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Hello Wifcon members,

I have a situation that I hope one of you can help me with. A subcontractor that worked under one of our Prime Contracts recently sent me their final invoice this month (Sept 2016), their final invoice was a rate adjustment based on their DCAA approved final indirect rates. The Prime Contract they worked under ended in 2014, but still has funding remaining on it. My questions are:

  1.  Can I bill their Final Rate Adjustment Invoice against the remaining funding left on the prime contract even though the prime contract has already ended?
  2.  Our prime contract costs for FY 2014 (year the prime contract was physically completed/ended) are currently being audited by the DCAA, would billing out the final invoice in FY2016 cause that cost to show up on the 2016 DCAA ICA? Is there a way to bill this Rate Adjustment Final Invoice without interfering with the DCAA's ICA?

I'm somewhat new to this whole process and appreciate any guidance.

V/R,

KR_2016

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Hello here_2 _help,

Would that be:

1.  Yes, I can bill the 2016 final subcontractor invoice even though the 2014 prime contract ended.  

2. Yes, the billed costs will show up on 2016's ICA.

If the billed subcontractor costs show up on the 2016 ICA then I assume I'll have to wait until 2016 ICA audit is complete to close out the Prime Contract, correct? There is no way around that I suppose.

 

Thank you

 

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8 minutes ago, KR_2016 said:

1.  Yes, I can bill the 2016 final subcontractor invoice even though the 2014 prime contract ended.  

2. Yes, the billed costs will show up on 2016's ICA.

 

1. Yes.

2. Yes.

3.  If the billed subcontractor costs show up on the 2016 ICA then I assume I'll have to wait until 2016 ICA audit is complete to close out the Prime Contract, correct? There is no way around that I suppose. Yes, there is. You can close out your subcontract at any time based on your negotiation with the subcontractor and agreement of the final rates to be billed. Neither your company nor the subcontractor need government approval to reach agreement on rates to be used to close-out the subcontract.

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5 minutes ago, here_2_help said:

1. Yes.

2. Yes.

3.  If the billed subcontractor costs show up on the 2016 ICA then I assume I'll have to wait until 2016 ICA audit is complete to close out the Prime Contract, correct? There is no way around that I suppose. Yes, there is. You can close out your subcontract at any time based on your negotiation with the subcontractor and agreement of the final rates to be billed. Neither your company nor the subcontractor need government approval to reach agreement on rates to be used to close-out the subcontract.

Thank you for the information, here_2_help. I  appreciate you taking the time to answer my question.

V/r,

KR_2016  

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1.Yes assuming the subcontract is not a fixed price contract and if cost reimbursement type, the final billed amount does not exceed the subcontract funded amount.

 

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Cost reimbursement contracts could be funded for the stated estimated cost and fee if any, or funded for less than or more than that amount. Typically, a cost reimbursement contract is funded for less than the negotiated estimated cost and fee during the earlier parts of performance, and funded for more than that amount as the performance ends. Typically I would expect to see a "funded amount" dollar value line in the subcontract contract. Hope this responds to your question. 

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I still do not know what you mean by "the subcontract funded amount."  Are you saying that the government has specified an amount of funds obligated on the prime contract that is to be used only for a particular contract?  While that may happen, it is a rare occurrence in my experience.  Also, prime contractors do not "fund" subcontracts in the way the government funds prime contracts because the fiscal statutes that apply to the government do not apply to prime contractors.  Primes usually budget for subcontracts.

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Hi Retreadfed

No, I am not saying that the government specified any amount of prime contract funds to be used only for a particular subcontract. Subcontract funded amount was intended to mean total amount allotted in FAR 52.232-22. My apologies there. I do agree with you that prime contractors should budget their government funding to cover internal work, management reserve and subcontracts. I spent over 30 years in major subcontracts with two of the top 3 prime contractors. The budget amount (total amount allotted) for each cost reimbursement subcontract was included in the subcontract to make it contractually enforceable. Cost reimbursement subcontracts  had a total amount allotted line item. It was incrementally changed from time to time as budget increased during the POP. FAR 52.232-22 was included with alterations to ensure that the prime is not obligated to reimburse a subcontractor for costs incurred and fee in excess of the total amount allotted in subcontract. This ensures that at the prime level, government funding is never unexpectedly exceeded due to subcontracts exceeding the internal budget. Perhaps the prime contractor here did not follow this practice. In my opinion, that is a questionable "non-practice." It may call into question the prime's proper financial management of its subcontracts (enforcing and managing the budget) and potentially could be at odds with approved accounting or financial system requirements. I wouldn't be surprised if there was a potential CPSR concern as well.      

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Hi NJRobe,

Just wanted to clarify, the Final invoice was within the funding limitation requirement set forth in the their subcontract per FAR 52.232-22 . We did not bill the Gov't for anything exceeding that funding limitation. The greater issue concerns the timeliness in which subcontracts should be closed, and I think here_2_help's advice on that issue is very helpful.

 

V/r,

KR_2016 

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Thanks for clarifying, KR_2016. Glad to hear how your company handles subcontract funding and its life cycle administration. Still, to me, there seems to be some risk in the prime contractually agreeing to final allowable costs with the subcontractor at this point because the facts do not suggest that the subcontractor has billed the prime "adjusted" final direct rates approved by the Government. Perhaps they already did so. If not, the risk would be that in closing out the prime, the Government performs an audit of the subcontract that questions the rates billed by the subcontractor as too high. Since you the prime would have already contractually agreed to them with the subcontractor as final, the prime would probably have to absorb that loss absent convincing substantiation to the contrary.

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20 hours ago, NJRobe said:

Still, to me, there seems to be some risk in the prime contractually agreeing to final allowable costs with the subcontractor at this point because the facts do not suggest that the subcontractor has billed the prime "adjusted" final direct rates approved by the Government. ... the risk would be that in closing out the prime, the Government performs an audit of the subcontract that questions the rates billed by the subcontractor as too high. Since you the prime would have already contractually agreed to them with the subcontractor as final, the prime would probably have to absorb that loss absent convincing substantiation to the contrary.

I don't believe your assessment is correct. If the prime and subcontractor have already settled the indirect rates, then that particular subcontract falls out of the universe audited by [DCAA or whomever]. The rates that are finalized with respect to government prime contract billings do not affect that already finalized and closed subcontract.

Your assessment seems to be based on the incorrect notion that the government has privity into the business-to-business contract between a prime and a subcontractor. It does in some areas, but not in this one. 52.216-7 clearly establishes the requirement that the prime is responsible for establishing final billing rates with its subcontractors as part of the close-out process. The few court cases that have dealt with this issue have reaffirmed that proposition. The government has no role to play in that process.

Finally, if you are concerned about risk, you can have the subcontractor sign tailored reps and certs that protect the prime, should the situation you fear come to pass.

Hope this helps.

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Subcontractors are not required, and frequently do not agree to give prime contractors access to their books and records. Especially major subcontractors. This information is proprietary and may be competition sensitive. In those cases, the prime would have an impossible task to establish any "final" subcontractor rates. In 52.216-7, as flowed by Government to a prime contractor, Contractor means prime contractor. When flowed by primes in my experience this only makes sense, and is flowed by stating that Contractor means subcontractor and Contracting Officer means Contracting Officer. So, for example,paragraph (d)(2)(i) means the prime flowdown of 52.216-7, with parties as altered above, ensures that the subcontractor submit the rate proposal to the Contracting Officer, a party having cognizance to access subcontractor books and records, when such access is not granted to the prime by the subcontractor.   

I was unable to locate language in 52.216-7 that requires the prime to establish the subcontractor's billing and/or final rates.

Seems like we have beaten this to death. Would be glad to have a sidebar with you to exchange views.   

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11 hours ago, NJRobe said:

Subcontractors are not required, and frequently do not agree to give prime contractors access to their books and records. Especially major subcontractors. This information is proprietary and may be competition sensitive.

I think your comment is based on the incorrect assumption that a prime must conduct an audit, in lieu of the DCAA, in order to settle indirect cost rates.

Further, I think your understanding might be enhanced by reviewing the Court of Federal Claims decision in U.S. Enrichment Corporation v. United States (7/28/2014).

Hope this helps.

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I have a related question to this topic.

Background:

Prime contract ended in June of 16. Prime contract contains Jun 2013 version of 52.216-7, allowable cost and payment. Prime submits notice to the Govt of excess current funds available for deobligation in the amount of 100k after its retainer for rate settlements. Government agrees issues bilateral modification to deobligate agreed upon excess funds a month later and obligates funds under follow-on effort. 
 
After FY, prime contacts PCO and states that they made a mistake in their excess funds calculation as they received an invoice from one of their CPFF SubKtrs for $15k for travel reimbursement that was not included in the primes original spend plan but was approved travel that occurred during the final year of the contract. Prime also states during conversation with PCO that they [the Prime] have not settled this subcontract with the SubKTR at this time.
 
Question:
Under the allowable cost and payment clause, is the government required to provide an increment of funds (either prior year (if available) or current year funds) as the $15k unexpected travel exceeds the retainer for rate adjustments, or should the Govt wait until DCAA and DCMA complete contract closeout and the contractor submits its final invoice before providing this increment in case there are other costs that are in excess of the retainer that arise during contract audit and settlement? 
 
 
 

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2 hours ago, uva383 said:

Question:

Under the allowable cost and payment clause, is the government required to provide an increment of funds (either prior year (if available) or current year funds) as the $15k unexpected travel exceeds the retainer for rate adjustments, or should the Govt wait until DCAA and DCMA complete contract closeout and the contractor submits its final invoice before providing this increment in case there are other costs that are in excess of the retainer that arise during contract audit and settlement? 
 

1. I believe the clause that controls is the limitation of cost clause (52.232-20). The prime contractor cannot exceed estimated costs without providing adequate advance notice, as specified by the clause. In the scenario described, it appears that adequate advance notice was not provided. If the prime contractor is not in compliance with the requirements of 52.232-20 (or -22) then it may be in a situation where it needs to pay its subcontractor but cannot obtain reimbursement from its customer.

2. As I have stated in my posts above, the prime and the subcontractor can settle the subcontract at any time of their choosing. If they choose to await a DCAA audit that's their choice.

3. The use of the phrase "retainer" in this context is not really helpful. What you are describing is a reserve for settlement of final indirect rates. The parties should be revising provisional billing rates to closely approximate final billing rates throughout contract (and subcontract) performance, so as to minimize any final contract cost adjustments. The question makes it seem that the parties have deferred billing rate adjustments, which is a noncompliance with 52.216-7 as well as other FAR requirements.

Hope this helps.

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