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Michael11

Subcontract Pricing - Prime wants sub rates/categories mapped to theirs

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In this scenario, which the prime has specifically requested, must the subk staff meet the same qualifications/experience as the prime maintains for the same categories? The prime bid rates for both themselves and a subcontractor and wants us to utilize those categories and rates. But our pricing really doesn't align with the qualifications which they bid at the proposal stage and therefore we're not willing to sign up to align our staff with qualifications we're not familiar with and risk noncompliance. Is this an issue that needs to be negotiated in the sub language - would it be permissible to propose our own qualifications and descriptions for the categories if they didn't meet the qualifications for the categories stated in the prime award? Is there a requirement for the prime that says if your sub is going to map to your categories they must be at least equivalent personnel? The trouble we're having is the prime is small biz and our rates are far higher and it will be tough to make this work. Sorry if this is not clear. Any thoughts are appreciated.

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Yes, a subcontractor can try to negotiate something different than what the prime contractor wants.

Maybe you will come to agreement.

Maybe you won't come to agreement.

If you don't come to agreement, then you won't get a subcontract and the prime contractor will have to find another subcontractor.

You don't say, but I'm wondering if the prime contract is a T&M arrangement. If so, the contract's hourly rates apply to work by both prime contractor and subcontractor employees. See para. ( a )( 1 ) of the clause at FAR 52.232-7. These rates are what the Government will pay the prime contractor -- the prime contractor may pay its employees different rates and may negotiate different arrangements for its subcontractors. Para. ( a )( 3 ) of the clause says that when labor qualifications are specified in the contract, the Government will make payment to the prime contractor only when the work is performed by employees who meet the qualifications. So you can negotiate anything you are able with the prime contractor, but your subcontract negotiations won't change the prime contract.

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Michael11:

Here are my thoughts: You've asked one question, as follows:

"Is there a requirement for the prime that says if your sub is going to map to your categories they must be at least equivalent personnel?"

By "requirement for the prime" I presume you mean a requirement imposed on the prime by the prime's customer. Am I right? If so, then the requirement have been imposed by contract. Right? If so, then how would we know, since we haven't seen the contract? Or do you mean something else?

Now, common sense suggests that if the prime contract specifies labor categories and also specifies the qualifications that persons working in those categories must have, then the prime should require any subcontractor who will provide persons to work in those categories to provide persons with the same qualifications. Don't you think? Isn't that what you would do?

Common sense also suggests that if the prime priced Labor Category X at $150.00 per hour, and if you want to charge the prime $250.00 per hour to provide persons with the qualifications that a person working in Category X must possess, then you and the prime may not have a business deal in your futures unless someone is willing to make one hell of a concession. Don't you think?

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Yes, the prime contract is T&M. Correct, Vern I meant was the a requirement imposed on the prime by the prime's customer. As the sub, we haven't actually seen the full prime contract either. We've been shared the rates which were awarded and a list of category descriptions that were included in the solicitation. I couldn't actually say whether a specific set of qualifications is listed for these categories in the prime. All we know is a list of qualifications from the RFP which the prime is suggesting for us to comply. Would you consider the descriptions they bid at the proposal stage to carry the same weight or would they be enforceable if not actually incorporated into the contract? To add to this, several categories are known to not have any qualifications attached to them. In the absence of a firm requirement we were thinking of just mapping functional titles to a reasonable rate for each.

The fact is it's two companies, two business models, and a lot of unknowns. I was sort of thinking this to be like the difference between taking inventory from a big box store, say a fishing rod from bass pro, which is for sale at a rock bottom price, and taking it to some mom and pop shop and telling them to sell it for the same price. Never gonna happen, right?

Hard to really know the full extent of our obligations until we see whether there are contract mandated qualifications for each category and what they are. I guess I tend to agree if those exist that a sub would have to comply with the same set of qualifications.

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Michael11,

I think you're worried too much about the prime contract -- the prime contract will not establish your obligations as a subcontractor; rather, your obligations will be established in the subcontract. Whether or not the prime contract mandates qualifications for each labor category, the prime contractor and subcontractor are free to establish qualifications in the subcontract. A subcontractor complies with the subcontract, and the prime contractor complies with the prime contract. It is not necessary that the subcontract match the prime contract in all its details.

But regardless, the prime contractor is only entitled to payment from the Government for labor hours performed by employees (prime or sub) that meet the qualifications established in the prime contract (see para. ( a )( 3 ) of the contract clause at FAR 52.232-7, or para. ( i )( 1 )( i )( B ) of the clause at FAR 52.212-4, Alt. 1). And, the prime contractor is only entitled to payment from the Government for labor hours performed by employees (prime or sub) at the rate set in the prime contract (see para. ( a )( 1 )( i ) and ( ii ) of the former clause, or para. ( e )( 1 )( ii )( A ) and ( B ) of the latter clause). You should expect pushback from the prime contractor if you're trying to establish a subcontract that puts the prime contractor at a risk of nonpayment (because subcontractor employees don't possess qualifications) or working at a loss (because subcontractor rates payable by the prime contractor are higher than the prime contract rates which the Government will pay to the prime contractor).

In your original posting, you said it will be tough to make this work. Maybe so. But if you want the subcontract, you and the prime contractor need to come to terms. Hopefully, if both of you open your kimonos, so to speak, you can do it. I recommend a heart-to-heart talk with the prime contractor.

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The interesting thing (at least to me) is that the 52.232-7 clause makes a distinction between two types of subcontracted effort. The first type is effort performed by a subcontractor that "meets the labor category qualifications of a labor category specified in the contract". The second type is effort performed by a subcontractor "for supplies and incidental services for which there is not a labor category specified in the contract".

The first type is treated as "T" in the T&M billing equation. I've always assumed that each subcontractor needed a separate hourly billing rate in the "T" equation, to avoid allegations that the contractor is getting a windfall profit by have a subcontractor perform the work and then billing it at prime contractor billing rates, but I confess I don't see that requirement in the clause itself. Did I miss something?

The second type is treated as Direct Material -- the "M" in the T&M billing equation. The prime contractor bills whatever subcontractor payments are made at its cost plus allocable indirect expenses. It seems to me that the subcontractor is made whole here -- i.e., the subcontractor is paid its actual costs plus profit on such efforts, but the prime contractor cannot put profit on its subcontractor payments (I note there are a couple of exceptions to that general rule).

Getting back to the question at hand, I think the answer is that the subcontractor must comply with the terms of its subcontract, but if the subcontract-specified labor categories do not map to the prime contract-specified labor categories, the subcontractor is not harmed financially. The prime is harmed to the extent that it cannot put profit on its subcontractor payments; and it has missed an opportunity to bill its subcontractor payments at prime contract hourly billing rates. None of which would affect the subcontractor in any way.

Hope this helps.

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