When a prime contracter for an IDIQ contract subcontracts part of the their business is it normal for them to charge subcontracters some kind of fee or pay a reduced rate for services as compensation for the time and effort the prime contract used to bid on the contract?  Is it generally cheaper for the government to directly contract with the subcontracter to avoid the markup of a middle man?  I am doing some research in this area and was wondering if anyone had insights. 

"Is it normal?"

No. But it happens.

When it happens, the prime needs to be very careful, because contract clause 52.203-7 is in play. Have you read that clause?

From my time in the prime contractor world of delivering end item goods to the Government, I offer the following response to your question:

1. I have never encountered or heard of any situation like that as an acceptable practice. Of course, prime contractors may well expect that its target price be reached in awarding or negotiating the subcontract, especially if the prime contractor could make the subcontracted work itself for less money than the subcontractor is proposing.

2. There are times where the government might find it advantageous (and sometime even the contractor may find it advantageous) for the government to contract directly with a subcontractor. But there may be unintended risks to the government. if the government contracted goods are an integrated with the prime contract end item but do not conform to contractor form, fit, function, quality or other significant requirements, the prime contractor would probably disavow liability and responsibility. Costs to resolve that type problem can exceed the "middleman savings." There are times where nothing goes wrong and there are savings.   

On 3/19/2022 at 1:56 PM, louistm said:

When a prime contracter for an IDIQ contract subcontracts part of the their business is it normal for them to charge subcontracters some kind of fee or pay a reduced rate for services as compensation for the time and effort the prime contract used to bid on the contract?  Is it generally cheaper for the government to directly contract with the subcontracter to avoid the markup of a middle man?  I am doing some research in this area and was wondering if anyone had insights. 

What do you mean by a “reduced rate”? , Do you mean paying the subcontractor less than a contract unit price? Please clarify. Thanks. 

Thought I would add that there is a case that may be on point regarding what is "normal" in this context.

See ASBCA Nos. 47416, 50453, 50888, United Technologies Corporation, Pratt & Whitney, July 30, 2001. (Subsequently reversed on appeal.)

The following is from a recitation of the facts.

Quote

In the early 1970s, Pratt began discussions with foreign entities regarding collaborative efforts for the manufacture of its commercial engines, principally to distribute the enormous risk associated with developing new engines and to obtain market access using foreign production facilities and sales. In May of 1973, Pratt signed separate Memoranda of Agreement (MOAs) with Motoren-und Turbinen-Union Muenchen GmbH (MTU) of Germany and Fiat Aviazione Societa Per Azioni (Fiat) of Italy setting forth the principles governing a joint collaboration for the 'design, development, production, marketing, product support and after-sales service of a new high bypass ratio turbofan aircraft engine' designated the JT10D engine for 'primary application in a short, medium and long range aircraft up to 250 passenger size.' The MOAs further acknowledged the parties’ recognition that 'such a development effort [was] not an acceptable economic risk for any one of them, and thus require[d] the sharing of effort and financial risk.'  ... Payment of fees to Pratt for participation in the program was based upon sales. Pratt retained responsibility for the overall program management. ...

All but [ ] require an upfront, non-refundable entry fee in exchange for the right to be 'a partner in the program,' i.e., to manufacture engine parts designated by Pratt for a particular engine program, to receive its program share of revenue, and to learn and benefit from Pratt’s experience in the development, manufacture and marketing of jet engines. The program share purchased by a collaborator determines its percentage share of the production requirements, program expenses and revenues.

The program entry fees are substantial; for example, the fee for the [ ] program was [ ] for a [ ]share. Pratt eventually sold [ ] of the base [ ] program to foreign collaborators. Additionally, Pratt has charged catch-up payments to collaborators joining [ ] program after [ ] started. Payments also are charged to collaborators increasing their program shares. The program entry fee approach was also used to fund an incremental improvement to the [ ] engine program.

Emphasis added. Citations omitted. Redaction in the original.

49 minutes ago, here_2_help said:

Thought I would add that there is a case that may be on point regarding what is "normal" in this context.

See ASBCA Nos. 47416, 50453, 50888, United Technologies Corporation, Pratt & Whitney, July 30, 2001. (Subsequently reversed on appeal.)

The following is from a recitation of the facts.

Emphasis added. Citations omitted. Redaction in the original.

Thank you very much that is great.

 

9 hours ago, here_2_help said:

"Is it normal?"

No. But it happens.

When it happens, the prime needs to be very careful, because contract clause 52.203-7 is in play. Have you read that clause?

Thank you for the reply.  I was thinking it would be more like a pass through charge under 52.215-23, but I think what you cites makes sense.  I guess it would be okay for them to charge a management fee to the government to help cover some of their costs, but not charge the subcontracter to participate. I figured the admin costs had to billed somewhere. 

6 hours ago, joel hoffman said:

What do you mean by a “reduced rate”? , Do you mean paying the subcontractor less than a contract unit price? Please clarify. Thanks. 

Yes, I was trying to figure out how the prime contracter made up the costs of bidding on the umbrella contract, finding the subs and managing the contracts.  I didn't know how those costs are typically billed.  I was also trying to figure out if the subcontracter was at a disadvantage in being a subcontracter or if it was better for them to contract with the government directly.  Sorry, I am not very familar with how they are typically billed. 

6 hours ago, Neil Roberts said:

From my time in the prime contractor world of delivering end item goods to the Government, I offer the following response to your question:

1. I have never encountered or heard of any situation like that as an acceptable practice. Of course, prime contractors may well expect that its target price be reached in awarding or negotiating the subcontract, especially if the prime contractor could make the subcontracted work itself for less money than the subcontractor is proposing.

2. There are times where the government might find it advantageous (and sometime even the contractor may find it advantageous) for the government to contract directly with a subcontractor. But there may be unintended risks to the government. if the government contracted goods are an integrated with the prime contract end item but do not conform to contractor form, fit, function, quality or other significant requirements, the prime contractor would probably disavow liability and responsibility. Costs to resolve that type problem can exceed the "middleman savings." There are times where nothing goes wrong and there are savings.   

Thank you for sharing that.  I appreciate the insight. 

15 hours ago, here_2_help said:

Thought I would add that there is a case that may be on point regarding what is "normal" in this context.

@here_2_help, in my experience the example you have given is not a subcontract arrangement. I see it as a collaboration effort on the contract side of the house. More like a partnership alliance.

15 hours ago, louistm said:

Yes, I was trying to figure out how the prime contracter made up the costs of bidding on the umbrella contract, finding the subs and managing the contracts.  I didn't know how those costs are typically billed.  I was also trying to figure out if the subcontracter was at a disadvantage in being a subcontracter or if it was better for them to contract with the government directly.  Sorry, I am not very familar with how they are typically billed. 

The prime contractor costs involving bidding and finding/managing subcontracts are taken care of in the prime contract price between the prime contractor and the government. The amount is generally treated as proprietary and not disclosed to 3rd parties, like subcontractors. Whether it is better to be awarded a subcontract from a prime contractor or win contracts from the government is a business decision for the company. Whichever way is best for the company should win out as the model in order to be successful. I am familiar with companies that market themselves either way, whichever works best for the target customer situation.

Edited March 23, 20223 yr by Neil Roberts
clarify last sentence.

2 hours ago, Neil Roberts said:

@here_2_help, in my experience the example you have given is not a subcontract arrangement. I see it as a collaboration effort on the contract side of the house. More like a partnership alliance.

Interesting point of view. You should take it up with Judge Dyk of the Federal Circuit, because I'm fairly sure he would disagree with your position, based on language in his decision reversing the ASBCA decision I quoted.

Short answer: primes usually levy a 1% fee on subcontracts to cover all associated management and proposal costs.  Prime contractors don't subcontract because they are altruistic saints who are there to pull up the little guy, they subcontract because they lack a required in-house capability*.  Their compensation is winning a contract under which they would have otherwise been deemed unqualified.  Not sure what your prime is doing but it sounds shady.

 

*or it will otherwise benefit them

On 3/22/2022 at 12:56 PM, here_2_help said:

...contract clause 52.203-7 is in play

Don't you think immediately characterizing the arrangement as 'kickbacks' might be a little overreach?

What was the decision in the Pratt case you provided?  You provided a good summary but it's not clear what decisions came out of it.

19 minutes ago, here_2_help said:

Interesting point of view. You should take it up with Judge Dyk of the Federal Circuit, because I'm fairly sure he would disagree with your position, based on language in his decision reversing the ASBCA decision I quoted.

@here_2_help, you are representing to the original poster that the case you cited may be a normal every day event in the life of government contractors and subcontractors. My experience is completely opposite that.

1 hour ago, Neil Roberts said:

@here_2_help, you are representing to the original poster that the case you cited may be a normal every day event in the life of government contractors and subcontractors. My experience is completely opposite that.

You are misrepresenting my point. My initial post was diametrically opposite of what you represent that I represented.

I literally said it was not a normal occurrence.

 

Thanks for all the replies. I am a student trying to understand the process.  It is not for any particular application-- just academic understanding. 

1 hour ago, louistm said:

Thanks for all the replies. I am a student trying to understand the process.  It is not for any particular application-- just academic understanding. 

 

23 hours ago, louistm said:

joel hoffman asked: “What do you mean by a “reduced rate”? , Do you mean paying the subcontractor less than a contract unit price? Please clarify. Thanks.” 

 

23 hours ago, louistm said:

Yes, I was trying to figure out how the prime contracter made up the costs of bidding on the umbrella contract, finding the subs and managing the contracts.  I didn't know how those costs are typically billed. 

The contractor will have a contract price to the government for the service(s) or product(s). It will either self-perform all or part of the services  or provide all or some of the product(s).

If it is going to subcontract some or all of an order, then it would seek quotes, bids or proposals (unless it has already has subcontracts or subcontractors in place to perform work or provide product(s). Either way, the contract price should reflect the subcontract price or self-performed cost plus prime contractor costs for contract administration,  overheads, profit, etc.

The government pays the contract price to the prime, the prime pays the subs and suppliers. 

All that should be normal business practice. 

This is what you said @here_2_help: "Thought I would add that there is a case that may be on point regarding what is "normal" in this context."

So, in a nutshell,what is it that is on point and normal, and what was the actual holding of the case?