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To Contents	Post audit, DCAA subcontractor unallowables
By Anonymous on Monday, June 16, 2003 - 03:21 pm: During a recent incurred cost audit, a subcontractor (small business) of mine was found to be calculating their indirects incorrectly and was told that they owe the govt back over $1M. We're the prime and the govt. wants the money from US first since this one contract is so large to them. Needless to say, we're not about to pay for our sub's wrongdoing. How can we avoid this? What's our recourse?? By joel hoffman on Monday, June 16, 2003 - 03:47 pm: Do you have flowdown provisions in your subcontract for defective pricing? Please advise. happy sails! joel hoffman By AnonYmus on Monday, June 16, 2003 - 04:10 pm: I don't really think this question is about defective pricing. I think it's about whether the subK received reimbursement from the primeK that the Gov't. now asserts to be in error. There's not a lot of info in the question, but let's discuss it as if both the primeK and subK had cost-reimbursement contracts. (Obviously, if somebody has a fixed-price K, then there's no adjustment due the Gov't.) Assuming the Gov't. is correct (a big assumption) then the SubK needs to process a credit voucher to the primeK, who will then adjust its costs accordingly and process a credit voucher to the Gov't. A more pertinent question would be whether the primeK flowed down 52.216-7 (Allowable cost and payment). I believe it's a mandatory flow-down and the primeK may be liable for failing to flow-down a mandatory clause. In any case, the Gov't. WOULD go after the primeK first (privity of contract). The primeK then goes after the subK for restitution. If I were Anonymous, I would ascertain whether the Government's position was well-founded with respect to the subK, I would ascertain whether the proper clauses had been flowed-down, and I would ascertain whether monthly invoices from the SubK had been reviewed for allowability. The answers to the above questions would help me decide whether to obtain a contracting officers final decision and, pursuant to CDA, to sponsor the subK for a claim against the Government. Alternatively, I would contact counsel and go after the subK for civil damages equal to the amount(s) of money I would have to pay the Gov't. Needless to say, the prime may be liable here and, in any case, the primeK's desire "not ... to pay for our sub's wrongdoing" won't stop DFAS or whomever from collected a debt through offsets if they want to. Good luck Anonymous. I hope your procurement files are in shape, particularly with respect to determining that you have a responsible SubK in sound financial condition. By Anonymous on Monday, June 16, 2003 - 04:31 pm: No. This subcontract was done originally by a company that we purchased who was an 8(a) at the time. They had no "flow downs" attached or "Cert. of Current Cost and Pricing Data" since they were inexperienced and basically "winging it" in contracts. By Anonymous on Monday, June 16, 2003 - 04:47 pm: As the primeK we're actually being told very little by DCAA because they're claiming "proprietary rights" for the SubK and their audit. As far as we can tell, what was found to be in err by DCAA was their indirect rates. They paid way too many family members "salary" on their board of directors. They won't reimburse and want us to join their fight. Clearly, we don't think it's a legitimate fight and don't want to go up against the govt. anyway. This is an AF contract and they don't want to pursue but DCAA is making it an issue and will not let it go. When you add on simple interest and penalties (which can equal the amount owed) it turns into a HUGE amount of money for any company to relinquish...especially one who isn't at fault. This is terribly frustrating and my management is looking for a miracle and I don't seem to be carrying one..... By puzzled on Monday, June 16, 2003 - 07:09 pm: Original Anonymous, are you saying in your 04:31 pm post that an independent company your company had subcontracted on this contract, without "'flow downs' attached or 'Cert. of Current Cost and Pricing Data'," is now owned by your company? Then you follow up with a statement that you cannot get access to the information you need. I'm puzzled. By AnonYmus on Tuesday, June 17, 2003 - 11:04 am: Okay, some more facts emerge. We're going to assume that you acquired a former 8(a) company who was a prime contractor to a subcontractor. DCAA now alleges that the subcontractor was a "closely held corporation" whose compensation expense was either (a) unreasonable and/or (b) really a distribution of profits. (See FAR 31.205-6.) The 8(a) prime contractor failed to flow down the proper (mandatory) clauses. The Government is holding the prime contractor liable for the subcontractor's unallowable costs, which were reimbursed and subsequently passed-on to the Government as costs of the prime contractor. Well, I'm no lawyer. But as I see it, you are screwed. The company you acquired didn't know how to do business as a Government contractor, and now you have to pay the price. Really, the core problem here is your failed due diligence. You acquired a company without checking their competence and without assessing for such contingent liabilities as unallowable subcontractor costs that could be imputed to the prime because of a failure to flow-down the proper contract clauses. Suggest you cough-up the bucks and chalk this up to "lessons learned." I also strongly recommend that you get experienced legal counsel involved right now, not only to check on the facts and assess your company's position, but also to see what other hidden landmines are buried in the procurement files of the company you acquired. Good luck. By anon3 on Tuesday, June 17, 2003 - 12:37 pm: Hold on a minute. You need to clarify - is the firm which was audited a sub to your firm or is it now owned by your firm? The DCAA would certainly release information to your firm, if you now own the former subcontractor. Your story that they are withholding the information from you "for proprietary" reasons doesn't make any sense. Something is fishy in your story.

Post audit, DCAA subcontractor unallowables

By Anonymous on Monday, June 16, 2003 - 03:21 pm:

During a recent incurred cost audit, a subcontractor (small business) of mine was found to be calculating their indirects incorrectly and was told that they owe the govt back over $1M. We're the prime and the govt. wants the money from US first since this one contract is so large to them. Needless to say, we're not about to pay for our sub's wrongdoing. How can we avoid this? What's our recourse??

By joel hoffman on Monday, June 16, 2003 - 03:47 pm:

Do you have flowdown provisions in your subcontract for defective pricing? Please advise. happy sails! joel hoffman

By AnonYmus on Monday, June 16, 2003 - 04:10 pm:

I don't really think this question is about defective pricing. I think it's about whether the subK received reimbursement from the primeK that the Gov't. now asserts to be in error.

There's not a lot of info in the question, but let's discuss it as if both the primeK and subK had cost-reimbursement contracts. (Obviously, if somebody has a fixed-price K, then there's no adjustment due the Gov't.)

Assuming the Gov't. is correct (a big assumption) then the SubK needs to process a credit voucher to the primeK, who will then adjust its costs accordingly and process a credit voucher to the Gov't.

A more pertinent question would be whether the primeK flowed down 52.216-7 (Allowable cost and payment). I believe it's a mandatory flow-down and the primeK may be liable for failing to flow-down a mandatory clause.

In any case, the Gov't. WOULD go after the primeK first (privity of contract). The primeK then goes after the subK for restitution.

If I were Anonymous, I would ascertain whether the Government's position was well-founded with respect to the subK, I would ascertain whether the proper clauses had been flowed-down, and I would ascertain whether monthly invoices from the SubK had been reviewed for allowability.

The answers to the above questions would help me decide whether to obtain a contracting officers final decision and, pursuant to CDA, to sponsor the subK for a claim against the Government. Alternatively, I would contact counsel and go after the subK for civil damages equal to the amount(s) of money I would have to pay the Gov't.

Needless to say, the prime may be liable here and, in any case, the primeK's desire "not ... to pay for our sub's wrongdoing" won't stop DFAS or whomever from collected a debt through offsets if they want to.

Good luck Anonymous. I hope your procurement files are in shape, particularly with respect to determining that you have a responsible SubK in sound financial condition.

By Anonymous on Monday, June 16, 2003 - 04:31 pm:

No. This subcontract was done originally by a company that we purchased who was an 8(a) at the time. They had no "flow downs" attached or "Cert. of Current Cost and Pricing Data" since they were inexperienced and basically "winging it" in contracts.

By Anonymous on Monday, June 16, 2003 - 04:47 pm:

As the primeK we're actually being told very little by DCAA because they're claiming "proprietary rights" for the SubK and their audit. As far as we can tell, what was found to be in err by DCAA was their indirect rates. They paid way too many family members "salary" on their board of directors. They won't reimburse and want us to join their fight. Clearly, we don't think it's a legitimate fight and don't want to go up against the govt. anyway. This is an AF contract and they don't want to pursue but DCAA is making it an issue and will not let it go. When you add on simple interest and penalties (which can equal the amount owed) it turns into a HUGE amount of money for any company to relinquish...especially one who isn't at fault. This is terribly frustrating and my management is looking for a miracle and I don't seem to be carrying one.....

By puzzled on Monday, June 16, 2003 - 07:09 pm:

Original Anonymous, are you saying in your 04:31 pm post that an independent company your company had subcontracted on this contract, without "'flow downs' attached or 'Cert. of Current Cost and Pricing Data'," is now owned by your company? Then you follow up with a statement that you cannot get access to the information you need. I'm puzzled.

By AnonYmus on Tuesday, June 17, 2003 - 11:04 am:

Okay, some more facts emerge. We're going to assume that you acquired a former 8(a) company who was a prime contractor to a subcontractor. DCAA now alleges that the subcontractor was a "closely held corporation" whose compensation expense was either (a) unreasonable and/or (b) really a distribution of profits. (See FAR 31.205-6.)

The 8(a) prime contractor failed to flow down the proper (mandatory) clauses.

The Government is holding the prime contractor liable for the subcontractor's unallowable costs, which were reimbursed and subsequently passed-on to the Government as costs of the prime contractor.

Well, I'm no lawyer. But as I see it, you are screwed. The company you acquired didn't know how to do business as a Government contractor, and now you have to pay the price.

Really, the core problem here is your failed due diligence. You acquired a company without checking their competence and without assessing for such contingent liabilities as unallowable subcontractor costs that could be imputed to the prime because of a failure to flow-down the proper contract clauses.

Suggest you cough-up the bucks and chalk this up to "lessons learned."

I also strongly recommend that you get experienced legal counsel involved right now, not only to check on the facts and assess your company's position, but also to see what other hidden landmines are buried in the procurement files of the company you acquired.

Good luck.

By anon3 on Tuesday, June 17, 2003 - 12:37 pm:

Hold on a minute. You need to clarify - is the firm which was audited a sub to your firm or is it now owned by your firm?

The DCAA would certainly release information to your firm, if you now own the former subcontractor. Your story that they are withholding the information from you "for proprietary" reasons doesn't make any sense. Something is fishy in your story.