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SKoslow

Limitations on Sub-Contracting

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Carl:

When a small business set-aside solicitation includes the Limitations on Subcontracting clause and a company submits a proposal, the CO may notice that by the terms of the proposal the contractor will not be able to comply with the limitations. In that case, the matter must be handled as a matter of the offeror's responsibility. When it appears that the offeror is not agreeing to comply it's a matter of the proposal's acceptability. Actual compliance is a matter of contract administration. See Cyber Solutions & Services, Inc., B-413563, 2016 CPD ¶ 352 at 3:

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With regard to small business set-aside contracts for services, FAR clause 52.219–14(c)(1), Limitations on Subcontracting-which was incorporated by reference in the RFQ-provides that “at least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.” RFQ at 30. As a general matter, an agency's judgment as to whether a small business offeror will comply with the subcontracting limitation clause is a matter of responsibility, and whether the contractor actually complies is a matter of contract administration. Geiler/Schrudde & Zimmerman, B–412219, et al., Jan. 7, 2016, 2016 CPD ¶16 at 7; citing Raloid Corp., B–297176, Nov. 10, 2005, 2005 CPD ¶205 at 4. Neither issue is one that our Office generally reviews. Id. at 7–8; see also 4 C.F.R. §21.5(a), (c). However, as our Office has consistently held, where a proposal, on its face, should lead an agency to conclude that an offeror has not agreed to comply with the subcontracting limitation, the matter concerns the proposal's acceptability. Id. at 8; citing Sealift, Inc., B–409001, Jan. 6, 2014, 2014 CPD ¶22 at 4. Because the limitation on subcontracting is a material term of the solicitation, a proposal that fails to conform to it is unacceptable and may not form the basis for an award. Id.; citing Addx Corp., B–404888, May 4, 2011, 2011 CPD ¶89 at 3–4.

What we have been talking about in this thread is performance of the contract, which, as you can see, is a matter of contract administration. The concept of responsibility and the Certificate of Competency program are not applicable in contract administration, because if the contract has been awarded the contractor has already been determined to be responsible. If you tell SBA that you are referring a contractor to them for a certificate of competency because they are not complying with the limitations on subcontracting they will say that's a matter of contract administration, not prospective contractor responsibility.

You ask:

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I guess it all boils down to this - what prevents a post award determination of responsibility?   Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not?

Once a contract has been awarded, both parties are bound by its terms. What clause allows a CO to do what you described? That's why SBA will not rescind a COC based on new information if the contract has already been awarded. See 13 CFR 125.5(l). What clause allows a CO to terminate a contract for default merely because new information bearing on its responsibility leads him to conclude that he should not have considered them to be responsible in the first place? T4C? Sure.

I cannot see that SBA has any responsibility or authority with respect to enforcement of the limitations. Their consultative role is just that,

I can see that you really like the idea of a post award COC referral, and I can see that I'm not going to be able to persuade you that it won't work, so I'm going to drop the matter. I doubt that we'll ever see it done, but if we do, then we'll know one way or the other.

 

 

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Vern/Pepe - Thank you.   As Vern notes I may not be fully convinced.  No further debate but rather I leave the discussion with this. 

To say "I cannot see that SBA has any responsibility or authority with respect to enforcement of the limitations. Their consultative role is just that, " leaves a big hole as to who pursuant to  13 CFR 125.6(h) will level the penalty.   As the penalty provision is part of the SBA's regulations and pursuant to the statute requiring its implementation it would seem authority lies solely and fully in SBA's lap.   To which I raise the question how does one refer to SBA a matter for penalty?   The CFR is not clear but as Pepe notes SBA may not help in clarifying in the FAR either. 

 

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I will leave the conversation with one additional note. When I was a CO in my past life we had these discussions often for services type of work. If the contractor was providing monthly financial reports that show that the labor was close to 50%, and had a plan to get back to 50% we never challenged the reports. If they were below 50% we would add this to their CPARS (I had 1 instance of this). I never had a situation where I would have ever considered a T for C, or D, for this situation, or where I would have requested the SBA to get involved.

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2 hours ago, SKoslow said:

When I was a CO in my past life we had these discussions often for services type of work. If the contractor was providing monthly financial reports that show that the labor was close to 50%, and had a plan to get back to 50% we never challenged the reports. If they were below 50% we would add this to their CPARS (I had 1 instance of this). I never had a situation where I would have ever considered a T for C, or D...

Interesting. Consider the following from the Limitations on Subcontracting clause:

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(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for—

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

Suppose that the contractor's actual percentage fluctuates from time to time during the course of performance, sometimes falling short of 50 percent, sometimes exceeding 50 percent, but that by the end of performance the cumulative percentage is within the limitation. When is performance determined? Continuously or cumulatively? Month by month or at the end of performance? Is the contractor in breach the moment performance falls short or only if it has fallen short at completion?

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Regarding 13 CFR 125.6, as updated June 30, 2016 per the 2013 NDAA, the final rule was published in the Federal Register on May 31, including extensive background explanation at : https://www.federalregister.gov/documents/2016/05/31/2016-12494/small-business-government-contracting-and-national-defense-authorization-act-of-2013-amendments

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21 hours ago, Vern Edwards said:

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

I always found this language interesting. I understood it as services being concerned with cost of performance incurred not actual performance of work, per se. Seems, under the old method, this could easily be manipulated by increasing employee wages. If the contractor was facing a penalty - it could make sense in many SAT procurements.

Now I know the SBA is moving from the labor-cost calculation to an amount-paid calculation, but what if the cost of the contract performance incurred exceeds the contract total? (Amount to be paid by the government)

I assume the only amount that matters is the contract amount.

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Jamaal, if you are asking about limitations on subcontracting under the revised SBA rules, see the above link that I listed, which states, in part::

"Section 1651 of the NDAA, as codified at 15 U.S.C. 657s, requires that the limitations on subcontracting for full or partial small business set-aside contracts, HUBZone contracts, 8(a) BD contracts, Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) contracts, and WOSB and Economically Disadvantaged Women Owned Small Business (EDWOSB) contracts, be evaluated based on the percentage of the overall award amount that a prime contractor spends on its subcontractors."

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On ‎1‎/‎26‎/‎2017 at 8:46 AM, Vern Edwards said:

DWGerard:

But the limitations are imposed by clauses in government contracts, and neither the statute nor 13 CFR give SBA any enforcement authority or powers. Am I wrong? Isn't it a CO's job to enforce the contract terms?

The SBA can perform the evaluation and provide the KO with the information he or she needs to know in relation to the LOS regulation.  The authority to enforce remains with the KO, but the information and evaluation process is difficult and time consuming for a KO (I know that some KOs would disagree, but I have been told it was too hard to do many times by KOs), so I as a PCR will perform the evaluation for the KO if there is a serious concern regarding a contractor's adherence with the LOS regulation

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15 minutes ago, DWGerard1102 said:

The SBA can perform the evaluation and provide the KO with the information he or she needs to know in relation to the LOS regulation.  The authority to enforce remains with the KO, but the information and evaluation process is difficult and time consuming for a KO (I know that some KOs would disagree, but I have been told it was too hard to do many times by KOs), so I as a PCR will perform the evaluation for the KO if there is a serious concern regarding a contractor's adherence with the LOS regulation

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

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Vern, I'm not sure what kind of data you have in mind when you say "[n]either a CO or a PCR can compel a contractor to submit", but if the data is cost data concerning contract performance, why would the audit clause, FAR 52.215-2, not provide the government the right to such data if we are talking about a contract to which the audit rights under that clause apply? 

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4 hours ago, Vern Edwards said:

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

Not necessarily so, if the contract is for construction, subject to the DBA and the other labor clauses for construction. The contractor must provide payroll info, which might allow a reasonable enough approximation to confirm or question compliance. 

Edited by joel hoffman
Clarified that "could" means "might", as in "maybe could"

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4 hours ago, Retreadfed said:

Vern, I'm not sure what kind of data you have in mind when you say "[n]either a CO or a PCR can compel a contractor to submit", but if the data is cost data concerning contract performance, why would the audit clause, FAR 52.215-2, not provide the government the right to such data if we are talking about a contract to which the audit rights under that clause apply? 

Retread:

The audit clause allows for audits for the following purposes only:

1. to determine costs incurred under certain types of contracts;

2. to evaluate the accuracy, completeness, and currency or certified cost or  pricing data submitted;

3.examination by the Comptroller General; and 

4. to evaluate the effectiveness of the contractor's production of data required by other contract terms and the accuracy of those data.

How will that clause assist an SBA PCR or a CO determine compliance with the limitations on subcontracting clause?

Joel:

I question whether Davis-Bacon payroll information would be enough to "approximate: a breach of contract.

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Vern, the audit clause is required to be inserted in covered subcontracts under covered prime contracts.  This gives the government the right to audit the costs incurred by both prime contractors and subcontractors under covered prime contracts and subcontracts.  Through this process, the government could determine the costs the prime contractor is incurring for its own personnel and what costs are being incurred for subcontract costs.  To me, this information would certainly be an aid in determining whether a prime is complying with the LOS restrictions.

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Retread:

By its own express terms, use of the audit clause is restricted to the circumstances and purposes stated in the clause. I do not believe that a CO can invoke that clause in order to ascertain whether a contractor has complied with the limitations on subcontracting. Nor do I believe that a CO can invoke the clause for a purpose stated in the clause in order to obtain information for another purpose. An SBA PCR has no authority whatsoever to invoke the clause.

There are limits to the uses to which the audit clause can be put. See e.g., Kepa Services, Inc., CBCA 2727, 15-1 BCA ¶ 35942.  If you think I'm wrong, please cite something or provide your analysis of the clause language.

Vern

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10 hours ago, Vern Edwards said:

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

Does the fact that the LOS clause has a direct nexus to 15 USC 645 have any bearing on the rights of the Government to request information specifically to determine if the contractor shall be penalized and/or debarred? 

 

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Does the fact that the LOS clause has a direct nexus to 15 USC 645 have any bearing on the rights of the Government to request information specifically to determine if the contractor shall be penalized and/or debarred?

 Carl:

I don't know. What do you think? Explain "direct nexus."

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Vern – The nexus is this in that 15 USC 645 (see below) is the connection (basis) for 13 CFR 125.6(h).   As referenced in 15 USC 645, 15 USC 657s is the subcontracting limitation provisions of the statute.  

 

While the penalty is not stated specifically in the FAR 52.219-14 clause as things go with the regulations of SBA all conclusions. processes and actions of SBA programs are not stated in the FAR.  FAR 19.00 is clear that it implements the “applicable sections of the Small Business Act” and the LOE as noted in this discussion is an “acquisition related” part of the Act.   Supported by the fact that within WIFCON there are references by many that direct an OP to 13 CFR for clarifying information with regard to action and process on small business matters. 

 

Noting this along with the fact that a violation of the LOE has specific penalty as prescribe by statute and regulation YES I believe the noted connection does give the Government (CO, SBA, GAO, OIG,  Justice and ????) the right to inquire as to a contractors compliance with the LOE.

 

For a contractor to simply tell the Government to “get lost” when inquiry is made with regard to LOE for a specific contract would be a wrong minded action by the contractor in my view.

 

15 USC 645

 

(g) Subcontracting limitations

(1) In general Whoever violates a requirement established under section 657s of this title shall be subject to the penalties prescribed in subsection (d), except that, for an entity that exceeded a limitation on subcontracting under such section, the fine described in subsection (d)(2)(A) shall be treated as the greater of—

(A)

$500,000; or

(B)

the dollar amount expended, in excess of permitted levels, by the entity on subcontractors.

(2) Monitoring

Not later than 1 year after January 2, 2013, the Administrator shall take such actions as are necessary to ensure that an existing Federal subcontracting reporting system is modified to notify the Administrator, the appropriate Director of the Office of Small and Disadvantaged Business Utilization, and the appropriate contracting officer if a requirement established under section 657s of this title is violated.

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The Federal Register notice of the final rule in the link I provided earlier discussed enforcement and why SBA dropped the contractor reporting requirements. Unfortunately, I am unable to read the report here, in the woods,  

The law and SBA regulations shifted the focus from cost of performance for labor to amount of subcontracting and performance of the work. For construction contracting, other tools available are teequired documentation for monthly progress payments. The backup info required to be submitted with a request for progress payment is information on the amount of work performed by each subcontractor and total amount of each subcontract. 

The contractor is also separately required to provide information on each subcontract awarded, at least for DoD contracts. I don't remember the details but it was an Acknowledgment form that included the name and maybe the amount.

It doesn't take a rocket scientist for a trained COR to be able to reasonably determine whether a construction contractor is self performing its share of the work...if the ACO and COR want to.  

EDIT 2/3/2017:  By "trained COR" , I am referring to those USACE Area and Resident Engineers and other personnel who are involved in the day to day contract administration on the jobsites and who are familiar with the entire contract, including the clauses, not just the technical scope of work. I'm not necessarily referring to a COTR or those appointed "COR's" who represent the project owner organization or who are "inspectors". 

I don't doubt that a PCO would have problems  unless they or their staff are intimately involved in day to day construction contract admin.  My perspective is from an organization staffed with ACO's and Contract Admin Offices.  

 

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Noting this along with the fact that a violation of the LOE has specific penalty as prescribe by statute and regulation YES I believe the noted connection does give the Government (CO, SBA, GAO, OIG,  Justice and ????) the right to inquire as to a contractors compliance with the LOE.

For a contractor to simply tell the Government to “get lost” when inquiry is made with regard to LOE for a specific contract would be a wrong minded action by the contractor in my view.

Carl:

15 USC 645 does not expressly require a contractor to maintain, report, or disclose on demand any information. Neither does 15 USC 657s. What 15 USC 645(d) says is that if there is a violation, then there is a penalty. The statutes leave unanswered the question of how the CO or the SBA would go about getting the information necessary to determine whether there has been a violation.

As to the right of the CO, GAO, OIG, DOJ, FBI, etc, to inquire. Well, they can always ask questions, but it's another thing entirely to have the power to compel an answer. Now, in this thread I have been concerned with contractual enforcement--i.e., contract administration, not investigation of crimes or other violations of law. Once we go there we run into issues associated with all sorts of complicated legal procedures--search warrants, depositions, and court enforced disclosure--that I'm not competent to discuss. So let's keep the focus on contract administration. I don't see how 15 USC 645, 15 USC 657s, or the LOS clause give a CO or an SBA PCR any contractual power of inquiry or contractual authority to compel a contractor to produce and disclose specific information. A CO can ask, but a CO cannot make a contractor answer, not based on the plain language of the two statutes, the FAR, SBA regulations, or the LOS clause. To the extent that you and others somehow infer that they grant such a power to a CO or a PCR, you have not made your argument clear to me.

I certainly respect your view about what would be a "wrong minded action" on the part of a contractor, but I don't see how that has anything to do with the problem before us.

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1 hour ago, joel hoffman said:

It doesn't take a rocket scientist for a trained COR to be able to reasonably determine whether a construction contractor is self performing its share of the work...if the ACO and COR want to.

Joel:

I have been a construction CO for the Air Force and the Dept. of Energy and spent a lot of time on site. To the extent that your comment is meant to suggest that it would be easy (or relatively easy) for a "trained COR" (whatever that means) to determine whether a construction contractor is in compliance with the limitations on subcontracting, I respectfully disagree. Here is the portion of the LOS clause devoted to construction:

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(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Thus, according to the LOS clause, the standard is 15 or 25 percent of "the cost of the contract," excluding the cost of materials. That standard does not appear in 15 USC 657s or in 13 CFR 125.6.

15 USC 657s does not establish a limitation for construction, but leaves it to SBA. 13 CFR 125.6(a)(4) and (5)  do not use the phrase "cost of the contract." Instead, they state the limitations in terms of percentages of "the amount paid by the government." I don't know why the current LOS clause (JAN 2017) deviates from 13 CFR 125.6.

According to 13 CFR 125.6(e):

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(e) Determining compliance with applicable limitation on subcontracting. The period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period.

When considered in conjunction with the language of the clause, I interpret that to mean that compliance under a construction contract must be determined after contract completion, when the amount paid by the Government is finally known.

In my opinion it would be very difficult and perhaps impossible for a COR to know the amount that will be paid by the government and the percentage performed by the contractor at any given point in time prior to final completion and payment, especially if there are outstanding REAs and claims or the possibility of undiscovered or reported constructive changes, differing site conditions, etc. In fact, the amount paid by the Government might not be determinable until years after physical completion and the close of litigation.

I frankly do not think that CORs are in any position to determine the contractor's compliance with the LOS clause and I wouldn't require a COR to do it. At most, a COR could recognize only gross violations.

If anyone knows of information indicating that I have misinterpreted the statutes or the regulations, please let me know.

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My staff and/or I negotiated the sole source contracts so we knew what the contractor said they would do to comply.  I was very familiar with the clause and it's interpretation of cost of personnel and no materials, etc. I also coordinated with the SBA Regional Office to develop forms for set-aside RFP' source selections to determine what the proposers intended to self perform.  

Materials were excepted because primes were "buying" (paying the bills for) materials for subs and "borrowing" construction equipment to meet the requirements of 52.219-14.

My discussion above of the SBAs intended shift from focus on cost of personnel to what work is subcontracted refers to the FR Notice of Final Rule for updating their FR.  I don't think the FAR clauses have been updated consistent with the revised SBA Regs.  

I mentioned the shift in focus because it , as well as why reporting is not required, possible enforcement, etc. were explained in detail in the FR Notice.  I don't know if anyone here read it or not. It's on my home computer. 'm not at home.

Regarding  the length of time to determine the cost of performance , these are small business set-asides and relatively small sole source construction contracts, which were usually closed out within a few months of completion. 

You have the right to disagree with me, that's fine.

My original post began with the words "That's not necessarily so..." in response to what I read as "the government  can't determine whether the contractor is complying with LOS ". 

 

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18 minutes ago, joel hoffman said:

My staff and/or I negotiated the sole source contracts so we knew what the contractor said they would do to comply.  I was very familiar with the clause and it's interpretation of cost of personnel and no materials, etc. I also coordinated with the SBA Regional Office to develop forms for set-aside RFP' source selections to determine what the proposers intended to self perform.  

Materials were excepted because primes were "buying" (paying the bills for) materials for subs and "borrowing" construction equipment to meet the requirements of 52.219-14.

Joel:

Your experience is old and not relevant to this discussion, which is based on newer rules. In any case, that experience does not justify your claim of how easy it would be for a COR to determine compliance. For the reasons I've given, It would not be easy.

18 minutes ago, joel hoffman said:

I don't think the FAR clauses have been updated consistent with the revised SBA Regs.  

The FAR councils issued a proposed rule on Dec. 2, 2016 to implement the SBA's final rule of Oct. 2, 2013. The proposed rule would not change the statement of the limitations as they appear in the current clause (JAN 2017). The councils apparently have not yet issued a proposed rule to implement the SBA's final rule of last year--the one to which you provided a link.

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"Easy"????? No such "claim" made by me here.  

Old and irrelevant experience? Ok, but so is your even older experience. As far as either the Air Force or the DOE are concerned, I was in the Air Force in construction and engineering and in contract admin. I was involved with the AF as their construction agent (USACE) at numerous Bases for almost 20 years and am somewhat familiar with their current organization and how they administer construction contracts. 

DOE? I am familiar with some of their big construction projects and how they (recently) administer contracts. I also consulted on a couple of their projects and have USACE friends who are or were loaned to DOE. 

I don't doubt that either Organization would find it difficult to determine LOS compliance on FFP contracts.

We both made the point that there is little or no guidance for enforcement and I indicated that , for the most part, few KO's, ACO's or COR's care -as long as the work gets done. 

Over and out. 

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24 minutes ago, joel hoffman said:

Do they even care? 

I don't think anybody really cares. The limitations are a sop to small business chronic complainers.

Any reading of the statute, the SBA regs, and the FAR shows that nobody really cares about anything except flagrant violations of the clause. If Congress really cared they would have required record keeping, reporting, and certification and they would have authorized compliance audits. Nobody wants COs to be aggressive in enforcement. Nobody.

A fine of $500,000 or more for a violation of even a few percentage points (15 USC 645(g)(1))? Absurd.

Quote

DOE? I am familiar with some of their big construction projects and how they (recently) "administer" contracts.

P.S. As for dodgy contract admin, people who worked in glass houses shouldn't throw stones.

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Vern –I feel you have distracted the conversation on a specific point without giving consideration to the whole of what “contract administration” is with regard to assurance of compliance with contract terms and conditions and the remedies given to both parties in a contract to help assure the compliance.

At first blush your comments suggest that clauses like the limitation on subcontracting clause and possibly the 52.236-7 Permits and Responsibilities clause are worthless as either clause lacks "contractual power of inquiry or contractual authority to compel a contractor to produce and disclose specific information as to compliance with a Federal law and regulation during performance of work under a contract.

The contract provides the power of inquiry, or in other words either party can ask the other party to a contract if the party is complying.   I would agree that if asked by one party if they are complying and for data to support such compliance the other party is not compelled to answer.  In fact I would say that as a whole the contract does not “compel” one to do anything contained in the contract.   You sure hope they do but if they do not then there is a course of action with regard to a breach of promises.

As I have already provided in my comments there is a course of action if the CO does not believe the limitations on subcontracting are being adhered to during performance and in the end if the contractor does want to tell me to get lost I have the power to compel them to tell me why I should have of or should not of gotten lost.   In Federal contracting I just terminate them for cause or default and they produce the information or not, their choice, but if they do not I am guessing that they sure won’t like the outcome.

My conclusion is that in the end as a party to a contract I can compel the information.

PS - Posted after you an Joel continued to discuss.  Relevant to my response here, who knows as I spent the time to produce the above response so I am just posting, what the heck.

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