resulting award contained the hourly rates but no details are given regarding whether the rates for each labor category are for the prime or its subs. NOTE: lower-tier sub was not involved with prime contract in any capacity until well after the award. As such, it was unable to participate in the hourly rate discussions/negotiations between the prime and first-tier sub. In addition, the lower-tier sub was not given any information about said discussions/negotiations.

First-tier sub to Company A issued subcontract to lower-tier sub for both CLINs. Beforehand, lower-tier sub quoted its GSA FSS contract hourly rates to first-tier sub; the first-tier sub accepted said rates. Lower-tier sub hourly rates accepted by first-tier sub were was much as $14.00/hr higher than those in listed Company A's prime contract. To the best of this writer's knowledge, the rates in Company A's prime contract had not been disclosed to the lower-tier sub prior to it submitting its proposal to, or receiving its subcontract from, the first-tier sub.

CAVEAT: the lower-tier sub is also a contract holder under the same MATOC (lower-tier sub's award was in the unrestricted suite) and most likely has the same KO administering its contract as Company A. The lower-tier sub's hourly rates negotiated with (and accepted by) the Govt. on its award are the same as above - its GSA FSS contract hourly rates. The Govt. is definitely aware the lower-tier sub is also performing under Company A's award as a lower-tier sub.

Issue:

Lower-tier sub performed multiple CLIN 2 corrective maintenance services over several months, during which time it invoiced its labor at the $14.00/hour higher rate. Govt. accepted all invoices and lower-tier sub was paid at the higher rate. During this time, the lower-tier sub is still unaware of Company A's negotiated rates.

Out of the blue, the Govt. decides it no longer wants to pay the lower-tier sub's higher rates and directs Company A to pay the lower-tier subs at Company A's lower negotiated rate.

Argument:

Lower-tier sub is well aware of the regulations governing T&M work and concurs it must abide by the rates in Company A's contract. The lower-tier sub does, however, take issue with the Govt. changing its position "midstream" on the hourly rates. Does the lower-tier sub have any valid arguments to make? If so, what are they?

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Guest Vern Edwards

What T&M payment clause is in Company A's contract? FAR cite and date of clause?

The issue is what the government must pay to Company A for the work done by the first-tier sub using the services of the lower tier-sub. The issue is not what Company A must pay to the first-tier sub for the work done by the lower-tier sub, or what the first-tier sub must pay to the lower-tier sub. The first-tier sub and the lower-tier sub do not have an issue with the government, because the government's contract was with Company A, not with them. The fact that the lower-tier sub also has a MATOC contract is irrelevant, since the government did not hire the lower-tier sub under that contract. What the lower-tier sub knew or did not know about the negotiations between Company A and the government is also irrelevant.

As for the government's initial payments of the higher rate, so what? If that rate was inconsistent with the terms of the task order the government can claim (1) that the payment was a mistake, an overpayment, and (2) that the prime made a false claim if it knew that the rate was not the rate due under the order.

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It contains 52.232-7 "Payments under Time-and-Material and Labor-Hour Contracts" (FEB 2007).

You are right about the government initial payment of the higher rates. I simply included that in my post to express my frustration. Regarding the other items you state are not an issue, I am aware of that as well. Simply included them so the readers get an idea of the "big picture".

Also, thank you for your response--it is an honor, sir. Also, read "Time-And-Materials Contract: The Time Has Come For A Long, Hard Look" recently--EXCELLENT writing! I know that regs have changed since you originally wrote it but thought it gave excellent insight into T&M contracts that many readers are never able to get otherwise.

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Let me ask a stupid question: What solicitation provision was in the RFP for how labor was to be priced under the contracts and how did Company A respond to that provision?

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Guest Vern Edwards

Thanks, Shauna.

Under 52.232-7, paragraphs (a) and ( b ), the government pays for work by subcontractors of the prime either at (1) hourly rates specified for subcontractor labor categories or (2) by cost reimbursement pursuant to the Allowable Cost and Payment Clause, FAR 52.216-7. So you have to answer two questions: (1) is there a labor category for that lower-tier subcontractor? See FAR 16.601( c )(2). (2) If there is no labor category for the subcontractor, then you must be able to show that the reimbursement sought by the contractor is "allowable", which means, among other things, that the rate is reasonable.

You said that there is no rate in the contract for the lower-tier sub. If so, then the contractor can seek reimbursement for the amount that it paid to the first-tier sub, as long as it can show that the amount is reasonable and otherwise allowable.

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Guest Vern Edwards

What solicitation provision was in the RFP for how labor was to be priced under the contracts and how did Company A respond to that provision?

That's irrelevant. The only thing that matters at this point is what the contract and the order say.

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