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Applying Limitations on Subcontracting Only to Prime Contractor's Management Efforts


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For negotiated sole source contracts under one of the FAR 19 small business programs, the offeror’s proposed price (at least for construction and design-build),  will reflect its proposed technical/execution approach, including self-performed and subcontracted share of the contract price. The intended approach can be discussed and mutually understood.

EDIT: As part of the technical analysis, which is a facet of cost analysis (15.404-1 (e) (1) and (2)) we would examine the offeror’s technical approach.

The government negotiators better have a clue as to what is self-performed and what is not self-performed. If the proposed contractor disagrees, that’s the time to work it out. 

Edited by joel hoffman
Elaborated on technical analysis as part of the cost analysis
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16 hours ago, Vern Edwards said:

Yet here's Carl's accusation against ji20874 and me:

A bit of clarification.   The "accusation" was made in response to comments made regarding my post relating to LOS and 8(a) Partnership Agreements.  It should not be confused with the whole of the thread as a full read suggests, at least in my view, that our thinking is not widely divergent.

16 hours ago, Vern Edwards said:

And here's what I said on September 22, more than a week ago:

LOS is both pre-award and post award matter.  Pre-award COC/responsibility where the FAR provides guiding principles to assist in a responsibility determination inclusive of the COC process.   Post award compliance, where this thread has seemed to evolve to, I do wonder about adding an additional clause.    Why?  While the FAR is lacking in guiding principles  13 CFR 125.6(d) provides some guidance but then there is the obscure paragraph at 13 CFR 125(e)(4).   I really do wonder if 125(e)(4) should have actually been 125(d)(4).  That said I guess if an additional clause was really something a CO wanted to try, and if that CO were me, I would be borrowing some of the language from 13 CFR 125(e)(4).

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5 hours ago, C Culham said:

LOS is both pre-award and post award matter.  Pre-award COC/responsibility where the FAR provides guiding principles to assist in a responsibility determination inclusive of the COC process.

@Contracting Officers:

The limitations on sujbcontracting are performance requirements, no different than the requirement to comply with the statement of work or specification or the Service Contract Act clause.

FAR 15.304(c)(4), which concerns proposed small business subcontracting, applies only to acquisitions that have not been set-aside. The limitations apply only to contracts resulting from small business set-asides.

Here's what the GAO said last year:

Quote

As a general matter, an agency's judgment as to whether a small business offeror will be able to comply with a subcontracting limitation presents a question of responsibility not subject to our review. Spectrum Sec. Servs., Inc., B–297320.2, B–297320.3, Dec. 29, 2005, 2005 CPD ¶227 at 6. A proposal need not affirmatively demonstrate compliance with the limitation on subcontracting clause. See Dorado Servs., Inc., B–408075, B–408075.2, June 14, 2013, 2013 CPD ¶161 at 12. Rather, such compliance is presumed unless specifically negated by other language in the proposal. See Express Med. Transporters, Inc., B–412692, Apr. 20, 2016, 2016 CPD ¶108 at 6. However, where a proposal, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal's acceptability. TYBRIN Corp., B–298364.6, B–298364.7, Mar. 13, 2007, 2007 CPD ¶51 at 5. 

Hughes Coleman, JV, B- 417787.5 (Comp.Gen.), 2020 CPD P 257, July 29, 2020, footnote 4. Emphasis added.

My advice to COs is that they not treat the limitations as a special pre-award issue during bid or proposal evaluation. 

For more on the limitations on subcontracting, see the following articles:

Limitations on Subcontracting: Are They Being Enforced? Will They Ever Be?, by Vernon J. Edwards, The Nash & Cibinic Report (August 2014) 28 NCR-NL ¶ 45 (This article addressed the difficulty of enforcing the old limitations and the challenges of the new limitations as they appeared in statute, before the finalization of the SBA rules.)

Postscript: Limitations on Subcontracting, by Ralph C. Nash, Jr., The Nash & Cibinic Report (November 2014) 28 NCR-NL ¶ 62

Postscript II: Limitations on Subcontracting, by Ralph C. Nash, Jr., The Nash & Cibinic Report, December 2020, 34 NCR-NL ¶ 70.

To COs: As for post-award compliance—unless you have a lot of time on your hands and are prepared to study and think about the limitations in depth, do not let this Wifcon thread prompt you to become small business activists. As a general rule, do not try to monitor compliance on an interim basis during performance. See the first Nash & Cibinic article cited above for more on the difficulty of in-progress monitoring under the new rules.

At contract pre-performance conferences, remind contractors of the clause, of 13 CFR 125.6, of their promises and obligations, and of the possible consequences of nonconformance. Ask for written confirmation of compliance and supporting payment information at the end of performance, after the contract is physically complete, and before final payment and contract closeout. Document the file. If anything suggests a possible violation of the limitations, seek guidance from your superiors and attorney.

Let agency policy and instruction guide you about any need to take more active measures.

I will have more to say about this in the November issue of The Nash & Cibinic Report, and will provide Bob with a copy of the article to post at Wifcon after its publication.

Vern

Edited by Vern Edwards
To correct an error of fact.
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3 hours ago, Vern Edwards said:

I will have more to say about this in the November issue of The Nash & Cibinic Report, and will provide Bob with a copy of the article to post at Wifcon after its publication.

I hope so as I suspect it will be a very interesting read.  LOS is complicated and hope there will be discussion about -

  • The relationship of FAR subpart 9.1 to FAR Subpart 19.6 (at (a)) especially in light of paragraph (e) of the LOS clause (with emphasis added -  "(e) Limitations on subcontracting. By submission of an offer and execution of a contract,..."
  • The fine line of the CO's responsibility that seems to be drawn by GAO when addressing LOS protests.  This one is from 2021 -
    • An agency’s judgment as to whether a small business vendor can comply with the limitation on subcontracting provision is generally a matter of responsibility, and the contractor’s actual compliance is a matter of contract administration; neither issue is one that our Office generally reviews. NEIE Med. Waste Servs., LLC, B-412793.2, Aug. 5, 2016, 2016 CPD ¶ 213 at 3-4; see also 4 C.F.R. § 21.5(a), (c). However, where a quotation, on its face, should lead an agency to the conclusion that a vendor could not and would not comply with the subcontracting limitation, the quotation may not form the basis for an award. See KAES Enters., LLC, B-408366, Aug. 7, 2013, 2013 CPD ¶ 192 at 2.
  • Specific efforts related to the LOS clause with regard to 8(a) in light of partnership agreements and the expressed view of GAO where in https://www.gao.gov/assets/gao-14-706.pdf   they provided - "We recommend that the Administrator of OFPP take appropriate steps to amend the FAR to include the following three requirements: • At the time of the contract award, contracting officers shall conduct and document an assessment of the 8(a) firm’s ability to comply with the subcontracting limitations; • Contracting officers shall include monitoring and oversight provisions in all 8(a) contracts to ensure that the contractors comply with the subcontracting limitations; and • Prime 8(a) contractors shall periodically report to the contracting officer on the percentage of subcontracted work being performed."

The view of the LOS is not that of a narrow view where one solution to evaluating a firms pre-award promise and post award compliance fits all, it (as it goes in Federal acquisition) depends. 

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On 10/2/2021 at 11:07 AM, Vern Edwards said:

My advice to COs is that they not treat the limitations as a special pre-award issue during bid or proposal evaluation. 

This is an over generalization, IMO.

When negotiating the cost and price of sole source construction contracts using cost analysis, it is not usually not very difficult to determine whether the proposer intends to comply with the LOS. One of the most important aspects of construction contract negotiations is understanding the scope of the project the basis of the proposal, including the proposed technical approach. If nothing else, it should prompt clarification before or during the price negotiations.

Just saying that this isn’t sound advice for general application to negotiating sole source construction contracts. 
 

On 10/2/2021 at 11:07 AM, Vern Edwards said:

At contract pre-performance conferences, remind contractors of the clause, of 13 CFR 125.6, of their promises and obligations, and of the possible consequences of nonconformance.

Agreed.

However, for sole source negotiated construction contracts, if the negotiator failed to obtain or perform a technical analysis of the proposal and if it would have been apparent or obvious that the contractor wasn’t proposing an execution approach compliant with the LOS, it would highlight the government’s ignorance or due diligence during negotiations.

If the government Ignored apparent or obvious signs of intentional or mistaken non-compliance intent in the construction contract proposal evaluation or during contract negotiations, it should be embarrassing if the contractor bows up or asks if the government knew what it was negotiating.  

On 10/2/2021 at 11:07 AM, Vern Edwards said:

As a general rule, do not try to monitor compliance on an interim basis during performance.

Again, this is over generalization.I won’t comment or argue the point for other than for construction contracts.

In construction contract administration there should be adequate information during performance to provide an indication whether the contractor can or is attempting to comply. This includes involvement by similarly situated subs. The contractor generally has to identify its subcontracts. The payroll reports will identify who the labor force works for. The daily contractor reports should identify on-site activities. Each progress payment request, including  the evaluation and agreement of associated progress prior to submission will identify what work is included. The progress payment invoice must identify subcontractors and subcontract amounts. It must include sub amounts included and amounts previously paid in the progress payment.

Sure, it is certainly possible that there might be changes, claims, unexpected costs, conditions or occurrences during construction that could affect the final percentages.

If unintentionally unavoidable, I don’t think that the government should penalize a contractor for failure to meet the LOS.

But due government diligence during construction contract administration is certainly possible, especially with all of the information available to the government.

 

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11 minutes ago, joel hoffman said:

Just saying that this isn’t sound advice for general application to negotiating sole source construction contracts. 

Okay. Everyone is entitled to an opinion. But then you say:

Quote

But due government diligence during construction contract administration is certainly possible, especially with all of the information available to the government.

But what is the purpose of "due government diligence during construction" when the parties have agreed that compliance will be determined on the basis of amounts paid by the as of the end of performance, especially since construction usually involve changes and frequently involves claims litigation, moreso than any other kind of government contracting? And what is the procedure for such diligence?

Why not just wait until the end, determine compliance after the dust has settled, and then seek guidance from SBA about fines, if any appear due?

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10 minutes ago, Vern Edwards said:

Okay. Everyone is entitled to an opinion.

Thanks for the acknowledgement.

The construction subcontracting community has long fought for prompt payment protections and visibility. Congress has responded. The government has plenty of information to determine who is doing what and where the money is going to. That includes subcontract amounts and  progress amounts excluded from progress payments to the contractor. 

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44 minutes ago, joel hoffman said:

The construction subcontracting community has long fought for prompt payment protections and visibility. Congress has responded. The government has plenty of information to determine who is doing what and where the money is going to. That includes subcontract amounts and  progress amounts excluded from progress payments to the contractor. 

Who cares about progress payments? Read the clause. And what are you going  to do if you decide at some point in time during performance that the contractor might not comply by the end. T for D? When the clause expressly states that compliance is to be determined at the end?

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1 minute ago, Vern Edwards said:

Who cares about progress payments? Read the clause. And what are you going  to do if you decide at some point in time during performance that the contractor might not comply by the end. T for D? When the clause expressly states that compliance is to be determined at the end?

Well, I certainly won’t advise ignoring it for construction - especially sole source negotiated contracts, as suggested for a general approach. 

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My mother in law just went to the emergency room and I’m involved in a Maintnence and repair project at church today so won’t be available to debate you.

You can demean and belittle my opinions at will today.  

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2 minutes ago, joel hoffman said:

My mother in law just went to the emergency room and I’m involved in a Maintnence and repair project at church today so won’t be available to debate you.

You can demean and belittle my opinions at will today.  

I'm sorry to hear that . I hope all goes well.

As for demeaning and belittling your opinions, I'm not doing that. I'm asking you questions about them. That's a sign of respect.

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12 minutes ago, Vern Edwards said:

Okay, so tell us what you'd do instead of ignoring it?

Based upon your hasty replies to my posts, it is evident that you didnt read what I’ve been saying and/or don’t know what to do for routine construction contract administration. But any other opinion appears to be unacceptable to you.

 

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1 hour ago, joel hoffman said:

Based upon your hasty replies to my posts, it is evident that you didn't read what I’ve been saying and/or don’t know what to do for routine construction contract administration. But any other opinion appears to be unacceptable. 

My replies were prompt, not hasty. I read your posts. And you're avoiding my questions.

Go to the hospital. You can come back later and tell us what you'd due by way of due diligence on sole source construction contracts.

And by the way, my last government job was Chief of Construction Contracting for the Bonneville Power Administration, U.S. Dept. of Energy, and our office received very high marks from the Department. We did construction of high voltage transmission lines and substations in the Pacific Northwest—Montana, Idaho, Washington, and Oregon. I reported to BPA's Chief Engineer.

So I know a little something about both routine and special construction contract administration.

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I'm on the contractor side, not government, so I don't know all the reasons why the government might or might not want to monitor compliance during contract performance and not take a "we'll fine them at the end" approach. But at least one sticks out in my mind. 

Every week, Koprince Law posts articles on fraudulently-obtained set-aside contracts. Sure, the government collected a fine, but in every single case, a deserving SB was denied the contract. Every day the wrongdoer performed was an opportunity lost forever for a deserving contractor. Had the government caught it, the CO could have terminated the contract and recompeted. There are tons of service contracts where a new contractor could step in and take over performance. 

Seems to me that's a good reason to do at least some monitoring during performance.

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9 hours ago, Fara Fasat said:

Seems to me that's a good reason to do at least some monitoring during performance.

Those of you who call for "monitoring during performance" must explain what you mean by that phrase. What kind(s) of action(s) do you contemplate when you say "monitoring"?

After you explain that, tell us what the point of it would be, since the clause does not require compliance throughout performance, i.e., at all times during performance, but only "by the end" of performance.

Even if at the halfway point of performance you conclude that the contractor will not be able to comply by the end, what would you do about it? What could you do?

Would you try to make the contractor terminate a large business subcontractor and reward the rest of the work to a small business subcontractor? Would you have the statutory, regulatory, or contractual authority to do that?

Would you suspend progress payments, performance-based payments, or partial payments?

Would you terminate the contract for default on grounds of anticipatory breach, even if the requiring activity were happy with the contractor's work? Would you take an action that would prevent the requiring activity from getting what it needs when and where it needs it?

Or, would it make more sense to (1) remind the contractor of the limitations at the start and midway point of performance, (2) wait until the end of performance to make a determination, and then, (3) if the contractor did not comply, ask SBA to assess the minimum $500,000 fine prescribed by statute and make an appropriate entry in CPARS?

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12 hours ago, Vern Edwards said:

Those of you who call for "monitoring during performance" must explain what you mean by that phrase. What kind(s) of action(s) do you contemplate when you say "monitoring"?

After you explain that, tell us what the point of it would be, since the clause does not require compliance throughout performance, i.e., at all times during performance, but only "by the end" of performance.

Even if at the halfway point of performance you conclude that the contractor will not be able to comply by the end, what would you do about it? What could you do?

Would you try to make the contractor terminate a large business subcontractor and reward the rest of the work to a small business subcontractor? Would you have the statutory, regulatory, or contractual authority to do that?

Would you suspend progress payments, performance-based payments, or partial payments?

Would you terminate the contract for default on grounds of anticipatory breach, even if the requiring activity were happy with the contractor's work? Would you take an action that would prevent the requiring activity from getting what it needs when and where it needs it?

Or, would it make more sense to (1) remind the contractor of the limitations at the start and midway point of performance, (2) wait until the end of performance to make a determination, and then, (3) if the contractor did not comply, ask SBA to assess the minimum $500,000 fine prescribed by statute and make an appropriate entry in CPARS?

For a negotiated, sole source CONSTRUCTION contract, by submission of a proposal, the prospective contractor agrees to limit the amount of subcontracting per the LOS clause.

The government will use cost analysis, including technical analysis to evaluate the proposed contract price.

The pricing should be consistent with and reflect that promise. If not, raise and resolve the issue before and/or during negotiations on the price.

The government’s pre-negotiations objective should consider and be consistent with the LOS.

Negotiate the issue, if necessary - before award.

As for Contract administration, there should be adequate information available to the government during performance, including the extent of the subcontract amounts, to determine whether the contractor appears to be attempting to comply. If not, you can “remind the contractor” of its responsibility and of the penalties and ask the contractor how it intends to meet the limitation - before it is too late.

if the contractor makes a good faith effort and circumstances beyond the contractors control arise during performance, such that the limitation will be exceeded, I personally wouldn’t seek penalties.

One  example would be government changes that effect the amount of subcontracted or self-performed work. Another example might be a dispute that arises between the prime and a sub, the prime having to replace a non-performing sub, etc.

But, I’d never negotiate a contract price,  ignoring the LOS. That would be stupid. And, since the subcontracted amounts are available to monitor trends of the apparent end of performance payments , it would be stupid to ignore that and only “remind the contractor” of the requirement.

That is being pro-active, not reactive and reflects competence on the government’s negotiators and CAB team.

The government would look stupid if all the signs are present from the point of proposal receipt and you ignored them and awarded a contract based upon a non- conforming proposal. Even more stupid if you ignored information available early in and throughout performance .

Then you either ignore it completely to closeout or try to penalize the contractor at the end of performance and reflect it in the CPARS rating. The government would not have used due diligence. I’d give the government a negative, “incompetent”,  “GPARS” rating! 

Vern asked “Who cares about progress payments?” I think that I explained why progress payments provide most of the information to provide the indicators of attempt to comply - from very early through essentially full performance. Congress revised the requirements for progress payment invoicing, payments and payments to subs and suppliers back in the Prompt Payment Act Amendments of 1988. I’m assuming that is after Vern’s described Bonneville Power Administration construction contracting experience. The Amendments were implemented by OMB Circular and the FAR was amended for all construction contracts awarded after 30 March or April of 1989. In addition, the contractor’s proposal should provide much information about the amount of proposed materials for the prime and major subs. Other sources will also provide materials pricing.

Daily reports and payroll information will provide info on who is doing what work but the progress payment invoice submission requirements require that the contractor identify subcontractors and current subcontract amounts.  

Finally, the KO can request information on sub’s material prices. Unless the SBA has changed its policies, we were told that, if a subcontract doesn’t breakout material prices then you look at the entire subcontract amount.

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As an admission, the new LOS appears to be simpler and easier to comply with for construction but if I were still working, I’d get clarification of the current material exclusion. The SBA’s construction examples don’t account for materials in their dollar breakouts and explanations or specifically address whether markups on materials are included in determining materials. That doesn’t seem to be insurmountable. I think it reflects a lack of real world construction contracting experience by the policy and regulation writers.

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By the way, materials have long been excluded as self-performed work for construction in the socio-economic programs and for buying materials for subcontractors to count as as self-performed work in unrestricted construction contracts.

The background is that prime contractors would purchase materials for subs and try to use that as “self-performed work.” In reality, the subs were estimating and identifying the required materials, sourcing the materials, often receiving the materials. If the prime was actually paying for the materials, there was very little, if any investment and it was unknown, who provided for upfront payment , if any to suppliers. The government government would pay for the invoiced cost of stored materials, often before the suppliers were paid. The SBA excluded materials many years ago from self-performed work.

We excluded materials from unrestricted prime contractor’s share of the work because it wasn’t “work performed” by the contractor’s  own organization, per clause 52.236-1 “Performance of Work by the Contractor”. 
 

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Joel,

I think everyone agrees that the contracting officer might be able to obtain some insight during a pre-award sole-source construction negotiation. However, the correct principle remains: while the contracting officer cannot award a contract in the face of evidence that the prospective contractor will not or cannot comply with LOS, the contracting officer has no affirmative duty to investigate -- that's what the GAO says.

On the one hand, you call for vigorous contracting officer post-award monitoring and enforcement, and on the other hand you admit the failure of policy and regulation writers to understand and elucidate the "whats" and "hows" of LOS compliance. There is a big disconnect. One cannot vigorously enforce that which he or she cannot understand.

And, you are willing to give the contractor a pass if it makes a good faith effort. Two questions, if you will allow:  Does the LOS contract text call for simply a contractor's best effort?  And, does the contract text or 13 CFR text vest enforcement decision-making authority and penalty-waiving authority in the contracting officer, by allowing the contracting officer to decide whether best effort has been applied and thus excuse the contractor from its LOS agreement?  I am thinking the answer to both of these questions is NO, but I admit a less-than-perfect knowledge of this matter.

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@joel hoffman

I simply do not think that there is any reason to devote any significant amount of time to "monitoring" the contractor's compliance with the limitations on subcontracting. Why not?

  1. Because the statute (15 USC 657s), the SBA policy (13 CFR 125.6), and the implementing contract clause (FAR 52.219-14) say that compliance is determined at the end of performance, not during.
  2. Because meaningful monitoring would entail more than just looking at amounts subcontracted. It would also entail verification of which subcontractors are "similarly situated entities" and which of the similarly situated subcontractors' subcontractors (second-tier subcontractors) are "similarly situated entities". 
  3. Because the statute and the SBA policy provide a specific remedy for noncompliance—a minimum fine of $500,000—that can be assessed and collected only after the end of performance.
  4. Because it is not clear that a CO is authorized by law, regulation, or contract to take action against a contractor prior to a determination made at the end of performance.

In short, given the terms of the statute, the SBA policy, and the clause, what is the point of "monitoring", especially when subcontracts might be affected by changes and changed conditions, and compliance dependent on the prime's ultimate settlements with the government?

Instead of devoting any time to "monitoring", I would instruct COs to adopt the measures that I have already described twice in this thread:

  1. Include a special clause in the contract requiring the contractor to confirm its compliance or acknowledge  its noncompliance in writing prior to final payment.  I think this is authorized pursuant to 13 CFR 125.6(e)(4).
  2. Remind the contractor, in writing, of the limitations—once at the start of performance and once at the midpoint, and ask for acknowledgement of receipt.
  3. Require that the contractor confirm its compliance or report its noncompliance and provide supporting data prior to final payment and contract closeout.
  4. Document a determination in the closeout file to the effect that there were or were not any indications of noncompliance. 
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ji, the GAO decisions concern competitively negotiated acquisitions

I’ve tried to explain some basics of one on one construction contract price negotiations when cost analysis is involved. As a condition for the privilege of being awarded “no-bid” (non-competitive) contracts, the contractor “agrees” with the submission of a proposal and with the award of the negotiated contract that it will limit the amount of subcontracting. The price proposal should reflect the intent and technical approach. 

The LOS is but one more contract requirement that shouldn’t be ignored. 

The SBA fines contractors not the KO. I don’t know whether the SBA would fine a contractor for noncompliance if it was beyond the control of the contractor and or the result of a Government cause circumstance. But I can guess.

At any rate that’s my opinion. 

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