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Michael11

Subk agreement needed to be audit worthy?

14 posts in this topic

So I've been providing ongoing support on incurred cost audits for my company. During their last big audit and before my time DCAA challenged and sought to disallow a substantial amount of ODCs that weren't supported with a formal vendor or subk agreement.

Maybe disallow is the wrong word but these were direct project ODCs which were all billed and paid during contract performance.

It seems they're taking the same stance with a current audit they're conducting.

My question here is what sort of clause or manual requires ODCs to be supported with an agreement in order to be deemed allowable? I'm not talking about what I'd consider a true subcontractor where we'd execute a formal sow, payment schedule, flow downs, etc. That's obvious. We're talking about things I'd normally consider simply vendors or suppliers of ODCs.

Maybe we asked them for a proposal, maybe they'd provide catalog pricing that fit our need, or whatever else. Like if you ordered 1,000 pens and pads of paper from Office Depot, say it cost $25k, would you go back to them to get some sort of additional documentation beyond simply processing and paying their invoice, then passing that along to the client as an allowable project cost (assuming it was)?

Does anyone have experience with what i've probably not all that well explained here?

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Have you had a recent CPSR? If so, what were the findings (if any)?

If not, then what do your Procurement policies/procedures say?

What I'm getting at is that some ODCs DO need agreements, while others do not. It's not a one-size-fits-all situation.

 

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Per FAR 31.204 costs must be reasonable. You didn't indicate how how your firm supported its reasonableness. Just because it is incurred, does not make it reasonable. If there was adequate support of its reasonableness at the time of purchase, perhaps you can explain what that was to DCAA. Not sure what is meant be "formal agreements" and "true subcontractors." Anything in writing between your firm and another entity has the potential to be a valid contract, no matter who executes it for your firm.

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If Michael11 cannot come back to explain what his company's policy position is regarding establishing price reasonableness, and what his company's procurement procedures require of its buyers, then I doubt anybody here can help him with his DCAA problem. Importantly, his company was put on notice of the DCAA interest in questioning costs in this area before he was even hired; presumably they enhanced policies/procedures in preparation for the next visit from government oversight officials. If they didn't do anything, then shame on them. Michael11 should find a more responsive and responsible company to go work for.

Related and potentially interesting point: I know of a company -- a fairly large and well-established contractor -- that does not require anything special in terms of justifying price reasonableness if the procurement value is less than $25K. There is a drop down box on an electronic form that lets the buyer check why the price was considered to be reasonable; that's all the support that's required. The choices in the drop down box are fairly limited. *Shrug* That contractor keeps passing CPSR after CPSR....

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20 hours ago, Michael11 said:

During their last big audit and before my time DCAA challenged and sought to disallow a substantial amount of ODCs that weren't supported with a formal vendor or subk agreement...

My question here is what sort of clause or manual requires ODCs to be supported with an agreement in order to be deemed allowable? 

I'm not talking about what I'd consider a true subcontractor where we'd execute a formal sow, payment schedule, flow downs, etc. That's obvious. We're talking about things I'd normally consider simply vendors or suppliers of ODCs.

Maybe we asked them for a proposal, maybe they'd provide catalog pricing that fit our need, or whatever else. Like if you ordered 1,000 pens and pads of paper from Office Depot, say it cost $25k, would you go back to them to get some sort of additional documentation beyond simply processing and paying their invoice, then passing that along to the client as an allowable project cost (assuming it was)?

Emphasis added.

As a general rule, all contractor purchases under government contracts are considered "subcontracts." The distinction you make between "true" subcontractors and vendors or suppliers doesn't hold. The government considers "vendors" and "suppliers" to be subcontractors. See the definitions of subcontract and subcontractor in FAR 44.101.

When a company receives a government contract it agrees to certain terms with respect to purchases of goods and services used in contract performance. For instance, if a contract includes the Equal Opportunity clause, FAR 52.222-26, subparagraph (c)(11) states:

Quote

The Contractor shall include the terms and conditions of this clause in every subcontract or purchase order that is not exempted by the rules, regulations, or orders of the Secretary of Labor issued under Executive Order 11246, as amended, so that these terms and conditions will be binding upon each subcontractor or vendor.

Unless a purchase is exempt, that will apply to subcontracts and purchase orders with "vendors" valued at less than $25,000. For the purposes of that clause, FAR 22.801 defines subcontract and subcontractor as follows:

Quote

“Subcontract” means any agreement or arrangement between a contractor and any person (in which the parties do not stand in the relationship of an employer and an employee)—

(1) For the purchase, sale, or use of personal property or nonpersonal services that, in whole or in part, are necessary to the performance of any one or more contracts; or

(2) Under which any portion of the contractor’s obligation under any one or more contracts is performed, undertaken, or assumed.

“Subcontractor” means any person who holds, or has held, a subcontract subject to E.O. 11246. The term “first-tier subcontractor” means a subcontractor holding a subcontract with a prime contractor.

If you were to purchase pens and paper from Office Depot just for performance of a specific government contract, Office Depot would be a subcontractor.

Are you familiar with DCAA's Contract Audit Manual? Have you read chapter 6, Incurred Cost? Have you read section 6-310, Purchasing and Subcontracting? Have you read subsections 6-310.3, Audit Guidelines-Basic Procedures? Compliance with those terms is necessary for subcontract cost allowability. Compliance in purchases above various dollar values is usually determined by inspection of some kind of subcontract document that records purchase terms. DCAA manual 6.310-3a indicates that DCAA will look at subcontract purchase documents in order to verify that the contractor has complied with its own contract and that subcontract costs are allowable.

If your company is purchasing goods or services for use in the performance of government contracts, and if the purchases are subject to terms in the company's government contracts, then it must ensure that it's complying with its contract and recording those purchases in subcontract documents when necessary to prove compliance. The kinds of informal purchase arrangements that are common in the private sector will not always be sufficient.

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3 hours ago, Vern Edwards said:

As a general rule all contractor purchases under government contracts are considered "subcontracts." The distinction you make between "true" subcontractors and vendors or suppliers doesn't hold. The government considers "vendors" and "suppliers" to be subcontractors. See the definitions of subcontract and subcontractor in FAR 44.101.

 

Vern, when DCAA audits for cost allowability, they do so pursuant to FAR Part 31, not FAR Part 44. Thus, I disagree with you that any definitions restricted to FAR Part 44 apply to DCAA audits concerning compliance with FAR Part 31.

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help:

As I think you well know, I understand the issues concerning the definitions of subcontract and subcontractor, and I didn't say that the definitions in FAR Part 44 apply to DCAA audits. I said: 

4 hours ago, Vern Edwards said:

As a general rule, all contractor purchases under government contracts are considered "subcontracts." The distinction you make between "true" subcontractors and vendors or suppliers doesn't hold. The government considers "vendors" and "suppliers" to be subcontractors. See the definitions of subcontract and subcontractor in FAR 44.101.

I stand by that. Can you show that the FAR distinguishes between vendors and "true" subcontractors. Does the EEO clause, for instance, make such a distinction? Can you show that DCAA generally recogniozes a difference between vendors and "true" subcontractors? 

I think that DCAA expects to see some contractual documentation of all but very minor purchases that will be charged directly to contracts. Am I wrong about that?

You didn't respond to Michael 11's question. He didn't ask about documentation establishing or justifying price reasonableness. Would you care to respond now?

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Vern, see 52.203-13, which does specify that only certain transactions are to be considered to be subcontracts, and not others.

Second, in my 35 years of doing this stuff I have never, ever, seen DCAA audit for compliance with EEO clauses. In point of fact, that happens by DCMA during CPSRs.

Third, I did respond and I asked Michael what his company policies/procedures said was required for those purchases. DCAA may expect to see ... something. A while ago DCAA expected me to provide a written contractual agreement associated with paying the bill from the local electrical utility. I didn't think then (nor do I now) that was a reasonable expectation to place on a contractor. Yet by the overbroad definition of Part 44, my local electrical utility was a subcontractor. So DCAA should expect the contractor to provide whatever its policies/procedures specify should be there, nothing more. If the procedures are deficient, that should be picked up in a CPSR.

I was in your neck of the woods last week, and I enjoyed the Friday weather. It was my first-ever view of Mt. Hood. Majestic!

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Michael11, generally there are several types of documentation that DCAA wants to see in regard to purchased supplies or services.  First, a document that requires the vendor to provide the supplies or services.  Next, some sort of document showing that the satisfactory supplies or services were received by the contractor.  Third, there was a payment at no more than the agreed upon price for the accepted supplies or services.  In the absence of any of these types of documentation there is the possibility that fraud may be perpetrated on the government.

In regard to the first type of documentation, there have been several cases where contractors have created false purchase orders to cover-up improper payments.  Contractors are expected to have internal controls in place to prevent this.  Those internal controls would generally require the documentation described above.  Also, by having documentation that indicates an agreement, DCAA can go to the vendor listed in the documentation and verify that it is a real agreement and not a false document created by the contractor.  This is an audit step known as confirmation.

Whether DCAA has properly utilized these audit procedures in your case, no one here can say, but hopefully this explains the concern and why DCAA generally expects this type of documentation.  Also, see FAR 31.201-2(d).

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1 hour ago, here_2_help said:

Vern, see 52.203-13, which does specify that only certain transactions are to be considered to be subcontracts, and not others.

help:

There are five or six definitions of subcontract and subcontractor in FAR and they do not all agree. Here are the ones from 52.203-13:

Quote

“Subcontract” means any contract entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract.

“Subcontractor” means any supplier, distributor, vendor, or firm that furnished supplies or services to or for a prime contractor or another subcontractor.

As you can see, they're similar to the ones in FAR 44.101. I think the trend is to make all new definitions of subcontract and subcontractor the same as the ones in 44.101. Still, my point was not that this or that purchase would be a subcontract, but that the government generally does not make a distinction between vendors and "true" subcontractors, a point that is confirmed by the definitions in FAR 44.101 and 52.203-13.

I'm not surprised that DCAA has not checked for compliance with EEO clauses. They barely have time to do anything. However, it would be wise for F&L to understand that if the EEO clause (or another clause) should have flowed down to a subcontractor (vendor, supplier), but was not, the cost of payments to that sub would be unallowable pursuant to FAR 31.201-2(a)(4). It is even possible that a request for reimbursement for such a payment could be a false claim. Thus, a contractor would be wise to document compliance, even if it did not expect DCAA to check on a routine basis. See DCAAM 6-310.3 d. "Negotiation. The auditor should... (4) ascertain if the type of subcontract issued meets the requirements of FAR Part 16 and includes all clauses required by the prime contract...."

Emphasis added.

You were out here and didn't call???!!! Well, I'm glad you saw Mt. Hood. We are finally seeing it on occasion from Portland now that spring has arrived. My wife and I are moving from L.O. to the mountainside across from Hood River, Oregon, and have a full view of Mt. Hood up close from our new living room window. (If it blows, we're done for.) The weather is drier east of the Cascade summits, and we'll see it a lot more often. Next time you're going to be here, call a few days in advance. I'll be about a 90 minute drive from the city.

Vern

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Vern,

This was a short fused trip, up and back. I did manage to spend 2 hours at Powell's, but that was it for my free time.

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Yes Mt. Hood is very nice. A little cloudy today but I can see if from my office window.

 

I hiked to the summit last year. Going to do Mt. St. Helens later this year.

Full page photo.pdf

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And all of this is good reason to avoid buying anything, even a pencil, on a cost type contract until you've got the KO's approval and determination of reasonableness in writing.

Oddly, to comply with the regulatory requirements, it makes sense to spend days of billable time to get the KO the approve a small ODC's purchase and provide the supporting determinations documents.  After a while it becomes a bit of routine, with it being a regular duty of one of the project people.

 

 

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3 minutes ago, rsenn said:

And all of this is good reason to avoid buying anything, even a pencil, on a cost type contract until you've got the KO's approval and determination of reasonableness in writing.

Oddly, to comply with the regulatory requirements, it makes sense to spend days of billable time to get the KO the approve a small ODC's purchase and provide the supporting determinations documents.  After a while it becomes a bit of routine, with it being a regular duty of one of the project people.

Uh, not where I work. Where I work, the customer expects us to comply with the rules and not bother them with the details. Nobody has the time or budget to get written PCO approval for the reasonableness of every little thing. (Obviously, advance consent is required where required.)

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