We have a CR contract awarded in 2012 to a not-for-profit small business organization for R&D. Now, in one of the option years, the contractor is claiming that they can do a portion of the work for less if they hire a subcontractor to do that portion of the work. They are trying to charge the government for the audit of a potential subcontractor to do this work. The government did not 'request' or 'require' that the subcontractor be used--the contractor proposed it on their own. I can't find anywhere that addresses this directly (or indirectly on the facts presented--existing contract, subcontractor audit, etc). So my question is whether the government is/can be liable for the cost of auditing the potential subcontractor? The contract is subject to the HSSAR if that helps.

Did the contract proposal state or indicate that the work is to be self performed and is the proposal part of the contract? I assume that the Government's RFP did not require self-performance, correct?

If the answers above are no-yes, then it would appear to me that the Kontr may subcontract the work. If an audit is necessary and reasonable for the Kontr to negotiate and award the subcontract, then I would think that the cost of the audit is allowable, assuming that that cost is reasonable. If the subcontract proposal is more than the previously self-performed cost to perform the effort, it would seem reasonable for the Govt to question the proposed approach or cost, because the Kontr is presumably switching approach on the basis of lowering costs. The Kontr should then justify the reasonableness of the approach, See rules in 31.201-2 and-3 for allowability and (no presumption of) reasonableness.

I have performed audits of subcontractor proposals for prime contractors and have always been paid by prime contractors with cost type contracts.