Hello All,

Recently DCAA finished it's audit of our 2008 Incurred Cost Submission. One of the findings we are taking issue with is for a subcontractor who apparently did not file (and has not filed to-date) an incurred cost submission of their own. DCAA affirms that it was our responsibility to make sure the subcontractor filed an ICS. I believe this was the only contract the subcontractor had for the year. This is leaving us with potentially millions in penalty. Does anyone have experience with this type of situation or similar? I am trying to research as much as possible to see what options we have at this point. Any and all feedback is helpful.

Thanks!

canberra07,

Did DCAA really assert your company, the prime (or higher tier subK), was subject to the DFARS penalty clause for failing to ensure your subcontractor submitted an adequate proposal to establish final billing rates? That's ... unusual.

I would be surprised if anybody had experience with that situation, because it's such an ... unusual ... position to take, one that would seem to conflict with the plain language of the clause, which only refers to INDIRECT expenses ... and those that are expressly unallowable at that.

Why don't you wander over to the website of Gibson Dunn and find the bio of one of their attorneys -- Karen Manos. On her page, you'll find a link to some of the many articles she's written. One of those is entitled "Penalties for Unallowable Costs." It's free and available for download. I suspect it will help you out.

Second, you can negotiate final rates with your subcontractor without the "assistance" of DCAA. It simply requires some smarts and some negotiation skills.

Hope this helps.

DCAA frequently takes the position that contractors and subcontractors have an inherent obligation to establish final indirect cost rates. That is clearly wrong. Contractors only have to do so if there is a contract clause in their contract(s) that requires them to do so. There is only one FAR clause that requires contractors to establish final indirect cost rates. That is FAR 52.216-7. That clause is not a mandatory flow down clause. Subcontractors would only have to establish final indirect cost rates if their subcontract contains a clause requiring them to do so. Primes should only include such a clause in subcontracts when actual indirect costs are necessary to fulfillment of the prime's obligations to the government. For example, this would not be necessary if the subcontract is a labor hour subcontract, a firm fixed price subcontract, or a subcontract for commercial items. There may be other subcontract types where establishing final indirect cost rates would not be necessary. Thus, Canberra needs to look at his subcontract and determine whether the subcontractor really does need to establish final indirect cost rates.