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NenaLenz

Affiliates as Participating Dealers or Subcontractors on GSA Contract

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I searched prior threads and couldn't find guidance quite on point.

Question: What is the proper way for a GSA Schedule-holder to delegate work to affiliated companies? Intercompany work authorizations? Subcontracts? 

Facts: The companies are wholly owned subsidiaries of a common parent. One affiliate holds the GSA Schedule contract. The SINs are all for services. Contract-holder gets the contracts/POs/BPAs. Work is performed by affiliates. Contract-holder delegates work to affiliates through work authorizations. Contract-holder submits requests for payment to purchasing agencies. GSA contract lists affiliates as "participating dealers". Contract-holder does not have "subcontracts" with affiliates. 

I've searched the regs and guidance and I'm not finding a clear answer. Am I missing something.

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You asked what is the proper way, and then you explained the facts of way it is done.  Is there a problem with the facts you described?

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I may not correctly understand your post. Generally, an affiliate in the business world is a company that is less than 50% owned by another company. In your post, you seem to indicate that you are referring to companies that are wholly owned by another company. If it is an affiliate, the other company should be dealing with it at arms length via a subcontract.

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23 hours ago, ji20874 said:

You asked what is the proper way, and then you explained the facts of way it is done.  Is there a problem with the facts you described?

I am wondering if the current practice is acceptable.

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22 hours ago, Neil Roberts said:

I may not correctly understand your post. Generally, an affiliate in the business world is a company that is less than 50% owned by another company. In your post, you seem to indicate that you are referring to companies that are wholly owned by another company. If it is an affiliate, the other company should be dealing with it at arms length via a subcontract.

You're right, the concept of affiliates is broader than what I described. Here, they are "affiliates" because they share the same parent company (they are "sister companies"). They are each wholly owned subsidiaries of the common parent. They are different companies with different DUNS etc. One company holds the GSA contract. Other companies do the work. How should they facilitate that? Subcontracts? Inter-company work authorizations?

Does that clarify my question?

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Nena:

I am not aware of any government acquisition regulation that requires a company to use any particular procedure or legal instrument to buy something from an affiliated company. However, there may be something in your GSA contract.

Do not assume that the government considers inter-company work authorizations and subcontracts to be different instruments. I think that in most cases the government will consider an inter-company work authorization or inter-organizational transfer to be a subcontract for the purposes of regulation and contract interpretation. See e.g., the definition of subcontract in FAR 12.001:

Quote

“Subcontract,” as used in this part, includes, but is not limited to, a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractor or subcontractor.

See also FAR 15.401:

Quote

“Subcontract” (except as used in 15.407-2) also includes a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractor or a subcontractor (10 U.S.C. 2306a(h)(2) and 41 U.S.C. 3501(a)(3)).

See FAR 22.801:

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.

See, too, FAR 44.101:

Quote

"Subcontract” means any contract as defined in Subpart 2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.

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

 

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This topic again ...

Look, the term "subcontract" is inconsistently defined in the FAR. It just is. For example, FAR 15. 407-2(b) states that " an item or work effort to be produced or performed by the prime contractor or its affiliates, subsidiaries, or divisions" is a make item not a buy item. Thus, if you look only at that section, it's clear that an order between affiliated entities is different--and subject to different requirements--from an order between two unaffiliated entities operating on an arms-length basis. For example, the company submits one Certificate of Current Cost or Pricing data for all affiliated entities, whereas a subcontractor would submit its own CCCPD and might be subject to a "prime's" cost or price analysis.

On the other hand, Vern has posted several FAR quotes that indicate the term "subcontract" includes less-than-arm's-length transactions. Thus: inconsistent.

I assert that there is no correct answer; that the answer to the OP's question is context and circumstance dependent.

I know companies that insist on a formal subcontract between sister divisions of the same company; and I know companies that use "Inter-divisional Work Authorizations" or something similar that are absolutely not formal subcontracts. The important requirement is that scope and budget be documented and that the company complies with 31.205-26(e). How that is accomplished is best left up to the individual company's management style.

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help:

1 hour ago, here_2_help said:

Look, the term "subcontract" is inconsistently defined in the FAR. It just is. For example, FAR 15. 407-2(b) states that " an item or work effort to be produced or performed by the prime contractor or its affiliates, subsidiaries, or divisions" is a make item not a buy item. Thus, if you look only at that section, it's clear that an order between affiliated entities is different--and subject to different requirements--from an order between two unaffiliated entities operating on an arms-length basis.

Calm yourself.

FAR 15.407-2 applies only when a contractor is required to have a make or buy program. The OP was asking about a GSA schedule contract. To the best of my knowledge, there is no requirement for a make or buy programs under any GSA FSS contract or any contract for commercial items. So I don't know why you brought up 15.407-2. Moreover, even if a firm is required to submit a make or buy plan, an affiliate can still be a subcontractor for some other contractual purpose.

As for the definitions of subcontract in FAR, there is no definition in FAR 2.101. Thus, there is no definition of subcontract that applies throughout the FAR. There are about seven definitions of subcontract, which appear in various places in FAR, and each is applicable only in the part, subpart, or section in which it appears. Otherwise, the term is defined in accordance with FAR 1.108(a). Most common dictionary definitions would include affiliates. The OP should be aware that under some of the FAR definitions, the government might assert that an affiliate is a subcontractor.

1 hour ago, here_2_help said:

I assert that there is no correct answer [to the OP's question]; that the answer to the OP's question is context and circumstance dependent.

Here is the OP's question.

On 8/17/2017 at 5:59 PM, NenaLenz said:

Question: What is the proper way for a GSA Schedule-holder to delegate work to affiliated companies? Intercompany work authorizations? Subcontracts? 

The correct answer is: It depends on what you mean by "proper." If "proper" means as required by the FAR, then I do not know of any requirement in that regard. Delegate the work however you like. If "proper" means as required by contract, then none of us can answer. Read your contract.

I think I said that in my first response. I only mentioned the subcontract definitions because the OP seemed to think that there is an essential distinction between an "inter-company work order" and a subcontract. That might not be the case. So I don't know why you're jacked up.

 

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16 minutes ago, Vern Edwards said:

help:

As for the definitions of subcontract in FAR, there is no definition in FAR 2.101. Thus, there is no definition of subcontract that applies throughout the FAR. There are about seven definitions of subcontract, which appear in various places in FAR, and each is applicable only in the part, subpart, or section in which it appears. Otherwise, the term is defined in accordance with FAR 1.108(a). Most common dictionary definitions would include affiliates. The OP should be aware that under some of the FAR definitions, the government might assert that an affiliate is a subcontractor.

We agree.

I don't know why you think my frustration was directed at you.

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It sounds like there is no clear answer in the regulations on how to structure/document the assignment of work between the sister companies. The contract itself does not say, either.

Follow-up question: The contract-holder is a large business with a small business subcontracting plan. Relying on the regulations, can we take the position that they are not subcontracting when they delegate work to the sister companies, meaning they are not required to use good faith efforts to award that work to S/DBEs?

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NenaLynz, I'm a little confused about what the facts are.  You say the SIN's on the GSA schedule contract are all for services.  You also say that the affiliate without the GSA schedule contract is listed as a "participating dealer."  That seems to indicate that supplies are being provided.  Is the non-schedule holder providing supplies to the schedule holder?  If yes, are the supplies a deliverable under the specific orders?

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5 hours ago, NenaLenz said:

Relying on the regulations, can we take the position that they are not subcontracting when they delegate work to the sister companies, meaning they are not required to use good faith efforts to award that work to S/DBEs?

You said you have searched regulations and guidance. Which ones? See the Small Business Administration regulations, 13 CFR 125.1:

Quote

Subcontract or subcontracting means, except for purposes of  § 125.3, that portion of the  contract performed by a business concern, other than the business concern awarded the  contract, under a second  contract, purchase  order, or agreement for any parts, supplies, components, or subassemblies which are not available commercial off-the-shelf items, and which are manufactured in accordance with drawings, specifications, or designs furnished by the contractor, or by the government as a portion of the solicitation. Raw castings, forgings, and moldings are considered as materials, not as subcontracting costs. Where the prime contractor has been directed by the Government as part of the  contract to use any specific source for parts, supplies, or components subassemblies, the costs  associated with those purchases will be considered as part of the  cost of materials, not subcontracting costs.

See 13 CFR 125.3:

Quote

Subcontract under this section means a legally binding agreement between a contractor that is already under  contract to another party to perform work and a third party (other than one involving an employer-employee relationship), hereinafter referred to as the subcontractor, for the subcontractor to perform a part or all of the work that the contractor has undertaken.

See also FAR 19.701:

Quote

“Subcontract” means any agreement (other than one involving an employer-employee relationship) entered into by a Government prime contractor or subcontractor calling for supplies and/or services required for performance of the contract, contract modification, or subcontract.

Emphasis added.

Now, you said your affiliate is a "sister company," i.e. a separate firm with the same parent. The relationship between the firms is not employer-employee. Based on the above definitions, if you give your sister firm an intercompany ("inter" means between separate companies) work authorization ("delegation," as  you now call it) you are making them, a third party, a subcontractor.

So my answer to your question is no. Is your sister firm a small business?

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8 hours ago, Vern Edwards said:

Is your sister firm a small business?

No. The parent company and all the subs/sisters are large. 

So: the FAR regs are silent as to whether transactions between separate but affiliated companies are subcontracts. But the SBA regs are not silent -- they consider those transactions to be subcontracts. Accordingly, while subcontracts with mandatory flowdowns are not required, consideration of small business subcontracting goals is required? The sister company can't delegate 100% of the work to its affiliates/sisters without violating its small business subcontracting  plan, which require good faith efforts toward S/DBE subcontracting goals? 

Your conclusion makes sense from a strict reading of the definitions. But it is not good news for us. 

 

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Just now, NenaLenz said:

 

NenaLynz, I'm a little confused about what the facts are.  You say the SIN's on the GSA schedule contract are all for services.  You also say that the affiliate without the GSA schedule contract is listed as a "participating dealer."  That seems to indicate that supplies are being provided.  Is the non-schedule holder providing supplies to the schedule holder?  If yes, are the supplies a deliverable under the specific orders?

 

I think it is a bit odd, too. The SINs are for services. If there are goods/supplies, they are ancillary to the services. The sister companies are listed on the GSA schedule as "participating dealers", with the idea that the company would "self-perform" work by using the labor of its affiliates/sisters.

I'm trying to untangle all of this and figure out how it should be set up. 

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6 hours ago, NenaLenz said:

I think it is a bit odd, too. The SINs are for services. If there are goods/supplies, they are ancillary to the services. The sister companies are listed on the GSA schedule as "participating dealers", with the idea that the company would "self-perform" work by using the labor of its affiliates/sisters.

I'm trying to untangle all of this and figure out how it should be set up. 

Nena, why not ask GSA?  The contract is with them. 

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Nena - I would say based soley on the information provided here that your company would be in violation of its "good faith efforts" required by subcontracting.  Under a GSA MAS contract, large businesses are required to submit a subcontracting plan.  The fact that your company is owned by a parent that also owns your sister company is irrelevant.  Your company has the GSA MAS contract and so the responsibilities are for your company.  Therefore, GSA will see it as your company subcontracting to another large business and by doing so where is the good faith effort to utilize small businesses?   Are there no parts of the service that can be subcontracted out?  Can your sister company get a GSA MAS contract so that they can self-perform the work instead of being a sub to your company?

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12 hours ago, NenaLenz said:

So: the FAR regs are silent as to whether transactions between separate but affiliated companies are subcontracts.

Not true. With respect to small business subcontracting goals and plans see FAR 19.701, which I cited and quoted above. An inter-company work order is a subcontract for purposes of the small business subcontracting program if it fits that definition.

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14 hours ago, NenaLenz said:

Accordingly, while subcontracts with mandatory flowdowns are not required....

Not true. An "inter-company work order" must include any flowdown in which the applicable definition of subcontract applies.

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