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The restrictions within FAR 16.603-2(c)(3) ; definitization within 180 day or before completion of 40% of the work to be preformed [the lesser of] do not appear to flow to the contractors subcontracts, but rather appear to be restrictions in place for the Government KO.  However, note there is a reference within FAR 16.101(a) that states "a wide selection of  contract types is available to the Government and the contractor..."   (only referencing this as this is where the auditor is pointing to).

Under a FFP definitized prime contract (or really under any type of prime), shouldn't it be the contractors procedures that determine the guidelines for how they utilize UCA's not the restrictions in FAR 16.603-2(c)(3)?  

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5 minutes ago, Z-Mil said:

Under a FFP definitized prime contract (or really under any type of prime), shouldn't it be the contractors procedures that determine the guidelines for how they utilize UCA's not the restrictions in FAR 16.603-2(c)(3)?  

Yes, but did you check the underlying statute to see what, if anything, applies to contractors?

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15 hours ago, Z-Mil said:

However, note there is a reference within FAR 16.101(a) that states "a wide selection of  contract types is available to the Government and the contractor..." 

That's referring to the prime contract negotiated between the Government and the contractor. The FAR doesn't apply to contractors. It applies to acquisitions (see FAR 1.104). By definition, acquisitions are made by the Government. Not all auditors understand that. 

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14 hours ago, Z-Mil said:

Reviewing 10 USC § 2326, I further do not see any application to the subcontractor.   Should I be looking somewhere else?

(noting here that Don's post was made while I was typing but decided to "submit" anyways.

First I believe your research has supported the generally accepted principle that the FAR does not apply to a contractor (see FAR part 1).   

Next are two additional references that the auditor must include in their full read of the FAR.

One is 16.603-2(a) which clearly by my read supports the principles of FAR part 1 that the FAR with regard to Letter Contracts only applies to Government.

The other is found in 16.203(c)(3) itself where IF the auditor continues to insist that the time or value standard does apply to a contractor the contractor has the ability, just like the government, to change that standard as I would argue that if the reference is all inclusive of government and contractor then the contractors procedures are allow as well..   And I quote "  However, the contracting officer may, in extreme cases and according to agency procedures, authorize an additional period. If, after exhausting all reasonable efforts, the contracting officer and the contractor cannot negotiate a definitive contract because of failure to reach agreement as to price or fee,"

All told the auditor is grasping at straws to provide the reference to support their argument.

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Thank you for the responses.   In addition to the above I will reference the definition of UCA from 10 USC § 2326 (j)(1).  (emphasis added)

(j) Definitions.—In this section:

(1) The term "undefinitized contractual action" means a new procurement action entered into by the head of an agency for which the contractual terms, specifications, or price are not agreed upon before performance is begun under the action. Such term does not include contractual actions with respect to the following:

(A) Purchases in an amount not in excess of the amount of the simplified acquisition threshold.

(B) Special access programs.

(C) Congressionally mandated long-lead procurement contracts.

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