T&M Subcontracts - requirements and ICE Reporting and adjustments

[Mary D]

Scenario is as follows: Prime Contractor has FFP Contract with the Government. Wants to award T&M Contract to Subcontractor.

Questions regarding a T&M Subcontract:

Does the subcontractor have to submit ICE Report? Research shows the answer is yes since the source of prime's funding is the Government.

Since the subcontractor has to submit ICE report, is there a similar rate adjustment for the labor rates and overhead after the ICE audit? For example, I know that under CPFF, if an ICE Report audit shows that overhead was either greater or lesser than the amount billed, then the prime contractor is either owed the difference by the government or owes the government the difference.

When it's a subcontractor under a T&M, after an ICE report audit, is there a similar true-up? What is reviewed and adjusted? Since any true-up is between the prime and sub, doesn't that have to be negotiated? It's not the same as between a prime and the government. Is the Prime obligated to get a refund from the subcontractor if rates experienced are lower than rates bid due to changed circumstances? And if the Prime gets a refund, does it have to pass it on to the Government if it's contract with the Government is FFP? Seems like this would be a business negotiation between prime and sub.

Do the DFARS and FARS related to T&M apply to a subcontractor if the Prime doesn't include them in the subcontract/PO?

[here_2_help]

15 minutes ago, Mary D said:

Scenario is as follows: Prime Contractor has FFP Contract with the Government. Wants to award T&M Contract to Subcontractor.

Questions regarding a T&M Subcontract:

Does the subcontractor have to submit ICE Report? Research shows the answer is yes since the source of prime's funding is the Government.

Since the subcontractor has to submit ICE report, is there a similar rate adjustment for the labor rates and overhead after the ICE audit? For example, I know that under CPFF, if an ICE Report audit shows that overhead was either greater or lesser than the amount billed, then the prime contractor is either owed the difference by the government or owes the government the difference.

When it's a subcontractor under a T&M, after an ICE report audit, is there a similar true-up? What is reviewed and adjusted? Since any true-up is between the prime and sub, doesn't that have to be negotiated? It's not the same as between a prime and the government. Is the Prime obligated to get a refund from the subcontractor if rates experienced are lower than rates bid due to changed circumstances? And if the Prime gets a refund, does it have to pass it on to the Government if it's contract with the Government is FFP? Seems like this would be a business negotiation between prime and sub.

Do the DFARS and FARS related to T&M apply to a subcontractor if the Prime doesn't include them in the subcontract/PO?

1. Maybe not. If the prime contract does not include 52.216-7 then there is nothing to flow down. If the subcontractor doesn't have any other government contracts that require submission of final billing rates, then I would argue it doesn't have to do so.

2. The requirements of 52.216-7 apply to the "M" part of the T&M contract; it does not apply to the "T" part, which remains fixed-price per labor hour.

3. If you have a FFP prime contract then subcontractor adjustments, if any, are absorbed by the prime. Credits are not passed on to the government, absent an allegation of defective pricing or fraud.

4. The prime is obligated to flow down all applicable clauses in its prime contract. Nothing more.

Hope this helps.

[Retreadfed]

5 hours ago, here_2_help said:

The prime is obligated to flow down all applicable clauses in its prime contract. Nothing more.

I generally agree with what H2H has said.  However, I think this statement needs a little more clarity.  The term "flow down" is frequently used to describe clauses that a prime includes in its subcontracts.  However, there is no FAR definition of what is a flow down clause.  If we are talking about what clauses from a prime contract are to be inserted into subcontracts, H2H's statement is literally true.  However, clauses from a prime contract are not all the clauses that should be in a subcontract.  In Mary's scenario, the prime contract is an FFP contract.  It should contain the appropriate FP payments clause.  However, the prime is considering awarding a T&M subcontract.  The FAR T&M Payments clause is 52.232-7 which should not be in the prime contract.  Thus, the prime can used 52.232-7 in the subcontract or use its own version of a T&M payments clause.  If the prime uses 52.232-7, that clause incorporates 52.216-7, but makes it applicable to material only.  Thus, it is possible that the sub will be required to establish final indirect cost rates, but if the T&M subcontract is the only contract the sub has that includes 52.216-7, that will be a matter between the sub and prime.

[AlsoExDCAA]

Is 52.216-7 in the subcontract? If so, does the subcontract have language to designate who the 'contracting officer' and 'auditor' are with regards to the subcontract per FAR 52.216-7(d)(2)(i)?

As a practical matter, the prime has responsibility to settle the subcontract with the sub. The prime flowing down 52.216-7 as-is, and the sub providing an ICS to the USG, will likely not assist in this effort. The DCAA will determine there is no auditable dollar volume on the FFP prime contract along with all subcontracts under it. If the sub has other flexibly-priced contracts that are auditable, their ICS may be audited by DCAA, but the prime would likely not get any visibility into the allowable direct costs and indirect rates recommended by that report through an assist audit request- because the DCAA should only include auditable contracts and subcontracts in their audit report. Settling the costs will require a negotiation between prime and sub within the context of other general clauses agreed to.

[joel hoffman]

Mixing a FFP prime contract with other than FFP subcontracts reminded me of a situation back in 1997 where the prime contractor on a Cost Reimbursement Major Systems Contract with a FFP construction Phase awarded a  a major subcontract for the electrical installation on cost reimbursement basis.

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In early 1997, the Army awarded Raytheon Engineers and Constructors (REC) - technically Raytheon Demilitarization Company (RDC) - a Major Defense Systems Contract to Construct, Systemize, Pilot Test, Operate and Close a Chemical Weapons Demilitarization Plant in eastern Oregon.

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REC was one of the top ten US Engineering and Construction companies.

The umbrella Systems Contract management and all other phases were priced as Cost Reimbursement Fixed Fee (CPFF) for well over a billion dollars. The initial phase was initially about $230 million FFP for construction and installation of about $150 million of Government Furnished Process Equipment (GFE).

RDC was unable to award the electrical construction subcontract within its portion of the budget. They selected an electrical subcontractor working on the Hanford,  Washington DOE Project in the Tri-City area on a Cost Reimbursement (CPFF)  price basis.

RDC’s budget problems may have been complicated by a supposed Corporate level, pre-award direction*  to cut the proposal for the FFP construction phase by $20 million to help win the Systems Contract competition.

RDC intended to directly manage and control the CPFF electrical sub’s schedule and workforce.

However, they were dealing with a Hanford, Washington, Cost Reimbursement, Union electrician workforce. Virtually all of the decades long Hanford Project work, including Electrical,  is priced on a Cost Reimbursement basis.

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The result on the Oregon project was a tremendous cost overrun of the electrical  portion of the FFP construction phase due to major electrical trade labor force inefficiency.

This electrical trade inefficiency also impacted the other FFP trades on the project to various degrees, as the electrical work was concurrent and interrelated with most of the other trade work. There were hundreds of electricians in the multi-thousand construction labor force.

It contributed to delayed construction completion of the Chem-Demil Plant for almost a year.

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This was in direct comparison to construction of a very similar Chem-Demil Plant at Anniston Alabama. The scope and design of the two projects were essentially the same.

Both plants also had essentially the same GFE process equipment, which was available and in local storage ahead of time.

Both plants had virtually the same design changes after award.

The construction phases for both plants began at about the same time.

The construction phase contractor on that project was the non-Union arm of Bechtel.

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*Someone who was on the RDC pre-award team personally revealed this to our project engineer, who told me about it.

 

[Neil Roberts]

On 1/28/2025 at 9:21 AM, Mary D said:

Scenario is as follows: Prime Contractor has FFP Contract with the Government. Wants to award T&M Contract to Subcontractor.

@Mary D FYI, the following are pro forma terms incorporated by a well known prime contractor in every T&M subcontract under a government prime.

FAR 52.216-7, Allowable Cost and Payment (AUG 2018). This clause applies only to the portion of contract that provides for reimbursement of materials (as defined in FAR 52.232-7) at actual cost. The term “Contractor” means “Seller,” the term “Contracting Officer” means “Buyer’s Authorized Procurement Representative” except in paragraph (g) where “Contracting Officer” means “Contracting Officer or Buyer,” and the term “Government” and “United States” means “Buyer” except in paragraph (a)(3) and (b)(1)(ii)(F), where Government means “Government and Buyer.” Paragraph (d) is deleted. Subparagraphs (a)(2), (b)(4), and paragraph (f) are deleted. In subparagraph (h)(2)(ii)(B), the term “6 years” is deleted and replaced with the term “5 years, 9 months.” The blank in paragraph (a)(3) is filled- in with the word “30th” unless otherwise specified in this Contract.
FAR 52.232-7, Payments Under Time-and-Materials and Labor-Hour Contracts (NOV 2021). The term “Contractor” means “Seller,” the term “Contracting Officer” means “Buyer’s Authorized Procurement Representative,” and the term “Government” means “Buyer.” Paragraph (c) is deleted. In paragraph (g)(2), the term “6 years” is deleted and replaced with the term “5 years, 9 months.” The reference to the Allowable Cost and Payment clause in paragraph (b)(4), means FAR 52.216-7, Allowable Cost and Payment (AUG 2018), and reference to the “Disputes Clause” means the “Disputes” Article of this Contract.

 

Edited February 1 by Neil Roberts
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