Subcontract Management Responsibilities

Subcontract Management Overview Subcontract Management Tasks by Phase Discussion Topics Introduction Subcontract Management Overview Subcontract Management Tasks by Phase Take-Aways Noah

FAR 42.202(e)(2) identifies prime contractor responsibilities Introduction Complexity of Federal procurements, organizational limitations, socio- economic programs and teaming agreements drive subcontracting requirements The government relies on the prime to procure goods and services and administer the subcontractor as the government does with the prime in a normal competitive business environment Government must rely on the prime contractor to manage subcontract effort due to the absence of a direct contractual relationship (privity) with the subcontractor Subcontract management is a combination of administrative and oversight tasks crossing over regulatory, technical and financial requirements FAR 42.202(e)(2) identifies prime contractor responsibilities Noah

Subcontract Management Overview Subcontract management can be defined as the management of the administration and oversight responsibilities of subcontracts Defining and understanding roles and responsibilities of the prime and subcontractor is critical to subcontract management success and eliminates confusion Noah

Subcontract Close-Out Project Cost Analysis & Reporting Subcontract Management Phases Pre-Award Planning Resource Analysis Statement of Work Subcontract Risk Considerations Terms and Conditions RFP/RFQ Package Award Proposal Analysis Representations & Certifications Evaluation Key Subcontract Management Related T&Cs Award Meeting Post-Award Project Set-Up Administrative Compliance Performance Oversight and Acceptance Invoicing Changes Subcontract Close-Out Subcontract Requirements Performance Evaluation Final Invoice and Payment Project Cost Analysis & Reporting Subcontract Level Program Level Resource Mix and Margin Modeling Estimates to Complete Billing Status Understanding the subcontract lifecycle aids in managing the subcontract process Specific tasks, requirements and responsibilities can be identified and assigned throughout the phases Many of the requirements expected of the prime in managing the subcontractor are similar, if not the same, as those inherent to the government in managing the prime Understanding what is included in the contract is critical to administering and managing the subcontract Anne

Subcontract Life Cycle Phase – Pre-Award Pre-Award Planning Resource Analysis Statement of Work Subcontract Risk Considerations Terms and Conditions RFP/RFQ Package Pre-Award activities center around the planning the procurement Examples of tasks during the Pre-Award phase may include: Identifying capability vs. capacity and the costs and the costs and benefits Defining technical, performance and/or deliverable requirements Identifying pricing and funding considerations Identifying subcontract types based upon the type of work Identifying terms and conditions to be flowed down to the subcontractor Developing the request for proposal and required submission content, format and timing Developing evaluation criteria Anne

Subcontract Life Cycle Phase – Award Proposal Analysis Representations & Certifications Evaluation Key Subcontract Management Related T&Cs Award Meeting Award activities center around the successful award of the subcontract Examples of tasks within the Award phase may include: Performing the technical and price reasonableness evaluation as part of the proposal analysis Identifying past performance/reputation considerations Evaluating representations & certifications Validating debarment status Consideration of Socio-Economic Considerations Negotiating key subcontract related terms and conditions Establishing awarded subcontract value and funding levels Planning and holding the award meeting to review contract and expectations Anne

Importance of Contract Clauses The prime contract’s FAR clauses (Section I) significantly influence subcontract management Understanding the entire contract is critical Frequent differences between the IDIQ award and task orders Certain clauses are explicitly required to be flowed down Failure to comply could result in system deficiencies and non- compliance with contract terms Optional clauses exist that the prime may wish to flow down to protect its own interest Anne

Consent to Subcontract FAR 52.244-2, Subcontracts, identifies the requirements for subcontracting and is included in solicitations and contracts when contemplating the following contract types - Cost-reimbursement Letter contracts > simplified acquisition threshold (SAT) Fixed-price contracts > SAT when unpriced actions anticipated Time-and-materials > SAT Labor-hour > SAT Consent is required when the Contractor does not have approved purchasing system Consent may also be required as part of the contract when the Contractor has an approved purchasing system for specific subcontracts Failure to obtain consent could lead to cost disallowance Noah

Requirements to Support Consent Thirteen minimum considerations to support consent are prescribed in FAR 44.202(a) and reflect those activities performed by the government Is the decision to subcontract consistent with the contractor’s approved make-or- buy program, if any? Is the subcontract for special test equipment, equipment or real property that are available from Government sources? Is the selection of the particular supplies, equipment, or services technically justified? Has the contractor complied with the prime contract requirements regarding small business subcontracting and nonprofit agencies ? Was adequate price competition obtained or its absence properly justified? Competitive sourcing utilized to the maximum extent possible Justification and adequate cost/price analysis for sole source awards Potential consequences could include: Weakened negotiation position Cost disallowance as “unreasonable” (FAR 31.201-3) Noah

Requirements to Support Consent Did the contractor adequately assess and dispose of subcontractors’ alternate proposals, if offered? Does the contractor have a sound basis for selecting and determining the responsibility of the particular subcontractor? Evaluation of price, quality, technical capabilities, and financial capabilities Selection excludes debarred or suspended subcontractors Maintain complete and accurate documentation of purchase history Has the contractor performed adequate cost or price analysis or price comparisons, and obtained certified cost or pricing data and data other than certified cost or pricing data? Maintain accurate documentation to support vendor selection and prices paid Access to cost or pricing data is prime’s primary challenge and must request the government to audit, otherwise prime must develop a strategy to evaluate Potential consequences could include Withholding of consent to subcontract (may impact performance period) Cost disallowance as “unreasonable” and weakened negotiation position Prime could be responsible for the effect of the defective subcontract price impact on the prime contract price Noah

Requirements to Support Consent Is the proposed subcontract type appropriate for the risks involved and consistent with current policy? Does NOT have to follow the Prime contract type Should align with the nature of the work the subcontractor will provide Determining the adequacy of subcontractor’s accounting system is a primary challenge Request the government to audit, otherwise the prime must develop a strategy to evaluate Potential consequences could include Cost disallowance as not allocable Cost disallowance in accordance with cost principle of FAR 31 Has adequate consideration been obtained for any proposed subcontract that will involve the use of Government-provided equipment and real property? Has the contractor adequately and reasonably translated prime contract technical requirements into subcontract requirements? Noah

Requirements to Support Consent Does the prime contractor comply with applicable cost accounting standards for awarding the subcontract? Prime Contractor has responsibility to administer CAS on covered subcontracts Determine Disclosure Statement adequacy if necessary Resolution of Cost Accounting Practice Changes and Cost Impacts when cost accounting practice changes or noncompliance has occurred Common for subcontractors to deny prime access to accounting records Potential consequences could include: Cost impacts becoming the prime contractor’s responsibility Is the proposed subcontractor in the System for Award Management Exclusions Check SAM Exclusions upon identifying potential subcontractors and prior to award Noah

Subcontract Life Cycle Phase – Post-Award Project Set-Up Administrative Compliance Performance Oversight and Acceptance Invoicing Changes Post-Award activities ensure obligations and deliverables of the subcontractor are being properly managed Selected tasks of note within the Post-Award phase include: Maintaining subcontract files from both procurement and program management perspectives Ensuring compliance with the subcontracts administrative requirements Reviewing and approving/rejecting subcontract deliverables Obtaining, reviewing, and acting upon subcontractor status reports Reviewing and approving payment on subcontractor invoices Tracking funding levels and obtaining funding notifications Administering subcontract administrative and technical changes Anne

Subcontract Life Cycle Phase – Project Cost Analysis & Reporting Cost analysis and reporting activities focus on the impact of subcontractor costs to overall program funding, reporting and profitability Selected tasks of note within project cost analysis and reporting include: Obtaining and reporting subcontractor costs at the proper levels Incorporating subcontractor costs into program level on a timely basis Identifying how subcontractor utilization is impacting performance, funding and contract levels; is resource mix and funding accurate Incorporating subcontractor costs into timely EACs and ETCs Ensuring subcontractors billed and unbilled costs are current and align to status reports Project Cost Analysis & Reporting Subcontract Level Program Level Resource Mix and Margin Modeling Estimates to Complete Billing Status Anne

T&M contracts are subject to FAR 52.232-7 Invoicing Guidance Payment terms should be in accordance with terms and conditions of the contract and no more favorable than offered by the government Payments on cost-reimbursable and T&M (material component only) contracts are subject to FAR 52.216-7 (a)(1) The Government will make payments…in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2…The Contractor may submit …in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract. T&M contracts are subject to FAR 52.232-7 Direct labor hours performed at prescribed hourly rate Direct materials, subcontracts, Other Direct Costs (ODCs), and applicable indirect costs (all subject to FAR 52.216-7) Prime is responsible for ensuring costs claimed by the subcontractor are reasonable, allocable, in accordance with CAS or GAAP, in accordance with terms of the contract and Limitations in FAR 31.2 Demonstrates the importance of the subcontractors accounting system on contract type Anne

Cost-Reimbursable Considerations Invoicing Guidance Cost-Reimbursable Considerations Requires an adequate subcontractor accounting system Payments to subcontractors are based on actual incurred costs and provisional indirect cost rates Provisional billing rates may be different than forward pricing rates Prospectively or retroactively revised to prevent substantial over or under payments T&M Considerations Subcontractor may be restricted invoicing indirect costs and potentially ODCs and materials depending on accounting system adequacy Obtain time-cards and ODC support to allow for self-audit and closeout Application of indirect rates to materials and ODCs requires incurred cost submission Fee limits and withholding per T&Cs Fixed fee limits on cost-plus-fixed-fee contracts as prescribed by FAR 52.216-8 T&M limits of 5% as prescribed in FAR 52.232-7 Anne

Incurred Cost Submission Requirements Subcontractor required to submit incurred cost proposal if FAR 52.216-7 is included in the subcontract Prime should review adequacy of subcontractor incurred cost proposals and supporting data Prime contractor should make arrangements to have subcontractor incurred cost proposal reviewed for adequacy and completeness if subcontractor does not agree to submit directly to prime Prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request (FAR 52.216-7(d)) Prime should make arrangements with government or third party to determine final indirect cost rates of subcontractor FAR 52.216-7 requires that within 60 days after settlement of final indirect cost rates, the contractor shall update the billings on all contracts to reflect the final settled rates and update the schedule of cumulative direct and indirect costs claimed and billed Ensure the subcontractor submits timely invoice and indirect rate adjustments to reflect the claimed or settled year-end indirect cost rates Noah

Funding and Cost Monitoring Limitation of Funds (LOF) / Limitation of Cost (LOC) clauses Apply to cost-plus type contracts LOF (FAR 52.232-22) applies to contracts that are incrementally funded LOC (FAR 52.232-20) applies to contracts that are fully funded Both clauses require that the contractor provide separate, written notice regarding sufficiency of funds provided Generally 60 days before reaching 75% of funding or estimated costs May be modified to suit individual contract needs Should be based on a current EAC using “best guess” indirect rates Compliance permits a contractor to stop work when funding has been expended. Noncompliance may require a contractor to continue performance without additional funding. Noah

Subcontract Life Cycle – Close-Out Subcontract Close-Out Subcontract Requirements Performance Evaluation Final Invoice and Payment Subcontract close-out activities ensure final subcontract performance and administrative requirements are satisfied and captured prior to contract close-out Examples of tasks within the Close-Out phase may include: Verifying completion and acceptance of SOW and all deliverables Managing government furnished property Obtaining waivers and releases Finalizing indirect rates Obtaining and paying final invoices Completing performance evaluations Anne

Contract Close Out FAR 4.804-5(a)(9) provides that the Government cannot closeout a prime contract until all of the subcontracts are settled The subcontract can be close-out by subcontract management office when it has received evidence of physical completion Government Property is received All interim or disallowed costs are settled Prior year indirect cost rates are settled Contract audit is complete Subcontractor’s closing statement is completed Subcontractor’s final invoice has been submitted Cost Type Contracts Verify agreed to direct costs and indirect rates Anne

Contract Close Out Prime contractor is responsible for closing subcontractors generally using procedures similar to the Government FAR 52.216-7 requires that “within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates.” The completion invoice or voucher shall include settled subcontract amounts and rates The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. Anne

Take-Aways The subcontract life-cycle can help guide subcontract management by defining phases, tasks, roles, and responsibilities Subcontract management is a combination of administrative and oversight tasks and it is critical to understand what is required and who is responsible for managing regulatory, technical and financial tasks Understand mandatory and optional flow down clauses, and ensure the subcontractor understands their responsibilities Subcontract management is not a one-size-fits-all; consider program size, subcontract type, and complexity of the arrangement in defining responsibilities The government lacks privity of contract with the subcontractor, as a result, mimic what the government requires of you to the subcontractor Noah

Questions and Comments: Noah Leiden, CPA Partner (703) 923-8321 noah Questions and Comments: Noah Leiden, CPA Partner (703) 923-8321 noah.leiden@bakertilly.com Anne Coviello, CPA Manager (703) 923-8492 anne.coviello@bakertilly.com Connect with us: bakertilly.com/governmentcontractors