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2nd Tier Sub Labor Violations


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The company I work for is Prime on a government contract, our subcontractor then subbed out part of their work - business as usual, right?   Unfortunately, we've just been notified that the 2nd tier sub wasn't paying their employees.  I'm a wet-behind the ears newbie to the world of Subcontract Management.  I'm looking for some knowledge and understanding as to why the Prime would be held accountable for paying these employees, what our recourse is, how does FAR 42.202(e)(2) play into this equation and anything else I may be missing.

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Generally speaking, the government will hold the prime accountable. The prime will hold the 1st tier subK accountable. The 1st tier subK will hold the 2nd tier subK accountable. And by "accountable" I mean responsible for remediating any damages caused and for making appropriate financial restitution.

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1 hour ago, Sun$hine said:

what our recourse is, how does FAR 42.202(e)(2) play into this equation and anything else I may be missing.

Your recourse is whatever is allowed by your subcontract with the Tier 1 sub.  From your perspective, the Tier 2 is synonymous with the Tier 1; Tier 2 fails, you ding Tier 1.

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The contract is a FFP; no this is not a construction contract.

The "discussions" I've been pulled into [read: arguments between the PM and Supply Chain] are that we (Prime Supply Chain) should have been aware of the 2nd tier sub's violations.  We audit our subcontractor but I didn't think we would or should have any authority to audit our subcontractor's subcontractor.   That makes sense that the Prime can hold our subcontractor accountable to recoup the expenses.  Everything rolls somewhere, does it not?

Thank you!

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Sun$hine, you did not state whether the contract at issue is subject to the Service Contract Act and if it is whether the 1st tier sub and 2nd tier subs are also subject to the SCA.    If they are, you, as the prime, and each subcontractor can be held jointly and severaly liable for non-payment of required wages and fringe benefits.  In addition, the Depart of Labor can propose each of you for suspension and debarment for the non-payment.

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FAR Part 42.000 guides Government oversight of a prime contract and in rarer cases, a subcontractor. Was it the Government that advised your firm about the non-performing subcontractor? Your concern about (e)(2) language is understandable. My view is that a 2nd tier subcontract is not "its" (your firm's) subcontract and therefore your firm is not responsible for managing the 2nd tier subcontract. Perhaps the Government is providing such oversight? Nonetheless, if in managing your 1st tier subcontract's important milestone performance/progress, your firm did or should have been aware of non-performance by the 2nd tier subcontract that negatively affected the 1st tier subcontract performance, it could be said your firm did not adequately manage "its" subcontract.   

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Guest Vern Edwards

How many times do we have to say that the provisions of FAR apply to the government? A provision of FAR does not apply to a contractor unless made a part of a contract.

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On 1/18/2018 at 9:53 AM, here_2_help said:

Generally speaking, the government will hold the prime accountable. The prime will hold the 1st tier subK accountable. The 1st tier subK will hold the 2nd tier subK accountable. And by "accountable" I mean responsible for remediating any damages caused and for making appropriate financial restitution.

While walking the dog this morning I was thinking I had misstated the chain of responsibility. Let me rephrase:

The 1st tier subK will hold the 2nd tier subK accountable for noncompliance with contract terms. The 1st tier subK will have to try to recover as best it can from the 2nd tier subK. It may have to litigate.

The prime will hold the 1st tier subK accountable for noncompliance with contract terms. The prime will have to try to recover as best it can from the 1st tier subK. It may have to litigate.

The government will hold the prime accountable for the prime's noncompliance with contract terms, as well as for the 1st tier and 2nd tier subK compliance with the terms of the prime contract (i.e., flowdown clauses). In other words, the prime contractor is accountable to its government customer for compliance with contract terms and applicable statutes for the entire depth of its program supply chain.

I'm happier with that summary of the situation.

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On 1/19/2018 at 4:59 PM, Retreadfed said:

Neil, please see the ASBCA decision at http://www.asbca.mil/Decisions/2016/59508, 59509 Lockheed Martin Integrated Systems, Inc. 12.20.16.pdf.  In light of this decision, what obligation does a prime contractor have in regard to 42.202(e)(2)?

Hi Retread. I think Vern's post answered your question. I think the case you cited struggled with what "managing a subcontract" means even if 42.202 (e)(2) was incorporated in the contract. Absent specific "managing a subcontract" requirements incorporated in the prime contract, I would say that prime contractors should generally "manage its subcontracts" by taking action to include those in CPSR review requirements, if the prime may be subject to a CPSR.   

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Sure, Retread. CPSR requirements include "Maintain subcontract surveillance to ensure timely delivery of an acceptable product and procedures to notify the Government of potential subcontract problems that may impact delivery, quantity, or price." What is your company doing to comply in post award surveillance of subcontracts? Example: What does the purchasing, business or accounting system do identify and monitor critical part supplier financial health during the performance period? 

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Thanks for the clarification.  Of course, the language you quoted is from DFARS 252.244-7001.  Thus, this is a contractual requirement under the contracts in which that clause is inserted.  Moreover, it only deals with surveillance of 1st tier subs.  It does not go to second tier subs.  Therefore, this language would not impose any obligations on a prime contractor in regard to a 2nd tier sub.  Also, because this is only a DFARS clause, it has no application to contractors who do not do business with DoD.

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8 hours ago, Retreadfed said:

Thanks for the clarification.  Of course, the language you quoted is from DFARS 252.244-7001.  Thus, this is a contractual requirement under the contracts in which that clause is inserted.  Moreover, it only deals with surveillance of 1st tier subs.  It does not go to second tier subs.  Therefore, this language would not impose any obligations on a prime contractor in regard to a 2nd tier sub.  Also, because this is only a DFARS clause, it has no application to contractors who do not do business with DoD.

Retread, I don't believe I said a prime contractor is required to directly manage its 2nd tier subcontract. If you are asking me for such examples, I have none to offer. I thought I said "prime contractors should generally 'manage its subcontracts' by taking action to include those in CPSR review requirements, if the prime may be subject to a CPSR." There is nothing in my language that suggests that a prime contractor's 2nd tier subcontract is the primes (its) subcontract. If you are asking for examples of how a prime should generally manage its subcontracts under FAR contracts, see FAR 44.303 (g) and (j) for example. 

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