SKoslow

Limitations on Sub-Contracting

72 posts in this topic

 

 

I dislike broad brushes and digression.  

If no one cares why is there even discussion in WIFCON on any contractual matter?    God forbid  why is there an organizations like NCMA or even prestigious publications like Nash & Cibinic?

this discussion has gone off track and I am going to take the spur line..

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55 minutes ago, C Culham said:

The contract provides the power of inquiry

The contract provides the rights and obligations stipulated therein, no more, no less.

55 minutes ago, C Culham said:

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. 

Thank you for confirming my assertion.

55 minutes ago, C Culham said:

[T]here is a course of action if the CO does not believe the limitations on subcontracting are being adhered to during performance....

I agree. And I'm sure that the agency's lawyer will concur with a termination for cause or default if the CO can demonstrate that there will be a breach upon completion of performance.

55 minutes ago, C Culham said:

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.

I'm not sure that you have that power, but let's say you do. The contractor's response: Because the contract does not say that I have to do what you want me to do. Are we in compliance? I think so. End of convdersation.

55 minutes ago, C Culham said:

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.

You would terminate without proof of breach? Interesting.

55 minutes ago, C Culham said:

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

Okay, but I haven't seen a valid argument in support of that assertion.

For an example of what happens to an agency and its CO when they try to read obligations into a contract that are not there, see Lockheed Martin Integrated Systems, Inc., ASBCA 59508, 2016 WL 7655944, Dec. 20, 2016,  http://www.asbca.mil/Decisions/2016/59508, 59509 Lockheed Martin Integrated Systems, Inc. 12.20.16.pdf.

A hard slap down. Contracting people who do not believe in the sanctity of contracts are the bane of our business. And remember, small businesses are entitled to their legal costs under Equal Access to Justice.

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5 minutes ago, C Culham said:

I dislike broad brushes and digression.  

If no one cares why is there even discussion in WIFCON on any contractual matter?    God forbid  why is there an organizations like NCMA or even prestigious publications like Nash & Cibinic?

this discussion has gone off track and I am going to take the spur line..

Okay. Bye.

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Vern, I disagree with your assertion that the audit clause does not permit the government to require contractors to produce data regarding the cost of performing set aside contracts in order to determine compliance with the terms of the LOS clause.  Your reliance upon KEPA is wide of the mark.  The contract there was a firm fixed price contract.  Therefore, it was not a contract under which the government could audit the costs incurred by the contractor.  Moreover, in the context of the ability to continue to audit a covered contract, e.g., a cost reimbursement contract, while a dispute is being litigated concerning that contract, the ASBCA has ruled in Holston Defense Corp. ASBCA No. 49900, that DCAA can continue to audit the contract and does not have to follow the Board's discovery rules in order to gain access to cost data even cost data relating to the contractor's claim.

Nothing in the audit clause, 52.215-2 or the other audit provisions in other clauses such as 52.216-7 and 52.232-7 limits the uses the government can make of the data to which it has a right under those clauses.  Without a prohibition on the use of that data in determining compliance with the terms of the contract, such as compliance with the LOS clause, the payment of wages and fringe benefits under the SCA clause, 52.222-41, or compliance with the Buy America clause etc. I see no reason why a CO could not use the data to which the government is entitled to receive under its audit rights for these other purposes.

This brings up the question, if an audit determined that a contractor did not incur at least 50% of the cost of labor using its own personnel under a cost reimbursement service contract, could the government disallow the subcontract costs that are in excess of 50% of the labor cost under the contract?

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1 hour ago, Retreadfed said:

Your reliance upon KEPA is wide of the mark. 

My argument does not rely on Kepa. I cited it only to show that there are limits to the uses to which the audit clause can be put.

1 hour ago, Retreadfed said:

Nothing in the audit clause, 52.215-2 or the other audit provisions in other clauses such as 52.216-7 and 52.232-7 limits the uses the government can make of the data to which it has a right under those clauses. 

I agree with you. But the clause limits the purposes for which an audit can be conducted. Paragraph (b) gives the government the right to audit in order to "reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract." Reading the clause as a whole, that purpose is consistent with the limitation of its application to contracts under which compensation is based on incurred costs. It's for that reason that I believe that under a T&M contract the right to audit is limited to material costs and labor hours. I don't think that the government can audit labor costs, because compensation for labor is not based on incurred costs, only incurred hours.

I agree that once the government has obtained cost data via the audit clause it can use it for any purpose, including confirmation of compliance with the LOS clause. But I challenge the assertion that a CO can order an audit so that the CO or an SBA PCR can determine compliance with the limitations of subcontracting.

What's interesting about your position is that you seem to be admitting that a CO has no way to obtain the data necessary for enforcement of the LOS clause under FFP contracts. I wonder what percentage of all set-aside awards are FFP vs. CR, T7M, or incentive.

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This brings up the question, if an audit determined that a contractor did not incur at least 50% of the cost of labor using its own personnel under a cost reimbursement service contract, could the government disallow the subcontract costs that are in excess of 50% of the labor cost under the contract?

That's a side issue, but I think that if contractor compensation is based on the allowability of incurred costs, then the answer would be yes, the government could disallow the excess..

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The collection of information contained in FAR 52.215-2 (currently approved under OMB Control Number 9000-0034) was recently submitted to OMB for a clearance extension. See 81 FR 93688-02, December 21, 2016. The stated purpose of the information collection was as follows:

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The objective of this information collection, for the examination of records by Comptroller General and contract audit, is to require contractors to maintain certain records and to ensure the Comptroller General and/or agency have access to, and the right to, examine and audit records, which includes: Books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form, for a period of three years after final payment. This information is necessary for examination and audit of contract surveillance, verification of contract pricing, and to provide reimbursement of contractor costs, where applicable. The records retention period is required by the statutory authorities at 10 U.S.C. 2313, 41 U.S.C. 254, and 10 U.S.C. 2306, and are implemented through the following clauses: Audit and Records-Negotiation clause, 52.215-2; Contract Terms and Conditions Required to Implement Statutes or Executive Orders-Commercial Items clause, 52.212-5; and Audit and Records-Sealed Bidding clause, 52.214-26. This information collection does not require contractors to create or maintain any records that the contractor does not normally maintain in its usual course of business.

I don't see how an audit conducted for the sole purpose of determining compliance with the LOS clause would be within the scope of the approved information collection.

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Vern, you and I are on the same page in regard to FFP and T&M contracts. 

Don, what does "contract surveillance" as used in the notice mean to you?  To me, that has a broad meaning.  In any event, the audit need not necessarily be performed to determine compliance with the LOS clause.  When DCAA conducts an audit and issues a report on its findings, it frequently includes in the audit report what is known as a Statement of Condition.  This is used to impart information to readers of the audit report that was discovered in the conduct of the audit which may require further action by DCAA, the recipient of the report or the contractor.  Thus, for example, if in the conduct of an audit the DCAA auditor were to discover that the contractor was not paying its employees in accordance with a wage determination attached to the contract, this fact could be reported in a Statement of Condition or separately transmitted to the contracting officer.

One thing we have not discussed in this thread is the impact of the doctrine of implied certification concerning any requests for payment made by a contractor who is not in compliance with the LOS clause.  Under this doctrine, when a contractor submits a request for payment under a government contract, the contractor gives an implied certification that it has complied with all material terms of the contract.  If the contractor has not complied with all material terms of the contract, it is exposing itself to False Claims Act liability.  In this regard, auditors are required to include steps in their audit program that are designed to provide reasonable assurance that the matter being audited is free from fraud.  Because of these requirements, I see no reason why DCAA or other Federal contract auditors could not include steps in their audit programs  to check on compliance with specific contract clauses when conducting an audit of incurred costs on covered contracts and report on those findings to the contracting officer.

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50 minutes ago, Retreadfed said:

Don, what does "contract surveillance" as used in the notice mean to you?

I read that sentence several times before I posted the excerpt, and I don't know what they were trying to say.

2 hours ago, Don Mansfield said:

This information is necessary for examination and audit of contract surveillance, verification of contract pricing, and to provide reimbursement of contractor costs, where applicable. 

What is examination of contract surveillance? What is audit of contract surveillance? Is it looking at the records the contractor kept in performing surveillance of its performance?  

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Retread:

Something has occurred to me as a result of your question about the allowability of subcontract costs in excess of the limitations. Perhaps a CO could invoke paragraph (b) of the audit clause to determine whether the contractor was complying with the LOS clause in order to determine the allowability of subcontract costs in light of the limitations. 

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I re-read the FR Notice of Final Rule implementing the 2013 NDAA in SBA's 13 CFR's. The Report stated that, per contract clause 52.204-10,  prime contractors are (even now) required to report first tier subcontract awards of $30k and up, including who, what for and the amount of the subcontract. This doesn't include subcontracts for transportation and some other costs. 

If the LOS clause ever gets updated, the measures of limitation of subcontracting will change from "cost of labor" basis to amounts subcontracted (less materials) to firms other than similarly situated SB firms. The emphasis (to the limited extent of possible monitoring) is intended shift to what the prime and similarly situated subs will actually perform themselves or further sub to similarly situated 2nd tier subs.  There is no reporting requirement below first tier.  

This should provide "some" resource assistance to the government in monitoring compliance for service contracts. 

And the LOS would be applicable to the predominant purpose of the work contracted for in hybrid/combined scope contracts, e.g., services/supply.

Its not an air-tight monitoring mechanism, of course. 

I haven't read the entire revised CFR on this IPhone at my camp. However, I do remember reading in the old 13 CFR that, for purposes of negotiating sole source prime contracts, if the amount of subcontracted materials isn't identified in the sub's proposal, it was counted as subcontracted labor for LOS purposes. 

Carl - I hope that I didn't give you the impression that I don't care about the LOS.  There is also a "Performance of Work by the Contractor" clause for unrestricted construction contracts that pre-dated the later LOS clause for SB preference type contracts and orders.  I was/still occasionally am a contract negotiator, contract administrator and was the lead for conducting all of our District's source selections for a period of years. 

I was extremely concerned about the various ways that primes could be awarded or attempted to be awarded unrestricted or special preference program contracts, either for themselves or as a "front" or "broker" for another firm, then subcontracted or passed-through the work to other firms. 

During my first assignment in the Air Force as a civil engineer at base level in the early 70's, I wondered why the second low bidder on many of our minor construction for building additions and maintenance and repair contracts ended up performing the work and why I never met or even saw the prime.  I didn't know to ask but suspected that something was fishy.

Then, later as I negotiated contracts and conducted source selections, I learned many of the tricks that firms will attempt to use to broker or front for others over the years. 

 I even had one firm that was one of the "mafia-type" local cartel member in one geographical area call me by mistake one day to discuss participating as a sub on a project.   We had taken the project out of an 8(a) or HubZone sole source program because we couldn't agree on a reasonable price. It was a civil works,  local sponsor cost shared  bridge replacement and that sub was behind the "front" prospective prime. We had just advertised for full and open competition when he called. The conversation went something like "Hey, do you remember that bridge project that we were working together on? It's on the street now and I was wondering if you're still interested in working for us." Imagine his surprise when I told him that I was with the Corps, not a sub!  Rather embarrassed sounding, he quickly ended the conversation.

OK, so I cared deeply and still do. But it doesn't seem that many others do. Perhaps because they haven't been exposed to or in the dark about how much of that goes on...

i developed means and methods to dissuade such tactics and to help determine compliance. My staff and I were able to reject and get SBA concurrence on numerous offered primes then get them replaced.  We were able to get successfully removed or otherwise rejected those teams in source selections that were brokers. We prevailed in the one Agency protest on an LPTA set-aside that we faced. 

Carl, as contracting policy analyst, don't give up.  Find ways to enforce the laws and CFR's.  Good luck. 

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Joel - Thank you.....and I never will.

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Vern, DCAA requires most of what you have identified to be included in interim vouchers under cost reimbursement contracts.  However, many times the contracting officer or COR do not see these vouchers because DCAA is responsible for reviewing them so they are submitted to DCAA not the CO.

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1 hour ago, Vern Edwards said:

The easiest way to monitor compliance with the LOS clause is to include invoicing instructions in the contract telling the contractor to identify what amount of each billing is attributable to actual or prospective payments to subcontractors, to identify those subcontractors by amount, and to state the cumulative payments to subcontractor prior to the invoice. A capable CO should be able to do that in two or three sentences.

What if the use of this procedure had a significant cost or administrative impact on contractors?

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On 1/27/2016 at 8:06 P.M, Vern Edwards said:

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?

 

Per the 2013 NDAA, the Final Rule updating the SBA's CFR's with respect to Limits on Subcontracting was published in the Federal Register on May 31, 2016 at : https://www.federalregister.gov/documents/2016/05/31/2016-12494/small-business-government-contracting-and-national-defense-authorization-act-of-2013-amendments

It addresses your question.

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On ‎2‎/‎2‎/‎2017 at 11:57 AM, Don Mansfield said:

What if the use of this procedure had a significant cost or administrative impact on contractors?

The Final Rule updating the SBA's CFR's with respect to Limits on Subcontracting  may address your question.  The SBA initially proposed to require prime contractor and first tier subcontractor reporting of compliance efforts.  After reviewing the public comments, the SBA concluded that this would have been too burdensome on small businesses.  It was deleted in the Final Rule.

The detailed invoicing requirements for progress payments in construction contracts was codified in the 1988 Amendments to the Prompt Payment Act and the FAR.  The contractor must identify what amount of each billing is attributable to actual or prospective payments to subcontractors, identify those subcontractors by amount, state the previous payments to subcontractor and the amounts, if any that have been retained and the amount of the subcontract. We got some complaints from primes when that went into effect in 1990-1991 but not so much about the administrative impact. The primes complained about the impact on project financing. The purpose of the PPA invoice reporting requirements is to help subs get paid on time from government progress payments and to prohibit primes from personally holding retainage from progress payments to their subs. It just happens that the information is also useful for monitoring compliance with the limitations on subcontracting. It will be more useful when the L.O.S. clause is updated to be consistent with 2013 NDAA and the SBA's 13 CFR's.

And the information that all primes (not just construction contract primes) have to post in the System for Award Management per clause 52.204-10** should also be useful for service contracts after the L.O.S. clause is updated.  But the reporting wasn't specifically required for the purpose of monitoring compliance with the limitations on subcontracting.  Construction contracts already require that the contractor notify the government of all subcontract awards for acknowledgment of the contract's Labor requirements. .

**Per contract clause 52.204-10,  prime contractors are required to report first tier subcontract awards of $30k and up, including name, the amount and the purpose of the subcontract. This doesn't include subcontracts for transportation and some other costs. 

Kumbya!

 

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Vern, DCAA requires most of what you have identified to be included in interim vouchers under cost reimbursement contracts.  However, many times the contracting officer or COR do not see these vouchers because DCAA is responsible for reviewing them so they are submitted to DCAA not the CO.

All that is required is to include an instruction to the contractor in the contract (Section G of the UCF or the appropriate place in a construction contract) that when submitting an invoice it must break out the subcontract costs for each subcontractor, so that the contracting officer can determine how much of each billing is for subcontractors. The CO should also instruct the contractor to identify which subs it claims to be "similarly situated" subcontractors and which are not. The CO can also instruct the contractor to state on each invoice the cumulative amounts previously billed for similarly situated and other subcontractors.

The CO can use the invoice information to monitor contractor compliance with the LOS clause, but not to determine noncompliance, because compliance or noncompliance can only be determined after performance is complete and final costs or payments have been tallied. But the CO can determine the likelihood that the prime will be able to comply and might be able to intervene to prevent a breach. 

The invoicing requirement should be the work of but a few moments and would not have a significant impact on a contractor, since it would have to know that information anyway in order to prepare invoices. The inclusion of false information on an invoice would make the invoice a false claim, which should motivate contractors to prepare invoices properly and truthfully. I wouldn't hesitate to use this procedure.

This procedure is much simpler than determining a contractor to be nonresponsible after contract award based on incomplete performance data and then going to SBA for a certificate of competency. Responsibility is not an issue after contract award. Postaward determination of responsibility based on contract performance is not contemplated by statute or regulation. And the issuance of certificates of competency after award is contrary to statute and SBA regulations.

The biggest debate issue in this thread as far as I'm concerned has been the question of using the audit clause, FAR 52.215-2, to obtain the information needed to monitor contractor compliance with the LOS clause. I think that issue has been as thoroughly discussed as it's going to be, so I will not pursue it further. The approach that I propose is simple. It does not require the involvement of SBA or any other agency or any separate investigation, unless the CO suspects false reporting. It would not require involvement by CORs, who might have a hard time obtaining and understanding the necessary cost or payment data. If invoices are normally submitted to DCAA, the contract can instruct the contractor to copy the contract administrator.

I see no reason to rely of good will, good faith, or the duty to cooperate to obtain information from a contractor after award that the contract does not expressly require it to provide. State the requirement in the solicitation and resulting contract and there should be no issue about it after award. Ask a contractor to provide information after award that the contract does not require the contractor to provide could result in refusal or a request for additional compensation.

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A possible alternative that is close to that suggested.

Following the ideal of FAR 52.222-41 Service Contract Labor Standards include in the 52.219-14 clause a "Records" paragraph adjusted accordingly to indicate required records to support the LOS.  This paragraph would stipulate that only SBA is allowed access to the records.  As such at completion of all work under a contract (an order in some cases) if a CO suspected non-adherence to the LOS they would simply refer to SBA for investigation, penalty etc. prior to final closeout of the contract.  I am suggesting this alternative as there appears to be a parallel with regard to who should have the power with regard investigation and enforcement of violations.      In labor laws the  DOL has the investigative and penalty powers and in the latter it appears that by statute and regulation that SBA has or should have the investigative and penalty powers.

An alternative to this alternative if you will could be like that stated in 52.222-8 where such LOS records are accessible by both the CO and SBA.

In suggesting the "Records" paragraph be in 52.219-14 I believe that having the requirement for "Records" stated within the 52.219-14 clause helps reinforce its necessity without having to refer to another part of the contract.  If only the SBA is listed as that party that has access to the records I would suggest that adequate information is otherwise available during performance to suggest whether compliance will occur by completion giving the CO the foresight to possibly "intervene to prevent a breach" at contract end.  Of course having both the CO and SBA listed would be of great benefit.  That benefit being the ability to help avoid a breach in the end much like the ability to do in process inspection that is the norm for non-commercial contracts in the Federal sector.

One issue would be a performance evaluation of a contractor that was suspected of non-adherence and investigation concludes that non-adherence did in fact happen.  It would seem that this should be captured in a performance evaluation.   I am unsure if CPARS allows for revised/amended evaluation and if it does if there is a limitation on when such a amended evaluation can be done.  Here I am reminded as well that interim performance evaluations can be done and might possibly be the tool that helps the CO intervene during contract performance.

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Question re limitations on subcontracting FAR clause versus limitations on subcontracting SBA regulations in 13 CFR 125.6:

Some frogs know that FAR clause updates don't affect the deal you struck when you signed the contract. You are subject to the (version of the) FAR clauses that were included in the contract at that time. If a FAR clause changes or is updated, you are still subject to the older version of the FAR clause that was included in your contract. Again, that's the deal you struck.

(1) Does this same principle apply specifically to SBA regulation 13 CFR 125.6? (13 CFR 125.6 states the limitations on subcontracting, "What are the prime contractor's limitations on subcontracting?") The regulations for limitations on subcontracting have changed a few times over the years.

(2) Is the contractor subject only to the version of 13 CFR 125.6 that existed at the moment the contract was signed, rendering future updates irrelevant for that specific contract that is already signed?

Or: (3) Is the contractor subject to changing versions of 13 CFR 125.6?

Or: (4) Is this question irrelevant, because who cares what the SBA regulations say? (The binding, contractual language is the FAR clause that implements the SBA regulation, FAR 52.219-14, Limitations on Subcontracting.)

Here's another twist:

(5) What if the contracting officer did not include the FAR clause that implements 13 CFR 125.6, FAR 52.219-14, Limitations on Subcontracting, into the contract? Do the limitations on subcontracting apply at all? If so, how? Through SBA regulations (with no FAR clause in the contract)? Through the Christian doctrine? (The limitations on subcontracting clause seems like a good candidate to meet the *two*-prong Christian doctrine test.)

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From a strictly contractual point of view, the contractor is bound by what's in the contract, not what's in a regulation, unless the regulation has the force and effect of law, was in effect at the time of contract award, and the contract, when awarded, did not conform to the regulation.

Q1: Generally, a new regulation applies only to actions taken on or after the effective date stated in the Federal Register. New regulations do not apply to contracts awarded prior to the regulation's effective date. See FAR 1.108(d). That applies to 13 CFR, as well. Regulations take effect on or after their effective date.

Q2: The contractor is bound by the clause in its contract. If the clause in the contract is inconsistent with 13 CFR § 125.6 as of the time of award, it is not clear that 13 CFR prevails over the FAR. I don't think that's been decided in court.

Q3: No.

Q4: See the answer to Q2.

Q5: The Christian Doctrine will apply if the regulation is found to have had the force and effect of law. But see Q2.

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 Verne's invoice breakout idea would certainly work, but with FFP subcontracts all you would be "validating" is that the contractor knows how to divide a particular number by 12.  That idea also neglects the fact that the LOS is over the entire PoP; you can't put an arbitrary line in the sand to determine 'compliance'*. On a LH contract,  a (noncompliant) 49/54 prime/sub split last month could be a (compliant) 54/46 split this month.  If an option exercise occurs, the calculation gets even more obtuse.  

It seems to me that one of the core problems with the LOS clause is that you can't truly measure for compliance until the PoP is over.

We balance the prime/sub staffing mix on my  FFP contract to get as close to 51/49 as possible and cut a subcontract to reflect that balance.   I tell my sub "that's your budget to support our client for the PoP", split the invoice payments accordingly, and Bob's Your Uncle.   If the government asks questions, I am prepared to provide my subcontract.  

If I were still a working CO,  I would include  Consent to Subcontracts  any time I included the LOS clause as an avenue to ensure compliance, and then ensure that the subcontract  meets the intent of the LOS clause before approving it.  Not sure what else you can do really.

[* I maintain that "...not pay more than 50% of the amount paid by the government to it" refers to the TCV, not the amounts on individual billing cycles.]

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Rea'n, please read 13 CFR 124.510 and 12 CFR 125.6.  I think the SBA has a different take on when you measure compliance with the statutory limitation on subcontracting.

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37 minutes ago, REA'n Maker said:

If I were still a working CO,  I would include  Consent to Subcontracts  any time I included the LOS clause as an avenue to ensure compliance, and then ensure that the subcontract  meets the intent of the LOS clause before approving it.  Not sure what else you can do really.

Would you include the clause in contracts that it wasn't prescribed for?

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