Jump to content

Subcontract Process


going_alone

Recommended Posts

Hi all,

Newbie here - I have spent the weekend reading FAR guidelines, DCAA requirements, all about NAICS, DUNS, SAM etc... I am an engineer, not a contract specialist.

I work for a small defense contractor that routinely subcontracts out T&M LOE contracts to a large defense contractor (think Boeing, Raytheon etc.).  I am very heavily weighing starting my own 1 person LLC and setting up my own subcontract with the larger company and charging them a similar rate for my services that my current smaller company performs. 

I am trying to understand what my FAR/DCAA requirements are.  These contracts would be 6 months to a year and be in the mid 6 figure range, so below the FAR 15.403-4 threshold.  It is simple enough to define direct labor project codes for my various contracts in a spreadsheet and make sure I am recording time daily to be used when I invoice... I am not going to be bidding Cost Plus Fee contracts directly to the government so I am hoping officially computing labor rates is not needed.

All of the things I am reading, like establishing provisional labor rates with DCAA (calculating G&A %, OH %, Fringe %, fee %) - all look to be when entering a contract as a prime.  I have no intention of doing that and if I needed to calculate rates like this it would be interesting because a single member LLC is taxed as a sole proprietor, the owner does not have a salary, they simply gain income after deducting expenses from revenue.

Rates are competition sensitive so I know G&A %, base labor rate etc. are all not disclosed to the larger company - when my smaller company presents a proposal it is simply direct labor cost with labor rate/category breakdown (# hours x final labor cat rate = total cost over a PoP).

Questions are:

Am I at risk of being audited by the DCAA?  I have no employees and no concept of indirect charges as there is no salary or hourly rate computed?  Even then, I am thinking I only need the categories I anticipate charging: Travel ODC and Labor Direct Cost per contract so I should be fine from an audit standpoint from my simplified situation (am I being naive here)

Do I need to have G&A, OH, Fringe, etc. computed at all?  I am going to set my rate to the same as my previous company, perhaps slightly lower, because of the enormous risk of living contract to contract and being out of work for months at a time.  Paid vacation and sick days, holidays, salary - these things don't exist in a single member LLC as a sole prop for taxation.

I am going into this thinking there is very little for me to do from a federal regulation standpoint (ignoring contract/agreements/NDAs I need to work out with the larger defense co).  I would register my LLC in DUNS and get an NAICS # because that's simply enough just to have, but I don't plan on bidding contracts to the fed.

 

Link to comment
Share on other sites

On 2/6/2022 at 10:13 AM, going_alone said:

Questions are:

Am I at risk of being audited by the DCAA?  I have no employees and no concept of indirect charges as there is no salary or hourly rate computed?  Even then, I am thinking I only need the categories I anticipate charging: Travel ODC and Labor Direct Cost per contract so I should be fine from an audit standpoint from my simplified situation (am I being naive here)

Do I need to have G&A, OH, Fringe, etc. computed at all?  I am going to set my rate to the same as my previous company, perhaps slightly lower, because of the enormous risk of living contract to contract and being out of work for months at a time.  Paid vacation and sick days, holidays, salary - these things don't exist in a single member LLC as a sole prop for taxation.

I am going into this thinking there is very little for me to do from a federal regulation standpoint (ignoring contract/agreements/NDAs I need to work out with the larger defense co).  I would register my LLC in DUNS and get an NAICS # because that's simply enough just to have, but I don't plan on bidding contracts to the fed.

 

Unless you are providing a commercial service, I believe the answers to your questions are:

 

1. Yes. As with most small start-ups I work with, you are not seeing the difference between you as owner and you as employee to your business. Two different concepts. The business has its own expenses, of which your salary is but one. The business makes a profit or loss, which is taxable income to you (depending on how you structure your business).

2. Yes, your business does, if it wants to do business in the government marketspace. Yes, paid time off does exist--as a business expense of the business. Forget taxation (or don't forget it, but don't focus on it either). You need to set up the business, even if it is a sole proprietorship. The business will need its own financials statements.

3. If you are going to subcontract with a prime, you will still need to have the accoutrements of a business. Even if you are just a consultant.

Link to comment
Share on other sites

On 2/7/2022 at 10:49 PM, Don Mansfield said:

Why can't your contract be FFP?

No reason, it could be if they wanted to structure it like that, but really it's the exception for how we do things as these are mostly LOE efforts and hard to define deliverables for FFP.

Are you cueing off how I only mentioned T&M or are you saying going FFP solves a lot of problems?

Link to comment
Share on other sites

On 2/8/2022 at 12:48 PM, here_2_help said:

Unless you are providing a commercial service, I believe the answers to your questions are:

 

1. Yes. As with most small start-ups I work with, you are not seeing the difference between you as owner and you as employee to your business. Two different concepts. The business has its own expenses, of which your salary is but one. The business makes a profit or loss, which is taxable income to you (depending on how you structure your business).

2. Yes, your business does, if it wants to do business in the government marketspace. Yes, paid time off does exist--as a business expense of the business. Forget taxation (or don't forget it, but don't focus on it either). You need to set up the business, even if it is a sole proprietorship. The business will need its own financials statements.

3. If you are going to subcontract with a prime, you will still need to have the accoutrements of a business. Even if you are just a consultant.

Thanks I appreciate the response

For 1. and 2. - an LLC is a legal entity, but can be either taxed as a disregarded entity where all profits flow back to the owner or an S corp where an S corp defines a reasonable employee salary separately from business profits as employer - isn't that how it works?  How do you calculate yourself a salary, paid time off benefits etc. for Fringe when you aren't actually paying yourself a salary from a tax standpoint?

For 3. For FAR do you need approved provisional rates established from the DCAA as a sub with contract value < $1 mil?  Thinking of FAR 15.403-4.  I am thinking only of accoutrements required for a federal contracting business specifically, but a small sub, not a prime, doing hourly consulting, so hoping this is minimal

 

Link to comment
Share on other sites

15 hours ago, baj said:

Thanks I appreciate the response

For 1. and 2. - an LLC is a legal entity, but can be either taxed as a disregarded entity where all profits flow back to the owner or an S corp where an S corp defines a reasonable employee salary separately from business profits as employer - isn't that how it works?  How do you calculate yourself a salary, paid time off benefits etc. for Fringe when you aren't actually paying yourself a salary from a tax standpoint?

For 3. For FAR do you need approved provisional rates established from the DCAA as a sub with contract value < $1 mil?  Thinking of FAR 15.403-4.  I am thinking only of accoutrements required for a federal contracting business specifically, but a small sub, not a prime, doing hourly consulting, so hoping this is minimal

 

I'm neither an attorney nor a tax expert. That said, I have helped a half-dozen companies enter the Federal marketplace. In each case, I have counseled the owner(s) to treat themselves as employees of the company. Several of my clients have listened to their tax advisors and, as a result, decided not to pay themselves a salary. (That's when we part ways.) That's fine, especially if you are getting a FFP contract award and/or your customer will be determining that your price is fair & reasonable based on something other than cost analysis. But when you have a customer who is performing cost analysis, you will then have no costs to show. Everything will look like profit. If you're okay with that result, then feel free to ignore my anonymous advice.

Re: your second question, no. You will be too small for DCAA to care about. But your billing rates have to be based on something. Since you may not have costs, a cost plus markup approach will not work. In that case, your customer will likely look to the market to set the reasonableness standard for your billing rate. You should think about how to help your customer make the determination that's in your favor.

Link to comment
Share on other sites

17 hours ago, baj said:

No reason, it could be if they wanted to structure it like that, but really it's the exception for how we do things as these are mostly LOE efforts and hard to define deliverables for FFP.

Are you cueing off how I only mentioned T&M or are you saying going FFP solves a lot of problems?

It seemed like you were headed toward cost-reimbursement contract, which I think would be more trouble than FFP or T&M/LH.

I've been in the same position as you and have set up an LLC, but never pulled the trigger to become a subcontractor. If I ever do, I would prefer a FFP LOE or LH subcontract with bimonthly payments. I would charge whatever rate would result in no increased cost to the client.

Link to comment
Share on other sites

3 hours ago, Don Mansfield said:

It seemed like you were headed toward cost-reimbursement contract, which I think would be more trouble than FFP or T&M/LH.

I've been in the same position as you and have set up an LLC, but never pulled the trigger to become a subcontractor. If I ever do, I would prefer a FFP LOE or LH subcontract with bimonthly payments. I would charge whatever rate would result in no increased cost to the client.

By no increased cost to client you mean from what they are billed now by my company vs what I would bill them correct?  Yes totally agree, was going to undercut by 5% as my overhead would be lower.

3 hours ago, here_2_help said:

I'm neither an attorney nor a tax expert. That said, I have helped a half-dozen companies enter the Federal marketplace. In each case, I have counseled the owner(s) to treat themselves as employees of the company. Several of my clients have listened to their tax advisors and, as a result, decided not to pay themselves a salary. (That's when we part ways.) That's fine, especially if you are getting a FFP contract award and/or your customer will be determining that your price is fair & reasonable based on something other than cost analysis. But when you have a customer who is performing cost analysis, you will then have no costs to show. Everything will look like profit. If you're okay with that result, then feel free to ignore my anonymous advice.

Re: your second question, no. You will be too small for DCAA to care about. But your billing rates have to be based on something. Since you may not have costs, a cost plus markup approach will not work. In that case, your customer will likely look to the market to set the reasonableness standard for your billing rate. You should think about how to help your customer make the determination that's in your favor.

Ok thank you for your perspective, it is very valuable as an initial starting point to orient myself.  I am not interpreting it as financial advice or comprehensive, but good to know.  I basically don't want to scare myself into not taking the leap due to paperwork and your response aligns more with what I was thinking for what I need: basic business structure as LLC, tax structure, and an invoicing system.  I know my market rate, I know what my company and other companies charge for my experience level/role and I also know the prime only is entitled to the final billing rate as the derivation of this rate (Base Rate, G&A, Fringe, Profit Fee etc.) is highly protected due to competition and subs do not give this out.

 

 

Link to comment
Share on other sites

1 hour ago, baj said:

By no increased cost to client you mean from what they are billed now by my company vs what I would bill them correct?  Yes totally agree, was going to undercut by 5% as my overhead would be lower.

I mean my subcontractor rate plus prime contractor markup would be no more than the loaded rate the prime currently charges the client for me.

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...