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Prime purchase of subcontract from subcontractor

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We are purchasing a subcontract from our subcontractor.  Are the cost of that purchase chargeable to a fixed price contract?  My opinion is yes but wanted your thoughts.  My question is on the allowability of those costs.

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In my experience the costs of contractor M&A activities are treated as indirect costs, not as direct costs. I get the point that you can identify specifically what you are buying but ... why would you want to do that?

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19 hours ago, pat said:

We are purchasing a subcontract from our subcontractor.  Are the cost of that purchase chargeable to a fixed price contract?  My opinion is yes but wanted your thoughts.  My question is on the allowability of those costs.

I concur with the other two.  You said that the contract is fixed-price.  [T]he “allowabity of those costs” is for what purpose??

It is likely “chargeable to the contract” cost in your accounting system.

That doesn’t necessarily make any of those costs reasonable or allowable if you are seeking reimbursement on the basis of cost for some reason.

Buying out a subcontract, by itself, doesn't entitle you to a price adjustment on a fixed price contract. 

 

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6 hours ago, pat said:

We are purchasing a subcontract from our subcontractor.

What does this mean?  Why not just terminate the subcontract and do the work yourself?  Are you buying something other than a subcontract?

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Pat, does this have something to do with your Time and Materials contract from earlier threads? We can’t answer your question here without any context. Thanks. 

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Purchase implies novation, does it not?

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1 hour ago, here_2_help said:

Purchase implies novation, does it not?

I don’t think they purchased the subcontractor, only a subcontract from a subcontractor...

 

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“Purchasing”  a firm doesn’t necessarily change the legal identity of a contractor, either. 

At any rate, the OP seems to have checked out on this thread.

 

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2 hours ago, joel hoffman said:

I don’t think they purchased the subcontractor, only a subcontract from a subcontractor...

Joel,

1. The only way this makes sense is if the company is purchasing an unrelated contract from a third party, who happens to be a subcontractor under another contract. If the prime was "purchasing" the subcontract that it awarded to a subcontractor, that wouldn't make any sense because why not just T4C and then self-perform the remaining scope?

2. So if the company is purchasing a completely unrelated contract from a third party, one that the third party is currently performing on as a subcontractor to an unrelated prime contractor, then the (sub)contract being purchased would have to be novated, would it not? The purchased (sub)contract would be performed by an entity that was unrelated to the one to which it was originally awarded. To me, that means novation.

3. Novation is tricky and I would be surprised to learn that the original prime contractor (or government customer) would consent to novation, knowing that the purchasing company intended to charge the purchase costs to the (sub)contract that was being novated.

Anyway, as you noted the OP has moved on. Just wanted to make my points for academic purposes...

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On 1/4/2019 at 11:21 AM, here_2_help said:

Purchase implies novation, does it not?

Why is this relevant to a subcontract?  FAR 42.12 is directed toward prime contracts and is how the government consents to the transfer of a contract despite the terms of the Anti-Assignment Act.  It does not require prime contractors to do anything if a subcontract is transferred.

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4 hours ago, Retreadfed said:

Why is this relevant to a subcontract?  FAR 42.12 is directed toward prime contracts and is how the government consents to the transfer of a contract despite the terms of the Anti-Assignment Act.  It does not require prime contractors to do anything if a subcontract is transferred.

Okay, I'll accept that position. The prime contractor will accept that another subcontractor, other than the one to which it awarded the subcontract, will perform the work.

Gosh, I hope that new subcontractor is not on the EPLS and has a valid SAM registration. As you posited, the prime has no recourse but to accept the new subcontractor.

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The scenario is very unclear. It appeared that the Prime intends to do the effort itself or have someone else do it for the prime.

Maybe the OP meant that they paid off the sub for some reason but some or all of the subcontracted FFP scope of work remains to be completed??? 

 The OP hasnt responded to at least FIVE questions, requesting clarification and contex, asked by several respondents.

So, what does it matter anyway? It’s a waste of time for respondents to speculate and debate. 

There is no “novation” from the government perspective due to a change in who performs the scope of a subcontract on a FFP contract, whether it be the prime or another subcontractor.

And - it is common practice for Corporations to purchase other firms (if that were the case here) or to divest divisions, without changing the Corporation’s legal identity, correct? Thus, no novation of the prime contract is involved. 

 

 

Edited by joel hoffman

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20 hours ago, here_2_help said:

The prime contractor will accept that another subcontractor, other than the one to which it awarded the subcontract, will perform the work.

I have no idea what you are talking about.  This discussion has focused on a prime buying a subcontract from a subcontractor, not another concern buying the subcontract from the subcontractor.  Here the prime is in control of the transaction.

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9 hours ago, Retreadfed said:

I have no idea what you are talking about.

We are in agreement

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On 1/4/2019 at 3:17 PM, here_2_help said:

The only way this makes sense is if the company is purchasing an unrelated contract from a third party, who happens to be a subcontractor under another contract. If the prime was "purchasing" the subcontract that it awarded to a subcontractor, that wouldn't make any sense because why not just T4C and then self-perform the remaining scope?

However, the OP said his company was "purchasing a subcontract from our subcontractor."  While not absolutely clear, this indicates that Joel's assessment of what is happening is correct.  In that case, there is no other prime contractor involved.

In any event, neither the Anti-Assignment Act nor FAR 42.17 applies to the transfer of a subcontract by a subcontractor.  Such actions are governed by the terms of the subcontract and applicable state law.   Most subcontracts with which I am familiar have an anti-assignment clause in them.  These clauses prohibit the subcontractor from transferring a contract, even by operation of law, without consent of the prime contractor.

As for the government's involvement in the transfer, it is not at all clear that FAR 52.244-2 would require government consent to the transfer of a subcontract if the prime contractor did not have an approved purchasing system.  In this regard, most of the factors in FAR 44.202-2 would have already been considered when the original subcontract was awarded.  If the prime does have an approved purchasing system, the chances of government involvement are reduced even further.

 

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It’s all fine and good discussion, however it doesn’t answer Pat’s question. Which, by the way makes no sense. And Pat apparently doesn’t intend to clarify or otherwise explain it.

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