February 2006 The Importance of Subcontract Management to Program Success

2 We’re drowning in information and starving for knowledge. -Rutherford D. Rodgers

3 Topics The Relationship Flow downs Source Selection Subcontracting Process

4 Contractual Relationships Subcontract/PO establishes relationship between prime and subcontractor Protects the rights of primes and the Government

5 Contractual Relationships

6 Subcontract Management tools used in Program Management: –Advance Notification –Consent to Subcontract –Debarment Process –Small Business Subcontracting Programs

7 Risk Management Tools Sarbanes-Oxley Act Make or Buy Program (FAR Part 15) Competition in Subcontracting (FAR )

8 Risk Management Tools Prime Contract –Terms and Conditions –Statement of Work Subcontract Process –RFP –SOW –Selection of Subcontract Type –Flow downs Lowdown Clauses –Truth in Negotiations (FAR Part 15) –Cost Accounting Standards (FAR Appendix A) –Right to Audit Clause (FAR )

9 Risk Management Tools Proposal Analyses (FAR Part 15) Subcontracting for Commercial Items (FAR ) Contractor Purchasing System Review (CPSR) (FAR Part 44)

10 CPSR – The Customer’s Review Measures How Efficiently and Effectively a Contractor Spends Government funds and; Evaluates Compliance With Government Subcontracting Policies, Regulations, and Laws.

11 CPSR – The Customer’s Review Subcontractor’s Government business volume exceeds $25 million (excluding competitive FFP, competitive FFP/EPA contracts/subcontracts, and commercial item acquisitions) Whenever an Administrative Contracting Officer or Procuring Contracting Officer specifies

12 CPSR Risk Assessment: Basis for Selection CPSR Approval History Identified by PCO or ACO Increased Sales to Government Growth Pre-Award Surveys Major Programs/High Visibility Other Audits Self Assessment Activities

13 CPSR: Identification of Risk Factors Signs of a Weak Purchasing System Identified During Self Assessments: –Inadequate Procurement Lead Time –Violation of Public Laws –No or Poorly Written or Implemented Policies –No or Weak File Documentation –Lack of Upper Management Commitment to Compliance with Procurement Regulations

14 Opportunities for Success or Failure 98% of firms will not pass their initial CPSR!

15 Impact of an Unsuccessful CPSR on Contractors: Losing The Competitive Marketing Advantage! Source Selection Implications Past Performance Implications Losing A Competitive Proposal Loss of Revenue

16 Impact of an Unsuccessful CPSR on Contractors: Long-Term External Compliance Oversight Impact Defense Contract Audit Agency or Inspector General’s (and Other Audit Agencies) Alerted Other Audits Will Follow Possible Negative Press

17 Impact of an Unsuccessful CPSR on Contractors: Procedural Burdens with Project Management Impact Increase Administrative Contracting Officer Surveillance Delay in Placing Orders Increase Administrative Expenses Delayed Billings & Collections

18 Impact of an Unsuccessful CPSR on Contractors: Costly Internal Compliance Impact Implement Corrective Actions Change Processes Change Culture Implement Training Program Prepare for Follow-Up Audit

19 Key to Embracing Compliance Communication –Purchasing/Subcontract Admin –Contracts –Program Management –Engineering –Clients

20 Subcontracting Process Timeline ACO/PCOConsentNegotiationsPrice Analysis &Tech EvaluationProposal /QuoteRFP/RFQ/RFISourceJustificationPRDebarmentVerificationCertifications PO/SubK

21 The Source Selection “T” Sourcing FactorsPricing Factors Competitive SourcingCompetitive Pricing Non-Competitive Sourcing Competitive Pricing, Price Analysis, or Cost Analysis

22 Single/Sole Source Justification Required in accordance with: –FAR “The Contractor shall select subcontractors (including suppliers) on a competitive basis to the maximum practical extent consistent with the objectives and requirements of the contract.”

23 Team Sourcing Documentation Document the Team Source Selection Decision Focus on Team Competitiveness Document Sole Source Team Members

24 Price Analysis- Comparison Process Identify Factors That Effect Comparability Determine Effect of Identified Factors Adjust Prices for Comparison Compare Offered Prices With Adjusted Prices Select Price for Comparison Prices for Comparison Other Proposed Prices Commercial Prices Previously-Proposed Prices, Subcontract Prices Parametric Estimates Independent Estimates Quantitative Techniques to Adjust Prices Index numbers Trend Analysis Price-Volume Analysis Graphic Analysis Learning Curve

25 Negotiations Per FAR Unfair Price? Negotiate!! –Price negotiation is intended to permit the contracting officer (buyer) and the offeror to agree on a fair and reasonable price.

26 Ineffective Negotiations

27 Contract Management’s role The Role of Contract Management is Critical: –Contracts must work with CO’s to pro-actively remove restrictive, unnecessary, or out-of-date clauses from RFP’s and contracts

28 Path Forward –Educate Process Owners in terms of how certain clauses impact the program: Cost Accounting Standards Cost and Pricing Data - only when required Consent/Advanced Notification - only when required Organizational Conflict of Interests –If a clause is not required, ask that it be eliminated!