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Sunnyo

Subcontractor/Prime Relationship

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Hello everyone,

I am new to this website; however, it seems very informative and helpful.  I had a couple of question that I hoped you all could provide some insight on.

Background:  We have teamed up with a Prime (we are the Sub).  Due to our knowledge of the requirements stated in the solicitation, the Prime has asked us to write the Proposal—which we obliged to.  The team that is built was recruited by our company as well.  So, the only thing the Prime is doing…is being the Prime—which is allowing us to bid on the contract because we have no past performance.

Questions.

The Prime sent us a letter stating, “Upon award of contract they will utilize our company at the Sub”; however, this is very vague.  Should we draft a subcontractor contract with the Prime stating an exact percentage?

What normally happens in Sub/Prime relationships in a T&M contract?  Does the Sub get a percentage of the “end profits” or the Sub receives funds based off of the Sub’s FTE allocation?

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8 hours ago, Sunnyo said:

Questions.

The Prime sent us a letter stating, “Upon award of contract they will utilize our company at the Sub”; however, this is very vague.  Should we draft a subcontractor contract with the Prime stating an exact percentage?

What normally happens in Sub/Prime relationships in a T&M contract?  Does the Sub get a percentage of the “end profits” or the Sub receives funds based off of the Sub’s FTE allocation?

1. Yes. You should have an enforceable contract now that obligates the Prime to award to you a subcontract consistent with your expertise. You can agree on a fixed number of FTEs, a number of labor hours by category, or a percentage of the Prime's FTEs/hours -- or whatever other metric makes sense.

2. You seem to be reaching for a Joint Venture relationship, where the profits are shared, instead of a Prime/SubK relationship. The profit paid to the SubK in a T&M contract is paid on the SubK's labor hours (see 52.232-7). You normally don't see any more profit distribution than that. But that's not to say that you can't ask for something else on top of your profit-per-labor hour.

Hope this helps.

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Thank you for your response--very insightful.  One more question.  If a fixed number of FTE is agreed to, then that is what we'll make our profit from?  i.e. our profit will be made exclusively from our FTE.  I'm just trying to see what's more pragmatic.  As an example, for a 60/40 split (we have 40%), we'd take 20 out of 50 FTE for our 40%...and that's where our profits would come from (after cost and benefits)?

I apologize in advance for the amount of questions.  As I said before, we are a fledgling business, and I want to ensure we put ourselves in the best position to be successful--or not be taken advantage of.

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Yes. Normally that's how it works. The subcontractor makes profits only on its costs and the prime makes a profit on its costs plus often on the subcontractor's costs as well. In a JV relationship things are different; the overall profit may be shared in accordance with a specified formula.

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A  thoughts to add to h2h's response that may or may not be important to consider.

 

Noting the proposed approach is the Prime "being the Prime" allowing your firm to price and by appearance do the majority if not all the work be aware that if the project work for which you will be competing is a Small Business Set-aside then the FAR Clause  52.219-14, Subcontracting Limitation may be in the solicitation/resulting contract which would require the Prime to perform a certain level of the work with their own forces.   For further reference if the work is a set aside see the Small Business Administrations Regulations regarding subcontracting limitations at 13 Code of Federal Regulations (CFR) 125.6.   It can be found here - https://www.ecfr.gov/cgi-bin/text-idx?SID=50ff66d5d1cc9357d5f4ce114fcc5c79&mc=true&node=pt13.1.125&rgn=div5#se13.1.125_16 

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On 12/23/2017 at 5:44 PM, here_2_help said:

What normally happens in Sub/Prime relationships in a T&M contract?  Does the Sub get a percentage of the “end profits” or the Sub receives funds based off of the Sub’s FTE allocation?

Sunnyo:

Please take the time to communicate clearly.

What do you mean by "Sub/Prime relationships in a T&M contract"? Are you saying that the subcontract that you will receive is to be time-and-materials and you want to know how you'll earn profit? Or are you saying that the prime contract will be time-and-materials and you want to know how the prime and the sub can split the prime's profits?

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Vern Edwards,

Thank you for your response. The Prime Contract will be Time-and-materials and I am inquiring on how the prime and the sub can split the prime's profits.  The Prime, verbally, agreed to 60/40 split but I'm not sure how that works.  I.e. would I take 40% of the FTE?

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2 hours ago, Sunnyo said:

The Prime Contract will be Time-and-materials and I am inquiring on how the prime and the sub can split the prime's profits.  The Prime, verbally, agreed to 60/40 split but I'm not sure how that works.  I.e. would I take 40% of the FTE?

Don't confuse labor hours/FTEs and associated costs with profit. Profit is the difference between the costs incurred and the amounts billed/reimbursed.

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Here_2_Help

Understood and thank you.  Utilizing your definition, it would behoove one to have more FTE/labor hours because that could result in higher profit.  Correct?

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Sunnyo, not necessarily.  The hourly rate has to be priced so that the contractor makes a profit on an hour of labor.  There is no guarantee that the contractor will actually make a profit on each hour of labor.  In fact, it is possible for the contractor to lose money on a T&M contract that is not properly priced. 

By the way, you have not told us how your subcontract will be priced.  Is it also a T&M contract or is it priced differently?

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5 hours ago, Sunnyo said:

Vern Edwards,

Thank you for your response. The Prime Contract will be Time-and-materials and I am inquiring on how the prime and the sub can split the prime's profits.  The Prime, verbally, agreed to 60/40 split but I'm not sure how that works.  I.e. would I take 40% of the FTE?

DANGER, WILL ROBINSON!  

Oral agreements that are unclear in their intent or meaning will lead to problems later. First, seek clarification and then get the clear terms of the agreement in writing. Nobody here can answer that question for you based upon the information you provided.

 

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Sunnyo

It is becoming clear that you need professional help. Your intent of gaining an understanding of the risks before contracting is admirable, but you need to face the fact that you cannot do this alone. You need guidance and support from somebody(s) with experience and expertise. I strongly recommend you find such body(s).

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20 hours ago, here_2_help said:

Don't confuse labor hours/FTEs and associated costs with profit. Profit is the difference between the costs incurred and the amounts billed/reimbursed.

Moreover, when you talk profit, are you talking about the amount included in an hourly rate calculation or the amount realized after performance? The realized profit might be greater or lesser than the amount included in a rate calculation. The rate is used to bill the government, but it does not necessarily reflect incurred costs and realized profit.

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On 12/26/2017 at 12:27 PM, Sunnyo said:

The Prime Contract will be Time-and-materials and I am inquiring on how the prime and the sub can split the prime's profits.  The Prime, verbally, agreed to 60/40 split but I'm not sure how that works.  I.e. would I take 40% of the FTE?

You split revenue,  not profit/margin.

Revenue is based on  rates  x hours. 

Your rate should include a profit/margin component, based on your internal accounting practices and profit/margin goals ("loaded rate").

FTE%  will only match revenue% if every FTE has an identical loaded rate, so don't confuse the two;  they CAN be equal but they don't have to be (and probably won't be).

Your task is to align the 60/40 nominal revenue split with the FTEs required to accomplish the task.  

Your final agreement with the prime will be a horse-trading exercise to get the numbers and FTEs to line up (e.g., you can't split an FTE so you have to round to the nearest FTE and then figure out the resulting revenue split).  Don't sign anything final until you at least do a preliminary analysis along these lines.

Eazy Peazy.

 

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On 1/11/2018 at 3:33 PM, REA'n Maker said:

You split revenue,  not profit/margin.

Revenue is based on  rates  x hours. 

Your rate should include a profit/margin component, based on your internal accounting practices and profit/margin goals ("loaded rate").

FTE%  will only match revenue% if every FTE has an identical loaded rate, so don't confuse the two;  they CAN be equal but they don't have to be (and probably won't be).

Your task is to align the 60/40 nominal revenue split with the FTEs required to accomplish the task.  

Your final agreement with the prime will be a horse-trading exercise to get the numbers and FTEs to line up (e.g., you can't split an FTE so you have to round to the nearest FTE and then figure out the resulting revenue split).  Don't sign anything final until you at least do a preliminary analysis along these lines.

Eazy Peazy.

 

Thank you for your explanation.  This really cleared things up for me.

Ex. If the revenue is $5MM, and it's a 60/40 nominal split, the FTE would need to be aligned to equal the 40% or $2MM.  Correct?

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On 3/10/2018 at 3:10 PM, Sunnyo said:

....the FTE would need to be aligned to equal the 40% or $2MM.  Correct

Yes; you would need to come to an agreement that reflects a subcontractor labor mix which totals roughly $2M.  

As a practical matter, prior to every contract period,  you probably want to sit down with your prime and work out the exact numbers. Then sign the binding agreement for the hours you are expected to deliver for each LCAT.  Make sure you manage your people accordingly!

Also don't forget that at least until our robot overlords take over, you will have to deal with the uncertainty surrounding "people": people quitting, people's tasks changing, fickle client people, i.e., ongoing tweaks to your subcontract.

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